Final Results

RNS Number : 9584G

NCC Group PLC

05 July 2012

 



NCC Group

Increasing international revenue growth drive revenues up 24% and profits up 27%

Eight year CAGR for operating profit 21% and dividend 31%

5 July 2012.  NCC Group plc (LSE: NCC, "NCC Group" or "the Group"), the international, independent provider of Escrow and Assurance, has reported its preliminary results for the year to 31 May 2012.

Financial

§ Revenue increased 24% to £87.7m (2011: £71.0m) - organic 17% growth

§ Operating margin* increased to 27% (2011: 26%)

§ Adjusted pre-tax profit* increased 27% to £22.6m (2011: £17.8m)

§ Adjusted fully diluted earnings per share* up 24% to 46.7p (2011: 37.7p)

§ Total dividend up 24% to 16.1p (2011: 13.0p)

§ Cash conversion ratio 131% of operating profit (2011: 133%)

Operational

§ Group Escrow maintained strong revenue growth of 12% - UK up 7%

o   Increased US presence

§ Assurance Division enhanced international profile and position

o   Organic revenue growth 23% and operating margin up to 17% (2011: 14%)

o   iSEC acquisition notably enhanced position and widened global capabilities 

o   Innovation and development of potential major areas, including .secure and DDoS Secure

Outlook for 2012/2013

§ Group Escrow renewals forecast to increase by 4% to £17.9m (2011: £17.3m)

§ Assurance Division order book and renewals up by 10% to £25.5m (2011: £23.1m)

* 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, NCC Chief Executive, commented:

"Since we listed the Group in 2004 at 170p per share we have delivered a consistent year-on-year performance. Over that time, including today's announcement, we will have paid 66.85p per share of dividends to shareholders, and grown operating profit by a CAGR of 21% - a notable achievement given the economic trading environment over the last few years.

"We have built a very strong international business that is well positioned to capitalise on some of the key issues affecting the boardroom. The risk to all corporates as well as government bodies from cyber-crime and information security, for example has never been higher. As Jonathan Evans, the Director General of the Security Service, said on 25 June 2012, 'The Boards of all companies should consider the vulnerability of their own company to these (cyber) risks as part of their normal corporate governance'.

"With our global reach and product range - we monitor 16 million web sites weekly and protect 15,000 clients around the world - as well as our strong forward visibility, we remain confident about continuing to maintain our strong growth record."

Enquiries:

NCC Group  (www.nccgroup.com)	0161 209 5432
Rob Cotton, Chief Executive
Atul Patel, Group Finance Director
College Hill
Adrian Duffield/Jon Davies/Rozi Morris	020 7457 2020

Overview

The Group has delivered yet another very strong performance in a subdued economic climate in the markets in which it operates, and which continue to be difficult to predict.  Overall the Group performed well, growing organically as well as integrating and consolidating the acquisitions made over the last year or so.

Group revenues maintained their momentum, growing by 24% to £87.7m (2011: £71.0m).  Excluding the acquisitions of iSEC and Escrow Associates in the previous financial year, this showed good underlying organic growth of 17%. 

Group margins continued to be strong and adjusted operating profit margins were 27%.  This was achieved despite the effects of the excellent growth seen in the Assurance businesses, which have lower margins than the Escrow operations.

Adjusted pre-tax profits and adjusted fully diluted earnings per share were up 27% to £22.6m (2011: £17.8m) and 24% to 46.7p (2011: 37.7p) respectively.  The Group continues to be highly cash generative with operating cash conversion representing 131% of operating profit (2011: 133%).

This is the eighth successive year of delivering double digit improvements in revenue and profit by a combination of organic growth and integrated acquisitions.  This year compound annual growth rates, over the eight years since flotation, were 32% for revenues and 21% and 31% for adjusted operating profits and dividends respectively, based on the proposed final dividend. 

Reflecting the Board's commitment to the shareholders and following the progressive dividend policy, which tracks earnings growth, a final dividend of 11.0p is proposed making a total for the year of 16.1p, up 24%.

Strategy

The Group's strategy continues to be to develop its two divisions organically, by creating new ideas, products and services, as well as looking for acquisitions in markets and geographies to widen NCC Group's reach and exploit new opportunities. 

Whilst there has been only one small acquisition completed this year, there have been a number of on-going discussions with complementary and competitor businesses.  Any transactions will only be contemplated if they are suitably priced, earnings enhancing and provided that there is the management capacity to manage and integrate them.

More importantly, the Group is looking to strengthen further its position as a foremost provider of IT security by using its experience and skills to help develop and deliver a safer internet. 

During the year the Board applied for a generic top level domain (gTLD), .secure, within the ICANN (Internet Corporation for Assigned Names and Numbers) programme.  The Group is looking to provide a safer internet world in which to navigate and transact.  This is a concept that NCC Group has championed strongly for a number of years and one which is badly needed. 

Current trading and outlook

The Group has transformed and consolidated its scale and international reach during the last 18 months.  Totally focused on risk mitigation and delivering client peace of mind, the complementary range of services has the breadth and depth to provide multinational clients with total solutions to their business issues.  As the recent rebranding demonstrates, NCC Group is one company offering a complete set of services to help clients gain freedom from doubt.

The Group continues to grow carefully and sustainably.  It will continue to transfer its international appeal further afield in the dynamic world of information technology and information security. The goal remains to deliver a safe internet and this will continue to provide a rich vein of opportunity to the Group, ably supported by the strong growth and reliability of Escrow.

The start to the year sees Group Escrow renewals at £17.9m up from £17.3m in the year to
31 May 2012 and a verification order book of £1.7m of which £0.5m relates to Escrow Europe and Escrow US. 

The Assurance division order books have improved to £19.7m (2011: £17.8m) and have £5.8m of monitoring renewals forecast for the current financial year (2011: £5.3m). 

NCC Group has a very strong market leading position in all of the markets in which it operates and is well positioned for sustainable growth in quickly developing markets.  The development of its services and unparalleled reputation for the highest quality of service delivery has lifted the Group clear of its competitors.

The outlook for NCC Group remains very good in growing markets.  The Board remains confident in its ability to deliver further sustainable growth

Financial review

Revenue

The Group increased revenue by 24% to £87.7m (2011: £71.0m).  Excluding the full year effects of the acquisitions of iSec and Escrow Associates in October 2010 and March 2011 respectively, organic Group revenue grew by 17% to £78.3m.

The Group half year split saw 48% of revenue delivered in the first half (2011: 46%) and 52% in the second half (2011: 54%).  Moving forward it is expected that the split will return closer to the H1 40%:H2 60% split that the Group normally experiences.

Sixty nine per cent (2011: 74%) of revenue £60.4m (2011: £52.6m) was derived from the UK.  Europe contributed £6.2m (2011: £6.0m) with the rest of the world revenue increased strongly by 71% to £21.1m (2011: £12.4m).

Despite the growth of the international businesses the marginally adverse movements of the Dollar and the Euro against Sterling had little impact on the Group's performance.

The Group's recurring income levels continue to grow across the business.  In Escrow UK over 88% of all contracts renewed (2011: 88%). Assurance saw 74% of its revenues renewed (2011: 77%), this represents 51% of all customers (2011: 49%). 

The Group has also seen renewing Assurance customers' expenditure increase from £29,767 to £68,821; with total average customer spend increasing to £39,486 from £21,066.  In addition, 91% (2011: 91%) of the performance monitoring revenues were renewed and are recurring.

Group revenue by sector

The Group continued to have minimal reliance on any one customer or sector.  Within Assurance the largest customer represents 9% of Assurance revenue which is 6% of Group revenue.  The largest customer in Escrow is 2% of total Group Escrow revenue.

