23rd Jan 2007 07:01
NCC Group PLC23 January 2007 23 January 2007 NCC Group plc Pre-tax profits up 23% & Group expands web testing capabilities NCC Group plc (AIM: NCC), the provider of Escrow Solutions, Testing Solutionsand Consultancy services, published its interim results for the six months to 30November 2006 and today has acquired the web assurance testing company, SiteConfidence, for £9.1m in cash. Highlights • Revenue up by 17% to £11.5m (2005: £9.8m) • Pre-tax profits up by 23% to £3.2m (2005: £2.6m) • Earnings per share up by 24% to 6.8p (2005: 5.5p) • Interim dividend increased by 50% to 1.5p (2005: 1.0p) • Net funds at end of half-year up at £1.6m (2005: £1.5m) • Continued strong demand for both Verification (sales up 14%) and Penetration Testing (sales up 41%) • US investments, including July 2006 acquisition of Source Harbor, showing good returns with profitable revenues of over $1m • Acquisition of Site Confidence, a leading complementary web assurance testing and monitoring company, for up to £9.1m in cash - see separate announcement Rob Cotton, NCC Group Chief Executive, said: "The Group has continued to show strong organic growth and cash generation,based around the established and predictable software escrow business. Theverification and particularly web penetration testing businesses are showingnotable fast growth as their markets develop. Our US business is now firmlyestablished and showing good returns. "Site Confidence provides us with a complementary range of products andservices, a sales and operational hub in the South of England to increase ourmarket penetration for all our businesses, and considerable opportunities forcross selling. "We are developing a very strong platform for the future." Enquiries: NCC Group (www.nccgroup.com) Today 020 7457 2020 Rob Cotton, Chief Executive Thereafter 0161 209 5432/5200 Paul Edwards, Group Finance Director College Hill Adrian Duffield/Corinna Dorward 020 7457 2815/2803 Note to editors A software escrow agreement is a contract made between three parties: thesoftware vendor (the licensor), the software customer (the licensee) and anindependent third party (the escrow agent, such as NCC Group). Under the termsof the agreement, the licensor agrees to send a copy of the source code to theescrow agent and the escrow agent agrees to hold the source code securely, andto release it to the licensee only in the event of certain predefined triggerevents. These include the insolvency of the licensor or its failure to providesupport services as defined in the software license agreement. Contract - represents an escrow agreement to provide escrow services for anowner of the software on behalf of licensees who have signed to the agreement. Beneficiary - represents licensees who have signed to the contract and whoreceive the benefits of escrow as set out in the contract. Minimum annual fee - a charge is levied on the owner of the software under amultiple agreement where there are fewer than two beneficiaries to the contract.Once two or more beneficiaries are signed to the agreement the minimum fee isno longer charged. The fee is charged at the end of the year and released tothe P&L account over the following twelve months. This will decline as itintended that beneficiaries are signed to agreements. Interim Statement Trading results During the first six months of the financial year to 30 November 2006, NCC Groupsaw strong growth with revenue after deferred income increasing by 17% to £11.5m(£9.8m in 2005). The Escrow Solutions and Testing Solutions divisions bothcontinued to increase revenue strongly, growing by 27% and 18% respectively. Group operating margins improved by over 1% in the first six months to 28% (27%in 2005), after the additional costs of the planned and substantial investmentsmade in the management infrastructure across the Group. Group operating profits increased faster than the revenue growth at 22% to £3.2m(£2.6m in 2005) as NCC Group continued to benefit from tight control of itsfixed costs. Due to negligible net financing costs, the Group pre tax profitsincreased by 23% to £3.2m (£2.6m in 2005). Basic earnings per share grew by 24% to 6.8p (5.5p in 2005). Diluted earningsper share were up 25% to 6.6p (5.3p in 2005). The interim dividend has been increased by 50% to 1.5p per share up from 1.0p in2005. It will be paid on 2 March 2007 to shareholders on the register at theclose of business on 2 February 2007. The Group continues to be strongly cash generative with inflows from operatingactivities before interest and tax increasing by 12% to £3.5m (£3.1m in 2005) inthe period. At 30 November 2006, net funds were £1.6m, (£1.5m in 2005). Afteraccounting for the cash outflows for the initial acquisition cost of SiteConfidence, NCC Group expects to have a net debt of less than £1m at thefinancial year end. Web assurance testing acquisition NCC Group has today also acquired Site Confidence, see separate announcement,for