Half Year Results

25 September 2013

Outsourcery plc

Half year results

Outsourcery plc (AIM: OUT, "Outsourcery", or the "Group"), a world-leading Cloud Service Provider ("CSP") has published its half year results for the six months ended 30 June 2013.

Highlights

· Admitted to AIM in May 2013

· Revenue up 23.5% to £2.1 million (2012: £1.7 million):

- recurring revenue of £1.5 million

- non-recurring revenue of £0.6 million

· Monthly recurring revenue ("MRR") at 30 June 2013 of £0.3 million, giving annualised recurring revenue ("ARR") of £3.3 million

· MRR grown to over £0.4 million at 31 August 2013, giving ARR of £5.1 million

· Adjusted EBITDA showed a loss of £3.2 million (2012: loss of £3.9 million)

· Gross cash at 30 June 2013 of £7.3 million (2012: £1.1 million)

· Monthly recurring revenue growth expectations on track for December 2013, underpinning the year end exit run rate, with increasing pipeline visibility for 2014

· Partner network more than doubled since IPO, now exceeds 370 signed partners

· New strategic partnership signed with Ingram Micro, the world's largest technology distributor

· Virgin Media Business unified communications offering launched in September 2013

· Partnership agreement with Microsoft Corporation signed in September 2013 to deploy first IL3 accredited secure cloud platform for UK public sector

· Now a pure-play Cloud business following disposal of mobile distribution business

Piers Linney, Co-CEO said:

"This has been a period of significant development and progress for us as we consolidate our first mover advantage and broaden and deepen our reseller partner relationships. Our IPO has had a materially positive impact on our growth potential in a rapidly evolving market as we establish ourselves as the 'go to' Cloud Service Provider.

"The fund raising at the IPO has provided us with further resources to build the business and consolidate our market position as a pure-play Cloud Service Provider. Recently we have seen a number of exciting revenue growth related developments amongst our existing business pipeline as well as new growth opportunities. This includes an agreement with Microsoft Corporation to deploy a highly secure IL3 platform to provide our full range of services to the UK central Government. We remain focused on enabling our partners of all sizes to drive revenue growth as well as engaging with new partners.

"A number of our large strategic partners will commence revenue generation during the last quarter and we remain on track to achieve our revenue growth target for the full year whilst being highly confident about our growth prospects for 2014."

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About Outsourcery

Outsourcery is a world-leading Cloud Service Provider ("CSP") based in the UK. Cloud computing represents a systemic evolution in the way that IT platforms, applications and communications ("ICT") solutions are provided in a more cost effective and efficient way to enterprises of all sizes. The ICT model is rapidly shifting from a physical technology purchase to the consumption of services with a specified uptime service level on a monthly subscription basis. Outsourcery has invested in its platform and capabilities to apply economies of scale to provide highly resilient and secure services to a range of end-customers from shared platforms in its UK datacentres.

The Group sells to businesses via third party channel partners for whom Cloud services provide an increasingly important revenue stream and its partners range from local ICT suppliers to global telecommunication companies, IT distributors and systems integrators. The ultimate users of the Group's services are the employees of organisations ranging from start-ups to FTSE 100 companies.

The Group's revenues are derived from two sources:

· Monthly Recurring Revenue ("MRR") which are monthly recurring subscription fees;

· One Off Revenues ("OOR") which are professional service fees earned for solution design, customisation of, integration with and migration to a cloud-based computing environment.

Outsourcery is a Microsoft Certified Gold Partner with a total of six competencies of which three are gold and three are silver. Outsourcery has one of the broadest offerings of cloud-based services utilising Microsoft technology in the world that includes:

· Lync Server: Next generation communications and collaboration, including voice breakout;

· Exchange Server: Integrated email, calendars and messaging;

· Hosted Video Conferencing: Integrated Polycom, Lync and Skype conferencing;

· Microsoft Dynamics CRM: Hosting and customisation to automate business processes;

· Microsoft SharePoint: Workflow automation and document management;

· Microsoft Office 365: Microsoft's cloud-based productivity offering;

· Infrastructure-as-a-Service: Virtual servers and datacentre virtualisation based on Hyper-V Cloud and Windows Server;

· Backup and storage: Data storage, management and disaster recovery.