Top three sectors by Division	Escrow	Assurance
Software computer services	12%	41%
Banks & insurance	22%	24%
Telecoms	27%	5%

Group revenue split by sector

Sector	%
Banks & Insurance	25
Charity	3
Education	1
Local Government	6
Manufacturing	1
National Government	2
Professional Services	2
Retailing	2
Software & Computer Services	35
Support Services	1
Telecommunications	9
Travel	5
Utilities	4
Healthcare Equipment and Services	1
Technology	1
Media	1
Other	1

Profitability and margins

The Group continues to generate strong margins.  Adjusted Group operating profit grew by 27% to £23.4m (2011: £18.4m), excluding the amortisation of acquired intangibles, the exceptional items and share-based charges of £0.9m (2011: £0.5m), as set out in the table below.

Despite the increased percentage of revenue from the non-escrow businesses overall adjusted operating margins increased, as expected, to 27% (2011: 26%).

Escrow's margin has continued to improve, driven by a combination of effective selling and price increases.  Prices are expected to be increased in November 2012 as they were in 2011.  The Group continues to monitor pricing and market sentiment and although price inflation is part of the UK economy, so is cost control.

In Assurance the business is seeing a general improvement in margins as more work comes from premium rate services such as operational response, managed services and forensics.  This trend will continue going forward. 

The Group half year split saw 46% of adjusted operating profits delivered in the first half and
54% in the second half, compared to 43% and 57% in 2011.  The Group expects the profit split in future periods to revert to that seen in prior years.

In May the Board reported the complete suspension of the implementation of the Group's new fully integrated IT system and the reversion back to the previous Group-wide IT system.

The Group has written off the costs capitalised on the balance sheet in respect of software licences, non-usable hardware, third party consultancy costs and capitalised staff costs of £6.1m, whilst costs of £0.9m have been provided in respect of the reversion back to the old system.

		Operating profit
		2012	2011
		£000	£000
Reported operating profit		11,619	13,472
	Amortisation of acquired intangibles	3,726	3,275
	Exceptional items	7,111	1,144
	Share based payments	946	516
	Adjusted operating profit Adjusted operating profit	23,402	18,407

	Profit before tax
	2012	2011
	£000	£000
Reported profit before tax	10,572	12,768
Amortisation of acquired intangibles	3,726	3,275
Exceptional items	7,111	1,144
Unwinding of the discount on contingent consideration	208	68
Share based payments	946	516
Adjusted profit before tax	22,563	17,771

Adjusted Group pre-tax profit increased 27% to £22.6m (2011: £17.8m).  The Group's reported pre-tax profit was £10.6m (2011: £12.8m), after the inclusion of the unwinding of the discount on the acquisitions' contingent consideration, amortisation of intangible assets, share option charges and the exceptional items.

Taxation

The Group's effective tax rate is 28% (2011: 27%) which is above the average standard UK rate of 25.7%.  This is due to the increasing proportion of Group profits which are derived from the USA, the full impact of which is reduced by the continued decrease in UK corporation tax rates.

Taxation recognised in the income statement

		2012	2011
		£000	£000
Current tax expense
Current year		2,308	3,724
Adjustment to tax expense in respect of prior periods		86	(188)
Foreign tax		1,711	648
Total current tax		4,105	4,184
Deferred tax		(1,148)	(743)
Tax in income statement		2,957	3,441

Reconciliation of effective tax rate

			2012	2011
			£000	£000
Profit before taxation			10,572	12,768
Current tax using the UK corporation tax rate of 25.7% (2011: 27.7%)			2,714	3,546
Effects of:
Items not taxable/deductible for tax purposes			(171)	371
Effect of rate change		13		(56)
Differences between the overseas tax rates		232		12
Movements in temporary differences not recognised		51		-
Adjustment to tax charge in respect of prior periods		118		(432)
Total tax expense			2,957	3,441

Deferred tax recognised directly in equity was a charge of £62,000 (2011: credit of £341,000).

Earnings per share

The adjusted basic earnings per share from continuing operations increased 23% to 47.9p (2011: 38.9p).  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 the contingent consideration for acquisitions and the effect of the exceptional items.

	2012 Pence			2011 Pence
Basic EPS as per the income statement		22.2	27.5
Amortisation of acquired intangibles		7.8	6.7
Exceptional items		15.2	3.4
Unwinding of the discount on the contingent consideration of the acquisitions		0.6	0.2
Share based payments		2.1	1.1
Adjusted basic EPS		47.9	38.9

The adjusted fully diluted earnings per share from continuing operations increased 24% to 46.7p (2011: 37.7p) whilst reported fully diluted earnings per share was 21.7p (2011: 26.7p). 

Dividends

The Board is recommending a final dividend of 11.0p per ordinary share, making a total for the year of 16.1p (2011: 13.0p) up 24%.  This represents cover of 3.0 times (2011: 3.0 times) based on basic adjusted earnings per share from continuing operations. 

Since the Group's flotation in July 2004, the dividend has increased from 2.5p, a compound annual growth rate of 31%.

If approved at the Annual General Meeting, the dividend will be paid on 28 September 2012 to shareholders on the register at the close of business 31 August 2012. The ex-dividend date will be 29 August 2012. 

Cash

The Group continues to be highly cash generative with operating cash flow before interest and tax of £24.6m (2011: £17.9m) which is 131% of operating profit before interest and tax (2011: 133%).

After accounting for net cash outflows of £7.5m for acquisitions and contingent acquisition payments made during this year, the Group ended the year with net debt of £22.7m (2011: £20.5m).

Total capital expenditure for the year remained tightly controlled at £7.3m (2011: £4.5m) which predominantly related to the refurbishment of the Group's Manchester headquarters, the Group's core IT systems and the investment in Artemis, the subsidiary formed to promote, develop and implement a safer internet through the Group's application for the generic Top Line Domain (gTLD) .secure.

The Group's banking facility with RBS which provides a £35m revolving credit facility and a £2m overdraft, runs until July 2013.  Interest on the facility is charged at 2% over LIBOR and 2% over base rate on the overdraft.

The facility provides the Group with the necessary capacity to meet its current acquisition objectives, although this is regularly reviewed to ensure that unnecessary fees are not incurred due to non-utilisation.  The Group was utilising76% of the facility at the year end.

Balance sheet

Following the acquisition of Axzona, goodwill increased by 2% to £79.3m (2011: £77.9m). Due to the amortisation charge of £3.7m, the cost of intangible assets relating to customer contracts and associated relationships, decreased by 22% to £9.1m (2011: £11.7m).  The value of goodwill has been assessed and no impairment reported. 

Shareholders' funds at the end of the year were £60.4m (2011: £56.1m).

IT systems

In 2009 an extensive procurement process was run to select a technology supplier to specify, install and implement a new IT solution for the whole Group.

The new system was expected to provide a complete, integrated solution for all the Group's business processes as well as providing a systems backbone for NCC Group as it grew organically and by acquisition in the UK, Europe and North America.  The solution selected was also intended to fix and standardise the business processes to allow commonality of workflows throughout the expanding Group.

Following a thorough period of extensive testing, which along with the design process had already seen an 18 month slippage, the system was piloted in the web monitoring part of the Assurance division in October 2011.  In March 2012 it was then implemented in the UK Escrow business and the finance function.

Upon going live the new system caused immediate and significant disruption to the Group.  It became clear that the solution would, if it remained in use as it was, significantly impair rather than improve business efficiency. 

It was also confirmed in May, after extensive evaluations, that the provider had no product, or prospect of being able to deliver an integrated solution across the whole business, for the Assurance division to meet its essential resource scheduling requirements.

At this point and to curtail the substantial operational support costs and further development costs that were going to be required, the Board decisively suspended the implementation and agreed to revert back to the previous Group-wide IT system.

Given the substantial investment in time and resources, the Board has written off the £7.0m cost of the new system in the financial year to 31 May 2012. This figure includes the expected £0.9m cash cost of the reversion back to the old system, over the next three months.

