Results for the year ended 28 February 2013

Tangent Communications PLC ("Tangent" or the "Company)

Results for the year ended 28 February 2013

Key Highlights

Commenting on the year, Tangent's Chief Executive, Timothy Green, said:

"This was a transformational year for Tangent. Our retail websites printed.com and goodprint now generate a large proportion of our sales and profits. We aim to capitalise on our position in the UK market and gain a greater share of the European markets we now service."

Chief Executive's Review

Our aim for the financial year 2013 was to grow and develop our internet retail website printed.com and to support and drive our more established business units. In November 2012 we acquired goodprint which significantly increased our online sales and intensified the focus on developing our retail brands.

Both sales and underlying operating profits rose in 2013 reflecting the £0.23m underlying operating profit contribution from the acquired goodprint business.

printed.com's sales growth was ahead of budget increasing by 99% to £3.95m. From March 2012, we increased monthly advertising budgets to acquire customers faster. This was more expensive than initially budgeted for, which reduced profits. However, by November 2012, the scale of revenues and customers reached, enabled us to begin optimising our advertising campaigns and start driving down the cost of acquiring customers. With the loyalty scheme tie up with Avios now in place and a high level of returning customers, printed.com is making a consistent profit. This cycle of investing in advertising expenditure to drive faster growth at the expense of short term profits may well repeat in the future as we launch new products and grow market share.

In November 2012, we bought Goodprint UK Ltd ("goodprint") which included the brands goodprint and smileprint. The acquired business contributed £0.23m of underlying operating profit in the 4 month period from acquisition which was below our expectation; due to a rise in advertising spend, particularly in Europe. To address this, the goodprint advertising function has moved in house, with the printed.com team now overseeing all our advertising campaigns. An upturn is expected as the benefits of the new campaigns start to take effect.

Tangent Snowball began the financial year 2013 well but quickly saw gross margins impacted by accounts which required significant bought in print and postage expenses. In response, the business and the customer base have been rationalised during the second half of the year and changes were made to the management team. Gross margin in 2014 is expected to improve on revenues closer to £9m down from £10.65m in 2013. Headcount has already been reduced and profits in the past few months are comparable to historic levels.

All other parts of Tangent performed in line with expectations during the year. Sales to estate agents slowed in the year by 7%, yet we leveraged the Ravensworth facility to higher levels than ever to support the growth of printed.com and goodprint.

OutlookTangent will grow as our online customers buy from an expanded range of products on printed.com and goodprint. We will continuously optimise our websites to acquire and convert customers more efficiently. In addition, our loyalty programme continues to be highly successful in attracting the higher value repeat sales that follow first purchase.

On the back of the successful launch of the Carlsberg Global portal, Tangent Snowball continues to focus on increasing sales for consumer goods' brands to convenience stores. The appointment by PepsiCo and a promising pipeline puts us in good stead.

We enter the new financial year with a clear vision and an exciting business proposition and I look forward to updating you of our progress as the year continues.

Timothy GreenChief Executive

For further information, please contact:

Tangent Communications PLCTimothy Green - Chief Executive: 020 7462 6101Seema Paterson - Corporate Development : 020 7462 6101

Canaccord Genuity Limited - Nominated adviser and broker

Bruce Garrow / Emma Gabriel 020 7523 8350

Abchurch Communications Limited

Henry Harrison-Topham / Jamie Hooper 020 7398 7719

Business and Financial Review

Trading performanceSales increased by 11.8% to £24.29m (2012: £21.72m) largely driven by strong growth from printed.com (up 99%) to £3.95m and acquired revenues from goodprint (£1.20m).

Gross profit rose to £13.98m (2012: £11.83m), representing a 57.6% gross margin, up from the prior year's 54.5%. This reflects the impact of higher margin products and services being sold across the Group.

