1st Aug 2005 07:01
Royalblue Group PLC01 August 2005 1st August 2005 royalblue group plc interim results for the six months ended 30th June 2005 royalblue reports strong organic growth and continuing momentum. 2005 2004 ChangeRevenue £34.1m £28.5m +20%Operating profit £4.3m £3.6m +19%Pre-tax profit £4.8m £4.1m +17%Diluted earnings per share 10.8p 8.8p +23%Interim dividend per share 3.3p 2.7p +22% All figures, including comparatives, are presented under IFRS. Highlights for the six months ended 30th June 2005:• Strong organic growth across all areas.• Recurring revenue up 30%, now representing 66% of total revenue.• Consultancy revenue recovering well, up 18%.• Over $30m of new enterprise Fidessa deals signed in the first half.• Substantial investment programme continuing in new products and services.• Strong momentum underpinning growth for the year. Commenting on these results, Chris Aspinwall, Chief Executive, said: "Positive momentum has continued into 2005 and this has been reflected in anincrease in revenue of 20% over the same period last year. Recurring revenue,representing annual licence and service fees, has grown 30% over the period to£23m, now accounting for 66% of total revenue. Consultancy revenue has continuedto recover with growth of 18% over the period. The business has continued to becash generative with net cash generated from operating activities of £4.5million. Progress has been maintained across all regions and we have seen a markedincrease in sales of enterprise Fidessa with four significant deals signed. Intotal these deals are expected to be worth in excess of $30 million over thenext four years. Sales of hosted Fidessa have moved ahead well with 11 newsignings and the total number of Fidessa positions in the market has increasedto nearly 7,500. Fidessa workstation has made further progress, and with inexcess of 1,400 positions installed, we are on track to meet our target ofdoubling our user base during 2005. The multi-broker order managementfunctionality within our workstation has been well received in the marketplacewith the first buy-side customers now live. We have maintained the investment programme outlined at the end of last year. Weanticipate that the programme will accelerate as we are seeing a strong demandfor global trading functionality. In order to address this we are bringingforward our plans to provide global data and are also expanding our data centresand network more rapidly. The areas where our investment is concentrated are: • Our data centres in Europe and the US have been expanded, a new datacentre has opened in Tokyo and a further data centre has been commissioned inHong Kong. We also expect to commission another data centre in Tokyo soon. • The depth of our data coverage across Europe and North America iscontinuing to expand and we are extending our data coverage into Asia. • We have opened a new office in Canada and expanded our officefacilities in the UK and US. • We are extending the market data and trading functionality in theFidessa workstation. • We have commenced development of support for derivative instrumentsalongside our current support for cash equities. We expect to remain within the guidance given at the year end that the combinedeffect of these initiatives will add approximately £2 million to the operatingcosts during 2005 and result in a reduction of the operating margin. However,the change to IFRS means that we now expect this reduction to be around 1percentage point rather than the 2 percentage points anticipated at the yearend. Overall, we expect strong trading conditions to continue for the remainder of2005 resulting in strong revenue growth for the year as a whole. We continue tomake progress in all areas of the business and are experiencing the strongestdemand that we have seen for several years. We are excited about the prospectsfor our expanded range of products and services and believe that they willcontinue to provide a firm foundation for further growth." Financial Summary In the six months to 30th June 2005 strong growth in revenue has been achieved,up 20% to £34.1 million, from £28.5 million for the same period last year. Thisheadline growth is supported by the underlying growth in both recurring andconsultancy revenue, and growth in all regions. The momentum in the recurringrevenue has been maintained, up 30% at £22.6 million and now representing 66% ofthe total revenue. In particular, growth in hosted Fidessa was a very strong77%, now at £10.5 million and 31% of the total revenue. On the back of theincreased number of positions the Fidessa workstation revenue has increased byover 150%, to almost £1m. The improvement seen in consultancy revenue in thesecond half of 2004 has continued with the revenue up 18% at £11.1 million, nowrepresenting 32% of the overall revenue. Staff numbers have increased to service the revenue growth and the investmentprogramme. At 30th June 2005 the headcount was 580, up 12% from 519 at the yearend and up 22% from 477 at the same time last year. Operating profit has improved by 19% to £4.3 million from £3.6 million in 2004,representing an operating margin of 12.6%. The interest earnings are down 5% onlast year, due to the return of cash to shareholders in June 2004, and leads tothe profit before tax being up 17% to £4.8 million from £4.1 million in 2004.Diluted earnings per share have increased by 23% to 10.8 pence, up from 8.8pence. The business continues to be cash generative with £4.5 million net cashgenerated from operating