The Board is extremely disappointed by the suspension of the implementation.  After the roll back is completed, a new project team will be commissioned to look at all suitable options and alternatives. 

In the interim, the solutions we are using, whilst not fully integrated, remain fit for purpose and scalable.  The Group has a planning, scheduling and resourcing tool that integrates directly into the other system areas that will continue to support the Group's development in Assurance for the foreseeable future.

The reason to upgrade systems however remains the same.  The Group needs to install a group-wide solution that has a low degree of bespoke development to allow easier upgrades and essentially more flexibility.  The Group currently runs a totally bespoke version of its software with the associated limitations.

Group Escrow

The Group's international Escrow businesses have continued to lead the market by offering the best value and strongest protection available. 

The Escrow businesses have had a solid year overall with strong performance in nearly all the key performance measures of profitability, renewals, terminations and verification testing. 

From the Group's global experiences the move to cloud computing has largely not happened for businesses' critical applications, with the pace of change being slower than is generally publicised.  Escrow as a Service (EaaS) model has been extremely successful in supporting customers who have made the move to the cloud, as it delivers scalable cover that can protect all components in the outsource model.  This provides clients with the appropriate protection where something happens to either the relationship or the suppliers' ability to provide the service.

The Escrow division increased revenue by 12% to £27.9m (2011: £24.9m).  Within this, Escrow UK revenue grew by 7% and Escrow US by 63%, although Escrow Europe only grew by 1%.

Excluding the full year effect of the acquisition of Escrow Associates in March 2011, Escrow US increased its revenue by 7%, although this is partially masked by the integration of the two operations.

Group Escrow profitability increased 12% to £16.3m (2011: £14.5m) with the UK contributing 81% (2011: 81%).  Escrow US and Escrow Europe continued to increase profitability and contributed 12% and 7% of total Escrow operating profits respectively.

Group recurring revenues through the renewals process increased by 12% to £17.3m (2011: £15.4m). Group Verification revenues grew by 23% to £5.3m (2011: £4.3m).

The Group's Escrow businesses have been, and always will continue to be, the cornerstone of NCC Group's profitability.  They produce a substantial margin and very strong cash conversion as well as a high degree of recurring revenue, due to the contracts renewals rate of over 88%. 

Escrow now accounts for 32% of the overall Group's revenue (2011: 35%) as the scale of the Assurance business grew due to faster organic growth and the full year effects of the recent acquisitions. 

Overall Group Escrow operating margins stayed strong due to good cost consciousness at 58% (2011: 58%). 

A process of harmonisation has begun throughout all of the Escrow locations that aims to adjust and standardise all price anomalies, where possible.  Price increases were introduced in November 2011, effective from January 2012 for renewals, of between 3% and 4%.  Verification pricing remained the same in the year.

Escrow UK

This year saw a consistent and robust performance from the Escrow UK team.  Growth levels were sufficient considering there were no real signs of any fundamental improvement in the economy. 

In the second half of the Group's financial year, the software market felt the most vulnerable that it has for a while, with little sign of the initiation or implementation of any new large scale client projects.  Most new sales came from increasing the level of protection required around existing environments.  Most notable was the slowdown from the financial services sector despite the increased regulation being sought from the FSA.

Escrow UK revenue was £20.3m (2011: £19.0m).  This 7% growth in revenue (2011: 6%) was delivered through contract growth and verifications, with only a limited amount coming from the effects of the price increase. 

Escrow UK recurring revenues increased over 5% to £12.3m (2011: £11.7m) and terminations remain below 12%.

Escrow Europe and Escrow US

The completed integration of US-based Escrow Associates has been very successful.  The Group is now able to offer a much stronger client proposition to its US and International customer base. 

Escrow US increased its revenues by 63% to £4.42m (2011: £2.71m) and by just over 7% when adjusting for the annualised impact of the acquisition of Escrow Associates.  Escrow Europe revenues were £3.22m (2011: £3.18m).  The unit now has a new management team and structure and it is expected that double digit growth will quickly return.

Escrow Europe now has 17 employees and the North American Escrow businesses have 38 employees.  The restructuring of Escrow Europe and the combining of the two USA Escrow operations has positioned them well to deliver strong growth plans through aggressive headcount increases. 

Assurance

The Assurance division saw very strong performances throughout, with all business lines making good progress.  The Group undertook a major step by rebranding all its European businesses within a single framework, NCC Group Assurance.

The Assurance division is divided into three areas security testing, audit and compliance, web performance and software testing, which broadly reflects the focus of the former acquired businesses.  iSEC which operates in North America is included within security testing.

Each product area has seen strong performances with all elements making good progress.  Assurance now accounts for 68% (2011: 65%) of Group revenues with total divisional revenues increasing 30% to £59.8m (2011: £46.1m). Excluding the acquisition of iSEC, organic revenue increased 23% to £52.2m, with very strong performances coming from security testing in the second half of the year. 

Operating profits jumped 58% to £10.3m (2011: £6.5m). The Assurance Division businesses' margins increased to 17% (2011: 14%).

As with Escrow, the major challenge for the Assurance Division is to increase renewal rates and renewal spend levels.  This is most imperative in security testing and the web performance businesses. 

Security testing, audit and compliance includes penetration and application testing, operational response, forensics, managed monitoring with the audit and compliance part covering social engineering, card and information security standards and security auditing.  This area grew 51% including the full year effects of iSEC, but the underlying organic growth was an impressive 39%.  This was achieved whilst ensuring that utilisation rates remained suitably low.

iSEC has continued to see encouraging growth and has delivered on its plans.  The Group continues to benefit from iSEC's technical knowhow and presence and the global join up to provide a better service to customers.  The first half of the performance based earn-out has been paid in full and it is expected that the second half will also be paid fully.

Web Performancehad a recurring revenue rate of 91% (2011: 91%) which continues its strong track record of client retention.  Through the coming year improvements to the service, additional product lines and potential new technologies will see this area continue to perform strongly.  During the year the business area grew by 14%.

Software testinghas seen a 4% growth in revenue and continues to provide a number of major client opportunities for cross divisional and cross group working.

The Assurance testing teams currently comprise over 200 qualified testers in the UK and USA.

Artemis - a safer internet - gTLD .secure

In May 2012, the Group applied to register the .secure generic top level domain (gTLD) as part of the ICANN programme to create a new set of gTLDs.  The .secure domain aims to create a universal environment for end users to operate and navigate the internet with complete safety and security.

The Group established a new wholly-owned subsidiary, Artemis Internet Inc. in San Francisco, to develop the critical infrastructure and know-how to deliver this project.  It is headed by Alex Stamos, one of the founding partners of iSEC.

In addition NCC Group has set up the Domain Policy Working Group and it is expected that a number of influential organisations drawn from major financial, software and social media companies will be joining soon.  The unit is focussed on web security and the development of a set of innovative new security standards for websites, which support the Group's vision in building a more trustworthy internet.

To date the ICANN application has gone as expected. The application is one of two for .secure.

The plan remains to invest progressively in Artemis over the next 15 months, subject to reaching key milestones.  The total investment is likely to be c. £6m, but over the next 12 months it is expected that subject to being in the first wave of approvals, the Group will be investing £3m - £4m in the foundations of the project.

Employees, recruitment and retention

Employee recruitment and retention remain one of the most important objectives of the Group.  The Group now employs 664 people across the world, supplemented by 150 associates.

The Group has ensured that staff retention has continued to be good, by remaining very pro-active in developing and managing all aspects of individuals' roles, responsibilities and aspirations.  The goal is to ensure that NCC Group remains the employer of choice particularly in the Assurance industry and in all matters concerning information and technology security.

The objective is to offer careers and development opportunities that actively encourage all staff to stay and grow within the Group.  The current employee retention rate is now close to 90% for the Group as a whole, with the technical teams running at over 98%.

