Full year results

10 March 2014

Escher Group Holdings plc

Full year results

Escher Group Holdings plc (AIM: ESCH, 'Escher' or 'the Group'), a world leading provider of outsourced point-of-service software to the postal industry, has published its results for the year ended 31 December 2013.

Highlights

· 8% revenue growth, to US$24.7 million (2012: US$23.0 million)

· Strong increase in services revenues, up 35% from core customers

· Saudi Post expanded its licenses during 2013 to cover its entire post office network

· Delivered software and services to USPS - currently supporting its deployment exercise

· Significant investment in new product areas now beginning to generate contract wins:

o RiposteTrEx™ platform won its first tender with South African Post Office

o Interactive Services won its first NFC payments contract

o Loyalty and couponing deal win with international food retail chain, Just Falafel

· Two important patents granted for RiposteTrEx's™ underlying technology

· Adjusted EBITDA* of US$4.2 million (2012: US$6.4 million)

· Renegotiated bank debt extending the Group's facilities to October 2018 reducing annual capital repayments

* Adjusted EBITDA represents operating profit before depreciation, amortisation and share based payments.

% Movements are based on unrounded data, rather than the rounded information presented in this report.

Liam Church, Escher's Chief Executive, commented:

"This has been a robust year of development and growth. All those customers which had contracts expiring during 2013 renewed them, with contract expansions in some instances. This is a great endorsement of the excellence and consistent performance of our solutions.

"Our investment in the diversification of our technology offering has already resulted in some early wins. We are now focused on building on these successes and addressing the potential for our products and services in new industries.

"With the strong quality of our pipeline and technology, we are confident about the prospects for 2014 and beyond."

Enquiries:

Forward looking statements

This press release contains certain forward-looking statements. Actual results may differ materially from those projected or implied in such forward-looking statements. Such forward-looking information involves risks and uncertainties that could significantly affect expected results.

About Escher Group

Escher is a world leading developer and provider of outsourced, point of service software for use in the postal industry worldwide. Its core software, RiposteEssential, enables post offices to expand upon their traditional offering, providing additional new services, reducing costs and increasing efficiency. Riposte is a messaging middleware that enables applications operating on different computers to communicate with each other. The Riposte software manages data, monitors the system status and communicates across the network. Escher operates across three divisions - its Retail Software Division, its Digital Services Division and its Interactive Services Division.

The Retail Software Solution (RiposteEssential) serves the postal and courier markets. Transactions include mail and financial services and the system is integrated with utilities and financial services companies, banks and central and local governments.

Escher's Digital Services Division (RiposteTrEx) is based on a digital post office box model and is designed to provide a national digital infrastructure linking governments, businesses and citizens via a secure platform.

Escher's Interactive Service Division has a range of in-store engagement software for loyalty, couponing and payment.

Overview

Escher Group delivered a solid performance in 2013, resulting in an 8% increase in revenue over the prior year, generating US$4.2m adjusted EBITDA* (2012: US$6.4 million). Escher's postal point of service business performed strongly with services revenues increasing following new contract wins in 2012. During 2013, there were also a number of contract renewals and extensions with customers including An Post, Posten Norge, Saudi Post, Brunei Post and Israel Post.

In October 2013, the Group revised its expectation of when it would recognise license revenue from a particular customer. Whilst Escher had delivered the required software, the customer had not yet deployed the software to a sufficient number of workstations to trigger full license payment by year end. The Group continues to believe that this can be achieved in the first half of 2014. Escher remains pleased with progress on this project and the Group is supporting the customer through its large and complex software deployment exercise.

Escher continues to invest in its Digital and Interactive Services businesses, which provide retail/mobile, digital government and community based message solutions. These solutions are now gaining traction with customers. In December 2013, the South African Post Office selected the RiposteTrEx™ platform to deliver its eRegistered mail solution following a rigorous tender process. In July 2013, Escher signed its first contract to provide peer-to-peer mobile payments for an Irish restaurant chain.

The Group's development of these new product areas is reinforced by the grant of two new patents in the US and Singapore, covering the RiposteTrEx™ platform for digital messaging and mailbox services. These add to Escher's growing intellectual property portfolio.

Importantly, Escher has continued this investment while maintaining control on its costs and cash flow. During the year adjusted EBITDA* was US$4.2m and the Group renegotiated its bank debt to reduce the annual capital repayments. Net debt was US$2.3m at 31 December 2013. This strong financial position, along with a significant amount of revenue already contracted for in 2014, puts Escher in a strong position going forward.

