Half Yearly Report

Lombard Risk Management plc

("Lombard Risk" or the "Company")

Interim results for the six months ended 30 September 2013

Lombard Risk Management plc (LSE:LRM), a leading global provider of collateral management, liquidity and regulatory reporting and compliance solutions for the financial services industry, is pleased to announce its interim results for the six months ended 30 September 2013.

Highlights

· Revenue of £7.3m (2012: £7.7m) down 5%, offset by record order book of contracted revenue at £5.4m (2012: £2.8m).

· 45 COREP contracts signed with 16 being for new names.

· EBITDA of £0.1m (2012: £2.0m) following increased staffing levels to deliver additional contracts.

· Loss before tax after fully expensing all development costs of £0.9m (2012: profit £0.1m).

· Cash at period end of £1.8m (2012: £1.5m) with reduction in debt to £1.0m (2012: £2.0m).

· Equity placing to raise £2.6m completed in July 2013.

· Continued investment in the development of COREP, COLLINE® Optimisation module the next generation REPORTER.

· Interim dividend of 0.030 pence (2012: 0.025 pence) per Ordinary Share.

Current trading and outlook

· COREP delivery to be heavily weighted to H2 in the current financial year.

· Further COREP contracts being negotiated.

· European Banking Authority's Financial Reporting (FINREP) regulations are in scope for many UK financial institutions creating additional mandatory spend requirements.

· Optimisation module for COLLINE® adds additional rich functionality to the product suite.

John Wisbey, Chief Executive, commented:

"The first six months have seen further positive progress across the Group, although recognised revenues have been impacted directly by delays to new regulatory products. This has led to a record order book as we move into the second half of the year. 45 clients have contracted to license our COREP product including 16 new clients. To meet those orders the Company has had to increase staffing levels to ensure that product deadlines are met. We are optimistic about the second half of the year owing to the record contractual order book and other wins where our software has been selected. Based on business already contracted or won, and assuming no further regulatory delays on COREP or other factors causing delays to project delivery, we believe we have already won enough business for the full year's revenues to equal or exceed last year's full year revenue number of £16.8m. Consequently, any business awarded to us and implemented in the next 5½ months will represent revenue growth for the year as a whole. This gives us continued confidence in meeting the full year revenue forecasts in the market."

Report of Philip Crawford, Non-Executive Chairman

It has been a busy six months for Lombard Risk. Although first half recognised revenue is down by 5% on the same period in the previous year, sales activity has been encouraging and the forward position is much stronger than in previous years. The positive level of sales activity has resulted in a record closing order book of contracted revenue totalling £5.4m. Much of this will be recognised in the second half of the year along with over £4.0m of annually recurring revenue.

We have good visibility of a significant proportion of the revenue we expect in the full year.

Sales in the first half were impacted directly by delays to the implementation of European banking legislation. 45 clients have contracted to purchase the Company's European Banking Authority Common Reporting solution (COREP), with 16 of these being new names. But the delay to implementation of the legislation has caused a delay to finalising our COREP product and consequently that product delivery is now taking place in the second half of the financial year. This was always anticipated to be a significant revenue stream for the Company in the current year. We believe that the majority of these orders will be fulfilled in the current financial year and it is therefore expected that full year revenues will be very much second half weighted.

The Company is now more than half way through its three year major investment cycle prompted by the opportunities arising from regulatory and market change. Key initiatives at present are the latest upgrades to the COREP and FINREP products, completion of the function-rich Optimisation module for COLLINE® and pushing ahead with the next generation REPORTER product.

The Company raised £2.6m in July at a time of heavy investment in product development, and to mitigate working capital risk from the delays in COREP installations caused by regulatory deadline delays and legislative amendments.

On a macro-economic level, further regulation in the financial world continues to gather momentum. This inevitably exerts additional regulatory pressures on our collateral risk customers. The Board continues to be confident that the future will bring a sustained period of growth for the Company.

Chief Executive Officer's statement

Summary

For a variety of reasons, recognised revenues in both the current and prior financial years are weighted to the second half. Given that around 75% of our costs are salary related and mostly fixed, that also leads to even higher variations in earnings between half years.