The major increase in other expenses was in advertising expenditure which increased to £1.86m from £0.51m in 2012, as we invested and expanded our online campaign. We primarily use google as the acquisition channel for our online brands. We will continue to maintain our top tier position in this premium advertising channel and plan the use of other direct channels like television in the new financial year.

printed.com has seen advertising as a proportion of sales start to reduce yet for goodprint and smileprint expenditure has risen, especially across Europe. This has reduced the profitability of goodprint. We have taken measures to address this and the advertising function has moved in house, with the printed.com team overseeing all advertising campaigns. An upturn is expected when the benefits of the new advertising campaigns start to take effect.

Employment costs at £9.85m for 2013 (2012: £9.73m) represented the largest single cost for Tangent, however as a greater proportion of sales were online we were able to generate a higher value per head. The ratio of wages to sales reduced from 44.8% to 40.6%. Despite this, there was a marginal increase in wage expenditure following the rise in national insurance rates which increased costs by £0.12m in the year.

Overheads remained at reasonable levels throughout the year, the one exception was the increase in London property costs where the annual charges rose by £0.20m.

Underlying operating profit for the year, inclusive of £0.23m from the acquisition of goodprint, increased by 6% to £1.62m (2012: £1.53m). Profit before tax of £0.86m was 40.7% lower than 2012 (£1.45m) as a result of significantly increased non-recurring expenses relating to the acquisition of goodprint, the subsequent closure of the goodprint facilities and the transfer of operations into existing Tangent infrastructure in Newcastle and London.

Further details on each of these items is provided under "Non-recurring expenses" below.

The tax charge of £0.24m (2012: £0.41m) represents an effective rate of 27.6% (standard rate 24%). This additional charge arises as Tangent has investments in capital assets which do not carry allowances for tax purposes, namely improvements to leasehold premises, together with expenses that are not deductible for tax purposes.

Underlying earnings per share for the year (calculated after share based payments but before non-recurring costs net of tax) were 0.56p per share (2012: 0.60p per share).

£1.52m (2012: £1.80m) of operating cash flow was generated during the year and cash and cash equivalents at 28 February 2013 amounted to £2.64m (2012: £1.82m). The business continues to be cash generative as increasing numbers of customers pay online, in advance, via pay pal and credit card.

printed.com, goodprint, smileprint

Tangent runs the following internet retail websites: printed.com, goodprint and smileprint.  Following the acquisition of Goodprint UK Ltd ("goodprint") in November 2012, we have integrated all of goodprint's operations with printed.com yet retained the customer facing brands.

Customers use the websites to design and buy their custom products. They typically pay online and expect delivery within 48 hours. All orders are processed and billed online. Products are created online, manufactured in Newcastle and delivered by courier or post across Europe.

Our brands service a range of customer types with differing shopping habits. Our customers are representative of the "corp-sumer" having emerged as the lines between personal and business have blurred.

Sales are derived from a multitude of products; business cards, leaflets, brochures, stickers and posters, all processed online and delivered directly to the customer. We hold no finished goods stock as all products are created on the website and personalised to each recipient.

We monitor the progress of our websites by reference to the following KPIs:

The recently launched printed.com design platform will allow customers to design their own products online with as much or as little autonomy as they choose. We expect this to act as a catalyst for attracting more consumers and offering branded products such as t-shirts, photo books, apparel and gifts. Enriching a customer's experience on our websites will facilitate faster product launches going forward. 

On 11 March 2013, we announced that British Airways and Avios had partnered with printed.com in its Customer Reward Scheme and this has been incredibly well received by customers.

To monitor the effectiveness of our advertising we use our in house customer attribution model and software partner Shomei. By looking at each touch point in a customer's journey we are better placed to use our advertising spend as effectively as possible. Our websites have required investment as sales have grown, we invested significantly during 2013 in on-going design and development but also in back end infrastructure to ensure stability. This has been included within software assets on our balance sheet at 28 February 2013. As development was still on-going at the balance sheet date no amortisation charge has been made in 2013, this expenditure will be amortised over a 5 year period from 2014 onwards.