activities. However, the investment programme, annualdividend payment and normal first half working capital movement have resulted inthe overall cash balance falling from £24.6 million at the year end to £21.9million at 30th June. The interim dividend is being increased by 22% to 3.3pence and will be paid on 26th September 2005 to shareholders on the register on26th August 2005, with an ex-dividend date of 24th August 2005. These are the first results that we have reported using International FinancialReporting Standards (IFRS) and all numbers presented for comparative periods arealso under IFRS. The change to IFRS, results in no change to the revenuerecognised. The primary area of change is regarding IAS 38 Intangible Assets,which requires that product development expenditure be capitalised. We haveadopted a policy of capitalising product developments and enhancements andamortising the expenditure over three years from the time of capitalisation. Webelieve this is a conservative policy, particularly taking into account thenature of the recurring revenue we generate from our products. In the period,this change results in expenditure capitalised of £2.6 million and amortisationof £2.1 million and as at 30th June 2005 an intangible asset of £7.0 million.The net effect of this capitalisation less amortisation is that for 2005 as awhole we expect around £1 million of contribution to the operating profit. Thiswill offset some of the impact of our investment programme and as a result wenow expect that the effect on the operating margin will be around one percentagepoint lower than last year rather than the two percentage points anticipated inthe 2004 statement. It should be noted, however, that these changes have noeffect on the underlying performance or cash generation within the business. The other area of change for royalblue is the expensing of share incentives tothe profit and loss account. This results in a charge of £0.3 million againstoperating profit in the period. A fuller explanation of the transition to IFRSis presented in Note 12 to the financial statements. Operations Introduction During the first half we have continued to make progress with all our coreservices whilst also moving forward with the development of new products. Wehave made strong sales of enterprise Fidessa across the world with 4 signings.One of these expands our relationship with an existing customer, HSBC, wherethey have now selected Fidessa as their global platform for handling all theircash, DMA (Direct Market Access), algorithmic and program trading flow. A seconddeal is with a major Australian bank, which is a leading trading firm in theAsian markets. This deal will further establish Fidessa as a leading localtrading solution for the pan-Asian markets. The third sale is to a majorCanadian bank where Fidessa will be used to support their Canadian flows andexecution on the US markets and the fourth is a US domestic firm focusing on OTCand listed trading. In parallel, we have made good progress with hosted Fidessa signing 11 new dealsand the total number of users now using hosted Fidessa has increased to inexcess of 1,800. The new deals have ranged in size from small systems covering afew trading positions to larger players and emphasises the range of firms whoare now able to take advantage of the industrial strength of the hosted Fidessaplatform. For Fidessa workstation, with over 1,400 positions now installed, we are ontrack to achieve our goal of doubling our workstation customer base during 2005and we also have the first buy-side customers live using our executionmanagement functionality. This allows buy-side customers to use the Fidessaworkstation's trading functionality in conjunction with the Fidessa connectivitynetwork in order to route flows to brokers for execution. This solution worksalongside their existing buy-side order management system. The Fidessa connectivity network continues to develop with in excess of 1,000connections now live. This represents an average rate of around 50 newconnections being put in place across the network every month and demonstratesthat the Fidessa connectivity network has already become an important hub forrouting order flow. We expect this will continue to develop as Europe and Asiafollow the lead of the US where on average each US customer connects to about 30different destinations. The number of remote brokers connected to the Fidessaconnectivity network has continued to increase and we have also found thatbuy-side clients want access to the full range of services offered by eachbroker including care (worked) orders, DMA and algorithmic trading. As a resultwe have been increasing the services we offer to existing brokers as well asadding new brokers. We have now established our plans for the derivative markets and are currentlyworking on the development of functionality to enable Fidessa customers to tradederivatives alongside the cash product. First releases of the software areplanned for early 2006. Europe In Europe, we have seen a strong performance throughout the business withconsultancy improving across our accounts as well as strong sales of hostedFidessa. New processes have been introduced to allow us to streamline hostedFidessa deliveries meaning that we have been able to deliver ten new systems inthe first half of 2005, including two major upgrades. The new delivery modelallows us to provide smaller hosted Fidessa installations than was previouslypossible. This combines with the transactional