a maximum cash consideration of £9.1m, payable in three stages up to June2008, and subject to the trading performance of the business. This earningsenhancing acquisition further strengthens the Group's position in theindependent web assurance and IT security market with a complementary range ofweb site assurance products and services. Based in Dorking, Surrey, Site Confidence is a leading UK website performancemonitoring company. It provides customers with independent, reliable andreal-time information around the clock about the technical performance of theirweb sites, which enables them to detect performance problems, respond quicklyand prevent future slowdowns or outages. Online consumer demand is driving the need for all online retail and marketingbusinesses to ensure they have the strongest, fastest and most robust webcapabilities in an increasingly competitive market. Increasingly site managersand owners need independent assurance that their online image and capabilitiesmeet, if not exceed, consumer expectations. The operation will be managed independently but will develop close links withthe Group's existing IT Assurance Testing business. The business has over 400blue chip clients and direct cross selling opportunities will be exploited. Review of divisional performances Overall the Group has seen substantial year on year growth, with strong salesperformances coming from the core Escrow Solutions and Testing Solutionsbusinesses. Business segment profits grew by 23% to £3.9m (£3.2m: 2005). Escrow Solutions UK: The Group's core operation has seen a strong overall performance with a 17%growth in revenue to £5.5m (£4.7m in 2005) and a 20% increase in operatingprofits to £3.3m (£2.8m in 2005). Escrow Solutions implemented price increases by an average of 6% with effect fornew business from November 2006 and for renewals from January 2007. The Groupcontinues to experience a better than anticipated agreement and beneficiarytermination rate which is below 11% (11% is, the Board believes, now a safeplanning assumption). There are now 14,020 beneficiaries of the 7,203 Escrow agreements, including 898minimum annual fees. Through 2007 NCC Group will be focusing particularly onsoftware owners to devise incentive plans and packages to encourage them toincrease Escrow adoption rates for their products. As well as the strong increases in contract business, the Escrow Solutionsaccount management team continue to be directly responsible for the significantgrowth in sales of Verification Testing, which is currently reported in theTesting Solutions business unit. The strong uptake in Verification Testing isalso a result of a better understanding of the benefits by clients. NCC Group employs 77 sales account managers within its Escrow Solutions UKbusiness, an increase from 67 at the start of the financial year. The Boardanticipates growing these numbers more quickly once Site Confidence has beenfully integrated into the Group, thereby providing the business with a secondlocation from which to recruit account managers. Germany: Trading in Germany has continued to be difficult as the Group hasfound the speed of adoption and increase in product awareness in the market tobe unacceptably low. In the first half of this year the business lost £192,000(2005: loss £144,000) on revenues of £88,000. The Board has now cut back the investment programme and will carefully reviewits strategic importance to the Group. As a result, in the second half of theyear NCC Group expects to see the rate of loss decrease. USA: The US business, which was formed from the acquisition of two small Escrowproviders, has performed well and is ahead of plan. Gross revenues were£519,000 ($1m) and the business contribution £69,000 before amortisation. These acquisitions marked a significant move to take NCC Group's successful UKescrow business template into North America. The sales template has requiredsignificant refinement to fit with the sales culture in the US, but the Grouphas started to make real headway in this important new market for the Group'sservices. To date the Board has been pleased with the leadership of the US business. NCCGroup has invested extensively in ensuring the right infrastructure is in placeand that the products deliver against the market's expectations and needs. TheUS business is also focusing on the education of its market, including the needfor Verification Testing and the more comprehensive escrow services the Groupprovides. Testing Solutions This division, consisting of Verification, Penetration and Specialist Testing,grew substantially in the last six months, continuing the positive momentum fromthe year end. It remains the Group's aim to become the market leading provider of IT AssuranceTesting. The opportunities afforded the Group from the Payment Card Industry(PCI) marketing initiatives, outlined below, and the acquisition of SiteConfidence are significant milestones towards achieving