Outsourcery was named both Microsoft's worldwide 'Hosting Solutions Partner of the Year' and Microsoft's worldwide 'Dynamics Hosting Partner of the Year' in 2010. The Group was also one of three finalists for the Microsoft worldwide 'Server Platform Partner of the Year' award in 2013 and the only finalist from Europe. Outsourcery and Microsoft are working together to deploy a highly secure 'IL3' accredited cloud platform to provide services to UK central Government and sensitive commercial sector organisations.

Employing 120 staff based in three UK offices and operating facilities in two UK datacentres, Outsourcery plays a leading role in the UK CSP industry. The Group was a founder member of the UK Cloud Industry Forum ("CIF") and has the following accreditations:

· ISO 27001 (Information Security);

· ISO 9001 (Quality Management);

· ISO 14001 (Environmental Management);

· CIF certification;

· CESG IL2 compliance for public sector solutions.

Outsourcery was the UK's first CSP to be certified as carbon neutral.

The Company's ordinary shares were admitted to trading on AIM on 24 May 2013 ("Admission"). Further, detailed information on the Group is set out in the Admission Document dated 22 May 2013 ("Admission Document") which is available in the Investor Centre on the Outsourcery website (www.outsourcery.co.uk/investors).

Strategic overview

Outsourcery is positioned to take advantage of the systemic market shift in the provisioning of IT and communications from an "on-premise" or "managed service" deployment model to a cloud-based model. The adoption of the cloud is being driven by a wide range of factors including a reduction in the total cost of ownership, operational agility, productivity and scalability.

The Group provides a wide range of cloud-based services via its growing network of partners to both larger enterprises and SMEs. These services are deployed on its proprietary O-Cloud platform, a combination of software, hardware and networking which is housed in a third-party enterprise grade datacentre. The Group has established itself as the leading independent CSP in the UK, demonstrated in part, by its recognition as Microsoft's global Hosting Partner of the year 2010 and a Finalist for Microsoft's Server Platform Partner of the Year Award 2013, acting as a UK launch partner for Microsoft Lync and Windows Server 2012 and by the commercial relationships it has with companies such as Virgin Media Business, Ingram Micro and Atos.

Outsourcery enables its partners to resell its broad offering of cloud services and thereby satisfy their end-customer requirements. One of the key differentiation factors contributing to the success of Outsourcery is its blend of know-how and skills from the different industry domains of IT and telecommunications that enables it to provide cloud-based, fully converged unified communications services. Unlike many IT and telecommunications market participants, Outsourcery is not hindered by the constraints of a legacy business model and systems.

Whilst the Group has experienced significant growth to date through the cloud delivery of Microsoft applications, its O-Cloud platform can also be used by customers for the deployment of a broader range of software applications which, whilst running on a Windows operating system, do not need to be limited to Microsoft. As a result, the combination of the Group's platform, application and unified communications services enables it to deliver a wide range, if not all, of an organisation's ICT requirements.

Outsourcery's business model is predicated on securing subscription-based customer contracts in order to provide a growing base of recurring revenues and to leverage what is a stable overhead cost base and a low ongoing requirement for capital expenditure. Outsourcery's strategy is to leverage the significant investment made in the Group's platform, processes, accreditations, people and partner network to monetise the growing and dynamic cloud opportunity by further developing its partner network and activating partners to drive revenue and achieve scale. The Group's inherent high operational gearing, means this should lead to high margins and profitability.

Outsourcery has won a number of UK-wide and international tenders for cloud services, from both large partners and end-customers. Unique know-how is being created as it deploys complex and hybrid solutions that integrate cloud-based services with existing on-premise solutions. The Group is also focused on business process automation and self-service for its partners to maximise scalability and minimise support costs.

