TIDMNCC
RNS Number : 3422L
NCC Group PLC
18 July 2017
18 July 2017
NCC Group plc
NCC Group plc (LSE: NCC, "NCC" or "the Group"), the independent
global cyber security and risk mitigation expert, has reported its
full year results for the 12 months to 31 May 2017 and provides an
update on the Strategic Review.
Year end results
-- Group revenue up 17% to GBP244.5m (2016: GBP209.1m), organic
growth 3% excluding impact of FX and acquisitions
-- Operating loss GBP53.4m (2016: profit GBP11.4m)
-- Adjusted* EBIT GBP27.5m (2016: GBP39.7m)
-- Individually significant charges of GBP71.0m, including
intangible asset write downs of GBP62.0m
-- Adjusted* EBITDA GBP36.2m (2016: GBP45.0m), in line with revised expectations
-- Adjusted* basic earnings per share 6.7p (2016: 11.8p)
-- Basic loss per share 20.4p (2016: earnings 2.5p)
-- Net debt reduced to GBP43.7m from half year level of GBP48.8m
-- Total dividend maintained at 4.65p per share with final dividend of 3.15p per share
-- Completed two small US based bolt-ons
-- Significant changes to the Board
Strategic Review
-- Markets and customer views of NCC services continue to be positive
-- NCC scores highly against the most important key customer purchasing criteria
-- Escrow remains an attractive business and stabilises the Group
-- Assurance focus on cyber security
o Web Performance and Software Testing businesses to be sold
-- Business needs better internal organisation - changes to operating model underway
Chris Stone, Executive Chairman, comments:
"Our strategic review has identified the business's unique
opportunity - leading positions in growing global markets,
customers who value us and our exceptionally skilled workforce.
But, we need to change how we organise ourselves and improve our
internal business processes.
"The last financial year was very challenging, with the business
performance falling well short of original expectations, as well as
outgrowing some of our business processes and controls.
"However, and more importantly, it is clear that the business
has a number of notable strengths. We still enjoy significant
organic growth in our core segments and have a strong balance
sheet. Furthermore, in a constantly evolving and complex market,
our unique skills and capabilities are recognised by our customers
as putting us at the forefront of the market.
"When we have successfully managed our way through this
transitional period, improved our organisation and how we go to
market, we see significant upside opportunities and material value
creation.
"Overall, the Board's expectations for adjusted EBIT in 2018 are
unchanged with its confidence in our prospects reflected in the
recommendation to maintain the dividend at the current level."
* This is a non-GAAP or Alternative Performance Measure (APM).
Adjusted figures exclude the amortisation of acquired intangibles,
individually significant items, share-based charges, the unwinding
of discount on deferred and contingent consideration, the results
of the exited Domain Services business and any associated tax
thereon.
Enquiries:
NCC Group (www.nccgroup.trust) +44 (0)161 209 5432
Chris Stone, Executive Chairman
Brian Tenner, Interim CEO
Instinctif Partners
Adrian Duffield/Chris Birt +44 (0)20 7457 2020
Executive chairman's statement
Overview
NCC has a unique opportunity: we hold leading positions in
growing markets around the world, our customer's value us, and our
workforce is exceptionally skilled. However, we need to change how
we organise ourselves and improve our internal business processes.
This will enable us to capture significant additional value.
My first statement to shareholders as Executive Chairman
reflects on two strong but contradictory themes. Firstly, the past
year has been very challenging, both operationally and financially.
Business performance has fallen short of expectations, we have
outgrown some of our business processes and controls, and we have
experienced significant changes to our Board.
Equally, and more importantly, it is already clear that the
years ahead present significant upside opportunities. Strong value
creation will result if we effectively implement our new strategy
and successfully manage NCC through the transitional period in
which we now find ourselves.
Our business is not broken - indeed it has some notable
strengths, both financial and operational. We still enjoy
significant organic growth in our core markets and have a strong
balance sheet. Furthermore, in a constantly evolving and complex
market, our unique market leading skills and capabilities are
keeping us at the forefront of thought leadership. This is
recognised by customers, who reward us with high levels of repeat
business. If we improve our organisation and how we go to market,
we will also see material value creation.
Business Performance
The financial performance for the year was clearly disappointing
though in line with revised expectations. Despite delivering
revenue growth of almost GBP35.4m (up17%), Adjusted* EBIT went
backwards to GBP27.5m from GBP39.7m in the prior year. Operating
profit fell from GBP11.4m in the prior year to a loss of GBP53.4m.
This outcome reflected a number of historical weaknesses in our
operating model.
Strategic Review and Strategic Plan
Following the trading update on 21 February 2017, the Board
commissioned a Strategic Review. The Review focused on three key
areas. Firstly, to develop a better understanding of our market
place, our competitors and our customers. Secondly, to assess the
relative strengths and weaknesses of NCC in the market. Thirdly, to
assess the value created by the current portfolio of
businesses.
The review confirmed that our markets remain attractive, and
more importantly, that customers regard NCC as a strong competitor
in these markets with a clearly differentiated proposition.
The cyber security theme (or 'golden thread') that runs through
the Assurance Division represents a unique set of competencies and
capabilities that we can leverage to deliver greater customer value
in a highly complex and fragmented market. Our sector and
application specific product offerings are leading edge and our
solutions capabilities are valued and sought after.
The Review also confirmed the current financial logic of the
relationship between Assurance and Escrow. Escrow itself is an
attractive business and provides a stabilising influence on the
Group.
Finally, the Review identified two of the smaller Assurance
businesses that sit outside the cyber golden thread whose future
would be better served under alternative ownership. These
businesses, Web Performance and Software Testing, will be disposed
of in due course.
Subsequently we initiated the development of a new Strategic
Plan and revised Target Operating Model in order to underpin our
'go to market' and delivery strategies. In the next 12 to 24
months, we intend to focus more of our efforts on internal
self-help measures than has historically been the case.
This should ensure that we reverse the margin compression seen
in both trading divisions and most territories in the last two
years. The Group will then benefit from further organic growth with
foundations built on scalable products and business processes.
These new foundations will also enhance our ability to leverage
acquisition related growth when the Group returns to being
acquisitive. Acquisition activity is therefore likely to be limited
during this period to smaller 'bolt-ons'.
Dividends
The Board has reviewed business performance in the current year
alongside our historical progressive dividend policy. While mindful
of the need for investment over the next few years, the Board is
confident in our prospects and hence recommends that the dividend
is maintained at the current level.
A final dividend of 3.15p is therefore being recommended by the
Board, making a total for the year of 4.65p, equal to the prior
year. If approved, the final dividend in respect of the year ended
31 May 2017 will be paid on 29 September 2017 to shareholders on
the register as at 1 September 2017 with an ex-dividend date of 31
August 2017.
As a matter of note, an administrative non-compliance issue has
been identified with respect to distributable reserves and the
payment of historical dividends. At all times the Group had
adequate reserves in subsidiary companies to meet these dividends.
We expect to remedy the position by means of a shareholder circular
and appropriate resolutions at the AGM in September.
Current trading and outlook
All businesses go through transitional phases as they grow and
mature. NCC is no exception. Where we are different, and at a
significant advantage to many, is that change has not been forced
upon us by mounting losses, a stretched balance sheet,
technological obsolescence or a sudden shrinkage in our
markets.
We are operating in a rapidly growing international market in
which our core skills and competencies allow us to lead rather than
follow. Our challenge is to manage the transition from one business
model to another, as the growth in scale and complexity has made
our early stage model ineffective. We now need to create structures
and products that allow us to benefit from our scale and deliver
additional value for our customers whilst never losing sight of our
core competencies and strengths, most notably represented in our
staff, their energy and their commitment.
So while there is a lot of work to do to implement new
processes, systems and structures, the outlook for NCC remains very
positive. In fast growing international markets, with a range of
innovative products and services, the challenge is to execute
effectively the planned changes in strategy and operating
model.
The Board is confident that the Group can deliver sustainable
earnings growth and enhanced shareholder value once it has more
robust foundations in place. We are not only 'securing tomorrow,
today,' for our customers, but for all of our long term
stakeholders.
In terms of trading for the current financial year, the Board
expects Escrow to return to low single digit revenue growth and see
some margin improvement. The Assurance business is expected to see
high single digit revenue growth as we build from the low point of
the second half of last year. Assurance gross margins will improve
as we implement our new operating model over the course of the new
financial year. Set against these gains in gross profit are some
cost headwinds arising from higher overheads linked to property
costs and the amortisation and depreciation increases that result
from capital spend in 2017. Finally, the disposal of the Web and
Software Testing businesses will reduce EBIT on a pro rata basis by
GBP2.7m based on 2017 results.