Markets

Escrow

NCC Group remains the largest provider of escrow services in the world, further strengthened by the acquisition and subsequent integration of Escrow Associates in North America.  NCC Group remains the only provider mandating quality; offering the best value and strongest protection available, ahead of price.  The Group does not intend to change that philosophy. 

The dynamics of the escrow market have not materially changed since the Group floated in 2004 and the same market assumptions, as detailed by Gartner at the time, remain.  The UK escrow market without verification testing is still niche and the Group estimates that the market size is approximately £100m, which still provides NCC Group with considerable headroom for growth. 

Both in the public and private sector, corporations and organisations still typically believe that they have several times more cover than they actually have.  They remain unaware that they are exposed to the degree that they are.  The estimates of the European market place vary wildly, but the Gartner research suggests the market, in total, may be worth two or three times that of the UK.

To date the Group has not seen a marked move to cloud applications other than for non-business critical applications.  The Group is extremely well equipped to harness this opportunity, if it comes, through its EaaS services which provide customers with peace of mind reflecting the importance of the application and sensitivity of the application to them.  The service covers all aspects of SaaS and can, from a menu, provide all or separate aspects of the SaaS model to provide a suitable cost effective solution to our clients.  EaaS can provide data, source code, data dictionary, architecture, back-up and quick start propositions extremely effectively to our customers.

Assurance - The need for transparency in the cyber world

If the last millennium was viewed on a timeline, the period from the invention of the computer and related by-products such as mobile devices until now would be a very small part.  The changes and advances that have been witnessed over the past generation have been nothing short of phenomenal.  Compared against history consensus is that technology will advance by a generation every two years as the computer is less than a century old and yet it is globally relied upon as much as the wheel.

As a consequence governments, businesses and consumers are left struggling to keep up with the constant innovation and technological developments that are presented on a daily basis. But more importantly legislation has not caught up either.

The rapidly changing nature of the digital world has made it difficult to control and regulate cyber practices within the laws of any country, which in turn make it easier for cyber criminals to operate with impunity.

The development of the online ecosystem has been coupled with an increase in its misuse. The explosion in the use of the internet was unexpected; hence the need for IPv6 to create more IP addresses, but more importantly it was never designed with cyber criminals or warriors in mind, so security has been on the back foot since day one.

As a consequence, as the threats to the cyber landscape increase and develop in complexity, the need for solid defence on local, corporate and national levels increases with urgency.  Today, data on the web proliferates at such a rate that as much is published on the internet daily, as was published from the start of the printed word up to 2002.

National security threats used to typically be of a physical nature, now the start of global cyber warfare is being more and more publically seen.  In 2010 the Stuxnet worm targeted Iran's nuclear infrastructure and more recently Flame malware infiltrated the computers of high-level officials across the Middle East.  Stuxnet was been attributed by the media to American and Israeli government authorities, as has the Duqu and Flame malware, and it is claimed it may even have been written by the same developers. 

As the frequency and intensity of these government operations increase, there is a knock on effect to the commercial security industry.  Ordinary cyber-criminals and hacktivists are now using the techniques pioneered by nation-state developers over the last decade.  Despite all of the warnings and cash spent since the very public Aurora incident, where the Chinese directly attacked Google, the ease and likelihood of launching a successful APT attack (Advanced Persistent Threat) has not reduced. 

It is clear that there is a pressing need to increase standards in cyber defences from large corporations to governments through to consumers.  It is essential this is a proactive drive for change rather than as a consequence of a devastating cyber-attack or war.

Standards need to be driven up across the board and one way to prompt this is by increasing transparency around security.  This transparency must cover the way businesses view, act and respond to cyber security issues.  They must also set out the reporting of corporate breaches and the consequences for those affected, as well as mapping out how incidents should be dealt with.  Until organisations are publicly held to account for security breaches, there will be a lack of incentive for them to implement stringent digital policies and infrastructures.

The bedrock of most internet security is anti-virus detection software, but this is no longer effective.  Whilst many see it as the security antidote, it is losing its potency because commercial anti-virus suppliers are struggling to respond to modern threats presented by nation-states and criminal enterprises.

Publicity over the failure of anti-virus has reached a crescendo with claims that consumer-grade antivirus products cannot provide protection against targeted malware created by well-resourced nation-states or criminals.  This was exemplified by the failure of all commercial anti-virus vendors to detect recent state sponsored malware attacks despite samples of it already existing within their collective detection catalogues.

Anti-virus vendors will continue to struggle as the volume of malware increases and the methodologies of malware authors diversify.  Whilst criminals have yet to reach the levels of nation state malware creators, governments and businesses need to develop much more sophisticated malware detection techniques than are being employed today.  

The actual answer lies within enterprises themselves to strengthen significantly their corporate networks, test their protections vigorously and prepare a clear and comprehensive operational response plan.  This will happen if there is better transparency, as admitting that a corporate security system failed can only serve to damage reputation and weaken customer trust, which should be motivation enough!

This drive for standards and transparent reporting is further supported by a cursory glance at three hot topics that are in the market today, all of which show some fundamental concerns that also are not being addressed.  Individuals and corporations alike are all being affected with alarming results. 

At a consumer level the cyber breach of the social networking website LinkedIn resulted in six million passwords being leaked in June 2012. In the following days, 60% of these hacked passwords were used, giving the criminals not only access to their LinkedIn accounts, but also to other accounts that shared the same passwords.

The breach, it has been widely alleged in the media, occurred because LinkedIn did not take strict enough security measures. If that was the case, it is a problem that could have been avoided and certainly one to avoid if there were bigger incentives to implement tighter security measures. But to be balanced, users of the social networks often make it easier for cyber criminals by only using one, often weak password, for all of their applications including banking and email.

The current trend towards Bring Your Own Device (BYOD) is a continuing theme as cost conscious enterprises push towards employee supplied devices and this has created a new conundrum for IT departments.  How can an IT department support and enforce corporate data retention and protection policies on a variety of devices outside their physical control? 

The easy, procurement-driven answer has been secure container technologies.  While some of these proprietary products are certainly better protected than those developed through open standards, research conducted in our iSEC business has demonstrated that they do not protect against many of the threats claimed.  Enterprise customers need help understanding how to accommodate BYOD in their corporate security strategy and to be realistic about the protection they provide against advanced attackers.

The proliferation of mobile and tablet devices has seen the uptake of Android based devices grow substantially. Unfortunately this has resulted in an exponential growth in malware with thousands of examples appearing.  Android has become the perfect target for malware authors due to a combination of reasons, market share, that it is an open source development platform, the effects of collaboration of dozens of competing companies and lack of accountability for Android application distributors. 

In the EU, unlike the US, there is no legal requirement for businesses to inform the authorities or their customers if they have been hacked.  If it is customer data that has been compromised, there is no legal obligation to inform those affected.  In the defence of hacked businesses, if they do not have to divulge the breach, why would they risk their reputation? 

The lead set in the USA should be followed and this should not be limited to publicly traded companies. The current proposals from a European directive pressures companies into full disclosure, informing national information commissioners of the breaches that affect consumers and citizens within 24 hours is a start, but it is limited.

Non-compliance will result in heavy fines of up to 2% of annual turnover, so it should force a major increase in risk awareness.  But as with all government initiatives take up will probably be lax.  The recent EU cookie legislation demonstrates this, with Government websites still not complying despite the May deadline being passed and likewise 1 in 5 of all other sites failing to comply.  In order to drive up standards across the board, it is imperative that businesses, governments and consumers are held to account when it comes to digital security.

Additionally there needs to be greater effort and collaboration on a national, continental and global scale. Transparency and openness should be the foundations from which to shore up defences and prepare our infrastructures in the fight against cybercrime.