Operational update

Since Outsourcery's IPO and following the end of the financial period under review, a number of significant strategic business developments have been announced that will further enhance the Group's service offering, consolidate its market position and materially increase revenue potential.

Strategic partnership with Ingram Micro, the world's largest technology wholesaler

On 16 September 2013, Outsourcery agreed a strategic partnership with Ingram Micro UK, a division of Ingram Micro Inc., the largest global wholesaler of technology products and supply chain management services.

Outsourcery's services will be made available to thousands of companies in Ingram Micro's UK partner network. The Group will directly enter into contracts with Ingram Micro's partners who will then be able to sell Outsourcery's hosted version of Microsoft Lync and related messaging services such as email giving them access to enterprise-grade 'voice' and unified communications functionality delivered from the cloud. This strategic partnership further broadens Outsourcery's IT channel relationships alongside its communications channel reach for the delivery of converged solutions to businesses of all sizes.

Sale of legacy mobile distribution business

As stated as the intention in the Admission Document, in September 2013, the Group completed the sale of its legacy mobile distribution business to a UK mobile services operator. This mobile business was the remainder of the Group's legacy mobile operations, the majority of which was divested during 2011.

Revenues for the mobile distribution business had been separately accounted for by the Group. The sale will have no material impact on working capital.

UK central Government cloud opportunity and Microsoft partnership

The public sector opportunity for CSPs such as Outsourcery is significant as UK local and central Government transitions to cloud-based services instead of large and complex on-site managed services. This shift is disrupting the traditional ICT supply-chain.

As a result of the ongoing austerity drive and the long term and often inflexible ICT contracts, the UK Government has implemented a strategy to reduce the cost and complexity of its ICT procurement and the solutions consumed. Cloud-based services are the natural solution as UK Government departments can consume the latest technologies combined with the flexibility, standardisation and subscription billing models offered by CSPs. The UK Government is a large Microsoft customer and the new partnership between Outsourcery and Microsoft will enable it to transition to cloud-based services based on next generation Microsoft solutions hosted on Outsourcery platforms.

The UK Government has introduced a Public Cloud First Policy mandate, meaning that departments are now mandated to consider public Cloud first in any IT procurement as well as more flexible contracts and the involvement of UK SMEs in the delivery of services. Microsoft's global platforms such as Azure or Office365 are now IL2 accredited, but are not hosted in the UK so are not capable of IL3 accreditation. UK Government departments often require solutions that are accredited to the more stringent 'IL3' security level, which requires additional security elements to the provision and the solution must be hosted within UK borders.

On 20 September 2013, Outsourcery entered into an agreement with Microsoft Corporation (NASDAQ: MSFT) to take part in Microsoft Corporation's initiative to accelerate the offering of IL3 compliant cloud services through its cloud operating systems network. Outsourcery will deploy and manage a new platform to provide secure cloud-based services to UK Government and commercial sector organisations with similar security requirements. Microsoft will offer direct technology design and implementation support for this new state of the art platform. This is the first initiative of its kind in the UK market.

Microsoft is pursuing a global initiative by working with partners to provide services to the public sector in a range of local markets. Outsourcery has been selected as the first such partner for the UK and has agreed with Microsoft Corporation to deploy the IL3 accredited platform based on next generation Microsoft technology which will be hosted in the UK. The platform would be wholly-owned and managed by Outsourcery.

The UK Government's aggregate hosting bills are estimated to be almost £2 billion per annum (source: Cabinet Office, August 2013) and there are approximately three million UK Government end-users requiring IL3 security level hosting services in the UK.

Unique to the UK market, this IL3 platform will be a physically separate version of Outsourcery's existing O-Cloud platform and will provide infrastructure-as-a-service, applications including Exchange Server, SharePoint and Dynamics CRM and Lync Server based unified communications with full voice capability.