This development period is expected to continue through the current financial year at a fixed rate. Later in the year there will be a requirement to increase security as the site falls under regulations applying to sites that carry a high volume and value of transactions. The costs relating to this infrastructure development will be capitalised and those relating to ongoing support expensed in the income statement as incurred.

All production has shifted to our Newcastle facility following the closure of the site in Thetford. The integration was smooth and the combined teams are working well together with a shared goal of growing sales and profits.

Tangent Snowball

Tangent Snowball is a top 20 digital marketing agency offering a unique blend of technology and creative insight predominantly B2B. Our teams are focused on providing digital solutions to large corporates to improve trade and customer engagement for global brands such as Carlsberg, PepsiCo, SAP and the Wolseley Group. 

Sales during the year slowed to £10.65m (2012: £10.90m). Sales growth in the first half was cancelled out in the second half as the business was refocused on higher margin contracts. As a result the business is taking a refined shape under new management with lower revenues, higher margins and comparable profits.

The positive response to our approach to loyalty in the impulse purchase market has been encouraging as we aim to improve the way in which consumer brands interact and communicate with their resellers, principally the convenience store, through loyalty schemes run on web and mobile applications from our TS Connect product. The methodology can also be applied to other B2B or membership organisational structures as demonstrated by our work with the Wolseley Group and The Labour Party. During the year, we continued our work for The Labour Party who extended their contract for membership services through to July 2014.

New business efforts will target the leading household brands following the successful roll out of the Carlsberg global engagement portal and the UK programme for PepsiCo. We are already in dialogue with a number of leading household brands as we develop a unique knowledge of driving sales in the convenience store market.

During 2013 we invested in the development of our internal software platform, TS Connect, which provides the core application upon which we develop software for our clients. This has been included on the balance sheet at 28 February 2013 within software assets. As development was continuing at that date no amortisation charge has been included in 2013, this expenditure will be amortised over a 5 year period from 2014 onwards.

RavensworthAs expected, Ravensworth revenues reduced to £6.25m (2012: £6.71m), 7% lower than last year, in line with the market decline. Any resulting spare capacity in our Newcastle print facility has been used up by our retail websites. We have undertaken a review of the estate agency business which does have the capability to be migrated online. Plans are in place to migrate all estate agency templates to an online platform so that orders can be transacted online enabling estate agents to purchase a broader range of products. This will increase the efficiency of servicing existing and attracting new customers. As sales from other areas continue to grow, Ravensworth forms a smaller proportion of overall Group sales, reducing the impact of economic conditions and factors affecting the market in which it operates.

Tangent on Demand (T/OD)

T/OD performed well with sales up 5.2% to £2.24m (2012: £2.13m) as the on-demand proposition for the advertising and retail communities continues to be in demand. The increase of higher margin products on a range of substrates improves the competitive edge of this business. Gross margin in the year was up by 2.8% and is expected to improve again in 2014. 

Non-recurring expenses

Non recurring expenses for the year amounted to £0.73m (2012: £0.06m) these costs do not form part of the normal operating expenses of Tangent and have therefore been excluded from underlying operating profit. They related to :

·; Acquisition, restructuring, closure, and termination costs following the acquisition of Goodprint UK Limited

In line with IFRS3, Business Combinations, acquisition related costs are recognised in the income statement as incurred. Costs in respect of the acquisition of goodprint amounted to £0.07m.

Following an extensive review of the operations undertaken by goodprint the Board decided to close the production site in Thetford, from which goodprint had been operating, combining all online sales within the Group's facility in Newcastle. Costs incurred in respect of both staff termination and site closure costs amounted to £0.40m.

Furthermore, the Board reviewed the operational focus and management structure of all business units. That review resulted in a reduction in head count, restructuring expenses and employment termination costs amounted to £0.17m.

·; Legal fees

In February 2013 we won the case brought by VLM Holdings Limited. Total fees incurred defending this action amounted to £0.40m, £0.20m of costs have been recovered resulting in a £0.09m charge in the year to 28 February 2013.