this objective. Overall Testing Solutions saw an 18% increase in revenue to £3.2m (£2.7m in2005) with the anticipated small decline (£45,000) in operating profits to £0.5m(£0.6m in 2005). This reduction was as a result of strengthening the seniormanagement team of the business units as well as further investing in testingresources to meet increasing demand. Escrow Verification Testing continues to perform strongly, delivering yetanother record six months. In total 169 (148: 2005) verifications weredelivered, an increase of 14%. As all the sales for Verification are managedand secured by the escrow sales team, the Group is planning to includeVerification sales figures and profit within the Escrow business in the nextfinancial year. Penetration Testing will benefit from the Payment Card Industry's (PCI)standards that have been mandated by all major card providers including Visa andMasterCard by June 2007. Even without the introduction of these standards, thedemand for NCC Group's services has never been stronger and the Group has seen agrowth of 41% in delivery as 467 tests were carried out (331: 2005). Specialist Testing, the smallest unit, saw an expected slight fall in revenue,but the prospects for the core areas of work remain solid as NCC Groupanticipates being awarded two sizeable contracts that underpin the second halfof the year. NCC Group has recently launched a number of marketing campaigns and initiativesincluding direct mail, trade and national press advertising plus market surveysto directly support a range of its services. For example, in a recent awarenesscampaign, targeting finance directors from 500 of the UK's plcs, over 47% riskedthe security of their business and customers by inserting an unidentified memorystick into their computers. UK business has never been so susceptible to the risk of serious electronicfraud and unless that threat is taken much more seriously, and quickly, by wayof a significant growth in their commitment to security and prevention measures,there will be a substantial increase in committed fraud, the cost of which willultimately be passed on to the consumer. In order to support not only the ambition outlined above and in line with marketdevelopments, the Group is now focussing its resources on developing anddelivering more general IT assurance services and products. It is reducing itsreliance on some of the more niche, unpredictable testing specialisms which havelower margins. The Specialist Testing unit is being absorbed into the other Testing areas andcertain products and services will be streamlined. Low yielding assignmentswill not be undertaken. The Testing Solutions operation has now been branded Assurance Testing andencompasses Penetration Testing, together with the newly acquired SiteConfidence operation. These businesses, along with the retained higher marginspecialist services, will be marketed together and form the basis of a highlyappealing portfolio of IT assurance testing services that broadens NCC Group'smarket appeal as well as offering considerably more opportunities at strongerday rates and margins. As a result of the recruitment drive, the Penetration Testing business now hasan Operational Director and a Commercial Sales Manager with Verification havinga dedicated Business Manager. The penetration testing team has grown to 17testers, excluding the small Argentinean off shore resource. With the acquisition of Site Confidence, NCC Group sees excellent opportunitiesto provide an additional penetration testing facility in the South of England.The Group plans to recruit extensively in the South of England using the SiteConfidence premises in Dorking as a base for both testers and sales resource.This will significantly help the recruitment process and enhance the Group'sgrowth prospects in the medium term. Consultancy This division has continued to operate effectively in a competitive market andhas only competed in sectors that have enable the Group to maintain margins. Asa result the Group has maintained a similar level of revenue achieved last yearat £2.2m but returned to normal levels of profitability for the six months to 30November 2006 of £0.2m (£42,000 loss: 2005). During the last six months there has been a greater percentage of client spendon information security consultancy work, driven particularly by the PCIstandards. NCC Group is well positioned to meet the increasing demand. Current trading and outlook During the six months the Group maintained its focus on its core business,Escrow Solutions, whilst widening its geographical reach, and refining andenhancing its total IT assurance product portfolio. Considerable resources havegone into recruitment and also acquiring the right business at the right priceto enhance and develop the Group's operations in the South of England. The Group's Escrow and testing businesses are in very good shape and areexpected to continue to perform strongly throughout 2007. The Testing