Overall the Group's expectations for adjusted EBIT in 2018 are
unchanged.
Governance
During the year, the Board has undertaken a major review of some
of the Group's governance structures. In part, this was prompted by
a combination of shareholder and employee feedback. In addition,
there was also the realisation that rapid growth in recent years
had taken the Group beyond the design limits of the previous
operating model.
The Board remains committed to high standards of corporate
governance. We are working actively to enhance governance as well
as our business processes and internal controls to match our
ambitions for the Group's future. The results of the Governance
Review will are set out in the Annual Report and Accounts
Board composition
There have been a number of changes to the Board during the
year. I joined the Board on 6 April 2017 as a Non-Executive
Director, becoming Executive Chairman in April when Paul Mitchell
stood down as Chairman.
Last year we noted our intention to strengthen the team further
with an additional independent Non-Executive Director. As a result,
Jonathan Brooks joined the Board as a Non-Executive Director on 13
March 2017. Jonathan brings significant valuable experience of the
technology sector.
Brian Tenner was appointed as Chief Financial Officer on 1
February 2017 following a search process prompted by the
resignation of, Atul Patel, on 10 August 2016. He became Interim
CEO on 1 March 2017, following the decision of Rob Cotton to step
down as CEO.
The current model of an Executive Chairman working closely with
Brian as Interim CEO and CFO has been a necessary and effective
bridge to deliver the Strategic Review and also maintain stability
in the management of the business. Recognising that this is not a
sustainable long term solution, the Board has commenced a process
to identify a permanent CEO using a firm of independent executive
search consultants.
Board effectiveness
As Executive Chairman, I am responsible for the leadership of
the Board and ensuring its effectiveness in all aspects of its
performance. During the year, the Board has reviewed its
performance and effectiveness in accordance with the requirements
of the Code. We note that the recent and significant changes in
membership and new strategic direction represent a transition
period for the Board as well as the Group.
The Board will work to enhance oversight of the Group's
strategic development, monitoring the delivery of its business
objectives and the development of the new Target Operating Model.
We will also work hard to ensure that we maintain an effective
corporate governance framework that keeps pace with the rate of
growth and change inside and outside NCC.
Employees
Our staff are the foundation for the value inherent in NCC. In
developing and implementing our new Strategic Plan and Target
Operating Model we will work to ensure that we create a working
environment that values the individual and allows each one of us to
contribute to our full potential. This will include creating
organisational values and clearer structures, roles and
responsibilities. The coming financial year will also see a greater
focus on personal development and training.
I would like to record my own and the Board's sincere thanks to
all of the Group's employees who have maintained their focus on
delivering excellent service to our customers. This has been
achieved against a backdrop of uncertainty caused by the Group's
volatile financial and share price performance, particularly in the
latter quarters of the year. Our business is entirely reliant on
the skills and experience of our staff. We are fortunate to have
them choose to build their careers with NCC, and I look forward to
working with all of them as we take our business forward.
Strategic Review
The Group began a Strategic Review in February 2017. The
objectives of the review fell into three broad categories:
-- Assessing our market place and customers buying preferences and criteria
-- Customer and market views of NCC and our capabilities, strengths and weaknesses
-- Assessing the commercial and portfolio logic of the current business lines within the Group
As findings emerged from the initial scope of work in the
Strategic Review, we began a parallel work stream to consider:
-- How we currently organise ourselves to address and capture
the opportunities presented in our markets by best leveraging our
strengths and unique selling propositions
Key Findings from the Strategic Review
The key findings from the Strategic Review are set out in more
detail below but can be summarised as follows:
Market place: our markets continue to grow at or around a double
digit rate. Companies buying decisions are more about technical
expertise and value for money than a simple price basis.
Our customers: NCC scores well on the issues that matter to
customers. Technical expertise, value for money and speed of
delivery. The quality of customer service does appear to be an
issue for the industry generally and NCC is similar in this regard.
Our customers want to buy more from us and value our brand and
reputation for excellence.
Our portfolio: The two divisions of Escrow and Assurance see
little cross over in customer purchasing. However, Escrow is a
robust stabilising influence on the Group. Within Assurance, we
have identified two service lines that would have a better
opportunity to flourish under alternative ownership and these will
be sold in due course.
As we digested the emerging outputs from the Strategic Review it
became clear that to reach our full potential we would need to
re-organise how we go to market and how we do business (in terms of
our internal processes and structures). We have therefore started
work on developing and implementing a new Target Operating Model
(TOM).
The market opportunity
Introduction
Fundamentally, NCC is operating in a dynamic and fast growing
market. Or rather, a series of related but separate fast growing
markets. These statements apply whether one considers the market
place from a product and service perspective, from a geographical
perspective, or from an industry vertical perspective. Change is
literally the one constant in almost all aspects of the market.
Today, cybercrime is one of the single biggest threats to
businesses and individuals around the world. We estimate that the
average cost to recover from a DDoS attack is GBP275,000 and more
than 90% of businesses have experienced some form of cyber security
threat. On average, it takes almost 120 days for an organisation to
find out that it has been compromised.
Furthermore, from our own research into the safety of the
Internet, almost two-thirds of consumers believe an online data
breach will compromise their financial information within the next
year. The fact that some 60% of consumers are more worried than
ever before about protecting their personal and financial
information online reinforces the threat as the greatest to face
business today.
Online security still seems to be behind the curve in failing to
keep pace with the numerous types of organisations and individuals
that seek to disrupt the internet and organisations use of systems
and data.
The threat of being hacked or having valuable data stolen
continues to evolve at a seemingly unstoppable pace. Attacks using
phishing, fake payment requests and ransomware are now every day
events. These attacks often cause significant operational
disruption whose economic consequences can vastly outweigh any cost
of remediation or prevention.
Our challenge is to ensure that customers understand that a
relatively modest upfront investment in advice or other cyber
services can ultimately save significant sums in remediation costs
and arising from reputational damage.
The world in which we live cannot be made completely safe from
cybercrime. As the number and range of threats proliferate, being
innovative and using our experience and skills to protect against
attacks becomes more important than ever. NCC is doing this by
providing the best security consultants to our clients as well as
conducting world-renowned security research.
Market dynamics
The relevant sub-segments that NCC's core cyber offering
competes in are shown below:
Size $bn* Market Segment NCC offering
7.0 Fully outsourced IT NCC provides limited Threat
Security services in this segment Intelligence
11.0 Managed Security Services MONITORING
6.0 Advisory, Governance Process & Governance
& Assessment
4.0 Forensic & Legal Response Security testing
10.0 Operational Security testing
*OC&C estimates
The addressable market is clearly large at $38.0 bn in total but
very fragmented. Management estimate that NCC is one of the largest
'pure play' cyber security companies focussing on services as
opposed to products but that we currently have relatively low
market shares in most segments and geographies. Once we have
developed robust and scalable internal structures and processes,
this will represent a significant opportunity to grow the business
profitably though bolt-on acquisitions.
Market research as part of the Strategic Review also confirmed
that market growth is likely to continue and that customers'
propensity to pay more for high quality advice and solutions is
growing.
Customers buying behaviours and key purchasing criteria
(KPC's)
Customers made clear that their key buying criteria focus more
on quality of technical expertise and advice as opposed to price.
While value for money (effectively a ratio or a comparison of
quality and cost) is very important, that reflects more on the
demand for quality than low cost.
Interestingly, customers did not place as high a value on the
ability to source internationally. Even in those customers who did
buy in multiple territories.
-- Technical Expertise
Consistently noted as having top-tier technical talent, Fox-IT
seen as most technically advanced player in NL
-- Customer Service
UK and US customers often feel NCC too transactional, Fox-IT
customers value their trusted partnership
-- Value for Money
NCC and Fox-IT generally perceived as good value, customers very
willing to pay more for quality
-- Speed of Delivery
Seen as "mid-sized" competing with boutique pure-plays, NCC
advantages include wider capabilities and flexibility
-- Brand / Reputation
Well known by security professionals in the UK and US, Fox-IT
highly regarded in NL (Dutch government work)
-- Low Price
Seen to be expensive but price rarely the deciding factor, NCC
rated highly as good 'value for money'
In summary, on the items that matter most to customers in their
buying decisions, NCC score well or very well with the exception of
customer service which appears to be an industry wide issue.
Our competitive position
We must continue to drive innovation and thought leadership in
our key market segments. The key is to ensure that our thought
leadership also leads to practical new solutions to apply to the
challenges and issues that our customers face. Finding the right
balance of 'blue sky' thinking and ideas that can be rapidly
commercialised.
Innovation and creativity are two key foundations for the
Group's continued development and growth. Our new Target Operating
Model is designed to ensure that these remain a core feature of the
business.