Current trading and outlook

The market for Escher's products is characterised by investment:

· Postal operators are investing in physical networks

· Postal operators are investing in retail and financial services to diversify revenue streams

· Governments are investing in post offices as a front office for government service;

· Governments are investing in public digital infrastructure

· Local governments, cities and mobile infrastructure players are investing in public digital services

· Retailers are investing in loyalty and couponing systems to acquire and retain customers and reduce transaction costs

With its track record of delivery, strong relationships and expanded product offering in these areas, Escher is well positioned to benefit from the significant investment in software infrastructure in the coming years. As the point of service automation supplier of choice for postal organisations across the globe, the Group will continue its drive to penetrate more of this market and to deliver further on the investments made during 2013.

Although lead times are long, the Group has been in contact with several postal organisations for some time and is confident that new customers will be signed during the course of 2014.

The new digital services and interactive retail markets are developing well and the pipeline of opportunities has expanded significantly over the last 12 months. The South Africa Post Office contract win is the start of the commercialisation of this opportunity and proof of the emerging demand for these services. Escher's Interactive Services have also developed a range of technologies including NFC to enable the identification of mobile phones, which has led to an increase in the number of opportunities in the market. Given the quality of the Group's pipeline and current technology set, Escher remains confident about the prospects for 2014 and beyond.

Financial review

Revenue

Revenue for the year increased by 8%, or US$1.7 million, to US$24.7 million (2012: US$23.0 million). The increase is mainly due to a 35% increase in software development and consulting services revenue from Pos Malaysia and the United States Postal Service (USPS). It should be noted that the delay of approximately US$6m of license revenue from 2013 to 2014 also had a significant impact on licensed revenue and EBITDA for 2013.

License revenue was US$5.1 million (2012: US$6.3 million). This reduction was due to the license revenue received from Pos Malaysia in the prior year. In 2013, Saudi Post extended its number of licenses and the USPS continued to make license payments in line with its agreement. License revenue was recognised for RiposteTrEx™ as it was delivered to the South African Post Office in the fourth quarter of 2013.

Maintenance revenue increased 6%, or US$0.3 million, on the prior year resulting from contract renegotiations with certain customers and a full year of maintenance contracts being in place for certain customers compared to a partial year in 2012. Revenue from support was US$2.5 million (2012: US$2.9 million); the decrease was due to one country's contract renegotiation. This was partially offset by new support revenue from other customers.

Gross profit

Gross profit was in line with the prior year at US$15.2 million for 2013 (2012: US$15.1 million). The Gross profit margin decreased to 61% from 66% in 2012 due to the revenue mix. License revenues decreased from 2012 to 2013 while software development services revenues increased but are at lower gross profit margins. Service margins increased in 2013 compared to in 2012, mainly due to higher volumes related to specific customers.

Operating expenses/profit

Operating expenses were US$13.1 million, an increase of US$2.9 million from US$10.2 million in the prior year. Of this increase, US$1.3 million related to research and development (R&D) which increased from 7% of revenue to 11% of revenue. R&D expenses include a R&D tax credit of US$0.8m (2012: US$0.4m). Excluding the R&D tax credit, R&D spend increased from 8% to 15% reflecting the Group's investment in new technologies such as RiposteTrEx and Interactive Services.

Administration expenses increased by US$0.6 million and sales and marketing spend increased by US$1.0 million from the prior year. The increase in general expenses is in line with the growth in revenue, being 22% of revenue in 2013 compared to 21% in 2012. Sales and marketing moved from 17% of revenue to 20% of revenue in 2013. This increase represents a full year of the new business development teams for digital services and Interactive services as these new products move from research and development projects to commercialisation. The new contract win for RiposteTrEx in South Africa is a result of the increased business development focus in this product area.

The Group capitalised US$2.7 million of R&D costs (2012: US$2.7 million) (gross of government grants of US$0.5 million (2012: US$ nil)) which were internally generated intangible assets and the amortisation for these assets was $1.1m (2012: 0.7m). The split between the projects and the amortisation charges are as follows:

Operating profit and Adjusted EBITDA

Adjusted EBITDA represents Operating profit before depreciation, amortisation and share based payments. Adjusted EBITDA was US$4.2 million (2012: US$6.4 million), mainly due to the additional costs and the mix of revenue in 2013 being more in favour of lower margin services revenues.