functionality in Fidessaworkstation to give us a seamless product line from the smallest firm with onlya few brokers and manual processes, right up to the largest and most complexglobal players. We have continued to extend the Fidessa connectivity network in Europe addingmore brokers and RSPs (Retail Service Providers). We now have the largestnetwork of RSPs available and a growing proportion of RSP flow is now executedthrough our network. The strength of our connectivity network in Europe hasenabled us to provide the first hosted Fidessa system that is used by a firmthat does not have any exchange memberships of its own. Instead the firm reliesentirely on the Fidessa connectivity network to provide access to executionvenues through remote brokers. Fidessa workstation continues to receive extremely positive reviews and wasawarded "Best Information Display Service" at the Systems in the City Awards2005. Data coverage has been extended with Sydney, Auckland, Toronto, Athens andJohannesburg added during the period. Further corporate actions, dividends,fundamentals, company accounts, broker forecast data and historical chartinghave been added and coverage for these extended across Europe and North America. Going forward, we are developing the Fidessa workstation as a comprehensiveaccess point to the growing Fidessa connectivity network. This will enableworkstation users to send and receive order flow to and from any FIX enabledclient or broker and will also provide full order routing and managementfunctionality together with intra-day risk management. In parallel, we willcontinue to extend the data coverage within Fidessa workstation, extending UScoverage to show the full order book and including other sources such as ECNs,Pink Sheets and OTCBB. In addition, we are planning to extend the news serviceas well as provide enhanced charting and other usability features. As part ofthe expansion of our global trading services we will also be providing Asiandata through Fidessa workstation and this will become a growing part of ourinvestment programme into 2006. North America Within North America, the markets continue to move rapidly with the changingregulatory environment and this is likely to result in structural changes acrossthe markets. These changes include Reg-NMS which for the first timedifferentiates between fast electronic markets and slow manual markets and incertain circumstances allows brokers to trade through1 the price offered on aslow market. This rule has particular implications for NYSE, which is thelargest market in the US and is currently floor based. In reaction to thesechanges the central markets in the US are making an increasing commitment totechnology-focused trading. NYSE is proposing to buy ARCA, which is anelectronic market that has traditionally traded NASDAQ securities. This willgive NYSE a very quick entry into electronic trading allowing it to compete as afast market. In a similar move, NASDAQ is increasing its own liquidity with thepurchase of INET, another electronic market. We expect these changes to resultin increased automation of trading across the markets and stimulate demand forfurther applications within Fidessa. In the brokerage community, as larger firms respond to these challenges we haveseen an increased level of activity within the enterprise customer base and wehave also seen two new enterprise Fidessa deals signed. One of these deals isfor a Canadian bank that also owns a US firm, which is already a hosted Fidessacustomer. Under this deal they will now use enterprise Fidessa for all theirCanadian trading and central order management, passing US order flowautomatically to their hosted Fidessa implementation for execution in the USdomestic markets. We believe this will be a growing trend in Canada with localfirms looking for automated ways to send their order flow into the US domesticmarket, and that this will result in further sales of product such as Fidessa inthis market. During the first half we have made the first sale of our US market data productproviding level two data for the NASDAQ market. This product is our first USdata product and aligns with our strategy to provide market data as a fullyintegrated service. We expect to make further sales of this service during thesecond half. We are also pushing ahead with our plans for the introduction ofFidessa workstation technology in the US market and expect to make furtherprogress with this during the second half. Across all our markets the buy-side is taking a more global view of theirinvestments and as a result we are seeing increased demand from the brokeragecommunity for "trading foreigns". Full global trading is an extremely complexprocess and is currently only attempted by our largest tier-one customers. Theconcept of "trading foreigns" is a first step towards this and involves beingable to enter and route order flow for non-domestic securities. We are currentlysupporting this functionality on behalf of a number of our customers and arerouting US domestic order flow from Fidessa systems outside the US. As we expandthe data set available within hosted Fidessa, we expect to extend this serviceto provide a full global trading solution. royalblue has a strong commitment to quality in all the products and servicesthat it offers. The firm is independently certified to ISO 9001 and during thefirst half we have successfully completed a SAS70 audit. We believe this auditis particularly important to our US clients, in enabling them to satisfy theirSarbanes Oxley requirements when using a Fidessa solution. 