The recent well publicised cyber-attacks on a wide range of
public and private enterprises around the world are a reminder of
the need to constantly innovate.
Our aim is to shift the current range and scale of the services
and products offered by NCC in the cyber security market to more
repeat business of a highly differentiated nature.
During the Strategic Review we assessed the Group's 'Net
Promotor Score' (NPS). This metric is widely used across a range of
industries where customer satisfaction is a critical performance
indicator. What NPS measures, quite simply, is whether or not a
customer, on the basis of its experiences with a service provider,
would recommend that service provider to another organisation.
The measurement scale in NPS is itself a challenge - a positive
score is counted if it rates a nine or ten out of ten. Conversely,
a negative score is recorded for any outcome ranging from zero to
six. What this means is that if a company received 100 scores of
its service, with 10 ratings in each category, its NPS score would
be negative 40.
The results of the NPS survey confirmed NCC with a score of
"positive 26". As noted above in the explanation of the
methodology, achieving any sort of positive score is difficult and
a positive score of plus 26 means the significant majority of
ratings by customers had to be above six out of ten and with a high
proportion of those scoring the top two marks.
What the survey did show was that NCC scored better than many of
its direct competitors in the Big Four or in the pure play cyber
services companies. It is clear, when combined with direct feedback
from customers that NCC is well regarded for our technical
expertise and our ability to help our customers overcome their
cyber security challenges.
Target Operating Model
Our current organisational structures and operating model have
reached the limits of their design tolerances. In many cases the
overlay of our business processes on those organisational design
features creates a 'spaghetti wiring diagram' that is complex,
creates unclear accountabilities and is inefficient at delivering
business processes and services to customers.
The recent addition of some relatively large acquisitions has
emphasised further the need for a clear and transparent operating
model that delivers a number of key objectives, the principle ones
being as set out below.
TOM Objective 1: Align the business to how our customers want to
buy
The Strategic Review revealed that even our global customers
tend to want to buy local services for delivery in country. This is
true even for customers who have a central technology input to
sourcing decisions.
This finding drives the conclusion of a TOM that has a primary
dimension of geographical business units and P&L
accountability.
TOM Objective 2: Leverage NCC's value between business units
The business has historically operated within silos. This has
been the case even inside individual business units where our
structures have not encouraged service or product line leaders to
cross sell or provide fully integrated solutions to our
customers.
Our historical Go-To-Market model was identified by customers as
being too transactional in many cases. While initiatives to address
this issue began during the year, the old operating model barriers
to collaboration were not removed.
Our customers value our technical expertise and the wide range
of services that we offer. Therefore, in order to leverage value
across the geographies and service lines, we concluded that a
matrix structure would be appropriate for the TOM.
Therefore, the secondary dimension of the TOM is based around
key service and product lines with key leadership and
accountability roles identified within each to ensure sharing of
best practice. To avoid unnecessary cost increases or duplication
of roles, there will be some 'double-hatting' in smaller businesses
as they grow.
TOM Objective 3: Deliver an integrated Go-To-Market
proposition
Our customers value our expertise and range of services. They
would like to buy more from us. But our current Go-To-Market
approach can make this difficult. The challenges flow from
disparate accountabilities and targets for different teams within
the business units.
We are therefore creating aligned sales and delivery teams with
single leaders within each geography. Critically, sales leadership
for strategic accounts, transactional sales activities, inside
sales, bid preparation and management, and supporting marketing
activities will report to one person in each territory. This will
allow us to join up our offerings at a more strategic purchasing
level within customers while also ensuring that our current
successful transactional sales generation machine continues to
perform.
TOM Objective 4: Create scalable structures that facilitate
profitable growth
Our historical ways of working and focus on certain services and
products prevent benefits of scale from being realised. Selling
more of a particular service would lead to an equal and
proportionate increase in our costs and hence no positive
operational leverage to drive improving margins.
Our staff management and work allocation processes have been
less efficient than we would like. This has led to under-selling of
key technical skills in that they are used on activities that
attract a lower day rate than they should.
As well as a more accurate matching our staff skills to the
value of the work being performed for customers, we also intend to
increase our focus on platform based sales such as monitoring
services and after sales value added services. In particular, these
will be driven from our Security Operations Centres in Delft (Fox)
and Leeds (MSS) and will include services such as Threat
Intelligence, DetACT, Managed Security Services, and our CTMp
platform.
TOM Objective 5: Design and implement effective and efficient
business processes that support operating leverage
Over the last few years our support costs have been rising
steadily, creating a further erosion of operating leverage or in
some cases even leading to negative operating leverage. This
reflects the fact that in many cases our business processes and
systems have not been upgraded to keep pace with the size and
complexity of the group.
The Group has been slow in rolling out its preferred core
systems and this has caused undue delays, cost increases and
inefficiency in how we work. These issues extend from finance and
reporting systems to CRM systems to work and staff planning and
management processes and beyond.
A key part of implementing the TOM is to embed effective and
efficient business processes and systems within it. Over the next
two years, we will therefore be focussing on designing and
implementing standardised business processes and making sure they
and the underpinning systems are rolled out across all of our
business units. These systems and processes will often be designed
and monitored centrally to ensure shared disciplines and effective
control of the business.
Underpinning all of the objectives for the TOM will be a series
of direct and specific key performance indicators and other metrics
that drive the desired behaviours and outcomes. For example, we
will be focussing on realisation for our consultants' time as
opposed to the more simple but less informative utilisation
measure.
Realisation will focus on a combination of hours worked but
also, critically, on the amount of work that is actually billed and
the rate at which it is billed. These are currently areas where we
believe there is value leakage from the Group and plugging these
leaks will help to generate improved margins in future.
Our strategy
Our new Strategic Plan is designed to deliver more sustainable
revenue growth at improved margins, increases in shareholder value,
and an improved service and product offering to customers.
We are developing a new set of KPIs that align more closely to
our strategic priorities. Some of these are still under development
as noted below. We will report on each one as we implement our
strategy.
Strategic Rationale and current KPIs and our performance Focus and goals
Priorities status in 2017 for 2018
-------------------- -------------------------------- -------------------------------- ----------------------------
1 Grow In attractive and growing Underlying* organic* revenue Implement new
At a managed markets where NCC enjoy growth Go-To-Market strategy
pace and in strong competitive 2017: 4% (2016: 19%) and team structures
areas of core differentiators, Stripping out the impact Growth may therefore
strength we aim to deliver medium of acquisitions and changes lag behind the
term growth in excess in foreign currency exchange market during
of market rates. By focusing rates, we aim to deliver the year Develop
on higher value added growth in the short term a clearer understanding
services we will avoid broadly in line with market of our pipeline
growth for its own sake rates. and ordering processes
while simultaneously
protecting
our margins.
-------------------- -------------------------------- -------------------------------- ----------------------------
2 Implement The Strategic Review Adjusted* gross margin Implement the
Our new Target identified to improve organisation design
Operating that we do not organise 2017: 34.7% (2016:38.5%) concepts in the
Model ourselves in a way that Measured as a percentage TOM Develop role
brings simplicity and of gross margin to annual descriptions for
efficiency to our service revenue. named management
delivery. Gross margin being revenue posts Implement
We will implement a new less direct costs of sales a staff appraisal
and clear operating model and service delivery. system
that delivers better customer This will be one measure
service at an improving that shows the effectiveness
gross margin. and efficiency of our new
TOM
-------------------- -------------------------------- -------------------------------- ----------------------------
3 Improve Our existing business SG&A* ratio to improve Focus on implementing
Business processes processes are inefficient 2017: 23.4% (2016: 19.0%) new processes
and systems and in many cases difficult General Administration and systems roll
to scale. They often rely costs as a percentage of out Expect benefits
on manual activity and annual revenue. to flow in the
disparate information following year
systems that can lead This KPI reflects the Operational leverage
to a lack of clarity in efficiency gains driven by
decision making. of our business processes more basic cost
We will design and implement and our 'cost to serve'. control
improved business processes
with reduced manual
interventions
to lower in our costs
to serve.
-------------------- -------------------------------- -------------------------------- ----------------------------
4 Lead The market is evolving Engagement with thought Continued demonstration
Technical so quickly that we need leadership content across that NCC has a
thinking and to be at the forefront all mediums and resulting holistic view
product development of developing new services inbound activity. of cyber security
In a rapidly and responses to address Understanding
evolving and emerging threats. Our of opportunities
dynamic market customers' needs are also and risk associated
sector changing: not just in with emerging
response to new threats technologies Brand
but also in respect of growth with non-traditional
how and where they carry audiences
out their businesses.
We need to respond to
those changes in how we
position ourselves and
our services.