Based on business already contracted or won, and assuming no further regulatory delays on COREP or other factors causing delays to project delivery, we believe we have already won enough business for the full year's revenues to equal or exceed last year's full year revenue number of £16.8m. Consequently, any business awarded to us and implemented in the next 5½ months will represent revenue growth for the year as a whole. This gives us continued confidence in meeting the full year revenue forecasts in the market. 

Our regulatory European Banking Authority COREP programme has continued to be a great success, and we are now up to 45 contracted clients. We believe this is well ahead of our competitors, and we are confident of further new business in the near future. The regulator's rules were changed several times during the process with the last forms only released at the end of July 2013. As a result we have been required to increase our staffing levels to meet this shorter timeframe to implementation, with a resulting temporary increase in operating costs.

We raised £2.6m of funds in July 2013 at 11p per share to accelerate our software development programme safely without risking our working capital position, and that has allowed us to invest with confidence at a time when there is the potential for land grab in our sector. The second half of the financial year can be expected to be appreciably cash generative in contrast to the first half.

The outlook for revenue growth remains very promising, with a market environment favouring the Company's product positioning in regulation, compliance and risk management despite a tough budgetary environment in the financial sector. In addition, the investment we have made in the last year can be expected to stand us in good stead in the years to come.

Clients and business won

We have continued to make great progress in the UK on the regulatory side with 45 signed contracts won for the European Banking Authority's COREP and more recently FINREP. The wins to date include 29 existing regulatory customers and 16 new names of which 12 have historically been customers of our most direct competitors. 12 of these 45 names have been signed up since the beginning of the financial year. In Asia Pacific, we also had a good half year with a large new client won and several smaller deals. America was disappointing by contrast, but the pipeline there is encouraging.

Most of the expected first year revenue from these regulatory wins in the UK and Asia Pacific has yet to be recognised. We enter the second half of the year with a strong book of pent up and committed orders. The contractual order book was up 92% to £5.4m at the period end, from £2.8m a year earlier.

Our collateral market positioning for COLLINE® has for several years been across all sizes of firms with capital market operations, from some of the biggest global banks and asset managers to smaller banks. It is pleasing to be able to report that our new regulatory clients gained in the period include increasingly large banks with large volumes. Part of our investment being made in regulatory product is to ensure that we can meet the regulatory needs of the very largest banks at head office or regional head office level as well as at branch level. We expect this to be one of the engines of our future growth.

We regard our client base of around 300 financial institutions including 30 of the top 50 banks in the world as one of our most valuable assets, and in many cases we are seen as a trusted provider rather than only as a vendor. Our client retention rate for all products remains very high at over 95% with any attrition mostly caused by bank branch closures outside our control.

Finance Review

Recognised revenue dropped by 5% against the comparable half year to £7.3m (2012: £7.7m). Annually recurring revenues for the half year totalled £4.2m (2012: £3.6m), being 57% (2012: 46%) of total revenues.

Operating profit before depreciation, amortisation, share-based charges and fund raising costs (EBITDA) was £0.1m (2012: £2.0m). The first half figures were impacted by the higher level of staffing and, to some degree, by the strength of the Chinese Yuan against Sterling.

Cash at the end of the period was £1.8m (2012: £1.5m) with £1.0m debt (2012: £2.0m). The Company raised £2.8m (net) in the period, including £2.5m (net) from fundraising and £0.3m from share options exercising, and used £0.7m (2012: £0.3m) to service and repay debt. A dividend of £0.1m (£0.1m) was paid.

Capitalised development costs totalled £2.4m (2012: £1.9m), representing 68% (2012: 70%) of total research and development costs. The increase reflects the drive to develop new products, most notably a module for European Banking Authority's Common Reporting (COREP) and Financial Reporting (FINREP), a new collateral optimisation product, EMIR reporting in REFORM, and a next generation regulatory product.