The second phase of the proposed offering will also include data storage, archiving and backup followed by services for Big Data analytics. As the leading UK CSP, Outsourcery is particularly well-placed to provide the UK's central Government with a complete cloud-based ICT offering and expects to commence pipeline building towards the end of 2013, with deployment of customers on the platform in Q3 2014.

Outsourcery will be working closely with its existing and new reseller partners, many of which are well-established suppliers to the UK Government, on its go to market strategy. Outsourcery is already working on responses to UK central Government tenders with its larger partners that will require IL3 compliance.

Outsourcery is a recognised supplier to the UK Government Procurement Service, an executive agency of the Cabinet Office, through the G-Cloud Framework, alongside a number of its reseller partners, which provides access to 30,000 public sector organisations. Outsourcery is ISO 27001 (Information Security) accredited, CIF certified and is capable of deploying 'IL2' accredited solutions, which are typically suitable for UK local Government.

Financial review

Group revenues were up 23.5% to £2.1 million (2012: £1.7 million) with a gross margin of 37% (2012: 41%). Group revenues comprised £1.5 million of recurring revenue and £0.6 million of non-recurring or professional services revenue. The MRR at 30 June 2013 was £0.3 million, giving annualised recurring revenue ("ARR") on an exit run rate basis of £3.3 million. Since the period end the MRR had grown to £0.4 million at 31 August 2013, giving an ARR of £5.1 million.

Revenue growth expectations remain on track for December 2013 exit run-rate despite an elongated integration project with Vodafone and some other strategic partners,. Margins will improve over time as revenues scale against a tightly controlled cost base.

Administrative expenses (excluding fees associated with listing) were tightly controlled at £4.5 million (2012: £5.2 million). Cost control is expected to be maintained for the remainder of the year.

Adjusted EBITDA showed a loss £3.2 million (2012: £3.9 million). Adjusted EBITDA is calculated as reported profit from continuing operations, adjusted for exceptional costs and employee share-based payment options, before finance costs, taxation, depreciation and amortisation and is considered by the Directors to be a key measure of financial performance.

The Group's loss before and after taxation from continuing operations was £4.7 million (2012: £4.7 million) and basic loss per share for the half year was 22.8 pence (2012: loss of 27.0 pence).

The Group's adjusted loss before and after taxation from continuing operations was £4.1 million (2012: £4.7 million) and adjusted loss per share for the half year was 19.7 pence (2012: loss of 27.0 pence).

The Group had gross cash at 30 June 2013 of £7.3 million (2012: £1.1 million).

Current trading and outlook

Outsourcery has recently seen a number of strong opportunities for the growth and development of the business, including the agreement with Microsoft Corporation and new strategic partnership with Ingram Micro. Several existing strategic partners will also begin to contribute revenues during the second half of this year and the Group is well positioned to continue to exploit the market demand for Cloud Services.

Outsourcery remains on track to achieve its revenue growth target for the full year and is confident about its growth prospects for 2014.

Consolidated statement of comprehensive income

For the sixmonths ended 30 June 2013

*Adjusted EBITDA is calculated as adjusted loss (£4,061,000), before finance costs (£349,000), taxation (£Nil), depreciation and amortisation (£473,000) and is considered by the Directors to be a key measure of financial performance.

Consolidated statement of changes in equity

For the sixmonths ended 30 June 2013

\* The Merger Reserve relates to the share for share exchange between Outsourcery plc and Outsourcery Group Limited on 10 May 2013.

Consolidated statement of financial position

As at 30 June 2013

Consolidated statement of cash flows

For the sixmonths ended 30 June 2013

Notes to the interim report

1. General information

Outsourcery plc (AIM: OUT; "Outsourcery"; the "Company"; together with its subsidiary undertakings, the "Group"), is a world-leading provider of cloud-based IT and unified communications services. Outsourcery plc is the Group's ultimate parent company. The Company is incorporated in England and Wales and domiciled within the United Kingdom. The address of the Company's registered office is 10 Whitfield Street, London W1T 2RE. The address of the Group's head office is 1 The Avenue, Spinningfields, Manchester M3 3AP. The Company's shares are listed on the Alternative Investment Market of the London Stock Exchange.