-------------------- -------------------------------- -------------------------------- ----------------------------
5 Develop All of our key strategic Employee turnover 21.8% We will develop
our people goals will rely fundamentally Employee engagement survey and implement
to allow them on our people and their data from June 2017 will employee performance
to reach their skills. So we need to be used to develop some appraisal and
full potential ensure that we attract additional appropriate development systems
and contribute and retain high quality KPIs here.
fully to NCC staff. We need to ensure
they are properly trained,
gain the right experiences
and are also properly
incentivised - by recognition
and the working environment
as much as by reward.
-------------------- -------------------------------- -------------------------------- ----------------------------
Interim chief executive's review
Group revenue
For the financial year ended 31 May 2017, the Group increased
reported revenue by 17% to GBP244.5m (2016: GBP209.1m). Excluding
Domain Services business that was exited during the year, the
growth was GBP37.7m or 18%.
The table below shows the elements of growth that were organic
(net sales growth in businesses that were owned for equivalent
periods in the current and prior year), acquisitions growth
(includes the full year impact of prior year acquisitions), and
growth resulting from the impact of FX rates. Growth from changes
in FX rates is calculated by re-stating the prior year revenue
figures at current year weighted average rates.
2017 2017
Growth driver (excluding
Domain) GBPm % growth
Organic 6.8 3%
Acquisition 21.1 10%
FX 9.8 5%
------------------------- ----- ---------
Total growth 37.7 18%
------------------------- ----- ---------
The Group's current information systems do not report the impact
of foreign exchange movements as a matter of course. The figures
above are therefore calculated at year end using assumed weighted
average exchange rates for each relevant currency for each year in
question. This is being addressed in the Group's new consolidation
system which is being implemented in the first quarter of the new
financial year.
The FX growth above is driven by increases in the weighted
average exchange rates of both the US$ and EURuro against GBPGBP,
both of which strengthened by around 15%.
The geographical breakdown of revenue by the location of the
delivering business for the current and past year is as follows
(Domain excluded):
2017 2016
----------- -----------
GBPm % GBPm %
UK 147.1 61% 144.4 71%
US 58.4 24% 39.2 19%
Europe and RoW 36.4 15% 20.6 10%
--------------- ----- ---- ----- ----
Total revenue 241.9 100% 204.2 100%
--------------- ----- ---- ----- ----
Note: some businesses sell a modest amount of services in other
countries and report that revenue as being within their own
geography.
The amount of Group revenue earned outside the UK increased by
GBP35.0m and reflects the impact of the Fox-IT acquisition in the
Netherlands half way through the last financial year and also
strong growth in our US Assurance business.
Both of these factors occurred within the Assurance division
where the share of Group revenue has now risen to 85% (2016:
83%).
Underlying organic revenue growth in the first half of the
financial year was 19% but in the second half fell by 5% compared
to the prior year periods. The second half of the current year
actually saw revenue fall compared to the first half, contrary to
the historical trends the business has delivered.
Weakness in the second half compared to the prior year and the
first half of the current year was particularly focussed in MSS
third party product sales which were GBP6.5m down in the second
half compared to the first half.
Fox High Assurance product sales were also down GBP1.2m in the
second half. Between them these reductions accounted for 85% of the
fall in sales between the first and second halves.
A more detailed breakdown of the revenue performance in each of
the Operating Segments is shown in the Assurance and Escrow
divisional reports.
The Group is currently reviewing the basis on which revenue
analysis is further reported. This review will include concepts
such as recurring revenues, contracted revenues and repeat
business. The Group may need to implement systems changes to
accurately capture this analysis across all business units. Some
further analysis is set out in the Divisional reviews.
The Group continued to have minimal reliance on any one customer
or sector. Within Assurance the largest customer represents
approximately 4% of Assurance revenue. The largest customer in
Escrow is just over 1% of total Escrow revenue.
Group profitability and margins
The Board and Executive management use a number of non-GAAP
measures in their day to day management of the business. The
Group's primary financial profitability measure will be Adjusted
EBIT. Last year the Group used Adjusted EBITDA for this purpose. It
is management's view that Adjusted EBIT is more closely aligned to
the underlying performance of the business. The majority of our
peers and stakeholders use this metric, and hence it is therefore a
more appropriate KPI for use in the business and in our external
communications.
The table below sets out the reconciliation between reported
statutory measures and the non-GAAP measures of Adjusted EBIT and
Adjusted EBITDA.
2017 2016
GBPm GBPm
Reported operating (loss) / profit (53.4) 11.4
Results of Domain Services (exited) (1.0) 1.4
Individually significant items (details
below) 71.0 18.9
Amortisation of acquired intangible assets 10.3 6.8
Share based payments 0.6 1.2
------------------------------------------- ------ -----
Adjusted EBIT 27.5 39.7
Depreciation 5.2 3.7
Amortisation of software and capitalised
development costs 3.5 1.6
------------------------------------------- ------ -----
Adjusted EBITDA 36.2 45.0
------------------------------------------- ------ -----
During the year, despite delivering growth in most of our
business units, each business unit and the Group as a whole has
seen a contraction in our margins. The main cause relates to cost
increasing both before and at a faster rate than the growth in our
revenues in each business unit.
Margins contracted due to increases in both direct and indirect
costs. Salary related costs represent approximately 70% of the
Group's cost base. Cost increases were largely driven by a
significant increase in headcount (16%) combined with average
salary increases of 6-7% to give total salary based cost increases
of approximately 23% or around 16% of sales.
This compares with total organic and acquisition based revenue
growth of 15% and led to consequent reduction in utilisation and
realisation from our professional service delivery staff.
We also made investments in new sales structures that have not
yet born fruit in proportionately increased revenues. Other
indirect cost increases reflect GBP3.4m of additional depreciation
and amortization of tangible and intangible assets linked to a
number of systems having entered service and hence have started
amortizing. In addition there was a GBP1.3m of acquisition impact
on these costs.
Premises costs increased by GBP1.4m partly to accommodate extra
staff and also in upgrading facilities. Marketing spend rose
GBP1.3m as the Group sought to raise its profile in a number of
areas.
As a result, Adjusted EBIT in the year fell from GBP39.7m to
GBP27.5m despite the benefit of a positive foreign exchange impact
of GBP0.6m. At the same time, our Adjusted EBIT margin fell from
19.4% to 11.4%.
The Group's overall EBIT result included GBP0.2m of losses from
the now closed Domain Services operating segment (2016: operating
losses GBP1.4m). The current year charge was then offset by a
GBP1.2m profit on disposal of Open Registry (also treated as an
adjusting item).
The Group's reported pre-tax loss was GBP55.3m (2016: profit
GBP9.4m).
Assurance Division - Business Performance Review
Assurance revenue
Assurance now accounts for 85% of Group revenue and the impact
of foreign exchange rate changes contributed GBP8.0m to the growth
in the division.
In addition, Assurance benefitted from the full year effect of
the prior year acquisition of Fox-IT (impact in 2017: GBP14.0m) and
acquisitions in the year just completed (PSC GBP5.9m and VSR
GBP1.1m).
Net organic growth was GBP6.8m which represented year on year
growth of 5.0% with the balance due to changes in foreign exchange
rates (GBP8.0m impact).
The table below shows the revenue split between Security
Consulting and a combined Web Performance and Software Testing.
31 May 31 May
2017 2016 Change
Assurance revenue GBPm GBPm %
Security Consulting 178.1 138.9 28%
Software Testing and Web Performance 26.6 30.0 (11%)
------------------------------------- ------ ------ --------
Total 204.7 168.9 21%
------------------------------------- ------ ------ --------
Revenues in our Web Performance and Software Testing businesses
fell by GBP0.5m (5%) and GBP2.9m (14%) respectively. In Web
Performance, we felt the impact of a slower take up than expected
for a new service line an have taken an impairment charge on this
business.
In Software Testing the loss of a project that was already
underway at the start of the year, following a strategic decision
to cancel a divestment by the customer, had a negative impact on
both revenue and costs as utilisation rates for permanent staff
fell.
Towards the end of the financial year, both Web Performance and
Software Testing businesses saw a pick up in sales pipeline
opportunities and also in some longer term contract wins.
The table above can act as a guide to the impact on revenue of
the proposed disposals of the Web Performance and Software Testing
businesses during the course of the new financial year ending 31
May 2018. Neither business is particularly seasonal and therefore
any reduction to the Group total turnover following the disposals
is likely to be pro rated to the point in the new year when the
businesses are sold.
The Assurance division saw very mixed revenue results during the
year. While the headline growth rate for the Security Consulting
activities is very attractive, some business lines saw better
performance than others.
