Interim Results

NCC Group PLC 23 January 2007 23 January 2007 NCC Group plc Pre-tax profits up 23% & Group expands web testing capabilities NCC Group plc (AIM: NCC), the provider of Escrow Solutions, Testing Solutions and Consultancy services, published its interim results for the six months to 30 November 2006 and today has acquired the web assurance testing company, Site Confidence, for Â£9.1m in cash. Highlights â€¢ Revenue up by 17% to Â£11.5m (2005: Â£9.8m) â€¢ Pre-tax profits up by 23% to Â£3.2m (2005: Â£2.6m) â€¢ Earnings per share up by 24% to 6.8p (2005: 5.5p) â€¢ Interim dividend increased by 50% to 1.5p (2005: 1.0p) â€¢ Net funds at end of half-year up at Â£1.6m (2005: Â£1.5m) â€¢ Continued strong demand for both Verification (sales up 14%) and Penetration Testing (sales up 41%) â€¢ US investments, including July 2006 acquisition of Source Harbor, showing good returns with profitable revenues of over $1m â€¢ Acquisition of Site Confidence, a leading complementary web assurance testing and monitoring company, for up to Â£9.1m in cash - see separate announcement Rob Cotton, NCC Group Chief Executive, said: 'The Group has continued to show strong organic growth and cash generation, based around the established and predictable software escrow business. The verification and particularly web penetration testing businesses are showing notable fast growth as their markets develop. Our US business is now firmly established and showing good returns. 'Site Confidence provides us with a complementary range of products and services, a sales and operational hub in the South of England to increase our market penetration for all our businesses, and considerable opportunities for cross selling. 'We are developing a very strong platform for the future.' Enquiries: NCC Group (www.nccgroup.com) Today 020 7457 2020 Rob Cotton, Chief Executive Thereafter 0161 209 5432/5200 Paul Edwards, Group Finance Director College Hill Adrian Duffield/Corinna Dorward 020 7457 2815/2803 Note to editors A software escrow agreement is a contract made between three parties: the software vendor (the licensor), the software customer (the licensee) and an independent third party (the escrow agent, such as NCC Group). Under the terms of the agreement, the licensor agrees to send a copy of the source code to the escrow agent and the escrow agent agrees to hold the source code securely, and to release it to the licensee only in the event of certain predefined trigger events. These include the insolvency of the licensor or its failure to provide support services as defined in the software license agreement. Contract - represents an escrow agreement to provide escrow services for an owner of the software on behalf of licensees who have signed to the agreement. Beneficiary - represents licensees who have signed to the contract and who receive the benefits of escrow as set out in the contract. Minimum annual fee - a charge is levied on the owner of the software under a multiple agreement where there are fewer than two beneficiaries to the contract. Once two or more beneficiaries are signed to the agreement the minimum fee is no longer charged. The fee is charged at the end of the year and released to the P&L account over the following twelve months. This will decline as it intended that beneficiaries are signed to agreements. Interim Statement Trading results During the first six months of the financial year to 30 November 2006, NCC Group saw strong growth with revenue after deferred income increasing by 17% to Â£11.5m (Â£9.8m in 2005). The Escrow Solutions and Testing Solutions divisions both continued to increase revenue strongly, growing by 27% and 18% respectively. Group operating margins improved by over 1% in the first six months to 28% (27% in 2005), after the additional costs of the planned and substantial investments made in the management infrastructure across the Group. Group operating profits increased faster than the revenue growth at 22% to Â£3.2m (Â£2.6m in 2005) as NCC Group continued to benefit from tight control of its fixed costs. Due to negligible net financing costs, the Group pre tax profits increased by 23% to Â£3.2m (Â£2.6m in 2005). Basic earnings per share grew by 24% to 6.8p (5.5p in 2005). Diluted earnings per share were up 25% to 6.6p (5.3p in 2005). The interim dividend has been increased by 50% to 1.5p per share up from 1.0p in 2005. It will be paid on 2 March 2007 to shareholders on the register at the close of business on 2 February 2007. The Group continues to be strongly cash generative with inflows from operating activities before interest and tax increasing by 12% to Â£3.5m (Â£3.1m in 2005) in the period. At 30 November 2006, net funds were Â£1.6m, (Â£1.5m in 2005). After accounting for the cash outflows for the initial acquisition cost of Site Confidence, NCC Group expects to have a net debt of less than Â£1m at the financial year end. Web assurance testing acquisition NCC Group has today also acquired Site