1 Accept a price on the fast market even if that price is not as good as thatoffered on the slow market. Asia Market conditions in Asia have continued to improve with higher trading volumesbeing recorded across the main markets. This has caused a number of firms tore-evaluate their legacy systems creating further opportunities for enterpriseFidessa. In the first half we have signed a deal with a large Australian bankcovering the use of Fidessa in the Australian market and the other major marketsin Asia. Software to provide connectivity to the Japanese market has alreadygone live as part of this deal. At current levels of interest we see goodpossibilities for signing further enterprise Fidessa deals in the region during2005. As well as making the markets more attractive to foreign firms, the increasedtrading volumes are also making electronic connectivity, including FIX(Financial Information eXchange), more important. This is the case for alltrading firms but applies especially to domestic firms, as many of these havenot made substantial use of electronic connectivity before and are not FIXenabled. The Fidessa products, and particularly hosted Fidessa services, providean extremely cost effective and rapid route into this growing segment of themarket for our customers. To support the increased connectivity requirements andso that we can provide a hosted Fidessa solution for Asia, we opened a new datacentre in Tokyo in January and have now commissioned a further data centre inHong Kong. This centre in Hong Kong will be operational during the second halfand we are also expecting to commission a second data centre in Tokyo soon. As new clients have come online, the total number of Fidessa users in the Asiaregion has increased by over 30% and we expect continued strong growth of usernumbers in the region. The strength of our exchange connectivity softwarecoupled with the volume increases in the markets are also encouragingestablished companies to standardise on Fidessa for exchange connectivity. The active markets in Asia have also created an increased interest from Europeanand US clients for trading in Asian stocks. Clients are demanding that theirbrokers handle orders for non-domestic securities, even where the broker is arelatively small local firm and does not have any Asian presence or membership.This requires local hosted Fidessa systems to "understand" non-domesticinstruments and represents a first step towards full global trading. We believethis will be a key market for us in the future as we are the only vendor able tooffer a fully integrated global trading platform and connectivity network. Derivatives We have commenced a development programme to add support for trading a range ofderivative products through Fidessa alongside the existing cash product. Overone half of our current customers who trade the cash product also trade thederivative and across Euronext there are over 100 firms that are members of bothits cash and derivatives exchange. In the short-term we can provide significantbenefits to these customers by providing an industrial strength trading platformthat can support both instrument types. This platform will leverage the enormousinvestment in our core software, providing a highly resilient, fast, scalableand functionally rich platform from which to build. This strategy also alignswith current moves being made by some large trading firms who are moving awayfrom the traditional organisation of their trading desks towards a multi-assetclass approach. These firms are responding to the perceived blending of exchangeand OTC market places generating a requirement to manage the business processflows and hedge risks effectively across the different instrument types. Webelieve that the size of the global customer base we could address with thehosted Fidessa platform extended to support derivatives could increase to asmany as 1,000 customers. Going forward we also see that we will be able toprovide derivative only functionality as another hosted service taking advantageof the strength of our underlying platform and the innovative derivativesoftware we are now developing. First releases of the new software are plannedfor early 2006 and we anticipate that the opportunity will develop graduallyover the next few years. Lava Patent Lawsuit In June 2003 we noted the announcement released by Lava Trading Inc. (Lava) thatit had filed a patent infringement claim in the US against royalblue. The patentrelates to the concept of displaying prices from more than one source (ECN) on asingle screen in the US. In December 2003 Lava filed an amendment to its lawsuitalleging unfair trade practices on the part of royalblue, in particular inrelation to the pricing of products and associated services. In June 2004 we announced that the United States District Court for the SouthernDistrict of New York had made its ruling on the first stage of the patentinfringement case. This first stage, known as a Markman claims constructionhearing, defines the technical terms in the patent, which will be used insubsequent hearings and is instrumental in establishing whether patentinfringement has occurred. The ruling confirmed our definition of all the majorterms and strengthens our position that the case brought by Lava is withoutmerit. In December 2004 we announced that a Stipulated Judgment had been entered intothe record in the United States District Court for the Southern District of NewYork. This