The underlying performance of the Security Consulting business
lines is much easier to understand using constant currency and also
by splitting performance between organic and acquisition based
growth.
Assurance revenue is broken down into more detail in the table
below in terms of the impact of changes in foreign exchange rate,
the impact of acquisitions in both the prior year and the year
under review, and the organic performance of a number of operating
units within Security Consulting:
Growth Growth
Assurance revenue bridge GBPm GBPm %
Revenue for the year ended 31 May
2016 168.9
Impact of FX changes 8.0
Full year of owning Fox-IT 14.0
PSC acquisition this year 5.9
VSR acquisition this year 1.1
-------------------------------------------- ------ ------ ------
Net revenue growth from FX and acquisitions 29.0 17%
UK Consulting organic growth 11.0 19%
US Consulting organic growth 5.3 24%
Fox-IT - excluding High Assurance 1.6 17%
Fox-IT - High Assurance (3.6) (53%)
MSS - excluding product sales 2.8 17%
MSS - product sales (7.4) (48%)
Other including Web and Software Testing (2.9)
-------------------------------------------- ------ ------ ------
Net organic growth 6.8 5%
Total Assurance revenue growth 35.8 21%
-------------------------------------------- ------ ------ ------
Revenue for the year ended 31 May
2017 204.7
-------------------------------------------- ------ ------ ------
The table above highlights the number and variety of moving
parts in explaining this year's revenue performance. The impact of
changes in FX rates and acquisitions is shown in the top half of
the table.
For the purposes of this analysis, given that Fox-IT was
acquired at the end of November 2015, the whole of the first half
of the current financial year's revenue has been attributed to the
impact of the acquisition.
Growth in UK and US consulting revenues were very healthy,
representing growth of 19% and 24% respectively on a constant
currency basis. This was driven by a combination of market growth
and our ability to capture share due to our scale. In addition, we
have been bringing new products to market and continuing to expand
our focus areas beyond transactional activity.
Within Fox-IT we saw two strong opposing forces. As previously
announced, a key customer for Fox High Assurance products (Fox-HA)
significantly slowed down its purchases from the business following
the change in ownership of the company.
It is clear that we should have engaged with this customer in a
transparent way ahead of the acquisition to allay some of their
concerns. However, we have since been working hard and
collaboratively to allay the concerns of the customer and we are
starting to see some new orders coming in for Fox-HA products from
this critical customer.
If momentum is maintained we should see some growth in this
service line in the new financial year compared to the year ending
31 May 2017.
In sharp contrast, to Fox-HA, the other Fox service lines saw
organic growth of 17% in the second half of the year compared to
the same period of ownership in the prior year. In particular, our
CTMp platform and Threat Intelligence made promising progress.
This is particularly pleasing in that both of these are key
service lines that we aim to expand within the Netherlands and then
to leverage in other NCC locations.
The scalability of the CTMp platform will also support margin
recovery. It is for this reason and the emerging recovery in
Fox-HA, that while the execution challenges for the business are
reflected in the impairment of around 30% of the goodwill
associated with the acquisition, we remain confident about the
prospects for the Fox-IT business and its capability to support a
broader platform of scalable high value add services across the
NCC.
In MSS we also saw two conflicting but slightly different themes
from those in Fox IT. The negative force there has been in the
re-sale of third party products which fell by GBP7.4m compared to
the prior year, equating to a fall of 48% and a fall in 2017 second
half sales of products of almost 90% to GBP0.7m.
The fall partly reflects the end of an earn-out period that had
been put in place when the business was acquired by the previous
owners and subsequently extended by NCC. In addition, we are trying
to change our focus to higher value add activities and the building
of long term relationships with our customers.
We have not pursued these sorts of sales as strongly as in
previous years. Instead, where we continue to sell third party
products, we will aim to link those purchases to implementation
consulting advice and after sales services such as monitoring in
our Leeds based Security Operations Centre (SOC).
While the revenue would have helped the year's results, we are
not overly concerned as we seek to deliberately re-balance the
business away from single transaction re-selling of third party
products.
Similarly to Fox-IT, the areas of the business where we do see
longer term value and growth potential, the service lines grew by
17% year on year.
The summary of the Assurance revenue is:
-- good growth was delivered in those areas where we want to
place our future focus as this is where scalable margin recovery
can be created
-- Fox-HA will start to recover in the coming year
-- Re-selling third party products in MSS in the medium term
will be continued if we can create linkages to our own value added
after sales services
-- Acquisitions and FX also played strong supporting roles in the revenue growth story.
The table below is an estimated split of our Assurance revenue
streams based on currently available information. We will be
improving the quality and granularity as well as the relevance of
our internal management information systems over the coming years.
The data therefore gives a broad indication of the split of our
revenue streams.
2017 2016
----------------- -----------------
Assurance revenue GBPm % of total GBPm % of total
type
Consulting services 156.1 76% 122.4 73%
Managed Services 24.9 12% 11.8 7%
Product sales 23.8 12% 34.7 20%
-------------------- ----- ---------- ----- ----------
Total 204.7 100% 168.9 100%
-------------------- ----- ---------- ----- ----------
Product sales are a mix of third party products and our own.
Currently we are not able to perform the same analysis at a gross
margin or profitability level.
Assurance profitability analysis
While revenue grew in total by GBP35.8m (21%), the absolute
level of adjusted operating profit fell year on year by GBP9.2m
(35%). The fall in operating profit is all the more stark because
it is after the positive impact of foreign exchange gains of
GBP0.4m and the benefit of acquisitions. The acquisition benefits
were from a full year of ownership of the Fox-IT (GBP0.5m) and part
year ownership of PSC and VSR (GBP1.7m).
Adjusted EBIT margins fell to 8.2% (2016: 15.3%). The more
significant driver for this was the increase in overall salary
costs.
Our consulting businesses in the UK and US both saw a fall in
absolute profitability as a lack of control over the cost base
meant that it grew faster than our revenue streams. In particular
this reflected a strategy to build sales and delivery teams ahead
of equivalent revenue growth and that led to margins being
compressed in both businesses at a Gross Margin and EBIT margin
level.
At the same time, the Group was starting to develop its
strategic sales capability to allow us to move further up our
customers internal purchasing decision chains to become less
transactional and more strategic in approach. That investment has
been slower than anticipated to bear fruit.
The Assurance business will typically see one or two major
unplanned contract wins in any particular year. These can be
related to the reaction to a major event at a customer or a
specific proactive project such as corporate activity.
In the year to May 2017, the division did not have a material
benefit from any such contracts and actually suffered from the loss
of some. In one specific case, a large scale Software Testing
project (reference above) was already underway with staff deployed
on the ground. When the customer discontinued the contract the
revenue stream stopped very quickly in the first half whereas it
had been expected to run for most of the year.
A second large scale project was cancelled before it began. In
the third, which had not become a contracted order but had been a
firm prospect as NCC were the preferred supplier for that type of
work, the customer decided not to proceed with the work.
The estimated potential revenue from the three contracts was
around GBP14-17m and GBP6-7m of gross margin (based on a gross
margin assumption of 40%). Approximately GBP7-10m of this revenue
had been included in the Group's operating plan at the start of the
year.
The most challenged part of the Assurance division was MSS which
saw a fall in revenue of GBP4.6m (14%). As noted earlier, while
much of the revenue fall related to less attractive sales of third
party products, the gross margin delivered would still have been a
helpful contribution towards the overhead base.
Similarly to the consulting businesses, in MSS the Group set
about re-balancing the sales efforts and teams towards strategic
and higher value added sales of customer solutions comprising
product, professional services and managed services. While we are
confident that this is the correct approach in the medium term, the
short term impact was to increase our cost base at a time when
revenues were falling.
There was also the impact of ongoing integration challenges for
the MSS service lines (acquired under the Accumuli plc
transaction).
Escrow Division Business Performance Review
Revenue performance
The Escrow division now accounts for 15% of Group revenues
(2016: 17%). Escrow revenue for the year grew by GBP1.8m (5%) to
GBP37.1m (2016: GBP35.3m). Excluding the impact of FX, at constant
currency rates underlying growth was GBP0.1m (0.3%).
31 May 31 May
2017 2016
Revenue GBPm GBPm % Change
UK 25.4 25.7 (1%)
USA 7.9 6.2 27%
Europe 3.9 3.4 13%
--------------------- ------ ------ --------
Total Escrow revenue 37.2 35.3 5%
--------------------- ------ ------ --------
Escrow UK
Escrow UK revenue was GBP25.4m (2016: GBP25.7m).
During the second half of the year we identified that some
invoices had been recognised as revenue ahead of the related
service delivery. The correction of this issue reduced reported
revenue in the year by GBP1.0m with an almost equivalent EBIT
impact.