Adjusted EBITDA, as an industry wide metric, is used by management as a key metric in assessing the performance of the Group.

Net finance expense

Net finance expense increased by US$0.1 million to US$0.6 million. The Group revised its facility with Bank of Ireland in October 2013, extending the term of the loan by more than 3 years to 2018 and increasing the loan to US$9.0 million from US$8.5million. Total costs to extend the facility amounted to US$0.2 million. The amortisation charge for deferred financing costs for 2013 was US$0.2 million (2012: US$0.1 million).

Profit before tax

Profit before tax was US$1.5 million (2012: US$4.4 million). Adjusted profit before tax excluding share based payments was US$2.0 million (2012: US$4.8 million).

Income tax expense

Income tax expense for the year was US$0.6 million a decrease of US$0.8 million from the prior year. The effective rate for 2013 was 38% up from 32% in the prior year. A fixed deferred tax charge of US$0.3 million (2012: US$0.3 million) was incurred related to corporate restructuring which increased the effective tax rate from 16.5% to 38%. The Group believes the effect of the fixed deferred tax charge will be significantly reduced in 2014 and eliminated in 2015.

Earnings per share

Basic earnings per share (EPS) was US$4.9 cents per share (2012: US$16.5 cents per share). Diluted EPS for 2013 was US$4.8 cents compared to US$16.3 cents in the prior year.

Dividend

The Board does not propose paying a dividend for the year.

Cash flow and net debt

Net debt at 31 December 2013 was US$2.3 million (2012: US$2.2 million). Cash at the end of 2013 was US$6.7 million (2012: US$7.8 million) and borrowings were US$9.0 million (2012: US$10.0 million).

Net cash generated from operations was US$3.1 million (2012: US$4.2 million). This main impact is the change in Adjusted EBITDA from US$6.4 million for the year ended 31 December 2012 to US$4.2 million in 2013. The R&D tax credit received of US$0.5 million reduced the tax paid in the year by the same amount. The balance of the movement on net cash generated from operations related to the increase in receivables was substantially lower than 2012. This is mostly due to a large receivable from Pos Malaysia for their license fee due at the end of 2012.

Net cash used in financing activities in 2013 was US$1.3 million compared to cash generated from financing activities of US$3.6 million in 2012. The Group agreed a revised facility with Bank of Ireland in October 2013 after the annual repayment of US$3.3 million were made. The revised facility is a five year term loan of US$9.0 million with a revolver of US$3.0 million, none of which was drawn at 31 December 2013. The revised structure is to extend the term of the loan with lower annual repayments of US$1.0 million compared to US$3.3 million under the previous facility.

Operational review

Retail Services - Postal point of service

Escher is the market leading vendor of outsourced software to the postal industry. The Group's products provide 35 national postal operators around the world with the infrastructure to generate revenues. This includes the USPS which is Escher's largest contract win to date and is one of the largest retail software implementations in the world.

The strategic focus for the Group's core postal point of service market is to drive incremental sales from existing customers and to further penetrate the outsourced postal counter market with its Riposte range of products. These provide seamlessly integrated counter and automation solutions for postal and retail organisations of all sizes.

This was exemplified by Saudi Post expanding its licenses during 2013 to cover its entire post office network. Other existing postal customers, particularly recently acquired customers like Malaysia and the USPS, have generated significant services revenues through integration services and requests for additional software functionality. Renewals of maintenance and support contracts by the Group's existing customers remain consistent and in line with previous years.

There is significant change occurring in the post office market. Customers' mail businesses are beginning to stabilise with increases in parcel delivery offsetting declines in letter volumes. This is driving postal operators to invest in their networks. While cost pressures inhibit the growth of traditional post offices there is a move to expand the number of postal outlets through agency or 'post in shop' arrangements. This requires a more mobile orientated software infrastructure which Escher is able to provide. In addition, Governments and post offices are diversifying revenue opportunities by increasing the product offering at post office and 'post in shop' networks.

These trends mean Escher is seeing a number of new country tender opportunities as well as upgrade opportunities for existing customers, resulting in a strong pipeline for 2014 and beyond.

RiposteTrEx™ and Digital services

RiposteTrEx™ is Escher's solution for digital Government, allowing citizens, governments and businesses to communicate and transact with each other anytime and from anywhere. Driven by the need to reduce costs and increase interaction with citizens, Governments and local authorities are looking for new cost effective and efficient ways to communicate. RiposteTrEx™ is a secure, highly scalable, digital post box solution which allows citizens, businesses, governments and international agencies to collaborate securely online.