Confidence, see separate announcement, for a maximum cash consideration of Â£9.1m, payable in three stages up to June 2008, and subject to the trading performance of the business. This earnings enhancing acquisition further strengthens the Group's position in the independent web assurance and IT security market with a complementary range of web site assurance products and services. Based in Dorking, Surrey, Site Confidence is a leading UK website performance monitoring company. It provides customers with independent, reliable and real-time information around the clock about the technical performance of their web sites, which enables them to detect performance problems, respond quickly and prevent future slowdowns or outages. Online consumer demand is driving the need for all online retail and marketing businesses to ensure they have the strongest, fastest and most robust web capabilities in an increasingly competitive market. Increasingly site managers and owners need independent assurance that their online image and capabilities meet, if not exceed, consumer expectations. The operation will be managed independently but will develop close links with the Group's existing IT Assurance Testing business. The business has over 400 blue chip clients and direct cross selling opportunities will be exploited. Review of divisional performances Overall the Group has seen substantial year on year growth, with strong sales performances coming from the core Escrow Solutions and Testing Solutions businesses. Business segment profits grew by 23% to Â£3.9m (Â£3.2m: 2005). Escrow Solutions UK: The Group's core operation has seen a strong overall performance with a 17% growth in revenue to Â£5.5m (Â£4.7m in 2005) and a 20% increase in operating profits to Â£3.3m (Â£2.8m in 2005). Escrow Solutions implemented price increases by an average of 6% with effect for new business from November 2006 and for renewals from January 2007. The Group continues to experience a better than anticipated agreement and beneficiary termination rate which is below 11% (11% is, the Board believes, now a safe planning assumption). There are now 14,020 beneficiaries of the 7,203 Escrow agreements, including 898 minimum annual fees. Through 2007 NCC Group will be focusing particularly on software owners to devise incentive plans and packages to encourage them to increase Escrow adoption rates for their products. As well as the strong increases in contract business, the Escrow Solutions account management team continue to be directly responsible for the significant growth in sales of Verification Testing, which is currently reported in the Testing Solutions business unit. The strong uptake in Verification Testing is also a result of a better understanding of the benefits by clients. NCC Group employs 77 sales account managers within its Escrow Solutions UK business, an increase from 67 at the start of the financial year. The Board anticipates growing these numbers more quickly once Site Confidence has been fully integrated into the Group, thereby providing the business with a second location from which to recruit account managers. Germany: Trading in Germany has continued to be difficult as the Group has found the speed of adoption and increase in product awareness in the market to be unacceptably low. In the first half of this year the business lost Â£192,000 (2005: loss Â£144,000) on revenues of Â£88,000. The Board has now cut back the investment programme and will carefully review its strategic importance to the Group. As a result, in the second half of the year NCC Group expects to see the rate of loss decrease. USA: The US business, which was formed from the acquisition of two small Escrow providers, has performed well and is ahead of plan. Gross revenues were Â£519,000 ($1m) and the business contribution Â£69,000 before amortisation. These acquisitions marked a significant move to take NCC Group's successful UK escrow business template into North America. The sales template has required significant refinement to fit with the sales culture in the US, but the Group has started to make real headway in this important new market for the Group's services. To date the Board has been pleased with the leadership of the US business. NCC Group has invested extensively in ensuring the right infrastructure is in place and that the products deliver against the market's expectations and needs. The US business is also focusing on the education of its market, including the need for Verification Testing and the more comprehensive escrow services the Group provides. Testing Solutions This division, consisting of Verification, Penetration and Specialist Testing, grew substantially in the last six months, continuing the positive momentum from the year end. It remains the Group's aim to become the market leading provider of IT Assurance Testing. The opportunities afforded the Group from the Payment Card Industry (PCI) marketing initiatives, outlined below, and the acquisition of Site