19th Jul 2005 07:00
NCC Group PLC19 July 2005 Organic growth drives NCC Group operating profit up 27% NCC Group plc, a well-established provider of Escrow Solutions, TestingSolutions and Consultancy, operating predominately in the UK and Europe,published its preliminary results for the year ended 31 May 2005 today. TheEscrow Solutions are provided globally. Highlights • Group turnover up by 24% to £18.0m (2004: £14.5m) o All three business units grew over 23% • Group operating profits* up by 27% to £6.1m (2004: £4.8m) • Underlying Group pre tax profits** up by 97% to £5.7m (2004: £2.9m) • Group pre tax profits up by 143% to £3.4m (2004: £1.4m) • Underlying earnings per share*** up by 22% to 12.6p (2004: 10.3p) • Final dividend proposed at 1.75p giving a total dividend of 2.50p • Net debt free at 31 May 2005 • Staff numbers up 42% to 216 • Notable demand for Penetration Testing - 525 tests up 71% • Investment programme to extend Escrow Solutions into Continental Europe initiated • Annual renewals up to £6.7m (2005: £5.8m) * Before goodwill amortisation of £1.5m. ** Before goodwill amortisation andexceptional items of £2.36m. *** Fully diluted, before goodwill amortisation andexceptional items of £2.36m Rob Cotton, NCC Group Chief Executive, said: "We have produced our strongest ever result - our first year as a listed publiccompany. "We have continued to grow profits and turnover organically by investing in ourpeople. The results clearly confirm that good quality recruitment andstrengthening the business units' management has improved the Group'sperformance and the sustainable nature of the business model. "One of the most notable growth areas being in Penetration Testing, where wecarried out 525 tests, averaged over two a day, up 71%. "We are confident about the current year and we are now looking to extend ourEscrow business into Continental Europe." 19 July 2005 Enquiries: NCC Group (www.nccgroup.com) 0161 209 5432/5200 Rob Cotton, Chief Executive Paul Edwards, Group Finance Director College Hill Adrian Duffield/Clare Warren 020 7457 2815/2055 Financial review NCC Group saw strong organic growth for the year to 31 May 2005. Turnover grewby 24% to £18.0m (2004: £14.5m). Each business unit grew revenue by over 23%with five of the six sub divisions producing record results in both turnover andprofitability. Overall the split of revenue across the Group's three divisionsremains consistent year-on-year with Escrow Solutions accounting for 46%,Testing Solutions 24% and Consultancy 30%. Group operating profits before exceptional items and goodwill were up 27% to£6.1m (2004: £4.8m). Operating margin before goodwill amortisation was up to33.9% (2004: 33.1%) and from 32.9% at the time of the interim results. Theunderlying margin is even stronger when the floatation and plc costs of £0.2mare excluded. Underlying Group pre tax profits, before goodwill amortisation and exceptionalitems of £2.36m, were up by 97% to £5.7m (2004: £2.9m). The exceptional chargeof £0.86m related to capitalised deal fees incurred at the time of 2003 buyout,which has now been written off as the debt has been repaid. Group profits before tax amounted to £3.4m (2004: £1.4m). The tax charge, after adding back goodwill amortisation, is 30.3% (2004: 30.7%)with the Group's underlying tax rate marginally over standard UK rate of 30%because of a small amount of non-deductible expenses. Underlying earnings per share, after adjusting for goodwill amortisation andexceptional costs, were up 22% to 12.6p (2004: 10.3p). The diluted earnings pershare were 6.0p (2004: 2.6p), Straight forward year on year growth comparisons are distorted due to the changein capital structure following the floatation. This has affected the level ofinterest payable as debt has been replaced by equity and the average number ofshares in issue has significantly increased. The Board is committed to a progressive dividend policy and is recommending afinal dividend of 1.75p per ordinary share making a total of 2.5p for the year.This represents cover of 4.9 times (2004: nil) based on fully diluted earningsand after adding back goodwill amortisation and exceptional items. If approved,the dividend will be paid on 30 September 2005 to shareholders on the registerat 2 September 2005. The ex-dividend date will be 31 August 2005. The Group is highly cash generative with operating cash inflows for the yearbeing £7.7m which represents 125% of operating profits (2004: 109%). The Groupexceeded expectations by becoming net debt free at the year end. Capital expenditure increased to £0.8m (2004: £0.2m) representing the expansionand refurbishment of the Group's new and existing leased accommodation inManchester and investments in its IT infrastructure, all of which are essentialto support the planned levels of growth. The Board does not expect capitalexpenditure to increase although it will always seek to provide an appropriateinfrastructure to attract and retain employees. The Company was admitted to AIM on 12 July 2004. The floatation raised £38.1mbefore expenses through a placing of 22.4m ordinary shares. Of the proceeds,£19.8m was for the selling shareholders and £18.3m of the proceeds received bythe Company was used to repay existing debt. Business unit performance Overview The organic growth in each business unit is based on the Group's position as aleading independent trusted adviser. The Group has also seen real benefits fromits listing. The Board has not seen any signs of economic decline in the market sectors inwhich the Group operates. The Escrow Solution is a 'peace of mind' propositionwhich provides real benefit in all economic times, whilst the independence ofthe Consultancy and Testing Solutions business units delivers the rightsolutions through unbiased opinion. The Group covers a broad range of market sectors through a wide range ofproducts and services with a clear and unchanged philosophy. NCC Group doesnot sell or offer third party solutions; it will not operate as a 'body shop' orbecome a solution implementer or reseller. The Board continues to manage the Group through the three