formally recorded that, based on the findings of the earlier Markmanhearing, royalblue does not infringe Lava's patent. In both this announcementand the one in June 2004, royalblue noted that it expected Lava to lodge anappeal. Lava has now lodged this appeal. A decision by the Appeals Court islikely to take at least 12 months. Outlook Looking ahead we expect that trading will remain strong for the rest of 2005.The general improvement in consultancy and continued growth in recurring revenueshould result in overall revenue growth for 2005 of more than double thatachieved in 2004. At the same time the acceleration of our investment programmemeans that we expect to see a decrease in the operating margin within thebusiness. However, the change to IFRS means that we expect this to be around 1percentage point rather than the 2 percentage points anticipated in the 2004statement. Looking further ahead we are now seeing the direct benefit that we are able toderive through the leverage between our services. For example, the Fidessaworkstation leverages the Fidessa connectivity network and hosted Fidessa bybringing more customers onto the network. Conversely as the Fidessa connectivitynetwork becomes an important destination for sending and receiving order flow,it leverages both the Fidessa workstation and hosted Fidessa as firms seek toparticipate in this network. We now believe that each of our areas of trading,market data and connectivity will become an important revenue stream in its ownright and that the combination of these components provides a firm foundationfor the growth of the business over the coming years. enquiries:John Hamer, Chairman Edward Bridges, Financial DynamicsChris Aspinwall, Chief Executive Ben Way, Financial DynamicsAndy Malpass, Finance Director Tel: 020 7831 3113www.fidessa.com Fax: 020 7831 6341Tel: 01483 206300 Fax: 01483 206301 Consolidated Interim Income StatementFor the six months ended 30th June 2005 2005 2004 2004 6 months to 6 months to 12 months to 30th June 30th June 31st December Note £'000 £'000 £'000 Revenue 34,082 28,459 59,768Operating expenses 3 (29,781) (24,832) (51,705)Operating profit 4,301 3,627 8,063Interest receivable 454 479 1,241Interest payable (1) (2) (2)Profit before income tax 4,754 4,104 9,302Income tax expense 5 (1,242) (1,255) (2,577)Gain relating to sale of operationdiscontinued in prior period - - 500Profit for the period 3,512 2,849 7,225 Basic earnings per share fromcontinuing operations 7 11.0p 9.0p 21.2pDiluted earnings per share fromcontinuing operations 7 10.8p 8.8p 20.7pBasic earnings per share fromtotal operations 7 11.0p 9.0p 22.7pDiluted earnings per share fromtotal operations 7 10.8p 8.8p 22.3p Consolidated Interim Balance SheetAs at 30th June 2005 2005 2004 2004 30th June 30th June 31st December Note £'000 £'000 £'000AssetsNon-current assetsProperty, plant and equipment 8 8,039 5,095 6,347Intangible assets 9 7,206 6,413 6,681Deferred tax assets 1,606 1,654 1,993Other receivables 898 898 898Total non-current assets 17,749 14,060 15,919 Current assetsTrade and other receivables 10 16,282 11,239 13,673Cash and cash equivalents 21,888 22,169 24,590Total current assets 38,170 33,408 38,263 Total assets 55,919 47,468 54,182 EquityShare capital 3,268 3,268 3,268Share premium 11,610 11,610 11,610Translation reserve (164) (138) (206)Retained earnings 21,092 14,872 18,838Total equity 35,806 29,612 33,510 LiabilitiesNon-current liabilitiesTrade and other payables 306 366 328Deferred tax liabilities 1,229 1,917 1,953Total non-current liabilities 1,535 2,283 2,281 Current liabilitiesTrade and other payables 11 15,557 12,612 14,849Current income tax liabilities 3,021 2,961 3,542Total current liabilities 18,578 15,573 18,391 Total liabilities 20,113 17,856 20,672 Total equity and liabilities 55,919 47,468 54,182 Consolidated Interim Statement of Changes in Shareholders' Equity Share Share Cumulative Retained Total capital premium translation earnings equity adjustment Note £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2004 3,268 11,610 - 21,423 36,301 Profit for the period - - - 2,849 2,849Net income recogniseddirectly to equity - - - 153 153Total recognised incomefor the period - - - 3,002 3,002 Employee share incentive charges 4 - - - 179 179Movement in employee share trusts - - - 265 265Dividend paid 6 - - - (9,997) (9,997)Currency translation adjustments - - (138) - (138)Balance at 30 June 2004 3,268 11,610 (138) 14,872 29,612 Profit for the period - - - 4,376 4,376Net income recogniseddirectly to equity - - - 136 136Total recognised incomefor the period - - - 4,512 4,512 Employee share incentive charges 4 - - - 235 235Movement in employee share trusts - - - 77 77Dividend paid 6 - - - (858) (858)Currency translation adjustments - - (68) - (68)Balance at 31 December 2004 3,268 11,610 (206) 18,838 33,510 Profit for the period - - - 3,512 3,512Net income recogniseddirectly to equity - - - 321 321Total recognised incomefor the period - - - 3,833 3,833 Employee share incentive charges 4 - - - 254 254Movement in employee share trusts - - - 22 22Dividend paid 6 - - - (1,855) (1,855)Currency translation adjustments - - 42 - 42Balance at 30 June 2005 3,268 11,610 (164) 21,092 35,806 Consolidated Interim Cash Flow StatementFor the six months ended 30th June 2005 2005 2004 2004 6 months to 6 months to 12 months to 30th June 30th June 31st December Note £'000 £'000 £'000 Cash flows from operating activitiesProfit before tax 4,754 4,104 9,302Adjustments for:Staff costs - share