Investment in software product development

During the period, we continued to invest heavily in the development of our software products, primarily in the areas driven by regulation and by regulatory and market initiatives around derivatives reform. This meant gearing ourselves up for the European Banking Authority's COREP and FINREP regulations and for the regulatory requirements of the EMIR program. While COREP has been developed as a new module of the existing REPORTER product, the other initiatives have been developed through our new REFORM product which has required appreciable expenditure. In addition, we have continued to invest in research and development for other products. For example for COLLINE® we continued to develop our offering for Clearing and invested in ensuring that COLLINE® is compliant with new Dodd-Frank and EMIR regulations. We also enhanced COLLINE® by delivering a superior module for Repos, and made good progress in building an API for COLLINE® which allows COLLINE® to be used as a web service. Finally we invested in COLLINE's Optimisation module to allow optimal inventory management of collateral.

We have over 140 staff in our development and testing centre in Shanghai. Having this capability has allowed us to take on much more work than we could have a few years ago and much of this work is project based, to meet particular client requirements - very little of our research and development is on a speculative basis. We have struck a prudent balance between innovation and other investment required to take advantage of opportunities in our core regulatory and collateral businesses.

Expansion of intangible assets

Intellectual Property

The Company has always focused on developing its own software products rather than selling the products of third parties. With significant investment over time in our products like REPORTER, REG-Reporter, COLLINE® and OBERON®, and more recently in REFORM®, REPORTER MIS, Compliance Assessor and other software for our future regulatory products, we have a valuable foundation of IP from which to build. Moreover our modern products are being designed with reusable common libraries of software or web services, meaning that we should be able to achieve quicker time to market and leverage our development effort more.

Brands

Our main brands at present are:

REPORTER - Regulatory Reporting in multiple jurisdictions. REPORTER is the biggest market brand for Bank of England and now European Banking Authority regulatory reporting in the UK, and an important brand in various Asian and European countries as well as the USA.

REG-Reporter® - Regulatory Reporting in the USA, Canada and other jurisdictions. REG-Reporter is the biggest brand used by foreign banks in the United States with more clients than all our international competitors' products combined.

COLLINE® - Collateral Management for OTC and Cleared Derivatives, Repos, Securities Lending and Listed Derivatives, and Collateral Optimisation around the resulting collateral inventory. COLLINE® is one of the top brands in these markets. 

REFORM® - Pre and post trade solutions and transactional reporting for the derivatives reform initiatives such as Dodd-Frank and EMIR. Other modules of the REFORM® engine provide connectivity and message transformation, for example enabling COLLINE® to connect to exchanges and to messaging systems.

OBERON® - Financial instrument valuation and related risk reporting. OBERON® has been a very durable system over many years.

COMPLIANCE ASSESSOR™ - Managing Regulatory Compliance Risk through mapping of regulations and internal policies against the actual actions taken by firms to ensure their compliance with such regulations and internal policies. 

REPORTER MIS - Flexible web based reporting tool allowing reporting to be produced from, for example, COLLINE® in conjunction with another third party system.

Partnership programme

We expect to see the proportion of sales through alliance partners increase over the next few years, which in turn will add a level of scalability to the Company over and above the level of profit growth achievable only through a direct sales force. We have made good progress in signing up partners and we expect the results of this to start coming through over the next few months. We are already talking to a number of possible partners for different products in different geographies, and the scale of this has reached the point where we have hired a senior person to act as our Alliances Director.

Market assessment

The regulatory market background remains net favourable to the Company. We estimate that we are about half way through an increase in the depth and breadth of regulation that banks and financial institutions face worldwide. Complying with these regulations has been a driver for our sales and an opportunity to gain market share. We expect there to be a further up wave of expenditure as banks review the enormous on-going cost of regulation and look to achieve greater efficiency in how they spend that money. We believe our products will be seen as part of the solution to greater efficiency rather than as part of the problem. The collateral market also has considerable opportunities, with collateral optimisation turning this industry into one that helps the front office make money rather than simply helping Operations work more efficiently.

Business improvement and our people

We are pleased to welcome two outstanding new non-executive directors to the board. John McCormick, currently Chairman and CEO of RBS in Asia, will join the board from 1st November, while Steve Rogers, a senior executive at Microsoft, joined the board in August. Once John McCormick is on board the composition of the various board committees will be finalised. Brian Crowe stepped down from the board in July after nine years' service as an NED starting at the time of our IPO in 2004. I would like to thank him personally for his wise counsel over those years.