Confidence are significant milestones towards achieving this objective. Overall Testing Solutions saw an 18% increase in revenue to Â£3.2m (Â£2.7m in 2005) with the anticipated small decline (Â£45,000) in operating profits to Â£0.5m (Â£0.6m in 2005). This reduction was as a result of strengthening the senior management team of the business units as well as further investing in testing resources to meet increasing demand. Escrow Verification Testing continues to perform strongly, delivering yet another record six months. In total 169 (148: 2005) verifications were delivered, an increase of 14%. As all the sales for Verification are managed and secured by the escrow sales team, the Group is planning to include Verification sales figures and profit within the Escrow business in the next financial year. Penetration Testing will benefit from the Payment Card Industry's (PCI) standards that have been mandated by all major card providers including Visa and MasterCard by June 2007. Even without the introduction of these standards, the demand for NCC Group's services has never been stronger and the Group has seen a growth of 41% in delivery as 467 tests were carried out (331: 2005). Specialist Testing, the smallest unit, saw an expected slight fall in revenue, but the prospects for the core areas of work remain solid as NCC Group anticipates being awarded two sizeable contracts that underpin the second half of the year. NCC Group has recently launched a number of marketing campaigns and initiatives including direct mail, trade and national press advertising plus market surveys to directly support a range of its services. For example, in a recent awareness campaign, targeting finance directors from 500 of the UK's plcs, over 47% risked the security of their business and customers by inserting an unidentified memory stick into their computers. UK business has never been so susceptible to the risk of serious electronic fraud and unless that threat is taken much more seriously, and quickly, by way of a significant growth in their commitment to security and prevention measures, there will be a substantial increase in committed fraud, the cost of which will ultimately be passed on to the consumer. In order to support not only the ambition outlined above and in line with market developments, the Group is now focussing its resources on developing and delivering more general IT assurance services and products. It is reducing its reliance on some of the more niche, unpredictable testing specialisms which have lower margins. The Specialist Testing unit is being absorbed into the other Testing areas and certain products and services will be streamlined. Low yielding assignments will not be undertaken. The Testing Solutions operation has now been branded Assurance Testing and encompasses Penetration Testing, together with the newly acquired Site Confidence operation. These businesses, along with the retained higher margin specialist services, will be marketed together and form the basis of a highly appealing portfolio of IT assurance testing services that broadens NCC Group's market appeal as well as offering considerably more opportunities at stronger day rates and margins. As a result of the recruitment drive, the Penetration Testing business now has an Operational Director and a Commercial Sales Manager with Verification having a dedicated Business Manager. The penetration testing team has grown to 17 testers, excluding the small Argentinean off shore resource. With the acquisition of Site Confidence, NCC Group sees excellent opportunities to provide an additional penetration testing facility in the South of England. The Group plans to recruit extensively in the South of England using the Site Confidence premises in Dorking as a base for both testers and sales resource. This will significantly help the recruitment process and enhance the Group's growth prospects in the medium term. Consultancy This division has continued to operate effectively in a competitive market and has only competed in sectors that have enable the Group to maintain margins. As a result the Group has maintained a similar level of revenue achieved last year at Â£2.2m but returned to normal levels of profitability for the six months to 30 November 2006 of Â£0.2m (Â£42,000 loss: 2005). During the last six months there has been a greater percentage of client spend on information security consultancy work, driven particularly by the PCI standards. NCC Group is well positioned to meet the increasing demand. Current trading and outlook During the six months the Group maintained its focus on its core business, Escrow Solutions, whilst widening its geographical reach, and refining and enhancing its total IT assurance product portfolio. Considerable resources have gone into recruitment and also acquiring the right business at the right price to enhance and develop the Group's operations in the South of England. The Group's Escrow and testing businesses are in very good shape