The issue had built up over three years and no individual year
required a material adjustment and hence the full impact was
recognised as a one off, non-recurring, non-cash item in the
current year. While there was never any question of not delivering
the service and in many cases payment was received in advance, this
revised approach is deemed to be a more appropriate application of
the Group's unchanged policy on revenue recognition.
The reported 1% reduction in revenue (2016: 8% growth) would
have been growth of 3% if not for the one-off adjustment.
Escrow UK recurring revenues increased to GBP14.1m (2016:
GBP13.7m) and terminations remain around 11% with nearly 90% of all
contracts renewed (2016: 90%).
We expect UK growth to remain modest given the relative market
maturity and our market share.
Escrow USA
Escrow US revenues grew by 27% to GBP7.9m (2016: GBP6.2m) with
recurring revenues of GBP4.5m. Approximately half of this related
to the impact of changes in FX rates with the balance all being
organic growth.
In the fourth quarter we re-structured our senior management and
sales team in Escrow USA to build further on the significant
opportunity we have in that country.
Escrow Europe
Escrow Europe revenues grew by 13% to GBP3.9m (2016: GBP3.4m)
with recurring revenues of GBP2.1m. However, all of this and more
was the result of changes in FX rates. On an underlying organic
basis the business actually shrank by 3%.
This reflects significant management change in our European
Escrow team that are being addressed in the first half of the new
financial year.
Escrow Rest of the World
The division has recently established an office in Dubai to take
advantage of the Group's reputation and expertise in a region that
has good demand potential for Escrow services and in which we have
a number of existing clients, allowing us to build a larger
footprint in anticipation of Expo 2020.
Our short term goals for the Escrow division as a whole are:
-- to maintain our market leading position in the UK, delivering modest annual organic growth
-- to continue to develop evolving solutions for customers in a SaaS and Cloud based world
-- to build on our scalable capability in the US
-- to stabilise our relatively small footholds in a number of
European territories (the Netherlands, Germany, and
Switzerland).
-- to begin to build out from our new positions in our 'Rest of
the World' offices in Dubai and Singapore.
Escrow UK now has 111 employees (2016: 107), Escrow Europe has12
employees (2016: 15) and the North American Escrow businesses have
41 employees (2016: 59).
Escrow revenues and growth can be further analysed as
follows:
2017 2016 Change
Reported revenue GBPm GBPm %
Escrow contracts 26.3 24.6 7%
Verification testing 9.6 9.7 (1%)
Other services 1.3 1.0 30%
--------------------- ----- ----- ------
Total Escrow revenue 37.2 35.3 5%
--------------------- ----- ----- ------
Escrow profitability analysis
The table below shows the split of EBIT by Escrow region. For
reporting purposes, RoW EBIT is included within the UK.
31 May 31 May
2017 2016 Change
EBIT GBPm GBPm %
UK 17.4 18.3 (5%)
USA 3.7 3.0 23%
Europe 1.9 2.0 (5%)
Shared central costs (3.9) (3.2) (22%)
----------------------- ------ ------ --------
Total Escrow adjusted*
EBIT 19.1 20.1 (5.0%)
----------------------- ------ ------ --------
The GBP1.0m impact on profitability of the revenue recognition
issue has been noted above. Because the revised approach was
adopted in the second half of the financial year but applied to the
year as a whole, it has had a disproportionate impact on the
reported results in the second half. Excluding this adjustment,
EBIT for Escrow would have been flat year on year.
The division experienced some of the same increases in the cost
base as seen in the Assurance division but to a lesser degree. As a
result, EBIT margins in the division fell by 5.6% to 51.3% (2016:
56.9%) with revenue recognition being a one off 2.6% reduction.
The revised operating model that is already in place for the
Escrow teams around the world mean that the division should deliver
an improvement in margins in the new financial year ending May
2018.
Individually significant items
The carrying value of all of our goodwill and intangible assets
were assessed as part of our normal year end process. As a result,
there have been a number of impairments recognised in respect of
good will and other intangible assets.
The Fox and former Accumuli businesses (the latter now known as
MSS) have underperformed in the year compared to our original
acquisition forecasts. They have also encountered integration
challenges that have slowed the pace of commercial leverage of the
different new service and product lines across the rest of the
Group.
In MSS we are also shifting focus away from one part of the
business that previously concentrated on simply re-selling third
party products often without value added after sales services.
The net result of these factors is to recognise an impairment of
the goodwill that arose on the acquisition of Accumuli plc by
GBP24.3m. This equates to around 50% of the goodwill attributable
to what is now known as MSS. It is worth noting that one part of
the Accumuli business has been successfully and fully integrated
with our UK Security Consulting business and its share of goodwill
(GBP14.3m) is now considered as part of that Cash Generating Unit
(CGU).
In Fox we have recognised an impairment of GBP24.3m of goodwill,
representing around 30% of the goodwill that arose on
acquisition.
While we are confident that the Fox IT business and service
lines and the MSS business re-focused on value added managed
services and advisory services are attractive business in the
medium to long term, there is much to be done to realise this
potential. The length of time needed to realise this potential and
the execution risks involved over that period mean that it is
appropriate to recognise the impairment of these assets.
In our Web Performance business we have reviewed the carrying
value of both internally generated intangible assets and the
goodwill associated with the acquisition of that business. While we
do see longer term value in this business, some of the revenue
generating intangible assets have been slower than originally
anticipated to generate revenues and a retained customer base.
The slower ramp up in revenue has therefore led to the
recognition of impairments over two assets amounting to GBP3.2m and
over goodwill of GBP5.7m.
In the prior year it was announced that the Group was
withdrawing from the Domain Services operating segment. At that
time two assets were retained with carrying values of GBP2.5m and
GBP2.0m in respect of the .trust TLD and a software application for
use in Domain and potentially in other retained parts of the
Group.
Given the inherent uncertainties in realising any value from the
.trust TLD, it has been decided to write that asset off in full.
The Group will seek to maximise any value from the asset. It has
now been identified that the retained Domain software system does
not have a role in the business going forward and it too has been
fully impaired.
Other individually significant items in the year are set out in
the notes below. They include:
-- Adjustments to deferred and contingent consideration due to changes in FX rates GBP2.9m;
-- Holiday pay accrual relating to previous financial periods of GBP1.8m;
-- Restructuring costs of GBP1.3m relate to professional fees
for the Strategic Review, the Target Operating Model project, exit
payments to the former CEO, and retention bonuses paid to former
employees of Accumuli plc;
-- Double running and exit costs of GBP1.3m for empty properties;
-- Impairment of property plant and equipment (GBP0.9m) on the
planned re-location of the Group's Manchester Head Office in
September 2017; and
-- Acquisition costs GBP0.8m.
Prior year individually significant items are set out in Note
3
Taxation
The Group's adjusted effective tax rate is 29.3% (2016: 22%),
which is above the average standard UK rate of 20% (2016: 21%). The
higher effective rate reflects the higher tax rates incurred in the
overseas businesses. It had been reported in January 2017 that the
tax rate for the year would rise to around 31%.
This was based on an estimated position at the time of the
Interim Results in January 2017 and included certain assumptions
about the level and geographical origin of pre-tax profits.
The actual results were lower than those estimates and a
significant part of the reduction was the level of profit arising
in higher tax territories. The Group expects to maintain the
effective P&L tax rate at around 30% for the next few years,
assuming a similar geographic split of profitability compared to
the current year.
The Group has recently hired a tax and treasury manager whose
role will include developing a longer term strategy for tax and
treasury matters. In both of these areas the Board has a low risk
appetite to purse aggressive tax strategies and the new strategies
will operate inside that.
Earnings per share
The adjusted basic earnings per share from operations was 6.7p
(2016: 11.8p).
The table below reconciles basic EPS to Adjusted EPS on the
Group's definitions of adjusting items including their tax
impact.
2017 2016
Pence Pence
Basic EPS as per the income statement (20.4) 2.5
Domain exit (0.6) 0.4
Amortisation of acquired intangibles 2.7 2.1
Individually significant items 24.8 6.2
Share based payments 0.1 0.4
Unwinding discount on deferred consideration 0.1 0.2
--------------------------------------------- ------ ------
Adjusted basic EPS 6.7 11.8
--------------------------------------------- ------ ------
The adjusted fully diluted earnings per share from continuing
operations was 6.7p (2016: 11.2p) whilst reported fully diluted
loss per share was 20.4p (2016: earnings 2.4p).
Dividends
The Board is recommending a final dividend of 3.15p per ordinary
share, making a total for the year of 4.65p. This represents a
dividend equal to that paid in the prior year.