incentives 254 179 414Product development amortised 2,113 1,776 3,789Depreciation of property, plant and equipment 1,705 1,180 2,433Amortisation of intangible assets 55 9 36Loss on sale of property, plant and equipment 4 - 8Net interest receivable (453) (477) (1,239)Cash generated from operations before changesin working capital 8,432 6,771 14,743Movement in trade and other receivables (2,406) 2,027 (623)Movement in trade and other payables 111 (1,809) 683Cash generated from operations 6,137 6,989 14,803Income tax paid (1,653) (783) (1,748)Net cash generated from operating activities 4,484 6,206 13,055 Cash flows from investing activitiesPurchase of property, plant and equipment 8 (3,214) (1,401) (4,043)Proceeds from sale of property, plant and equipment 19 11 11Purchase of intangible assets 9 (46) (19) (191)Product development (2,644) (1,942) (4,076)Net interest received 442 478 1,233Purchase of own shares by employee share trust - (75) (309)Proceeds from sale of own shares byemployee share trust 22 472 901Gain relating to sale of operationdiscontinued in prior period - - 500Net cash used in investing activities (5,421) (2,476) (5,974) Cash flows from financing activitiesDividends paid 6 (1,855) (9,997) (10,855)Net cash used in financing activities (1,855) (9,997) (10,855) Net decrease in cash and cash equivalents (2,792) (6,267) (3,774)Cash and cash equivalents at 1st January 24,590 28,498 28,498Effect of exchange rate fluctuations on cash held 90 (62) (134)Cash and cash equivalents at end of period 21,888 22,169 24,590 Notes to the consolidated interim financial statements These consolidated interim financial statements of royalblue group plc (the "Company") for the six months ended 30th June 2005 comprise the Company and itssubsidiaries (together the "Group"). The consolidated interim financialstatements were authorised for issuance on 29th July 2005. The financialstatements are unaudited but have been reviewed by KPMG Audit Plc and theirreport is set out below. 1. Basis of preparation EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements of the company, for the year ending 31st December 2005, beprepared in accordance with International Financial Reporting Standards ("IFRSs") adopted for use in the EU ("Adopted IFRSs"). This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRSs in issue that either areendorsed by the EU and effective (or available for early adoption) at 31stDecember 2005 or are expected to be endorsed and effective (or available forearly adoption) at 31st December 2005, the Group's first annual reporting dateat which it is required to use Adopted IFRSs. Based on these IFRSs, thedirectors have made assumptions about the accounting policies expected to beapplied when the first annual IFRS financial statements are prepared for theyear ending 31st December 2005. The Adopted IFRSs that will be effective (or available for early adoption) inthe annual financial statements for the year ending 31st December 2005 are stillsubject to change and to additional interpretations and therefore cannot bedetermined with certainty. Accordingly, the accounting policies for that annualperiod will be determined finally only when the annual financial statements areprepared for the year ending 31st December 2005. An explanation of how the transition to IFRSs has affected the reportedfinancial position and financial performance of the Group is provided in note12. This note includes reconciliations of equity and profit or loss for thecomparative periods reported under UK Generally Accepted Accounting Practices ("UK GAAP") to those reported for those periods under IFRS. The policies set out below have been consistently applied to all the periodspresented. The preparation of interim financial statements requires management to makejudgements, estimates and assumptions that affect the application of policiesand reported amounts of assets and liabilities, income and expenses. Actualresults may differ from these estimates. The comparative figures for the financial year ended 31st December 2004 are notthe Company's statutory accounts for that financial year. Those accounts, whichwere prepared under UK GAAP, have been reported on by the Company's auditors anddelivered to the registrar of companies. The report of the auditors wasunqualified and did not contain statements under section 237(2) or (3) of theCompanies Act 1985. 2. Accounting policies The transition to IFRS from UK GAAP has resulted in limited changes to theaccounting policies for the Group. The accounting policies under UK GAAP wereset out in the Annual Report and Financial Statements for the year ended 31stDecember 2004. The material changes resulting from the adoption of IFRS aredetailed below. (a) Basis of consolidation The consolidated financial statements include the financial statements ofroyalblue group plc and its subsidiaries. There are no associates or jointventures to be consolidated. Subsidiaries are all entities over which the Group has the power to govern thefinancial and operating policies, generally accompanying a shareholding of morethan one half of the voting rights. Subsidiaries are fully consolidated from thedate on which control is transferred to the Group and are de-consolidated fromthe date on which control ceases. Intra-group balances, and any unrealised gainsand losses or income and expenses arising from intra-group transactions, areeliminated in preparing the consolidated financial statements. Unrealised lossesare eliminated in the same way as unrealised gains, but only to the extent thatthere is no evidence of impairment. The Group uses the purchase method ofaccounting to account for the acquisition of subsidiaries. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies at the balance sheet date are translated topounds sterling at the foreign exchange rate ruling at that date. Foreignexchange differences arising on translation are recognised in profit or loss.Non-monetary assets and liabilities that are measured in terms of historicalcost in a foreign currency are translated using the exchange rate at the date ofthe transaction. Non-monetary assets and liabilities denominated in foreigncurrencies that are stated at fair value are translated to pounds sterling atforeign exchanges rates ruling at the dates the fair value was determined. (ii) Financial statements of foreign operations The assets and liabilities of foreign operations are translated to poundssterling at foreign exchange rates ruling at the balance sheet date. Therevenues and expenses of foreign operations are translated to pounds sterling atrates approximating the foreign exchange rates ruling at the dates of thetransactions. Foreign exchange differences arising on retranslation arerecognised directly in the translation reserve. (c) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred onproduct development (relating to the design, programming and testing of new orenhanced products) are capitalised as intangible assets when it is probable thatthe project will be a success, considering its commercial and technologicalfeasibility, resources are available to complete the development, and costs canbe measured reliably. The expenditure capitalised is the direct labour costs.Other development expenditures are recognised as an expense as incurred. Productdevelopment costs previously recognised as an expense are not recognised as anasset in a subsequent period. Capitalised product development expenditure is stated at cost less accumulatedamortisation and impairment losses. Product development costs that have beencapitalised are amortised from the time of development on a straight-line basisover three years. (d) Share-based payments The Group operates two equity-settled share incentive plans. No expense isrecognised in respect of share incentives granted before 7th November 2002 orincentives vested before 1st January 2005. For share incentives granted after7th November 2002 and vested after 1st January 2005 the fair value of theincentives granted is recognised as an employee expense with a correspondingincrease in equity. The fair value is measured at grant date and spread over theperiod during which the employees become unconditionally entitled to theincentives. The fair value of the incentives granted is measured using abinomial model, taking into account the terms and conditions upon which theincentives were granted. The amount recognised as an expense is adjusted toreflect the actual number of share incentives that vest except where forfeitureis only due to the share price not achieving the threshold for vesting. (e) Income tax Income tax on the profit or loss for the periods presented comprises current anddeferred tax. Income tax is recognised in profit or loss except to the extentthat it relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date, andany adjustment to tax payable in respect of previous periods. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Theamount of deferred tax provided is based on the expected manner of realisationor settlement of the carrying amount of assets or liabilities, using tax ratesenacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. (f) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks and other short-term highly liquid investments with original maturities ofthree months or less. (g) Investments The Group classifies its investments in the following categories: financialassets at fair value through profit and loss and loans and receivables. Theclassification depends on the purpose for which the investments were acquired. Investments categorised as financial assets at fair value through profit andloss have been fair valued at inception. They are classified as current assetsif they are held for trading or are expected to be realised within 12 months ofthe balance sheet date. Otherwise, they are classified as non-current assets. Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market and with nointention of trading. They are included in current assets, except for maturitiesgreater than 12 months after the balance sheet date, which are classified asnon-current assets. 3. Operating expenses 6 months to 6 months to 12 months to 31st 30th June 30th June December 2004 2005 2004 £'000 £'000 £'000 Staff costs - salaries 16,664 13,762 29,022 Staff costs - social security 1,740 1,386 2,757 Staff costs - share incentives 254 179 414 Depreciation of property, plant and equipment 1,705 1,180 2,433 Amortisation of intangible assets 55 9 36 Product development capitalised (2,644) (1,942) (4,076) Product development amortised 2,113 1,776 3,789 Other operating expenses 10,192 8,976 18,018 Other income (298) (494) (688) Total operating costs 29,781 24,832 51,705 4. Share-based payments There have been no grants of share incentives during the period. A descriptionof each type of share-based payment can be obtained from the 2004 Annual Report. The Group grants share incentives to employees in the form of share options andshare bonuses. The fair value of all incentives granted