In the previous year we achieved CMM-D level 3 accreditation in our Development and Testing centre, and our processes around software development and support have continued to improve. In the next six months we are making similar improvements to our CRM capabilities with a view to making our sales team more efficient. As for most successful technology companies we recognise that people are one of our greatest assets alongside customers and our IP. Our salary costs went up appreciably as our investment in COREP got underway. We also increased the size of our sales team with further sales or pre-sales recruitment in the UK the US and Asia. During the year we strengthened our HR function.

Outlook

For all the reasons mentioned earlier, the Board is optimistic about the second half of the year owing to the record contractual order book and other contracts awarded or where our software has been selected. We have good recurrent revenues and further predictable revenues from fixed-term licence renewals and contracted orders as well as new business won. The Board remains optimistic about the prospects for the Company in the medium term especially given the macro effect of a continuing level of regulatory change all over the world. This is combined with investment in collateral management together with the likelihood of additional revenue streams resulting from the successful investment in our product partnering strategy. A greater level of confidence seems to have returned to the banking market as the threat of a meltdown in the Eurozone seems to have receded, even though banks remain extremely cost conscious. As always a postponement of European regulatory deadlines could affect the timing of the Company's revenues, but we do not expect this now for COREP.

I would like personally to thank the many staff in London, Shanghai and our other offices who have gone the extra mile for us in the last few months, and will continue to do so in the period of COREP delivery. It is much appreciated as is the excellent support of our shareholders, bankers and advisers.

John Wisbey

Chief Executive Officer

14 October 2013

Consolidated unaudited interim statement of comprehensive income

For the six months ended 30 September 2013

Consolidated unaudited interim statement of financial position

As at 30 September 2013

Consolidated unaudited interim statement of changes in equity

For the six months ended 30 September 2013

Consolidated unaudited interim statement of cash flow

For the six months ended 30 September 2013

Notes to the interim report

For the six months ended 30 September 2013

1. Basis of preparation

This interim report was approved by the Board on 14 October 2013.

These consolidated financial statements are for the six months ended 30 September 2013. They have been prepared in accordance with International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretation Committee ("IFRIC") interpretations as at 30 September 2013, as adopted by the European Union. They do not include any of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 March 2013.

The preparation of financial statements under IFRS requires the Board to make judgements, estimates and assumptions that affect the application of accounting policies, the reported amounts of statement of financial position items at the period end and the reported amount of revenue and expense during the reporting period. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements that are not readily apparent from other sources. However, the actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an on-going basis.

This condensed consolidated financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2013 were approved on 13 May 2013. These accounts, which contain an unqualified audit report under Section 495 of the Companies Act 2006 and which did not make any statements under Section 498 of the Companies Act 2006, have been delivered to the registrar of companies in accordance with Section 441 of the Companies Act 2006.

2. Earnings per share

Basic earnings per share has been calculated by dividing the profit on ordinary activities after taxation by the weighted average number of Ordinary Shares in issue during each period.

Diluted earnings per share is calculated by adjusting the weighted average number of Ordinary Shares in issue on the assumption of conversion of all dilutive potential Ordinary Shares. The Group has only one category of dilutive potential Ordinary Shares, being share options granted under the Enterprise Management Incentive Plan and Unapproved Scheme.

3. Taxation

The taxation charge is based on the effective tax rate expected to apply for the full year, taking into account the anticipated benefit of brought forward tax losses. The effective tax rate is lower than the standard tax rate, principally as a result of prior years' tax losses brought forward which are available within the Group. The tax charge for the period relates principally to a reduction in the deferred tax asset and £5,000 of current tax paid by overseas subsidiaries.

4.  Report

Copies of this report will be sent to shareholders and will be available to the public from the Company's head office, 7th Floor, Ludgate House, 245 Blackfriars Road, London, SE1 9UF. The report will also be available to download from the investor relations section of the Company's website www.lombardrisk.com.