In December 2013, following a rigorous tender process, the South African Post Office selected the RiposteTrEx™ platform to deliver its eRegistered mail solution. The platform will provide eRegistered mail services to more than 51 million citizens. RiposteTrEx™ will allow South African Post users including citizens, government, business and SME's to send eRegistered and confidential mail to secure digital mailboxes, or as registered hybrid letters.

Underpinning Escher's investment in this key technology capability are two important patents. The Electronic Business Postal System patent covers the two way communication of messages between mailboxes and portals through a network of secured system end points. This patent, along with the Digital Mailbox System patent, protect the foundations of the RiposteTrEx™ digital services product and is a strong endorsement of Escher's Intellectual Property and expertise in interactive digital communications and digital mail technology.

The digital government market is developing rapidly and Escher has seen the number of opportunities in the market increase from one or two a year ago to several times that amount today.

Interactive Services

Escher Interactive Services has developed a range of in-store engagement software in areas like payment, loyalty and couponing. Its Interactive technology has already been implemented in a number of retail outlets by utilising a number of NFC (Near Field Communications) and other technologies such as Card Emulation, peer-to-peer (P2P) data transfer and QR codes.

The Group's focus in this area is on solving retailer's issues. Retailers seek to collect data on their customers in order to produce targeted marketing campaigns. Customers have numerous ways to pay for goods and services and tend not to be motivated towards any particular payment method without an incentive. Mobile loyalty programs which create these incentives are often the best way of obtaining customer data through mobile devices with embedded consumer identity. Escher's solutions also use other smartphone technologies in addition to NFC to ensure it is able to gather the optimum data from all customers.

Escher's P2P payments solution was deployed in Irish restaurant chain Graham O'Sullivan in July 2013 and is performing well. Customers can make payments using any NFC-enabled Android phone on any mobile network, once they have downloaded the retailer's app. It uses Android Beam to send the customer identity from the phone to the retail point of sale to allow closed loop payment, loyalty and coupon redemption. Being able to offer the latest secure payment and loyalty solutions in a cost effective way is increasingly important to customers operating in a very competitive retail environment.

In March 2014, Escher secured a contract to deliver loyalty couponing and mobile payments to international retail chain, Just Falafel. Just Falafel is the biggest falafel franchise in the world with plans to expand to 903 outlets in 18 different countries including Australia, Abu Dhabi, Canada, Turkey and the UK. Escher's capability and growing experience in the mobile retail space heralds a number of larger opportunities the Group looks forward to developing in 2014 as well as exploring possible channel partners.

Platform Technology

Escher's Riposte is a highly scalable peer to peer messaging and transaction platform and forms the foundation of all the Group's product lines. It has a significant pedigree in the postal transaction space handling millions of transactions on a daily basis across the globe for over 20 years without interruption. This platform also forms the basis of the digital services offerings giving potential customers the confidence in the ability of Riposte to also deliver for government, mobile operators and retailers.

CONSOLIDATED INCOME STATEMENT

Extract from our audited results for the year ended 31 December 2013

For the Year Ended 31 December 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the Year Ended 31 December 2013

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Extract from our audited results for the year ended 31 December 2013

At 31 December 2013

SELECTED ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES

For the Year Ended 31 December 2013

Selected accounting policies applied in the preparation of this consolidated financial information are as follows:

1 Basis of preparation

The financial information contained in this preliminary results statement has been extracted from the Group financial statements for the year ended 31 December 2013 and is presented in US$, rounded to the nearest thousand. The financial information does not include all the information and disclosures required in the annual financial statements. The Group financial statements for the year ended 31 December 2013 have been prepared under IFRS as adopted by the EU and were approved by the Board of Directors on 7 March 2014. The accounting policies used in preparing the group financial statements for 31 December 2013 are consistent with those applied in the prior year. The 2013 Annual Report will be distributed to shareholders and made available on the Company's website www.eschergroup.com. It will also be filed with the Companies Registration Office. The auditors have reported on the financial statements for the year ended 31 December 2013 and their report was unqualified.

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

1 Segment Information

In line with the requirements of IFRS 8, "Operating Segments", the Group has identified its Chief Operating Decision Maker (CODM) as the Board of the company. The Board reviews the Group's internal reporting in order to assess the performance of the Group and allocate resources. The Board considers the business from a product perspective and reviews working capital and overall statement of financial position performance on a Group wide basis. Consequently the Board determined there to be only one segment.