distinct businessunits; Escrow Solutions, Testing Solutions and Consultancy. Each is independentof the others and each is run by an autonomous management team. There is nofocus on cross selling, other than for Verification Testing. The increase in the Group's operating margin reported above was helped by thecontinued application of strict financial control with the increase in headoffice costs arising from the additional costs of being a listed company. Escrow Solutions Escrow Solutions is the cornerstone of the business and the management hasexperienced good growth in all the key measures of profitability; new contractsand beneficiaries, renewals and sales opportunities for Verification Testing. Turnover increased to £8.2m from £6.7m in 2004, up 23%. With an increase in thecompletion of agreements deferred income has increased to £4.9m (2004: £4.0m).Contract renewals, which represented £5.8m, benefited from improvements in thetermination process. Contract terminations are at 10.4% and agreementbeneficiary terminations are at 11.4%, which is much lower than the 13% themanagement use as a guideline and safe planning assumption. Profitability for this division grew by 32% to £5.0m (2004: £3.7m). The beneficiary base has now grown to over 11,000 and the number of contracts isnow above 6,200. Last year, there were over 9,500 beneficiaries and over 5,300contracts. Annual renewals ended the year ahead of forecast reflecting a better thanexpected termination rate and are now forecast to be £6.7m for this coming year. Testing Solutions Testing Solutions profitability grew to £1.0m, an increase of 18%, with a growthin turnover of 26% to £4.4m (2004: 3.4m). The business unit has seen very strong growth in the Penetration Testingbusiness as UK businesses and the public sector show further signs of taking therisk of intrusion more seriously. Penetration Testing is an evolving science; NCC Group has continued to movefurther away from the tools based providers by adding social engineering andforensics to its impressive security armoury. Businesses are more than ever atthreat from their own employees and the increasing vulnerabilities from thesignificant move towards mobile devices, wireless networks and home working. In the new year, the Board is looking to provide a managed service offering,where the Group will have the capability to detect network intrusion on behalfof clients 24 hours a day and seven days a week. The Escrow Solutions business is responsible for generating the sales lead forthe Full Verification Testing service which is currently the Group's biggesttesting area. Once the lead is generated, it is the role of the verificationconsultants to deliver the verification in association with both the owner ofthe application and the licensee. The Group sees Verification Testing and Penetration Testing to be the areas ofgreatest opportunity. Due to intense day rate pressure the Specialist Testingunit's revenues declined by 2% year on year. However, the fall was mitigated byhigher volumes. Consultancy Consultancy has seen very strong growth, with a 24% increase in revenue takingturnover in the year to £5.4m (2004: £4.4m), with profitability growing to£1.0m, an increase of 14%. The IT Consultancy unit grew by 9% whilst the IS Consultancy operation grew by162% as it began to achieve critical mass. However, the retention of margin has been through IT Consultancy rather than ISConsultancy where investment is still being made in the business unit. Inaddition, NCC Group has carefully managed utilisation. The management targetsconsultants on 80% utilisation and have resisted the temptation to operatehigher levels. We continue to only deliver assignments on a time and materialsbasis and have avoided the risks of long term fixed price contracts. Employees, recruitment and retention Recruitment and retention will always be the biggest obstacle to growth for apeople business such as the NCC Group. The Board has always stated that it isits intention to continue to invest in people to forge organic growth across theGroup as the management firmly believe this route can deliver the greatestreturns. The Board is committed to gaining the best people in the market whereverpossible. The Group employs 216 staff, which is 64 more than at the end of lastyear, an increase of 42%, with recruitment in all areas of the Group. The management is ambitious in its recruitment and to gain quality candidatesoffers very competitive packages with a number of attractive benefits includingshare ownership and option based schemes for all employees. NCC Group hasevolved its offerings in order to compete in a very competitive market as thisis the route to growth but there are more vacancies than ever before, with feweravailable candidates. This is due to the low levels of unemployment andbusinesses succeeding at retaining key staff. The main focus for recruitment is on Escrow Solutions, where the Group needsskilled account managers of the highest quality and potential, who understandhow to sell and how to manage accounts. The sales process does not allow forthe application of a script based, autodialed call centre environment and themanagement believe that this approach is an outmoded mechanism for sustainablegrowth. The Board has taken its first steps towards developing a graduate academy. Todate NCC Group has recruited seven new graduates. Although refinements will benecessary, the Group is very confident of developing this stream of recruitmentto complement its other activities. Strategy The Group's strategy remains unchanged. It is to build on NCC Group's positionas the UK market leader for escrow solutions by further penetrating the softwareescrow market, while continuing to grow its Testing Solutions and Consultancybusinesses. NCC Group has successfully grown organically by increasing itsclient base and product range across the Group. The Board has also been actively looking at acquisitions in complementarybusinesses to support its organic growth plans. To date it has not found abusiness where the price or strategic fit meets with its expectations. TheBoard