While dividend cover is negative (2016: 2.4 times based on basic
adjusted earnings per share from continuing operations), the Board
is confident that the Group's new Strategic Plan will be a source
of long term sustainable growth in earnings, cash flow and
shareholder value.
An administrative non-compliance issue has been identified with
respect to distributable reserves and the payment of previous
dividends. We expect to remedy the position by means of a
shareholder circular and appropriate resolutions at the AGM in
September 2017.
Cash
We will transparently disclose the key moving parts in our cash
flows. As part of this, we are adopting a new definition and
calculation of Free Cash Flow and Cash Conversion ratio that is
more closely aligned to market practice.
The table below summarises the Group's cash flow for the
year.
2017 2016
GBPm GBPm
Cash inflow before changes in working
capital 33.8 37.3
Changes in working capital (2.1) (14.2)
Interest paid (1.9) (2.0)
Income taxes paid (1.8) (7.3)
-------------------------------------- ------ ------
Net cash from operating activities 28.0 13.8
Net capital expenditure (10.6) (11.6)
Capitalised development costs (3.7) (1.9)
-------------------------------------- ------ ------
Free cash flow 13.7 0.3
Acquisitions (26.6) (76.7)
Disposals 0.1 -
Dividends (12.8) (10.3)
Share issues 0.7 123.7
-------------------------------------- ------ ------
Net cash flow before financing (24.9) 37.0
-------------------------------------- ------ ------
Opening net debt (12.7) (50.6)
Foreign exchange impacts (6.1) 0.9
-------------------------------------- ------ ------
Closing net debt (43.7) (12.7)
-------------------------------------- ------ ------
The Group generated a net GBP28.0m of cash from operating
activities. This is before deducting GBP3.7m of internally
capitalised development costs.
Working capital saw a reduction in accrued income as our billing
processes became more effective and timely in the fourth quarter.
While the natural consequence of this is then an increase in trade
debtors, the net impact is to shorten the working capital lifecycle
and accelerate cash conversion. The net working capital cash
outflow was the result of deliberate management action to improve
supplier relations by improving the profile of creditor payments
compared to prior years.
Significant opportunities to improve working capital remain. For
example, unbilled accrued income over 60 days old amounts to
GBP2.7m and GBP9.7m of similarly aged trade debtors represent an
opportunity to improve.
Interest and tax cash costs remained modest and the latter
reflects in part the lower profitability of our overseas higher tax
rate territories.
Net capital expenditure of GBP11.0m was a mix of discretionary
and maintenance capex. No breakdown of discretionary versus
maintenance capex is available as yet. However, maintenance spend
includes costs of new hardware and software for use in the
business. Discretionary spend includes a number of new office
locations that have either been acquired or moved into in the year
ending 31 May 2017.
The largest one off 'discretionary' capex spend in 2017 was the
GBP3.8m cost of Category A and B fit out costs of the Group's new
headquarters building in Manchester that will be occupied in the
summer of 2017.
The move was occasioned by the end of the existing lease and the
need for more space to accommodate business growth. The fit out
costs in the year were almost fully funded by a landlord
contribution of GBP3.7m. The estimate to complete the project is
GBP4.4m and the final cash costs will be paid in the 2018 financial
year.
We expect property, plant and equipment capex to be at a similar
level in the 2018 financial year. The expected reduction from
one-off property costs incurred in 2017 will be compensated by the
remaining costs of the Manchester head office capex. In 2019, after
the property projects have been completed, we expect capex to
reduce by GBP3-4m.
Conversely, we expect our annual premises costs which include
depreciation, rent, and rates to increase in the new financial year
by GBP1.9m which will be an annualised GBP2.2m in the following
year.
The calculation of the cash conversion ratio for the last two
years is set out below and referenced to the various notes in the
Annual Report.
2017 2016
GBPm GBPm
Net cash generated from operating activities 28.0 13.8
Adjusted EBITDA 36.2 45.0
--------------------------------------------- ----- -----
Cash conversion ratio (A) / (B) 77% 31%
--------------------------------------------- ----- -----
One of the main drivers for the difference between operating
cash flow and EBITDA are the capitalised development cash costs in
the year of GBP3.7m which if charged against EBITDA will give a
cash conversion ratio of 86% in 2017.
Financing facilities
In November 2016, the Group increased its banking facilities to
GBP110m (May 2016: GBP78m) with a new five year multi bank
facility, comprising a GBP80m (May 2016: GBP78m) revolving credit
facility and a GBP30m (May 2016: nil) five-year term loan. The term
loan amortises at GBP2.5m every six months until maturity and at
the end of the year the term facility stood at GBP25.0m.
The Group's primary banking covenants are:
-- Leverage limit of 2.5 times and this is calculated as
Adjusted EBITDA / Net Debt. For the purposes of the covenant test,
net debt includes deferred consideration on acquisitions (but not
contingent consideration)
-- As at 31 May 2017 leverage for banking purposes stood at 1.50
times, comfortably below the Group's maximum 2.5x covenant
limit.
-- Net Interest cover which is calculated as Adjusted EBITDA /
net interest payments and has a limit of 3.5 times.
-- As at 31 May 2017 net interest cover was 25.9 times, again
comfortably above the minimum level.
At the year end outstanding contingent payments relate to PSC of
GBP2.8m and VSR of GBP1.3m. The payments to the former owners of
PSC and VSR are due in two equal instalments and are measured in
December 2017 and December 2018 by reference to profit targets set
at the time of the acquisitions.
Also outstanding is non-contingent deferred consideration in
respect of the acquisition of Fox IT comprising of EUR10m in cash
and EUR2.5m shares due to be paid in November 2017. The Group has
the option to make the share based payment in cash instead.
Principal risks and uncertainties
The Group operates in a dynamic and evolving market place. As
new events occur or the business transitions into new activities or
phases of its development, the risk register is updated
accordingly.
For example, reflecting the changing nature of the business,
during 2016-17, we had to complete the integration of two new and
sizable acquisitions into our risk management processes. As a
result of these acquisitions, the Group now has a larger proportion
of its revenue coming from hardware or other product sales and also
from key strategic customers, with the consequence of there being
less predictable sales cycles and in some cases larger but less
frequent and less predictable sales.
During the year, we saw a slowing in purchase activity by a key
strategic customer in the Netherlands. We also incurred customer
losses, while professionalising the contracts management activities
in one of the businesses we recently acquired, as well as having to
bear increased costs.
Furthermore, as a result of these recent large acquisitions, the
scale and complexity of the Group increased and enhanced controls
and processes needed to be put in place. In order to address this,
the Board approved the appointment of a Director of Risk and
Assurance, and a Group Tax and Treasury Manager.
Detailed descriptions of the current principal risks and
uncertainties faced by the Group, their potential impact and
mitigating processes and controls are set out below. The tables
also highlight whether the risk is assessed as increasing or
decreasing with a similar assessment for the position last year.
This includes identifying new principal risks and
uncertainties.
Risk Areas Potential Impact Mitigation
---------------------------------- ----------------------------------- ------------------------------------
1 Strategy A poor strategy or ineffective Members of the Board have
As the Group and its operating execution of a strategy significant experience
environment change, so would have a material negative in evolving business strategies.
too must its strategy impact on the Group's financial This experience has been
if it is to continue to performance and value. complemented by the use
succeed and generate increasing It would potentially weaken of external consultants
shareholder value. the Group compared to its who have participated in
The Group is in the process competitors and risk the the recent Strategic Review.
of changing and developing Group's established position
a new strategy that will in the market place.
need to take root.
---------------------------------- ----------------------------------- ------------------------------------
2 Management of change Poor change management The Board has been enhanced
As the Group adapts and could lead to ineffective during the last six months
changes its strategy there implementation of projects by the appointment of an
are a number of complex that then cost more to executive Chairman and
projects and initiatives deliver, take longer to Interim CEO, both of whom
that not only need to deliver, result in fewer have extensive experience
be delivered but also benefits being realised of implementing change
require understanding (or all three). on organisations.
and support from all staff Through regular engagement
with all levels of staff
the Group will ensure that
the Group's Vision and
strategy is shared with
and understood by all staff.
---------------------------------- ----------------------------------- ------------------------------------
3 Information Technology If the Group's systems The Group has made significant
The Group is heavily reliant failed, this could affect investment in its IT infrastructure
on continued and uninterrupted the Group's ability to to ensure it continues
access to its IT systems. provide services to our to support the growth of
The Group is a natural customers. If a system the organisation.
target for individuals failure was the result The Group has appropriate
who may seek to disrupt of a successful external controls in place in order
the Group's commercial cyber attack, this could to mitigate the risk of
activities. result in the loss of sensitive systems failure and data
data and compromise the loss, including systems
Group's reputation as a back-up procedures and
leader in the field of disaster recovery plans.
cyber security. The Group also deploys
Failing to successfully appropriate malware protection,
implement new IT systems network security controls
could similarly cause business and encryption of mobile
disruption. devices.