Acquisition of goodprint

On 13 November 2012 Tangent completed the acquisition of the entire issued share capital of goodprint for a net cash consideration of £6.88m. No further consideration is due in respect of the acquisition.

From 13 November 2012 to 28 February 2013 goodprint contributed £1.20m in revenue and £0.23m in underlying operating profit.

Cash Flows

Tangent's cash and cash equivalents at 28 February 2013 amounted to £2.64m (2012: £1.82m).

Tangent continues to be cash generative with £1.52m of cash generated from operations representing 94% of underlying operating profit (2012: 118%) and 173% of operating profit (2012: 122%). As in prior years charges for amortisation and depreciation of £0.75m (2012: £0.67m) were the major reasons for operating cash flow exceeding operating profit. Although sales increased by £2.57m the level of total trade and other receivables at 28 February 2013 remained in line with 2012. This was a direct result of increased online revenues where transactions are paid for via credit card or paypal at the time of order.

The major items included within the consolidated cash flow statement are as follows:

·; Net proceeds of £9.36m were raised following the placing of 100,000,000 new ordinary shares at a price of 10 pence per share, costs of the placing amounted to £0.64m and have been offset against the share premium account.

·; £6.88m was spent on the acquisition of goodprint, more information on which is included in note 9.

·; Capital expenditure of £0.81m (2012: £0.98m) was invested in the acquisition of digital printing and finishing equipment together with related IT infrastructure which increased annual capacity at our Newcastle site. This facility is now able to service markets across Europe and supports all sales that are driven by goodprint and smileprint following the closure of the acquired Thetford plant.

·; Investment in software assets both external and internally generated amounted to £0.76m (2012: £nil).

·; Tax payments of £0.60m (2012: £0.49m) represented final payments in respect of Tangent's 2012 liability together with instalments in respect of the year to 28 February 2013.

·; Payment of the final instalment of deferred consideration of £0.48m in respect of the acquisition of Snowball.

·; Dividends of £0.35m (2012: £0.35m) were paid during the year.

·; Borrowings of £0.18m (2012: £0.12m) were repaid in respect of finance leases.

Balance Sheet

In 2013 Tangent's net assets increased by £9.78m to £30.76m (2012: £20.98m). In November 2012 Tangent issued 100,000,000 new ordinary shares via a placing to certain financial institutions and private investors. This placing raised a total of £9.36m in funds after expenses of £0.64m which have been offset against the share premium account. Goodwill amounting to £7.77m arose on the acquisition of goodprint and has been included in intangible assets at 28 February 2013. The carrying value of goodwill is tested at least annually for impairment or when there is an indication that an impairment charge may be likely. No such impairment was present at 28 February 2013. Full details of the impairment test undertaken at 28 February 2013 are included in note 5 below.

Dividend DeclarationThe Board believes that paying a dividend forms an important part of providing returns to shareholders. To that end the Board is proposing a final dividend for the year to 28 February 2013 of 0.20p per share at the Company's Annual General Meeting.

If approved, the final dividend will be paid on 2 August 2013 to shareholders on the register on 19 July 2013 and the shares will become ex-dividend on 17 July 2013.

Renewal of Share Buyback Authority

The Company will be seeking shareholder approval at its Annual General Meeting on 9 July 2013 to renew its ability to buy back its shares, if the Board determines that the circumstances are appropriate. This authority was last granted in 2011 and will expire at the end of August 2013. Proposals for such a renewal and the necessary white wash will be sent to shareholders with the annual report and accounts.

Treasury, Funding and Exchange Risk

Tangent finances its operations through funds raised from shareholders, retained earnings and finance lease borrowings. In addition Tangent has a variable rate £1m overdraft facility which has not been used at any time in the last 12 months. Regular reports on cash balances and borrowings are provided to the Board.

The majority of Tangent's trade is conducted in Sterling although a material amount is denominated in Euros and Australian Dollars. The Directors monitor exposure and use forward contracts together with matching foreign currency denominated sales and expenditure where possible to mitigate exposure.