and are expected to continue to perform strongly throughout 2007. The Testing Solutions and Consultancy order books have increased and now stand at Â£2.7m and Â£1.8m respectively (up from Â£2.1m and Â£1.7m in November). The continued improvement in Escrow agreement termination rates means that NCC Group now expects annual renewals to be Â£9.2m (Â£9.1m in November 2006) in this financial year. The Board remains confident of a strong second half to the financial year with further opportunities to develop the business in the following year. Group income statement 2006 2005 2006 six months six months year ended ended ended Notes 30 November 30 November 31 May (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 Revenue 2 11,516 9,807 20,747 Cost of sales (6,344) (5,424) (10,647) Gross profit 5,172 4,383 10,100 Administrative expenses before amortisation of intangible assets (1,878) (1,738) (3,417) Earnings before interest, tax and amortisation 3,294 2,645 6,683 Amortisation of intangible assets (60) - (47) Total administrative expenses (1,938) (1,738) (3,464) Operating profit 2 3,234 2,645 6,636 Financial income 43 105 175 Financial expense (66) (144) (260) Net financing costs (23) (39) (85) Profit before taxation 3,211 2,606 6,551 Taxation (982) (829) (1,993) Profit for the period 2,229 1,777 4,558 Attributable to equity holders of the company 2,229 1,777 4,558 Profit for the period 2,229 1,777 4,558 Earnings per share 4 Basic earnings per share 6.8p 5.5p 14.0p Diluted earnings per share 6.6p 5.3p 13.6p Group balance sheet 2006 2005 2006 30 November 30 November 31 May (unaudited) (unaudited) (audited) Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Non current assets Property, plant and equipment 1,276 1,120 1,257 Intangible assets 31,314 27,419 30,420 Deferred tax assets 475 229 423 Total non-current assets 33,065 28,768 32,100 Current assets Trade and other receivables 5 5,582 3,742 4,840 Cash and cash equivalents 1,590 5,961 5,139 Total current assets 7,172 9,703 9,979 Total assets 40,237 38,471 42,079 Equity Issued capital 326 326 326 Share premium 19,929 19,913 19,913 Retained earnings 9,605 5,146 7,964 Currency translation reserve 27 - 15 Total equity attributable to equity holders 29,887 25,385 28,218 of the parent Total equity 29,887 25,385 28,218 Liabilities Interest bearing loans - 3,285 2,689 Lease incentives 117 130 123 Total non current liabilities 117 3,415 2,812 Interest bearing loans - 1,200 1,200 Trade and other payables 6 2,613 2,382 2,750 Deferred revenue 6,611 5,234 6,037 Current tax payable 1,009 855 1,062 Total current liabilities 10,233 9,671 11,049 Total liabilities 10,350 13,086 13,861 Total liabilities and equity 40,237 38,471 42,079 Group cash flow statement 2006 2005 2006 six months six months year ended ended ended 30 November 30 November 31 May Notes (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 Cash inflow from operating activities Profit for the period 2,229 1,777 4,558 Adjustments for: Depreciation charge 304 248 550 Share based charges 250 208 468 Amortisation of intangible assets 60 - 47 Finance expense 23 39 85 Profit on sale of property plant and equipment - - (9) Income tax expense 982 829 1,993 Operating cash flow before changes in working capital 3,848 3,101 7,692 Increase in receivables (719) (147) (1,045) Increase in payables 375 170 636 Cash generated from operating activities before 3,504 3,124 7,283 interest and tax Interest paid (83) (149) (272) Income taxes paid (1,110) (761) (1,808) Net cash generated from operating activities 2,311 2,214 5,203 Cash flows from investing activities Interest received 43 105 175 Proceeds from the sale of plant and equipment - - 34 Acquisition of property, plant and equipment (319) (366) (824) Acquisition of business (896) - (2,546) Net cash used in investing activities (1,172) (261) (3,161) Cash flows from financing activities Proceeds from the issue of ordinary share capital 16 94 94 Payment of bank loans (3,900) (600) (1,200) Payment for shares in minority interest - (18) (18) Equity dividends paid (815) (571) (897) Net cash from financing activities (4,699) (1,095) (2,021) Net (decrease) / increase in cash and cash equivalents 7 (3,560) 858 21 Cash and cash equivalents at beginning of period 5,139 5,103 5,103 Effect of exchange rate fluctuations on cash held 11 - 15 Cash and cash equivalents at end of period 1,590 5,961 5,139 Statement of changes of equity Share Share Retained Currency Minority Total capital premium earnings translation interest Equity Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Balance at 1 June 2005 326 19,819 3,755 - (23) 23,877 Share based charges - - 208 - - 208 Profit for the period - - 1,777 - - 1,777 Recovery of VAT on share issue fees - 94 - - - 94 Purchase of minority interest - - (23) - 23 - Dividends to shareholders - - (571) - - (571) Balance at 30 November 2005 326 19,913 5,146 - - 25,385 Balance at 1 June 2005 326 19,819 3,755 - (23) 23,877 Share based charges - - 468 - - 468 Deferred