Whilst this type of openness is a start in driving standards of cyber security upwards and may well foster sharing of threats and attacks, the EU directive is still more than two years away and that in the world of IT security is still a generation away.

End

Consolidated income statement

For the year ended 31 May 2012

	Notes	2012	2011
		£000	£000 (Restated)
Revenue	2	87,713	70,995
Cost of sales		(54,140)	(44,873)
Gross profit		33,573	26,122
Administrative expenses before amortisation of intangible assets, share based payments, impairment losses and exceptional items		(10,171)	(7,715)
Operating profit before amortisation, share based payments, impairment losses and exceptional items		23,402	18,407
Amortisation of intangible assets		(3,726)	(3,275)
Share based payments		(946)	(516)
Impairment loss	3	(6,104)	-
Exceptional items	3	(1,007)	(1,144)
Total administrative expenses		(21,954)	(12,650)
Operating profit	2	11,619	13,472
Financial income	6	3	8
Finance expense excluding unwinding of discount		(842)	(644)
Net financing costs excluding unwinding of discount		(839)	(636)
Unwinding of discount relating to contingent consideration on business combinations		(208)	(68)
Financial expenses	6	(1,050)	(712)
Net financing costs		(1,047)	(704)
Profit before taxation	4	10,572	12,768
Taxation	7	(2,957)	(3,441)
Profit for the year		7,615	9,327
Discontinued operations
Loss for the period from discontinued operations	9	-	(1,098)
Profit for the year		7,615	8,229
Attributable to equity holders of the parent company		7,615	8,229
Earnings per share from continuing operations	10
Basic earnings per share		22.2p	27.5p
Diluted earnings per share		21.7p	26.7p
Earnings per share from continuing and discontinued operations
Basic earnings per share		22.2p	24.3p
Diluted earnings per share		21.7p	23.5p

Consolidated Statement of comprehensive income

for the year ended 31 May 2012

		2012	2011
		£000	£000
Profit for the year		7,615	8,229
Other comprehensive income
Foreign exchange translation differences		357	418
Total comprehensive income for the period		7,972	8,647
Attributable to:
Equity holders of the parent		7,972	8,647

Group balance sheet

at 31 May 2012

	Notes	2012		2011
		£000	£000	£000	£000
Non-current assets
Intangible assets	12	89,499		93,759
Plant and equipment	13	5,068		2,755
Deferred tax assets	16	1,943		1,150
Total non-current assets		96,510		97,664
Current assets
Trade and other receivables	14	21,347		18,389
Cash and cash equivalents		5,450		4,701
Total current assets		26,797		23,090
Total assets			123,307		120,754
Equity
Issued capital		343		341
Share premium		23,244		22,830
Retained earnings		36,730		33,230
Currency translation reserve		41		(316)
Total equity attributable to equity holders of the parent			60,358		56,085
Non-current liabilities
Other financial liabilities	19	579		206
Deferred tax liability	16	1,343		1,518
Contingent consideration on acquisitions	19	250		4,536
Interest bearing loans	19	28,149		25,182
Total non-current liabilities			30,321		31,442
Current liabilities
Trade and other payables	17	11,593		10,326
Contingent consideration                  on acquisitions	17	3,493		5,840
Deferred revenue	18	15,926		15,023
Current tax payable		712		2,038
Provisions	20	904		-
Total current liabilities			32,628		33,227
Total liabilities			62,949		64,669
Total liabilities and equity			123,307		120,754

These financial statements were approved by the Board of Directors on 5^th July 2012                     and were signed on its behalf by:

Rob Cotton

Chief Executive

NCC Group PLC

462044

Group cash flow statement

for the year ended 31 May 2012

	Notes	2012	2011
		£000	£000
Cash flow from operating activities
profit for the year		7,615	8,229
Adjustments for:
Depreciation charge	13	1,574	1,190
Share based charges		725	408
Amortisation of intangible assets	12	3,726	3,275
Impairment of intangible assets	12	6,104	-
Net financing costs		1,047	704
Loss/(profit) on sale of plant and equipment		10	(18)
Income tax expense		2,957	3,014
Cash inflow for the year before changes in working capital		23,758	16,802
Increase in trade and other receivables		(2,899)	(373)
Increase in trade and other payables		3,781	1,463
Cash generated from operating activities before interest and tax		24,640	17,892
Interest paid		(735)	(663)
Income taxes paid		(5,452)	(4,178)
Net cash generated from operating activities		18,453	13,051
Cash flows from investing activities
Interest received		3	8
Acquisition of plant and equipment		(3,620)	(1,815)
Development expenditure	12	(354)	-
Acquisition of intangible assets	12	(3,306)	(2,675)
Acquisition of business net of cash acquired	15	(7,498)	(14,432)
Net cash used in investing activities		(14,775)	(18,914)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital		416	1,127
Draw down of borrowings		2,354	9,099
Purchase of own shares		-	(856)
Payment of bank loans		-	-
Equity dividends paid		(4,778)	(3,855)
Net cash from financing activities		(2,008)	5,515
Net increase/(decrease) in cash and cash equivalents		1,670	(348)
Cash and cash equivalents at beginning of year		4,701	4,631
Effect of foreign currency		(921)	418
Cash and cash equivalents at end of year		5,450	4,701

Statements of changes of equity

for the year ended 31 May 2012

Group

	Issued Share  capital	Share  premium		Currency Translation Reserve	Retained earnings	Total
	£000	£000		£000	£000	£000
Balance at 1 June 2010	337	21,707		(734)	28,963	50,273
Profit for the period	-	-		-	8,229	8,229
Foreign currency translation differences	-	-		418	-	418
Total comprehensive income for the period	-	-		418	8,229	8,647
Transactions with owners recorded directly in equity	-	-		-	-	-
Dividends to equity shareholders	-	-		-	(3,855)	(3,855)
Re-purchase of own shares	-	-		-	(856)	(856)
Share based payment transactions	-	-		-	408	408
Deferred tax on share based payments	-	-		-	341	341
Shares issued	4	1,123		-	-	1,127
Total contributions by and distributions to owners	4	1,123		-	(3,962)	(2,835)
Balance at 31 May 2011	341	22,830		(316)	33,230	56,085
	Issued Share capital	Share  premium		Currency Translation Reserve	Retained  earnings	Total
	£000	£000		£000	£000	£000
Balance at 1 June 2011	341	22,830		(316)	33,230	56,085
Profit for the period	-	-		-	7,615	7,615
Foreign currency translation differences	-	-		357	-	357
Total comprehensive income for the period	-	-		357	7,615	7,972
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-		-	(4,778)	(4,778)
Re-purchase of own shares	-	-		-	-	-
Share based payment transactions	-	-		-	725	725
Deferred tax on share based payments	-	-		-	(62)	(62)
Shares issued	2	414		-	-	416
Total contributions by and distributions to owners	2	414		-	(4,115)	(3,699)
Balance at 31 May 2012	343	23,244		41	36,730	60,358

Notes

1 Accounting policies

Basis of preparation

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

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

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 May 2012 or 31 May 2011, but is derived from those accounts.  Statutory accounts for 2011 have been delivered to the registrar of companies, and those for 2012 will be delivered in due course.  The auditors have reported on those accounts; their reports were (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. The Group financial statements consolidate those of the company and its subsidiaries (together referred to as the "Group").  The parent company financial statements present information about the Company as a separate entity and not about its Group.

Both the parent and the Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU ("Adopted IFRS").  On publishing the parent company financial statements here together with the Group financial statements, the company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Operational and Financial Review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review. 

The Group's forecast and projections taking into account reasonably possible changes in trading performance show that the Group is able to operate within the level of its current facility.

As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. 

After making enquiries, the Directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for the foreseeable future. 

Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. 