Consolidated statement of comprehensive incomefor the year ended 28 February 2013

The results shown above relate entirely to continuing operations and are attributable to equity shareholders of the company.

1. Basis of preparation

Tangent Communications plc is quoted on the AIM market of the London Stock Exchange. It has the TIDM code TNG and is incorporated in England.

The Group's consolidated financial statements for the year ended 28 February 2013, from which this financial information has been extracted, and for the comparative year ended 29 February 2012 are prepared on a going concern basis and in accordance with IFRS as adopted by the EU ("IFRS"), and in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in section 434 of the Companies Act 2006 but it is derived from those accounts. The financial information for the year ended 29 February 2012 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under s498(2) or s498(3) of the Companies Act 2006. The consolidated statement of financial position at 28 February 2013, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes for the year then ended have been extracted from the Group's 2013 statutory financial statements upon which the auditor's opinion is unqualified and does not include any statement under s498(2) or s498(3) of the Companies Act 2006.

The announcement has been agreed with the company's auditor for release.

2. Non-recurring Expenses

In order to provide a clear view on operating performance Tangent shows separately on the face of the statement of comprehensive income those items that are both significant and non-recurring in nature.

Non-recurring expenses for the year amounted to £0.73m (2012: £0.06m) these costs do not form part of the normal operating expenses of Tangent and have therefore been excluded from underlying operating profit.

Acquisition, restructuring, closure, and termination costs following the acquisition of Goodprint UK Limited ("goodprint")

In line with IFRS3, Business Combinations, acquisition related costs are recognised in the income statement as incurred. Costs in respect of the acquisition of goodprint amounted to £0.07m. Following an extensive review of the operations undertaken by goodprint, the Board decided to close the production site in Thetford, from which goodprint had been operating, combining all online sales within the Group's facility in Newcastle. Costs incurred in respect of both staff termination and site closure amounted to £0.40m.

In addition the Board reviewed the operational focus and management structure of all business units. That review resulted in a reduction in head count. Restructuring expenses and employment termination costs amounted to £0.17m.

Legal fees

In February 2013 Tangent won the case brought by VLM Holdings Limited. Total fees incurred defending this action amounted to £0.40m, £0.2m of costs have been recovered resulting in a £0.09m charge in the year to 28 February 2013.

Non-recurring expenses are set out below:

3. Earnings per share

The calculation of the basic and diluted earnings per share is based on the following:

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares.

A calculation is performed for the share options to determine the number of shares that could have been acquired at fair value based on the monetary value of the subscription rights attached to the outstanding share options. The number of shares from this calculation is compared with the number of shares that would have been issued assuming the exercise of the options and the difference is deemed to be the number of dilutive shares attributable to share options.

4. Dividends

The recommended final dividend is subject to approval by shareholders at the 2013 annual general meeting and has not been included as a liability in these financial statements.

The Tangent employee share ownership trust, which holds a total of 1,428,340 ordinary shares, has agreed to waive all dividends so the directors estimate that the dividend will be payable on approximately 277m ordinary shares.

5. Intangible assets

The addition of £7.94m to goodwill has arisen from the following:-

The addition to software assets represents the acquisition and development of software platforms for the Group. At 28 February 2013 development was still in progress and as such no amortisation charge has been made against these assets. On completion these assets will be amortised over their expected useful life, estimated to be 5 years.

Impairment of goodwill

Goodwill acquired in a business combination is allocated for impairment testing to the cash-generating units (CGUs) that are expected to benefit from that business combination. From 1 March 2012 Tangent revised its CGUs as follows:-

·; Online (formerly Print) this business segment includes printed.com, goodprint (including smileprint) and Ravensworth; and

·; Services (formerly Digital), this business segment includes Tangent Snowball and T/OD (Tangent on Demand).

As it is the future cash flows from each CGU that need to be measured against the carrying value of goodwill in each business segment, the impairment testing undertaken has been based upon the amended segments from 1 March 2013. This will ensure that future cash flows are measured against the CGU in which the benefit of the business combination is expected.