Solutions and Consultancy order books have increased and now standat £2.7m and £1.8m respectively (up from £2.1m and £1.7m in November). Thecontinued improvement in Escrow agreement termination rates means that NCC Groupnow expects annual renewals to be £9.2m (£9.1m in November 2006) in thisfinancial year. The Board remains confident of a strong second half to the financial year withfurther opportunities to develop the business in the following year. Group income statement 2006 2005 2006 six months six months year ended ended ended Notes 30 November 30 November 31 May (unaudited) (unaudited) (audited) £000 £000 £000 Revenue 2 11,516 9,807 20,747Cost of sales (6,344) (5,424) (10,647)Gross profit 5,172 4,383 10,100 Administrative expenses before amortisation of intangible assets (1,878) (1,738) (3,417)Earnings before interest, tax and amortisation 3,294 2,645 6,683Amortisation of intangible assets (60) - (47)Total administrative expenses (1,938) (1,738) (3,464) Operating profit 2 3,234 2,645 6,636 Financial income 43 105 175Financial expense (66) (144) (260)Net financing costs (23) (39) (85) Profit before taxation 3,211 2,606 6,551Taxation (982) (829) (1,993)Profit for the period 2,229 1,777 4,558 Attributable to equity holders of the company 2,229 1,777 4,558Profit for the period 2,229 1,777 4,558 Earnings per share 4Basic earnings per share 6.8p 5.5p 14.0pDiluted earnings per share 6.6p 5.3p 13.6p Group balance sheet 2006 2005 2006 30 November 30 November 31 May (unaudited) (unaudited) (audited) Notes £000 £000 £000 £000 £000 £000Non current assetsProperty, plant and equipment 1,276 1,120 1,257Intangible assets 31,314 27,419 30,420Deferred tax assets 475 229 423Total non-current assets 33,065 28,768 32,100 Current assetsTrade and other receivables 5 5,582 3,742 4,840Cash and cash equivalents 1,590 5,961 5,139Total current assets 7,172 9,703 9,979Total assets 40,237 38,471 42,079 EquityIssued capital 326 326 326Share premium 19,929 19,913 19,913Retained earnings 9,605 5,146 7,964Currency translation reserve 27 - 15Total equity attributable to equity holders 29,887 25,385 28,218of the parent Total equity 29,887 25,385 28,218 LiabilitiesInterest bearing loans - 3,285 2,689Lease incentives 117 130 123Total non current liabilities 117 3,415 2,812 Interest bearing loans - 1,200 1,200Trade and other payables 6 2,613 2,382 2,750Deferred revenue 6,611 5,234 6,037 Current tax payable 1,009 855 1,062Total current liabilities 10,233 9,671 11,049Total liabilities 10,350 13,086 13,861Total liabilities and equity 40,237 38,471 42,079 Group cash flow statement 2006 2005 2006 six months six months year ended ended ended 30 November 30 November 31 May Notes (unaudited) (unaudited) (audited) £000 £000 £000Cash inflow from operating activitiesProfit for the period 2,229 1,777 4,558Adjustments for:Depreciation charge 304 248 550Share based charges 250 208 468Amortisation of intangible assets 60 - 47Finance expense 23 39 85Profit on sale of property plant and equipment - - (9)Income tax expense 982 829 1,993Operating cash flow before changes in working capital 3,848 3,101 7,692Increase in receivables (719) (147) (1,045)Increase in payables 375 170 636Cash generated from operating activities before 3,504 3,124 7,283interest and taxInterest paid (83) (149) (272)Income taxes paid (1,110) (761) (1,808)Net cash generated from operating activities 2,311 2,214 5,203 Cash flows from investing activitiesInterest received 43 105 175Proceeds from the sale of plant and equipment - - 34Acquisition of property, plant and equipment (319) (366) (824)Acquisition of business (896) - (2,546)Net cash used in investing activities (1,172) (261) (3,161) Cash flows from financing activitiesProceeds from the issue of ordinary share capital 16 94 94Payment of bank loans (3,900) (600) (1,200)Payment for shares in minority interest - (18) (18)Equity dividends paid (815) (571) (897)Net cash from financing activities (4,699) (1,095) (2,021) Net (decrease) / increase in cash and cash equivalents 7 (3,560) 858 21 Cash and cash equivalents at beginning of period 5,139 5,103 5,103Effect of exchange rate fluctuations on cash held 11 - 15Cash and cash equivalents at end of period 1,590 5,961 5,139 Statement of changes of equity Share Share Retained Currency Minority Total capital premium earnings translation interest Equity £000 £000 £000 £000 £000 £000 Balance at 1 June 2005 326 19,819 3,755 - (23) 23,877Share based charges - - 208 - - 208Profit for the period - - 1,777 - - 1,777Recovery of VAT on share issue fees - 94 - - - 94Purchase of minority interest - - (23) - 23 -Dividends to shareholders - - (571) - - (571)Balance at 30 November 2005 326 19,913 5,146 - - 25,385 Balance at 1 June 2005 326 19,819 3,755 - (23) 23,877Share based charges - - 468 - - 468Deferred tax on share based payments - - 103 - - 103Profit for the period - - 4,558 - - 4,558Currency translation reserve - - - 15 - 15Recovery of VAT on share issue fees - 94 - - - 94Purchase of minority interest - - (23) - 23 -Dividends to shareholders - - (897) - - (897)Balance at 31 May 2006 326 19,913 7,964 15 - 28,218 Balance at 1 June 2006 326 19,913 7,964 15 - 28,218Share based charges - - 250 - - 250Deferred tax on share based payments - - (23) - - (23)Profit for the period - - 2,229 - - 2,229Shares issued - 16 - - - 16Currency translation reserve - - - 12 - 12Dividends to shareholders - - (815) - - (815)Balance at 30 November 2006 326 19,929 9,605 27 - 29,887 Notes to the interim statement 1 Accounting policies Basis of preparation The interim statement has been prepared on the basis of the accounting policiesset out in the annual report and financial statements for the year ended 31 May2006 and in accordance with those accounting policies expected to be followed inthe year end financial statements. The Group has chosen not to adopt IAS 34 "Interim Financial Statements" in preparing the interim statement since theadoption of this standard is not mandatory. The financial information contained in this interim statement does not amount tostatutory financial statements within the meaning of section 240 Companies Act1985. The financial information contained in this report is unaudited but hasbeen reviewed by KPMG Audit plc. The financial statements for the year ended 31May 2006, from which data has been extracted, were prepared under IFRS and havebeen delivered to the Registrar of Companies. The report of the auditors wasunqualified in accordance with section 235 Companies Act 1985 and did notcontain a statement under section 237 (2) or (3) Companies Act 1985. The interimfinancial statements were approved by the Board of Directors on 22 January 2007. 2 Segmental information The Group is organised into three primary business segments, namely EscrowSolutions, Testing Solutions and Consultancy. These three segments are theGroup's primary reporting format for segment information. 2006 2005 2006 30 November 30 November 31 May £000 £000 £000Revenue by business segmentEscrow Solutions (UK) 5,511 4,698 9,832Escrow Solutions (Germany) 88 70 183Escrow Solutions (US) 473 - 371Total Escrow Solutions 6,072 4,768 10,386Testing Solutions 3,208 2,722 5,704Consultancy 2,236 2,317 4,657Total revenue 11,516 9,807 20,747 Operating profit by business segmentEscrow Solutions (UK) 3,330 2,773 6,065Escrow Solutions (Germany) (192) (144) (384)Escrow Solutions (US) 9 - 131Total Escrow Solutions 3,147 2,629 5,812Testing Solutions 542 587 1,300Consultancy 199 (42) 616Segment operating profit 3,888 3,174 7,728Head office costs (654) (529) (1,092)Operating profit 3,234 2,645 6,636 The table below provides additional disclosure on revenue by geographical marketwhere the customer is based 2006 2005 2006 30 November 30 November 31 May £000 £000 £000Revenue by geographical segmentUK 9,041 8,561 17,699Rest of Europe 979 634 1,275Rest of the World 1,496 612 1,773Total revenue 11,516 9,807 20,747 3 Dividends 2006 2005 2006 30 November 30 November 31 May £000 £000 £000Dividends paid and recognised in the period 815 571 897Dividends proposed but not recognised in the 489 326 815period Dividends per share paid and recognised in the 2.50p 1.75p 2.75pperiodDividends per share proposed but not recognised in 1.50p 1.00p 2.50pthe period 4 Earnings per share The calculation of earnings per share is based on the following: 2006 2005 2006 30 November 30 November 31 May £000 £000 £000 Profit for the period 2,229 1,777 4,558 Number of Number of Number of Shares Shares Shares 000's 000's 000'sBasic weighted average number of shares 32,609 32,604 32,604 in issueDilutive effect of share options 1,116 724 800Diluted weighted average shares in issue 33,725 33,328 33,404 5 Trade and other receivables 2006 2005 2006 30 November 30 November 31 May £000 £000 £000 Trade debtors 4,084 2,428 3,464Prepayments and accrued income 1,498 1,314 1,376 5,582 3,742 4,840 6 Trade and other payables 2006 2005 2006 30 November 30 November 31 May £000 £000 £000 Trade creditors 218 485 448Other taxation and social security 763 692 804Accruals 1,621 1,146 1,465Other creditors - 17 -Interest 11 42 33 2,613 2,382 2,750 7 Reconciliation of net cash flow to movement in net funds / (debt) 2006 2005 2006 30 November 30 November 31 May £000 £000 £000 (Decrease) / increase in cash in the period (3,560) 858 21Effect of exchange rate fluctuations on cash held 11 - 15Cash outflow from movement in loans and loan notes 3,900 600 1,200Non cash items (11) (3) (7)Movement in net funds in the period 340 1,455 1,229Net funds / (debt) at beginning of period 1,250 21 21 Net funds / (debt) at end of period 1,590 1,476 1,250 Analysis of net funds / (debt) At beginning of Cash Non cash At end of year flow items period £000 £000 £000 £000 Cash and cash equivalents 5,139 (3,560) 11 1,590Term loan (3,889) 3,900 (11) -Total 1,250 340 - 1,590 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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