tax on share based payments - - 103 - - 103 Profit for the period - - 4,558 - - 4,558 Currency translation reserve - - - 15 - 15 Recovery of VAT on share issue fees - 94 - - - 94 Purchase of minority interest - - (23) - 23 - Dividends to shareholders - - (897) - - (897) Balance at 31 May 2006 326 19,913 7,964 15 - 28,218 Balance at 1 June 2006 326 19,913 7,964 15 - 28,218 Share based charges - - 250 - - 250 Deferred tax on share based payments - - (23) - - (23) Profit for the period - - 2,229 - - 2,229 Shares issued - 16 - - - 16 Currency translation reserve - - - 12 - 12 Dividends to shareholders - - (815) - - (815) Balance at 30 November 2006 326 19,929 9,605 27 - 29,887 Notes to the interim statement 1 Accounting policies Basis of preparation The interim statement has been prepared on the basis of the accounting policies set out in the annual report and financial statements for the year ended 31 May 2006 and in accordance with those accounting policies expected to be followed in the year end financial statements. The Group has chosen not to adopt IAS 34 ' Interim Financial Statements' in preparing the interim statement since the adoption of this standard is not mandatory. 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 2006, from which data has been extracted, were prepared under IFRS and have been delivered to the Registrar of Companies. The report of the auditors was unqualified in accordance with section 235 Companies Act 1985 and did not contain a statement under section 237 (2) or (3) Companies Act 1985. The interim financial statements were approved by the Board of Directors on 22 January 2007. 2 Segmental information The Group is organised into three primary business segments, namely Escrow Solutions, Testing Solutions and Consultancy. These three segments are the Group's primary reporting format for segment information. 2006 2005 2006 30 November 30 November 31 May Â£000 Â£000 Â£000 Revenue by business segment Escrow Solutions (UK) 5,511 4,698 9,832 Escrow Solutions (Germany) 88 70 183 Escrow Solutions (US) 473 - 371 Total Escrow Solutions 6,072 4,768 10,386 Testing Solutions 3,208 2,722 5,704 Consultancy 2,236 2,317 4,657 Total revenue 11,516 9,807 20,747 Operating profit by business segment Escrow Solutions (UK) 3,330 2,773 6,065 Escrow Solutions (Germany) (192) (144) (384) Escrow Solutions (US) 9 - 131 Total Escrow Solutions 3,147 2,629 5,812 Testing Solutions 542 587 1,300 Consultancy 199 (42) 616 Segment operating profit 3,888 3,174 7,728 Head office costs (654) (529) (1,092) Operating profit 3,234 2,645 6,636 The table below provides additional disclosure on revenue by geographical market where the customer is based 2006 2005 2006 30 November 30 November 31 May Â£000 Â£000 Â£000 Revenue by geographical segment UK 9,041 8,561 17,699 Rest of Europe 979 634 1,275 Rest of the World 1,496 612 1,773 Total revenue 11,516 9,807 20,747 3 Dividends 2006 2005 2006 30 November 30 November 31 May Â£000 Â£000 Â£000 Dividends paid and recognised in the period 815 571 897 Dividends proposed but not recognised in the 489 326 815 period Dividends per share paid and recognised in the 2.50p 1.75p 2.75p period Dividends per share proposed but not recognised in 1.50p 1.00p 2.50p the period 4 Earnings per share The calculation of earnings per share is based on the following: 2006 2005 2006 30 November 30 November 31 May Â£000 Â£000 Â£000 Profit for the period 2,229 1,777 4,558 Number of Number of Number of Shares Shares Shares 000's 000's 000's Basic weighted average number of shares 32,609 32,604 32,604 in issue Dilutive effect of share options 1,116 724 800 Diluted weighted average shares in issue 33,725 33,328 33,404 5 Trade and other receivables 2006 2005 2006 30 November 30 November 31 May Â£000 Â£000 Â£000 Trade debtors 4,084 2,428 3,464 Prepayments and accrued income 1,498 1,314 1,376 5,582 3,742 4,840 6 Trade and other payables 2006 2005 2006 30 November 30 November 31 May Â£000 Â£000 Â£000 Trade creditors 218 485 448 Other taxation and social security 763 692 804 Accruals 1,621 1,146 1,465 Other creditors - 17 - Interest 11 42 33 2,613 2,382 2,750 7 Reconciliation of net cash flow to movement in net funds / (debt) 2006 2005 2006 30 November 30 November 31 May Â£000 Â£000 Â£000 (Decrease) / increase in cash in the period (3,560) 858 21 Effect of exchange rate fluctuations on cash held 11 - 15 Cash outflow from movement in loans and loan notes 3,900 600 1,200 Non cash items (11) (3) (7) Movement in net funds in the period 340 1,455 1,229 Net funds / (debt) at beginning of period 1,250 21 21 Net funds / (debt) at end of period 1,590 1,476 1,250 Analysis of net funds / (debt) At beginning of Cash Non cash At end of year flow items period Â£000 Â£000 Â£000 Â£000 Cash and cash equivalents 5,139 (3,560) 11 1,590 Term loan (3,889) 3,900 (11) - Total 1,250 340 - 1,590 This information is provided by RNS The company news service from the London Stock Exchange

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