The Board assess the performance of the segment based primarily on measures of revenues, adjusted EBITDA and profit before tax. Adjusted EBITDA is operating profit before non-cash share based payments, interest, tax, depreciation on property plant and equipment and amortisation on intangible assets.

These revenues derive from the following main sources:

The entity is domiciled in the Republic of Ireland. The Group's external revenues are derived from the following main geographic locations:

Fluctuations in revenues with individual customers are typically due to a combination of the number of up-front perpetual licence contracts as well as the level and timing of development and other software customisation requirements with that customer (the latter being from both from initial customisation work following a new licence win and periodic projects driven by a customer's internal requirements and software upgrades).

During the year the Group derived revenues from the following external customers which individually represented 10% or more of total reported revenues for that year:

The total of non-current assets other than deferred income tax assets located in the Republic of Ireland is US$6.7m (2012: US$5.5m), and the total of non-current assets located in other countries is US$31.4m (2012: US$36.0m).

(a) The profit on ordinary activities before taxation, all of which arises from continuing operations, is stated after charging:

Total share based payments for the period amounted to US$562,000 (2012: US$444,000) of which US$458,000 (2012: US$374,000), disclosed above, related to employees excluding directors. US$104,000 (2012: 70,000) related to directors' remuneration.

The average number of persons employed by the Group during the period was:

The number of persons employed by the Group (including executive directors) at 31 December 2013 was 169 (2012: 146).

The Group operates a number of defined contribution pension schemes in which the majority of Group employees participate. The assets of these schemes are held separately from those of the Group in independently administrated funds. The pension charge represents contributions payable by the Group to the schemes and amounted to US$262,000 in respect of 2013 (2012: US$149,000), of which US$90,000 was accrued at the year-end (2012: US$53,000).

(c) Deferred tax

The deferred tax included in the statement of financial position is as follows:

The deferred tax included in the statement of financial position is as follows:

The movement in the deferred tax during the financial year is as follows:

Depreciation of US$270,000 (2012: US$218,000) has been charged in administrative expenses and US$218,000 (2012: US$117,000) in cost of sales in the income statement.

Amortisation of US$0.84m (2012: US$0.64m) on Riposte TrEx is included in cost of sales in the income statement and amortisation of US$0.27m (2012: US$0.04m) on Riposte Development is included in operarting costs in the income statement. With the exception of Riposte TrEx and some of the Riposte products, these products are still in the development phase and no amortisation has occurred. The average remaining amortisation period of the Riposte TrEx development is 27 months (2012: 44 months). In the year there was US$2.8m (2012: US$1.5m) of research and development expenditure recognised as an expense in the income statement as the state of completion was not viewed as being sufficiently developed to warrant capitalisation.

The Group has two CGUs. The combination of these CGUs represent the lowest level at which goodwill is monitored by the Group and the lowest level at which management captures information for internal management reporting purposes about the benefits of the goodwill.

8 Government Grants

During the year Government Grants of US$512,000 (2012: US$nil) were recognised and were netted against the development cost of the related intangible assets. For further details please see Note 7 Intangible Assets.

The carrying value of trade receivables approximates to their fair value.

Trade receivables are non-interest bearing and are generally settled within a 45 day period.

Ageing of trade receivables

The ageing analysis of past due trade receivables is set out below:

As of 31 December 2013, trade receivables of US$2,446,000 (2012: US$2,593,000) were fully performing.

As of 31 December 2013, trade receivables of US$2,622,000 (2012: US$1,236,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default.

As of 31 December 2013, trade receivables of US$233,000 (2012: US$233,000) were impaired. The individually impaired receivables mainly relate to two customers.

(b) The majority of the Group's customers, primarily representing national post offices, operate within the postal service industry. As at 31 December 2013, a significant portion of the trade receivables of the Group related to 3 customers (2012: 4 customers) as follows:

No credit limits were exceeded during the year and management does not expect any losses from non-performance by the counterparties.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

The maximum exposure to credit risk at the reporting date is the carrying value of cash and cash equivalents noted above.

The Group's currency exposure is set out below. Such exposure comprises the cash and cash equivalents of the Group that are denominated other than in US dollars. As at 31 December 2013 these exposures were as follows:

The fair values of trade and other trade payables approximate to the values shown above.