Outsoucery's consolidated financial statements are presented in Pounds Sterling (£), which is also the functional currency of the parent company.

These consolidated interim financial statements were approved for issue by the Board of Directors on 24 September 2013.

2. Basis of preparation

The Group's interim consolidated unaudited financial statements are for the six months ended 30 June 2013 and have been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards as adopted in the European Union ("IFRS"). They have not been prepared in accordance with IA34 'Interim Financial Reporting'. These statements have not been reviewed or audited by the Group's auditors.

The figures for 31 December 2012 are an abridged version of the Group's full financial statements (subject to first time adoption of International Financial Reporting Standards) and together with other financial information contained in this interim report, do not constitute statutory financial statements of the Group as defined in Section 434 of the Companies Act 2006.

Statutory financial statements for Outsourcery Group Limited (refer to basis of consolidation below) for the year ended 31 December 2012 have been filed with the Registrar of Companies for England and Wales and have been reported on by the Group's auditors. The report of the auditors was unqualified and did not contain a statement under section 498 (2) or Section 498 (3) of the Companies Act 2006.

These interim consolidated unaudited financial statements have been prepared in accordance with the accounting policies set out in Section B of the Company's Admission Document, except as detailed below. The accounting policies have been applied consistently throughout the Group.

First time adoption of International Financial Reporting Standards

During the period, the Group has adopted for the first time International Financial Reporting Standards ("IFRS") as adopted by the European Union. The Group financial statements have been prepared under the measurement and recognition criteria of IFRS as adopted by the European Union. The date of transition to IFRS was 1 January 2012. The disclosures concerning the transition from UK GAAP to IFRS are detailed in note 7.

Basis of consolidation

On 21 January 2013, the Company was incorporated under the name Outsourcery Holdings Limited. On 10 May 2013, Outsourcery Holdings Limited acquired the entire issued share capital of Outsourcery Group Limited (the then ultimate holding company of the trading entities Outsourcery Hosting Limited and Outsourcery Mobile Limited) via a share for share exchange with the shareholders of Outsourcery Group Limited. On 17 May 2013, Outsourcery Holdings Limited changed its name to Outsourcery Limited and subsequently was re-registered as a public limited company with the name Outsourcery plc. Following the share for share exchange referred to above, Outsourcery plc became the ultimate legal parent of the Group.

The directors consider the share for share exchange transaction to be a group reconstruction rather than a business combination in the context of IFRS3 (revised), 'Business Combinations', which has been accounted for using merger accounting principles. Therefore, although the share for share exchange did not occur until 10 May 2013, the consolidated financial statements of Outsourcery plc are presented as if the Outsourcery group of companies had always been part of the same Group. Accordingly, the results of the Group for the entire period ended 30 June 2013 are shown in the consolidated statement of comprehensive income and the comparative figures for the period ended 30 June 2012 and the year ended 31 December 2012 are also prepared on this basis.

Accordingly, the following accounting treatment has been applied in respect of the share for share exchange:

· The assets and liabilities of Outsourcery Group Limited and its subsidiaries are recognised in the interim consolidated unaudited financial statements at the pre-combination carrying amounts, without restatement to fair value;

· The retained losses and other equity balances recognised in the interim consolidated unaudited financial statements for the period ended 30 June 2013 reflect the retained losses and other equity balances of Outsourcery Group Limited and its subsidiaries recorded before the share for share exchange. However the equity structure (share capital and share premium balances) shown in the interim consolidated unaudited financial statements reflects the equity structure of the legal parent (Outsourcery plc), including the equity instruments issued under the share for share exchange. The resulting difference between the parent's capital and the acquired group's capital has been recognised as a component of equity being the 'merger reserve';

· Comparative figures have been restated on the same basis as above.