Restatement

The consolidated income statement for the year ended 31 May 2011 has been restated to present charges in respect of share based payments within administrative expenses rather than within cost of sales. The purpose of this restatement is to report the share based payments charges with other indirect salary expenses within administrative expenses. The impact of this restatement is an increase in administrative expenses of £0.5 million for the year ended 31 May 2011. Cost of sales has decreased by the same amount. The restatement has no impact on the group's reported profit.

2 Segmental Information

	2012 £000	2011 £000
Revenue by business segment
Escrow UK	20,296	18,968
Escrow Europe	3,224	3,180
Escrow USA	4,424	2,707
Total Group Escrow	27,944	24,855
Assurance Delivery	51,760	39,111
Monitoring Performance	8,009	7,029
Total Assurance Testing	59,769	46,140
Total revenue	87,713	70,995
Operating profit by business segment
Group Escrow	16,320	14,488
Assurance Testing	10,259	6,507
Segment operating profit	26,579	20,995
Head office costs	(3,177)	(2,588)
Operating profit before amortisation, charges for share based payments and exceptional items	23,402	18,407
Amortisation of intangible assets Group Escrow	(559)	(423)
Amortisation of intangible assets Assurance Testing	(3,167)	(2,852)
Share based payments	(946)	(516)
Operating profit before exceptional items	18,730	14,616
Exceptional items	(7,111)	(1,144)
Operating profit	11,619	13,472

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

	Assets	Liabilities	Assets	Liabilities
	2012	2012	2011	2011
	£000	£000	£000	£000
Assets/(liabilities) by business segment
Group Escrow	13,846	(18,736)	13,242	(14,587)
Assurance Testing	18,872	(9,919)	16,338	(10,091)
Unallocated net assets	90,589	(34,294)	91,174	(39,991)
Total assets/(liabilities)	123,307	(62,949)	120,754	(64,669)

Unallocated net assets consist of goodwill arising on consolidation, cash, tax payable and other centrally held assets and liabilities.

2012		Depreciation	Capital expenditure	Total costs incurred to acquire segmental assets
		£000	£000	£000
Group Escrow		171	522	-
Assurance Testing		661	921	1,200
Unallocated		742	2,177	-
Total		1,574	3,620	1,200

2011		Depreciation	Capital expenditure	Total costs incurred to acquire segmental assets
		£000	£000	£000
Group Escrow		132	103	4,825
Assurance Testing		560	546	9,758
Unallocated		498	1,317	-
Total		1,190	1,966	14,583

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

	2012 £000	2011 £000
Revenue by geographical origin and destination
UK	60,383	52,565
Rest of Europe	6,172	6,018
Rest of the World	21,158	12,412
Total revenue	87,713	70,995

The table below provides an analysis of the Group's assets/(liabilities) by geographical market where the assets/(liabilities) are based.

	Assets	Liabilities	Assets	Liabilities
	2012	2012	2011	2011
	£000	£000	£000	£000
Asset/ (liabilities) by geographical segment
UK	87,989	(40,470)	86,508	(40,306)
Rest of Europe	4,893	(2,358)	5,615	(2,722)
Rest of the World	30,425	(20,121)	28,631	(21,641)
Total assets/(liabilities)	123,307	(62,949)	120,754	(64,669)

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.

	2012 £000	2011 £000
Exceptional items and acquisition related costs
Impairment losses (see note 12)	(6,104)	-
Remedial costs	(904)	-
Acquisition related costs	(103)	(1,144)
Total	(7,111)	(1,144)

Following the termination of the Group's IT system implementation project, the Group has written off the costs capitalised on the balance sheet in respect of software licences, non-usable hardware, 3rd party consultancy costs and capitalised staff costs of £6.1m.

As a result of the termination, remedial costs of £0.9m have been provided in respect of the Group's transfer of operations to its previous IT system, see note 20 for further information. 

Acquisition related costs of £103,000 principally consist of professional fees incurred in relation to acquisitions and adjustments to deferred consideration balances (see note 6).

Exceptional costs in the year ended 31 May 2011 were £1,144,000 principally consisting of professional fees incurred in relation to the acquisitions of iSEC Partners Inc in October 2010 and Escrow Associates LLC in March 2011.

The tax effect in the income statement relating to the exceptional items recognised is:

	2012 £000	2011 £000
Exceptional items and acquisition related costs
Credit in respect of Impairment losses and remedial costs	(1,798)	-
Credit in respect of acquisition related costs	(101)	(458)
Total	(1,899)	(458)

4 Expenses and auditors' remuneration

	2012	2011
	£000	£000
Profit before taxation is stated after charging/(crediting):
Amounts receivable by auditors and their associates in respect of:
Audit of these financial statements	30	36
Audit of financial statements of subsidiaries pursuant to legislation	36	46
Total audit	66	82
Taxation compliance services	43	-
Total fees	109	82
Depreciation and other amounts written off tangible and intangible fixed assets:
Owned	1,574	1,190
Amortisation of intangible assets	3,726	3,275
Impairment losses (see note 3)	6,104	-
Exchange (gains)/losses	(46)	17
Operating lease rentals charged:
Hire of property, plant and equipment	1,479	1,304
Other operating leases	802	665
Loss/(profit) on disposal of fixed assets	7	(18)

5 Staff numbers and costs

Group

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

	Number of employees
	2012	2011
Operational	162	140
Administration, sales and marketing	450	389
	612	529

The aggregate payroll costs of these persons were as follows:

	2012	2011
	£000	£000
Wages and salaries	34,403	27,676
Share based payments	725	408
Social security costs	3,389	2,900
Other pension costs	649	568
	39,166	31,552

6 Net financing costs

	2012	2011
	£000	£000
Financial income
Interest on short term deposits	3	8
	3	8
Financial expenses
Interest payable on bank loans and overdrafts	(832)	(629)
Interest capitalised within the construction of intangible assets	103	64
Amortisation of deal fees on term loans	(113)	(79)
Contingent consideration finance expense (see below)	(208)	(68)
	(1,050)	(712)

Interest has been capitalised at the rate applying to the specific funds borrowed in respect of capital projects.  Where specific funds are not borrowed to finance capital projects, a capitalisation rate, based on a weighted average of borrowings outstanding during the period, is applied to the expenditure on the asset. The rate applied during the current financial year is 2.2% (2011: 2.2%).

The contingent consideration finance expense of £208,000 (2011: £68,000) relates to the acquisition of SDLC Solutions Limited, NGS Meridian Limited, iSEC Partners Inc, Escrow Associates LLC and Axzona Limited.

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

Contingent consideration finance expense			2012	2011
			£000	£000
SDLC			41	(9)
Meridian			-	(24)
iSEC Partners Inc			135	97
Escrow Associates LLC			26	4
Axzona			6	-
			208	68

The discount rate used was 3% (2011: 3%).

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

Contingent consideration			2012	2011
			£000	£000
SDLC Solutions Limited			-	3,625
iSEC Partners Inc			2,582	5,893
Escrow Associates			911	858
Axzona Limited			250	-
			3,743	10,376

Current liabilities includes £3,493,000 (2011 £5,840,000) contingent consideration payable in relation to the acquisition of iSEC Partners Inc, Escrow Associates LLC and Axzona Limited (see note 17).

7 Taxation

Recognised in the income statement

		2012	2011
		£000	£000
Current tax expense
Current year		2,308	3,724
Adjustment to tax expense in respect of prior periods		86	(188)
Foreign tax		1,711	648
Total current tax		4,105	4,184
Deferred tax (note 16)		(1,148)	(743)
Tax in income statement		2,957	3,441

Reconciliation of effective tax rate

		2012	2011
		£000	£000
Profit before taxation		10,572	12,768
Current tax using the UK corporation tax rate of 25.67% (2011: 27%)		2,714	3,546
Effects of:
Items not (taxable)/deductible for tax purposes		(171)	371
Adjustment to tax charge in respect of prior periods		118	(432)
Differences between overseas tax rates		232	12
Movements in temporary differences not recognised		51	-
Effect of rate change		13	(56)
Total tax expense		2,957	3,441

Deferred tax recognised directly in equity was a charge of £62,000 (2011: credit, £341,000).

