As part of an initiative to maximise consulting margins and cope
with this increased demand, we are setting up an operations office
in Mumbai, India. The operation's purpose is twofold: to support
growing demand for our services in India and the Middle-East, and
to support consulting operations globally with a lower cost
structure. We anticipate that the office will be fully operational
by year end and will also provide support for development and
maintenance of our software products, as well as assisting in
material development for our organisational solutions projects.
SOFTWARE
Software sales in the first half year were higher than in the
same period of 2010 at GBP6.5m (2010: GBP5.8m), around 10% of which
was from new licence awards. It was pleasing to see some large
licence renewals, in particular one of our first Petro-SIM
licensees, OMV in Austria. We anticipate that this growth will
continue in the second half of 2011 when we expect to see the usual
increase in sales towards the end of the year. Annualised
maintenance and support revenue at 30 June 2011 stood at GBP6.5m
compared to GBP5.4 at 30 June 2010.
Following the successful release of Petro-SIM Version 4 in
October 2010, software development activity has continued and we
anticipate releasing Version 4.1 during the second half of
2011.
As part of a planned development of our software business,
during the second quarter we recruited a new Vice President of
Software with considerable software simulation experience to lead
this part of the business. To assist in delivering the growth
opportunities in software, we are planning to enhance our sales
effort by using dedicated regional software sales personnel and
will be implementing changes in the development and quality
assurance functions. This will ensure that we are able to maximise
the value of our product portfolio in both current and new
markets.
SOFTWARE ARBITRATION
As previously reported, the arbitration process commenced by a
competitor alleging unauthorised use of certain software code,
which has been fully refuted by KBC, is largely complete with the
arbitrator's award expected between now and the end of
September.
RESULTS
Revenue for the period was GBP26.0m, up from the GBP25.6m
reported for the same period last year.
Direct costs were essentially the same as in the first half of
2010 at GBP3.4m. Reported staff costs were marginally higher at
GBP14.6m compared to GBP14.4m in 2010. After taking capitalisation
of development costs into account, costs overall showed a marginal
decrease. Other operating charges decreased by 3% despite a charge
of GBP0.4m for the costs of the software arbitration.
Underlying operating profit for the period of GBP2.7m compared
to GBP1.4m in 2010, an increase of 86%. Note 3 to this statement
shows the measure of underlying profit that excludes the impact of
the arbitration costs, the carry forward of software development
costs and the amortisation of acquired intangible assets. We
continue to carry forward the development costs of the latest
version of our Petro-SIM software which are being amortised over
five years. This amortisation amounted to GBP0.3m in this period
compared to GBP0.7m in the first half of 2010. Operating profit
increased by 24% to GBP2.3m (2010: GBP1.8m).
Profit before tax in the first half year after finance revenue
and cost is GBP2.2m (2010: GBP1.8m). After the tax charge of
GBP0.7m, at an effective rate of 32%, profit for the period was
GBP1.5m (2010: GBP1.0m).
The tax charge reflects a forecast for the second half year and
is materially lower than previous years as we expect a higher
proportion of our profits to be generated in Asia in lower tax
regimes and we expect to benefit from additional allowances claimed
for R&D costs in both the US and UK. It also reflects the fact
that there are insufficient profits in the UK company to allow us
to recover taxes withheld on remittances from overseas clients, as
in previous years. The benefit attributable to the one-off R&D
allowances is estimated to be less than 2% of the charge and will
not recur next year. More detail on this forecast charge can be
seen in note 5.
Basic earnings per share in the period were 2.8p, up from 1.9p
in the first half of 2010, with the underlying measure of 3.3p
against 1.6p in the first half of 2010.
Net cash at 30 June 2011 was GBP2.7m, down from GBP4.5m at 31
December 2010 and up from GBP1.7m at 30 June 2010. The main reason
for the decline in cash in the six month period was the working
capital required for the PEMEX projects. Payments for these
projects are largely milestone driven but revenue recognition is
based on the proportion of work executed. However, it is only
towards the end of the project that invoicing and cash collection
will catch up with the work executed. There has been an improvement
in working capital in July and August, with cash close to GBP4.0m
at the end of August, and we expect further improvements by the
year end. However, it is likely that the working capital increase
from the PEMEX projects will not fully unwind until August
2012.
DIVIDEND
An interim dividend of 0.7p per share will be paid on 12 October
2011 to shareholders on the register at 30 September 2011. This
compares to 0.55p per share interim dividend paid in 2010 and
reflects the Board's confidence in the continued improvement in
business performance, as well as our stated aim to increase the
proportion of full year profits paid by way of dividend.
A final dividend for the year to 31 December 2010 of 1.3p per
share was paid during the period, making a total of 1.85p for the
whole of 2010.
OUTLOOK
The diverse conditions seen in the first half of 2011 in the oil
and gas industry provide many opportunities for KBC to support its
clients. We will continue to work with our clients in the growth
regions to enable them to implement their ambitious capital
programmes, whilst in the major western economies our services and
software tools provide clients with solutions that enable them to
improve their competitive position. We are also increasingly able
to deploy the same skill sets in other parts of the oil and gas
industry where there are higher levels of investment and better
economic indicators for the future.
We expect to be very busy for the rest of the year and to
increase our consulting resources further to provide capacity to
execute the future work. We also anticipate the usual increase in
software licence revenue in the second half year. We are confident
that this combination of factors will allow us to deliver our
current expectations for the year as a whole.
Ian A Godden
Condensed group income statement
for the six months ended 30 June 2011
Unaudited Unaudited Audited
6 months 6 months 12 months
to to to
30 June 30 June 31 December
2011 2010 2010
Notes GBP000 GBP000 GBP000
Revenue 26,046 25,567 53,061
Direct costs (3,352) (3,371) (6,472)
Staff and associate costs (14,633) (14,417) (29,539)
Depreciation and amortisation (547) (554) (1,173)
Other operating charges (5,252) (5,397) (12,101)
---------- ---------- -------------
Operating profit 2,262 1,828 3,776
Finance revenue 13 3 7
Finance cost (49) (28) (135)
---------- ---------- -------------
Profit before tax 2,226 1,803 3,648
Tax expense (712) (757) (1,431)
---------- ---------- -------------
Profit for the period 1,514 1,046 2,217
---------- ---------- -------------
Earnings per share
Basic 2 2.8p 1.9p 4.0p
Diluted 2 2.7p 1.8p 4.0p
---------- ---------- -------------
Condensed group statement of comprehensive income
for the six months ended 30 June 2011
Unaudited Unaudited Audited
6 months 6 months 12 months
to to to
30 June 30 June 31 December
2011 2010 2010
GBP000 GBP000 GBP000
Profit for the period 1,514 1,046 2,217
Other comprehensive income:
Exchange differences on retranslation
of foreign operations recognised
directly in equity (142) 909 875
---------- ---------- -------------
Total comprehensive income/(loss)
recognised in period 1,372 1,955 3,092
---------- ---------- -------------
Unaudited condensed group statement of changes in equity
for the six months ended 30 June 2011
Capital Share Foreign
Issued Share redemption Merger Own based exchange Retained
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