since 7th November 2002and not vested at 1st January 2005 is recognised as an employee expense with acorresponding increase in equity. The fair value has been measured using abinomial model. The material inputs into the model have been: Share Share Share bonuses Options options granted granted March 2003 March 2004 Fair value 75.5p 166.9p 368p-488p Share price at grant 257.5p 560p 405p-537.5p Exercise price 257.5p 560p Matching share to ones purchased Expected volatility 35% 35% 35% Expected life 6 years 6 years 3 years Expected dividends 3.2% 3.2% 3.2% Risk-free rate of return 4.35% 4.63% n/a 5. Tax The charge for tax for the six months ended 30th June 2005 has been calculatedbased on the anticipated effective tax rate for the period. Differences betweenthe anticipated effective tax rate and the statutory rate include but are notlimited to the effect of tax rates in foreign jurisdictions, non-deductibleexpenses, tax incentives not recognised in the profit and loss, the effect oftax losses utilised and under or over provisions in previous periods. 6. Dividends The dividends paid in the period covered by these financial statements aredetailed below. Dividend Dividend value per value share £'000 2003 final dividend paid 7th June 2004 6.15p 1,955 Special dividend paid 7th June 2004 25.3p 8,042 2004 interim dividend paid 20th September 2004 2.7p 858 2004 final dividend paid 6th June 2005 5.8p 1,855 An interim dividend in respect of 2005 of 3.3p per share, amounting to a totaldividend of £1,053,000, was declared by the directors at their meeting on 26thJuly 2005. This interim dividend will be payable on 26th September 2005 toshareholders on the register at the close of business on 26th August 2005, withan ex-dividend date of 24th August 2005. These financial statements do notreflect this dividend payable. 7. Earnings per share Earnings per share have been calculated in accordance with IAS 33 Earnings PerShare, by dividing profit attributable to shareholders by the weighted averagenumber of shares in issue during the year. The diluted earnings per share havebeen calculated using an average share price of 527p (for six months to 30thJune 2004 544p, for 12 months to 31st December 2004 495p). The earnings pershare from continuing operations excludes the capital repayment of loan notesexpensed at the time of the divestment of the Touchpaper business in July 2001. 6 months to 6 months 12 months to 30th June to 30th June 31st December 2005 2004 2004 £'000 £'000 £'000 Profit attributable to shareholders 3,512 2,849 7,225 Less gain relating to sale of operation discontinued in prior period - - (500) 3,512 2,849 6,725 Number '000 Number '000 Number '000 Average number of shares in issue 32,679 32,679 32,679 Average number of shares held by the employee trusts (767) (985) (909) Shares used to calculate the basic earnings per share 31,912 31,694 31,770 Dilution due to share options 584 820 686 Shares used to calculate the diluted earnings per share 32,496 32,514 32,456 Basic earnings per share from continuing operations 11.0p 9.0p 21.2p Diluted earnings per share from continuing operations 10.8p 8.8p 20.7p Basic earnings per share from total operations 11.0p 9.0p 22.7p Diluted earnings per share from total operations 10.8p 8.8p 22.3p 8. Property, plant and equipment Total Furniture & Long leasehold Computers Vehicles Equipment Buildings £'000 £'000 £'000 £'000 £'000 Cost At 1st January 2005 17,961 5,418 468 11,984 91 Exchange adjustment 460 152 29 279 - Additions 3,214 1,260 - 1,918 36 Disposals (2,188) (334) - (1,778) (76) At 30th June 2005 19,447 6,496 497 12,403 51 Depreciation At 1st January 2005 11,614 2,977 96 8,492 49 Exchange adjustment 254 58 6 190 - Charged in the year 1,705 459 8 1,230 8 Disposals (2,165) (334) - (1,779) (52) At 30th June 2005 11,408 3,160 110 8,133 5 Carrying value At 30th June 2005 8,039 3,336 387 4,270 46 At 31st December 2004 6,347 2,441 372 3,492 42 9. Intangible assets Total Product Software development purchased for internal use £'000 £'000 £'000 Carrying value at 1st January 2005 6,681 6,511 170 Exchange adjustments 3 - 3 Additions 2,690 2,644 46 Amortisation (2,168) (2,113) (55) Carrying value at 30th June 2005 7,206 7,042 164 10. Trade and other receivables As at: 30th June 30th June 31st December 2005 2004 2004 £'000 £'000 £'000 Trade receivables 12,093 8,320 9,230 Prepayments 1,086 1,159 1,379 Accrued revenue 1,430 268 1,346 Other receivables 1,673 1,492 1,718 Total trade and other receivables 16,282 11,239 13,673 11. Current liabilities; trade and other payables As at: 30th June 30th June 31st December 2005 2004 2004 £'000 £'000 £'000 Trade payables 1,756 1,901 1,989 Accrued expenses 6,180 4,734 6,176 Deferred revenue 6,233 4,876 5,337 Other taxes and social security 1,388 1,101 1,347 Total trade and other payables 15,557 12,612 14,849 12. Explanation of transition to IFRS As stated in note 1, these are the Group's first consolidated interim financialstatements for part of the period that the first annual consolidated financialstatements will be prepared in accordance with IFRSs. The accounting policiesreferred to in note 2 have been applied in preparing the consolidated interimfinancial statements for the six months ended 30th June 2005, the comparativeinformation for the six months ended 30th June 2004, the financial statementsfor the year ended 31st December 2004 and the preparation of an opening IFRSbalance sheet at 1st January 2004, the Group's date of transition to IFRS.Related Shares:
Fidessa Group