Following the above changes the carrying value of goodwill relating to the acquisition of T/OD has been reallocated to the Services segment and that arising on the acquisition of goodprint added to the Online segment as follows:

The above represents the lowest level within Tangent at which goodwill is reviewed for impairment.

Tangent tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

The recoverable amounts of the CGU's are determined from value-in-use calculations. The key assumptions for the value-in-use calculations are those regarding the discount rates, growth rates and expected changes to forecast profitability. These assumptions have been revised in the year to take account of the current economic environment. Management estimates discount rates using pre-tax rates that reflect the current market assessments of the time value of money and the risks specific to each CGU.

Future cash flows are derived from the most recent financial budget approved by management for the next five years, beyond that period cash flows are extrapolated using a growth rate of 3% (2012: 3%).

The rate used to discount forecast future cash flows for both business segments is 10% (2012: 10%).

In 2013 no impairment charge has been made against goodwill for either CGU (2012: £nil). Headroom in the Online CGU is £19.4 million and £8.5 million in the Services CGU.

Tangent has conducted a sensitivity analysis on the impairment test of each CGU's carrying value with the following results:

·; The discount rate would need to increase to 19.61% to remove the headroom in the Online CGU and to 15.12% to remove the headroom in the Services CGU.

·; Reducing the long term growth rate to 0% does not create an impairment charge in either CGU.

·; Cash flows over the next five years would need to reduce by 59.3% to remove the headroom in the Online CGU and by 42.5% to remove the headroom in the Services CGU.

6. Provisions for liabilities

The provisions for liabilities of £180,000 at 28 February 2013 consist entirely of provisions for closure costs, which are the estimated cost of on going contracts following the closure of the Group's production facility in Thetford.

7. Share capital

The company has one class of ordinary share which carries no right to fixed income, each share carries the right to one vote at general meetings of the company.

At 28 February 2013 and at the date of this report the number of issued ordinary shares is 278,812,981.

8. Share premium account

9. Acquisition of subsidiary

On 13 November 2012 Tangent acquired 100 per cent of the issued share capital and thereby control of Goodprint UK Limited ("goodprint"). 

goodprint is an online retailer based in the UK, offering the creation and delivery of marketing material to business and personal customers through the brand name "goodprint" in the UK and "smileprint " in other international markets.

Details of the consideration paid, fair value of assets acquired and liabilities assumed are set out below. This transaction has been accounted for by the acquisition method of accounting.

Satisfied by:

The net cash outflow arising from the acquisition was as follows:

The goodwill recognised above comprises expected synergies, revenue growth and future product and market developments. These benefits are not recognised separately from goodwill because they do not meet the criteria for separately identifiable intangible assets.

Tangent also acquired the website, customer lists and customer relationships of goodprint as part of the acquisition. These assets are wholly interdependent on each other and the business as a whole, they could therefore not be separately recognised from goodwill as they are not capable of being separated and sold, transferred, licensed, rented or exchanged, either individually or together with any related contracts.

The acquired business contributed £1,195,000 in revenue and an underlying operating profit of £229,000 from the date of acquisition (13 November 2012) to 28 February 2013. Following an extensive review of the operation undertaken by goodprint and to maximize production efficiency the Board decided to close the production site in Thetford, from which goodprint had been operating, combining all online sales within the Group's facility in Newcastle. Costs incurred in respect of both staff termination and site closure costs amounting to £400,000 have been included in non-recurring expenses as they do not form part of the normal operating expenses of goodprint and have been excluded from the underlying operating profit as noted above. Loss for the period after non-recurring expenses and tax amounted to £129,000.

If the acquisition of goodprint had been completed on the first day of the financial year, Group revenue for the period would have been £27.1m and Group profit would have been £980,000.

Acquisition related costs of £74,000 have been expensed and are included in non-recurring expenses (note 2).

10. Cash generated from operations

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