has had detailed discussions with a number of companies involved inpenetration testing, process outsourcing consultancy and escrow, but none havesufficiently met the criteria for a successful acquisition. The Board will continue to pursue acquisitions but will not invest without beingvery clear that returns on investment and a successful integration can beachieved. The Group has a strong balance sheet which will enable it to makeacquisitions, either strategic or value enhancing at the right price and where asuccessful integration can be achieved. The lack of an acquisition has not impaired the Group's growth as has been shownby the ability to grow organically, consistently at over 20% per annum. Themanagement's track record has shown that it can quickly revise its strategic andmarket objectives and enter markets quickly, for example Penetration Testing andIS Consultancy. Investment in Continental Europe As stated at the time of the Group's floatation, the Directors recognise thatthe lack of a significant provider of software escrow solutions in ContinentalEurope may provide an opportunity for the Group to address that market in thefuture. In each of the last two years, NCC Group has sold in excess of £1.0m of EscrowSolutions into Continental Europe, of which only a small proportion has beendirectly sold by its single employee German subsidiary. The Boards now actively plans to invest in its German operation in order totarget both the German and Dutch markets. It has identified a small team toestablish a stronger presence in Germany, to be followed by an operation in theNetherlands. The Board has commissioned market research to confirm its views onthese two markets as it believes that whilst they may is not as mature as theUK, continental markets have the potential to be as big. The Board expects tomake an initial investment of £0.5m over the next 12 months to establish thebusiness. Accounting Standards - IFRS NCC Group currently plans to adopt International Financial Reporting Standards(IFRS) in the accounts to 31 May 2006, so as to ensure comparability of itsaccounts with those on the Full List. Accordingly the Board intends to publishinterim accounts to 30 November 2005 under IFRS. This is two years ahead of thecurrently mandated date. An initial assessment of adopting the standards shows an impact on goodwillamortisation, a charge for the cost of employee-based share payment schemes, achange to the accounting for proposed dividends and deferred taxation. Of these items, the most significant is the charge relating to the cost ofemployee-based share payment schemes and the Board has had the chargeindependently valued. The change for amortisation of goodwill would potentially reduce theamortisation charge whilst the dividend charge would only show dividendsactually paid, not proposed. A deferred tax asset will be created representingthe credit arising on the cost of employee based share schemes charged to theprofit and loss in the year. In addition there will be numerous presentationalchanges. IFRS are constantly being updated. However, by way of illustration theprincipal effects on the accounts for the year ended 31 May 2005 are shownbelow. Illustration of potential profit and loss account impact 2005 £000Charge for share based payment schemes(£1.013m over a three year period) 338 Reduction in the charge for goodwill amortisation (1,500) Deferred tax credit arising on the cost of employee based share schemes (101) Profit and loss account credit (1,263) Illustration of potential balance sheet impact 2005 £000's Increase in intangible assets as a result of the non amortisation of goodwill 1,500 Reduction in accruals for dividend 571 Deferred tax asset arising on the cost of employee based share schemes 101 Increase in net assets 2,172 A full reconciliation of the UK GAAP to IFRS accounts will be carried out in thenext few months and the Board intends to include a reconciliation of theseamounts in the interim accounts for the six months to 30 November 2005. Outlook and current trading Escrow Solutions will continue to see deeper penetration into the Group'scustomer base, whilst providing Verification Testing with more opportunitiesthan ever before. NCC Group will continue to retain its specialist testingbusiness to ensure its technical credibility remains undiminished, with theobjective of retaining its turnover and levels of profitability in a competitivetesting market. Penetration Testing and Information Security Consultancy are still fledglingmarkets, but the Group has positioned itself well. NCC Group's consultants areexperts who do not rely on tools to provide answers alone and are not confusedby vendor or application relationships. This, the management believe is the keyto success. The Information Technology Consultancy targets remain ambitious; the Boards hasbalanced profitability and consultant utilisation and will deliver real growthby continued recruitment of senior experienced consultants. The client base isever expanding, but importantly the Board anticipates continuing to work withthe vast majority of its existing clients many of whom have been with NCC Groupfor a number of years. The management believes that we have the right structure and business culture inplace to continue with its ambitious and exciting growth plans. The Board alsoplans to increase the number of employees from our current level of 216. TheGroup is well placed in each of the markets in which it operates in and iscommitted to offering high quality business solutions to help alleviate clients'business risks. The start to the current financial year sees the Testing Solutions andConsultancy order books increased to £1.5m and £1.3m respectively up from £1.0mand £1.1m at last year end. The improvement in agreement termination ratesmeans that the Boards now expects the Escrow Solutions annual renewals to be£6.7m in this financial year an increase from £5.8m in 2005. The Board remains confident for the outcome of the year. --------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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