The 2012 Budget on 21 March 2012 announced that the UK corporation tax rate will reduce to 22% by 2014.  A reduction in the rate from 26% to 25% (effective from 1 April 2012) was substantively enacted on 5 July 2011, and a further reduction to 24% (effective from 1 April 2012) was substantially enacted on 26 March 2012.  Further reductions to 23% (effective from 1 April 2013) and 22% (effective from 1 April 2014) were not substantially enacted at the balance sheet date. 

These reductions will reduce the company's future current tax charge accordingly and further reduce the deferred tax asset/liability at 31 May 2012 (which has been calculated based on the rate of 24% substantively enacted at the balance sheet date). 

It is anticipated that each further 1% rate reduction will further reduce the company's future current tax charge and reduce the company's deferred tax asset/liability by £6,000.

8 Dividends

	2012 £000	2011 £000
Dividends paid and recognised in the year	4,778	3,855
Dividends proposed but not recognised in the year	3,769	3,015
Dividends per share paid and recognised in the year	13.95p	11.40p
Dividends per share proposed but not recognised in the year	11.00p	8.85p

9 Discontinued operations

In October 2010 the Group withdrew from the General IT Consultancy market in order to focus on growing the Group Escrow and Assurance testing divisions, organically and by acquisition.  Relevant information security services have been retained and operated from other appropriate parts of the Assurance testing division.

Expenses in the year ended 31 May 2011 included a charge of £950,000 in respect of the withdrawal from the advisory business.

	2012 £000	2011 £000
Results of discontinued operation
Revenue	-	1,719
Expenses	-	(3,244)
Results from operating activities	-	(1,525)
Income Tax	-	427
Loss for the period	-	(1,098)
Earnings per share from discontinued activities (pence)
Basic earnings per share	-	(3.2)
Diluted earnings per share	-	(3.2)

10 Earnings per share

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

	2012	2012	2011	2011
	£000	£000	£000	£000
Profit for the year from continuing operations used for earnings per share		7,615		9,327
Amortisation of intangible assets	3,726		3,275
Exceptional items (note 3)	7,111		1,144
Unwinding of discount (note 6)	208		68
Share based payments	946		516
Tax arising on the above items	(3,207)		(1,149)
		8,784		3,854
Adjusted profit from continuing operations used for adjusted earnings per share		16,399	12,804	13,181
		Number of shares		Number of shares
		000s		000s
Basic weighted average number of shares in issue		34,263		33,922
Dilutive effect of share options		831		1,048
Diluted weighted average shares in issue		35,094		34,970

11 Profit attributable to members of the parent company

The profit for the year dealt with in the accounts of the parent company was £535,000 (2011: £2,862,000).

12 Intangible assets - Group

	Software	Development costs	Customer  contracts and relationships	Goodwill	Total
	£000	£000	£000	£000	£000
Cost:
At 1 June 2010	1,563	-	13,629	63,873	79,065
Additions	2,675	-	5,031	14,074	21,780
At 31 May 2011	4,238	-	18,660	77,947	100,845
Acquisitions through business combinations	-	-	422	1,494	1,916
Other acquisitions - internally developed	3,306	354	-	-	3,660
Reclassification to plant and equipment	(300)	-	-	-	(300)
Effects of movements in exchange rates	-	-	296	888	1,184
Contingent consideration adjustment	-	-	-	(1,000)	(1,000)
At 31 May 2012	7,244	354	19,378	79,329	106,305
Amortisation:
At 1 June 2010	9	-	3,802	-	3,811
Charge for year	145	-	3,130	-	3,275
At 31 May 2011	154	-	6,932	-	7,086
Charge for year	259	-	3,467	-	3,726
Impairment loss	6,104	-	-	-	6,104
Effects of movements in exchange rates	-	-	(110)	-	(110)
At 31 May 2012	6,517	-	10,289	-	16,806
Net book value:
At 31 May 2012	727	354	9,089	79,329	89,499
At 31 May 2011	4,084	-	11,728	77,947	93,759

Following the board's decision to terminate the implementation of a new IT system and revert back to the previous Group-wide IT system, the Group has written off the costs capitalised on the balance sheet in respect of software licences, non-usable hardware, 3rd party consultancy costs and capitalised staff costs of £6.1m.

As detailed in note 6, additions during the year ended 31 May 2012 include £103,000 of capitalised borrowing costs (2011: £64,000).

The Group has made one acquisition in the year, details of which is included in note 15.

Other adjustments are in respect of a revision to the deferred consideration balance held in respect of SDLC which was acquired in March 2010. During the year, the Directors have reassessed the amount that is expected to be paid in final settlement of the deferred consideration and as a result of this have reduced the value of goodwill by £1m as it is considered unlikely that the final amount will be payable. 

The Company has no intangible assets.

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

		Goodwill
		2012	2011
Cash generating units		£000	£000
Escrow		22,871	22,871
Escrow Europe		6,653	6,487
NCC Group Inc.		6,831	6,315
Escrow		36,355	35,673
Assurance Testing		6,024	4,530
Site Confidence Limited		6,396	6,396
Secure Test Limited		11,074	11,074
SDLC Solutions Limited iSEC Partners Inc.		7,953 11,527	8,953 11,321
Assurance		42,974	42,274
Total		79,329	77,947

When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market discount rate.

Cash flow projections are based on the Group's current two-year plan. Beyond the two-year plan these projections are extrapolated using an estimated long-term growth rate of 1%-2.5% (2011: 1%-2.5%) depending on the CGU. The growth rates used have been determined as the lower of the nominal GDP rates for the country in which the CGU is based and the long term compound annual growth rate in EBITDA estimated by management.

The discount rates used have been based on management's calculation of the weighted average cost of capital using the capital asset pricing model to calculate the cost of equity. A range of alpha factors were used to reflect the risk of the cash generating units.

The discount rate has been revised for each CGU to reflect the latest market assumptions for the risk-free rate, the Equity Risk Premium and the net cost of debt. Pre-tax market discount rates of 10.1% - 14.3% have been used in discounting the projected cash flows.

The Directors do not believe that a reasonably possible change of assumptions would cause the recoverable amounts to fall below book value for any of the cash generating units.

13 Plant and equipment - Group

	Computer equipment	Plant and equipment	Fixtures and fittings	Motor vehicles	Total
	£000	£000	£000	£000	£000
Cost:
At 1 June 2010	6,231	410	1,705	267	8,613
Additions	685	-	1,117	164	1,966
Acquisition of Group Companies	61	-	1	-	62
Disposals	-	-	-	(201)	(201)
Movement in foreign exchange rates	-	-	-	-	-
At 31 May 2011	6,977	410	2,823	230	10,440
Additions	1,720	-	1,837	63	3,620
Acquisition of Group Companies	5	-	-	-	5
Transfer from intangible assets	300	-	-	-	300
Disposals	(21)	-	(21)	(100)	(142)
Movement in foreign exchange rates	5	-	11	-	16
At 31 May 2012	8,986	410	4,650	193	14,239
Depreciation:
At 1 June 2010	5,044	395	1,059	65	6,563
Charge for year	896	7	234	53	1,190
Disposals	-	-	-	(68)	(68)
At 31 May 2011	5,940	402	1,293	50	7,685
Charge for year	1,054	8	460	52	1,574
Disposals	(15)	-	(24)	(40)	(79)
Movement in foreign exchange rates	(4)	-	(5)	-	(9)
At 31 May 2012	6,975	410	1,724	62	9,171
Net book value:
At 31 May 2012	2,011	-	2,926	131	5,068
At 31 May 2011	1,037	8	1,530	180	2,755

The company has no plant and equipment.