The Company had no significant assets, liabilities or contingent liabilities of its own at the time of the share for share exchange and no such consideration was paid.

Admission and share issue costs

Transaction costs of equity transactions relating to the issue of the Company's shares are shown as a deduction from equity. Listing and Admission costs are charged to profit or loss as an administration expense.

The Directors have reviewed the expenditure related to the Admission and, where appropriate, made judgments as to how much of the expenditure related to the Admission process and how much related to the issue of new equity and should therefore be charged against the share premium account.

Going concern

Following the Company's placing and Admission, the Group has considerable financial resources available to it. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. The Directors have also prepared cash flow forecasts for the period until December 2014. As part of the preparation of these forecasts, the Directors have estimated the likely conversion of potential future business. Based on these forecasts, the Directors have confirmed that there are sufficient cash reserves to fund the business for the period under review. After reviewing these forecasts, consideration of the Group's cash resources and other appropriate enquiries, the Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the interim statements.

Profit or loss from discontinued operations

A discontinued operation is a component of the Group that either has been disposed of, or is classified as held for sale, and:

· Represents a separate major line of business or geographical area of operations;

· Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

· Is a subsidiary acquired exclusively with a view to resale.

Profit or loss from discontinued operations, including prior year components of profit or loss, is presented in a single amount in the income statement. This amount comprises the post-tax profit or loss of discontinued operations and the post-tax gain or loss resulting from the measurement and disposal of assets classified as held for sale.

3. Share capital

* The number of shares in issue for each of the comparable periods represents the shares issued by Outsourcery plc in the share for share exchange transaction that made the Company the legal parent of the Group, adjusted for the subsequent 100 for 1 subdivision.

4. (Loss) / earnings per share

*Adjusted loss per share has been disclosed to give a clear understanding of the Group's underlying trading performance. It has been calculated using the adjusted earnings figures above and the weighted average number of ordinary shares above.

5. Analysis of borrowings

Notes to the analysis of borrowings

1. The majority of the shareholder debt was converted to 1,909,276 ordinary shares upon Admission at the IPO price.

2. The Boost loan stock bore interest at 12.5% from 1 January 2013. Interest charged during 2012 was at 14%. This loan is expected to be repaid in full in March 2016. Due to a breach of covenant at 31 December 2012, this loan stock was classified as a current liability. The breach was rectified in the six months ended 30 June 2013.

3. The property mortgage bears interest at 10% and is expected to be repaid in full in July 2015. As at 30 June 2012, the property mortgage was repayable on demand. The repayment profile was subsequently amended following the introduction of a new lender.

4. £999,000 of the cash value of the Etive loan stock was converted to 908,182 ordinary shares upon Admission at the IPO price. The remainder of the £1.0 million Etive loan stock bears no interest and is shown at its present value. This loan stock is expected to be repaid in full in May 2016.

6. Explanation of transition to IFRS

This is the first time that the Group has presented its consolidated financial information under IFRS. The accounting policies detailed in note 2 have been applied in preparing the financial information for the 6 months ended 30 June 2013, the comparative information presented in this financial information for the year ended 31 December 2012 and the preparation of the opening IFRS statement of financial position at 1 January 2012.

An explanation of how the transition from UK GAAP to IFRS has affected the Group's financial position, financial performance and cash flows since the transition are set out in the following tables and notes.

Notes to the reconciliation of equity at 1 January 2012

1. On converting to IFRS, the treatment of rental expense for the Manchester and London offices has resulted in an increase of £84,000 in the annual charge to the consolidated income statement and the resultant adjustment required to trade and other payables as a result of spreading the lease incentives received over the full term of the lease. An additional increase of £85,000 was recorded in the year ended 31 December 2012.

2. The charges to retained losses are as a result of the adjustments to profit as shown in the reconciliation of total comprehensive income and related notes detailed below.

3. Recognition of merger reserve.