14 Trade and other receivables

	Group	Group	Company	Company
	2012	2011	2012	2011
	£000	£000	£000	£000
Trade receivables	14,280	12,753	-	-
Prepayments and accrued income	7,067	5,636	80	-
	21,347	18,389	80	-

15 Acquisitions

On 4 August 2011 the Group acquired 100% of the share capital of Axzona Limited for a maximum consideration of £1.7m, of which up to a maximum of £0.5m has been withheld subject to the achievement of performance criteria specified in the purchase agreement.  The performance conditions are required to be satisfied by 31 July 2012 and 31 July 2013.  The contingent consideration is expected to be paid in August 2012 and August 2013.

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

			Acquisition amounts
			£000
Acquiree's identifiable net assets at the acquisition date:
Plant and equipment			5
Trade and other receivables			59
Cash			80
Creditors & accruals			(242)
Deferred tax liability			(118)
Intangible assets purchased			422
Net identifiable assets			206
Goodwill on acquisition			1,494
Expected consideration to be paid			1,700
Less purchase consideration withheld			(500)
Net cash outflow			1,200
Cash acquired			(80)
Net cash outflow excluding cash acquired			1,120

Goodwill has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets, liabilities and contingent liabilities acquired. Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills. The amount recognised as contingent consideration reflects the amount which is considered probable to be paid and is based on profit forecasts. There are inherent uncertainties in deriving forecasts and the level of contingent consideration will be reassessed at each reporting date to reflect revisions to forecasts or differences between forecast and actual performance. 

During the period from acquisition, the Company contributed £234,000 to Group income and (£12,000) to Group cash flows. It is not practical to disclose what the contribution to Group revenue and profits would have been had the acquisition of Axzona been completed on the first day of the current period, as financial information was not prepared on an IFRS basis prior to acquisition.

During the year, the Directors have reassessed the carrying value of the deferred consideration held in respect of the acquisition and consider it unlikely that the first instalment of £250,000 will be paid in August 2012 and have therefore recognised this in the income statement (see note 3).

During the year, £3,753,000 was paid in relation to the part settlement of the deferred consideration due on the acquisition of iSec.

During the year, £2,625,000 was paid in relation to the part settlement of deferred consideration on the acquisition of SDLC Solutions Limited (see note 6).

16 Deferred tax assets and liabilities

Group

Recognised deferred tax assets and liabilities are attributable to the following:

	Assets		Liabilities		Net
	2012	2011	2012	2011	2012	2011
	£000	£000	£000	£000	£000	£000
Plant and equipment	183	335	-	-	183	335
Short term temporary differences	169	35	-	-	169	35
Intangible assets	796	231	(946)	(1,414)	(150)	(1,183)
Share based payments	765	549	-	-	765	549
Tax losses	30	-	-	-	30	-
Tax deductible goodwill	-	-	(397)	(104)	(397)	(104)
Deferred tax asset/(liability)	1,943	1,150	(1,343)	(1,518)	600	(368)

Movement in deferred tax during the year:

		1 June 2011	Recognised in income	Recognised in equity	Acquisitions	31 May 2012
		£000	£000	£000	£000	£000
Plant and equipment		335	(152)	-	-	183
Short term temporary differences		35	134	-	-	169
Intangible assets		(1,183)	1,151	-	(118)	(150)
Share based payments		549	278	(62)	-	765
Tax losses		-	30	-	-	30
Tax deductible goodwill		(104)	(293)	-	-	(397)
		(368)	1,148	(62)	(118)	600

Movement in deferred tax during the prior year:

		1 June 2010	Recognised in income	Recognised in equity	31 May 2011
		£000	£000	£000	£000
Plant and equipment		275	60	-	335
Short term temporary differences		20	15	-	35
Intangible assets		(2,314)	1,131	-	(1,183)
Share based payments		567	(359)	341	549
Tax deductible goodwill		-	(104)	-	(104)
		(1,452)	743	341	(368)

The Company has deferred tax assets related to share based payments of £252,000 (2011: £168,000).

The Group has not recognised a deferred tax asset of £101,000 (2011: £Nil) in respect of non UK tax losses due to the uncertainty over recoverability. These tax losses do not expire.

The Group has an unrecognised deferred tax liability of £800,000 (2011: £Nil) which would only arise in the event of the sale of the shares or assets in NCC Group Inc.  Due to the remoteness of this event no provision has been made.

As at 31 May 2012, the temporary differences arising from un-remitted earnings of overseas subsidiaries was £2,486,000 (2011:£1,791,000) No material tax charges are expected to arise if they were to be distributed.

17 Trade and other payables

	Group	Group	Company	Company
	2012	2011	2012	2011
	£000	£000	£000	£000
Trade payables	2,630	2,305	-	-
Amounts owed to Group undertakings	-	-	23	6,188
Contingent consideration on acquisitions	3,493	5,840	-	-
Non trade payables	2,960	2,949	-	1
Accruals	6,003	5,072	-	198
	15,086	16,166	23	6,387

18 Deferred revenue

	Group	Group	Company	Company
	2012	2011	2012	2011
	£000	£000	£000	£000
Deferred revenue	15,926	15,023	-	-
	15,926	15,023	-	-

Deferred revenue of £11,662,000 (2011: £11,358,000) mainly consists of Escrow agreement revenue that has been deferred to be released to the income statement over the contract term in accordance with the group's accounting policy.

Deferred revenue of £4,264,000 (2011: £3,665,000) consists of website monitoring and load testing agreement revenue that has been deferred to be released to the income statement over the contract term in accordance with the group's accounting policy.

19 Non-current liabilities

		Group	Group	Company	Company
		2012	2011	2012	2011
		£000	£000	£000	£000
Secured bank loan	28,257		25,367	-	-
Issue costs	(220)		(265)	-	-
Amortisation of issue costs	112		80	-	-
Interest bearing loans	28,149		25,182	-	-
Deferred tax (note 16)	1,343		1,518	-	-
Contingent consideration                                                             on acquisitions (note 6)	250		4,536	-	-
Other financial liabilities		579	206	-	-
Total non current liabilities		30,321	31,442	-	-

Other financial liabilities of £579,000 relates to the balance of a rent free period (2011: £206,000) which is released to the income statement over the term of the lease.

20  Provisions

		Remedial costs
		£000
At 1 June 2011
Current	-
Non-current	-
Arising during the year	904
At 31 May 2012		904
Analysed as:
Current		904
Non-current		-

Remedial costs relate to the costs expected to be incurred as a result of the termination of the Group's planned IT system implementation and transfer of operations to its previous IT system. This transfer is expected to be completed by October 2012. 

21 Other financial commitments and contingent liabilities

a) Capital commitments at the end of the financial year, for which no provision has been made, are as follows:

			2012	2011
			£000	£000
Contracted			-	197

b) Non-cancellable operating lease rentals are payable as follows:

	2012		2011
	Land and Buildings £000	Other £000	Land and Buildings £000	Other £000
Within 1 year	178	83	201	125
In second to fifth year inclusive	1,379	203	1,322	215
	1,557	286	1,523	340

There are no contingent liabilities not provided for at the end of the financial year.

22 Related party transactions

NCC Group's Non Executive Chairman Paul Mitchell is a director of Rickitt Mitchell and Partners Limited and the Group conducted business to the value of £90,500 (2011: £399,500) with Rickitt Mitchell and Partners Limited. Included within the charge is £25,500 relating to advice received in connection with the acquisition made during the year ended 31 May 2012.  The remaining £70,000 relates to the services of the Non Executive Chairman.  Rickitt Mitchell and Partners Limited also held 7,000 1.0p ordinary shares (2011: 7,000).

23 Principal risks and 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 entry of a significant competitor to threaten the Group's leading position in its domestic Escrow 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.

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

 

END

 

 

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