The Group is currently
reviewing high priority
systems changes to ensure
that projects are well
managed and deliver the
required targeted benefits
in an appropriate timeframe.
---------------------------------- ----------------------------------- ------------------------------------
4 Recruitment & retention Loss of key managers could Key personnel are tied
of key personnel result in a lack of necessary in through rewarding career
The Group would be adversely expertise or continuity structures and attractive
impacted if it were unable to execute the Group's salary packages, which
to attract and retain strategy. can include participation
the right calibre of skilled An inability to attract in share schemes.
staff. and retain sufficient high-calibre Succession plans are being
Some roles within the employees could become finalised for key members
Group operate in highly a barrier to the continued of the management team
technical and extremely success and growth of NCC where they are not already
specialised areas in which in place.
there are shortages of The Group is reviewing
skilled people. our assessment and development
processes to ensure that
our employees can enjoy
opportunities for further
career training and development.
---------------------------------- ----------------------------------- ------------------------------------
5 Conduct and Conduct risk can arise NCC operates a system of
reputational risk from a number of areas policies and procedures
Damage can result to our such as failing to meet which are regularly audited
reputation or business customer expectations on as part of the Quality
by a combination of unanticipated project delivery, testing System.
events or by the acts assignments or source code These, combined with management
of a single employee handling or from employees oversight, the risk management
who could maliciously disrupt process, project reviews
the business and steal and customer feedback,
customer information. mitigate the risk to successful
All such instances could service and project delivery.
result in damage to reputation, All staff are trained regularly
loss of repeat business and backups are taken wherever
and potentially lead to possible before testing
litigation and/or claims assignments begin.
against NCC. Employees are vetted before
joining and robust controls
and processes are in place
to manage employees such
as accounting controls,
IT monitoring large downloads
of data and controls on
client site operations.
---------------------------------- ----------------------------------- ------------------------------------
6 Cyber risk As a provider of security The Board has constituted
This is the risk that services, the Group is a Cyber Security Committee
is faced by many of our a high profile target and chaired by the Senior Non-Executive
customers, that external could therefore be targeted Director.
agents will successfully by attacks specifically Security testing is regularly
access and harm NCC data designed to disrupt the carried out on the Group's
and operating systems, Group's business and harm infrastructure and there
inspired by either the the Group's reputation. are extensive measures
pursuit of financial gain If such an attack was successful, in place to assist in identifying
or malice. it could adversely affect and dealing with security
the market's perception incidents.
of the Group as well as The Group has a dedicated
causing business disruption. Information Security Management
Forum which meets regularly
to discuss security risks
to the Group. Employees
also receive regular security
training and updates.
---------------------------------- ----------------------------------- ------------------------------------
7 Acquisitions and disposals Well-executed acquisitions As part of its medium term
Acquisitions and disposals and disposals with an appropriate strategy, the Board remains
can be costly to complete purchase price can create committed to making value-enhancing
and complex to deliver significant value. Poorly acquisitions.
the targeted benefits. executed acquisitions and The need to establish a
Risks range from deal disposals or those with robust and scalable 'Target
execution (including price excessive purchase prices Operating Model' for the
negotiations, due diligence, can destroy shareholder Group, including integrated
and contracting) to transition value. ways of working, processes
and integration into (or and systems, means that
separation from) NCC the Group is less likely
to make any material acquisitions
for the next 1 to 2 years
while that TOM is put in
place.
Furthermore, the significant
write down in the carrying
values of goodwill following
the acquisition of Accumuli
and Fox-IT has led the
Board to commence a review
of our acquisition process
and disciplines to identify
areas for improvement and
ways in which to reduce
the risk of future impairments
on any new acquisitions.
This includes developing
a more robust post-acquisition
integration process to
deliver targeted benefits.
---------------------------------- ----------------------------------- ------------------------------------
8 Competition and failure A major change in the technology The Group employs a number
to respond to market trends landscape could lead to of industry leading experts
Barriers to market entry a decline in an individual and thought leaders in
are relatively low in service line's revenue our market place. This
some of our lower value stream. One example of puts us at the forefront
service offerings. Equally, a recent change that needs of change and allows us
in such a dynamic and a response is the move early insight into emerging
fast evolving technology to more cloud based applications trends. This in turn allows
space, products or services and data storage. us to anticipate or pre-empt
can be rendered obsolete a number of potential risks.
by new technologies or Group wide technology and
platforms technical forums are used
to disseminate and share
market intelligence and
trends, as well as to formulate
responses, on a regular
basis.
---------------------------------- ----------------------------------- ------------------------------------
9 Failure to protect intellectual If such rights are not Patents are applied for
property sufficiently protected, where appropriate and intellectual
A number of the Group's the Group could potentially property is only disclosed
service offerings depend no longer be able to offer under a licence agreement
on intellectual property a particular service in or confidentiality agreement.
rights that need to be some or all countries. The Group also takes steps
registered, maintained to differentiate its IP
and protected in various as far as possible to lower
jurisdictions. Examples the risk of any potential
include trademarks, patents infringement claims.
and valuable know-how.
---------------------------------- ----------------------------------- ------------------------------------
10 Liquidity, foreign Inability to re-finance The Group's current banking
exchange and banking facilities the Group's core banking facilities cover all of
The Group requires access facilities could call into its expected needs of the
to adequate banking facilities doubt the Group's longer-term Group for the period of
to fund its daily operations, viability. Equally, if such facilities and are
capital investments and those facilities lacked sufficiently flexible to
potential acquisitions. the appropriate flexibility allow the Group to function
Furthermore, as the Group's and structure, this could effectively.
international footprint inhibit delivery of the The Group has recently
expands, there is an inherent Group's strategy. appointed a Tax and Treasury
risk of adverse foreign The absence of any currency Manager for the first time.
exchange movements affecting hedging in 2016-17 resulted Part of their role is to
profitability. in an exchange loss of support the CFO in developing
GBP3.7m a Treasury strategy and
overseeing its implementation.
The Board is currently
reviewing a new Foreign
Exchange hedging strategy
that is primarily based
on net cash flow hedging.
---------------------------------- ----------------------------------- ------------------------------------
On behalf of the Board
Brian Tenner
Interim Chief Executive
18 July 2017
Consolidated Income Statement
for the year ended 31 May 2017
Note 2017 2017 2017 2016 2016 2016
Total Adjustments Adjusted Total Adjustments Adjusted
(Note (Note 3)
3)
GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 2, 244.5 (2.6) 241.9 209.1 (4.9) 204.2
Cost of Sales (160.2) 2.3 (157.9) (150.6) 3.8 (146.8)
Reclassification
of costs 4 - - - 21.2 - 21.2
--------------------------- ----- -------- ------------ --------- -------- ------------ ---------
Gross profit 84.3 (0.3) 84.0 79.7 (1.1) 78.6
Administration
expenses (137.7) 81.2 (56.5) (68.3) 29.4 (38.9)
--------------------------- ----- -------- ------------ --------- -------- ------------ ---------
Administration
expenses comprises:
General & administrative
expenses (57.0) 0.5 (56.5) (41.4) 2.5 (38.9)
Profit on sale
of subsidiary
companies 5 1.2 (1.2) -
Amortisation
of acquired intangible
assets 9 (10.3) 10.3 - (6.8) 6.8 -
Individually
significant items 3 (71.0) 71.0 (18.9) 18.9 -
Share based payments (0.6) 0.6 - (1.2) 1.2 -
--------------------------- ----- -------- ------------ --------- -------- ------------ ---------
Operating (loss)/profit 2,4 (53.4) 80.9 27.5 11.4 28.3 39.7
Net Interest
expense (1.4) - (1.4) (1.4) - (1.4)
Discount on acquisition
consideration (0.5) 0.5 - (0.6) 0.6 -
--------------------------- ----- -------- ------------ --------- -------- ------------ ---------
Net financing
costs (1.9) 0.5 (1.4) (2.0) 0.6 (1.4)
--------------------------- ----- -------- ------------ --------- -------- ------------ ---------
(Loss)/profit
before taxation (55.3) 81.4 26.1 9.4 28.9 38.3
Taxation 6 (1.3) (6.3) (7.6) (3.1) (5.2) (8.3)
--------------------------- ----- -------- ------------ --------- -------- ------------ ---------
Attributable
to equity holders
of the parent
company (56.6) 75.1 18.5 6.3 23.7 30.0
Earnings per
share from continuing
operations 8
Basic earnings
per share (20.4p) 2.5p
Diluted earnings
per share (20.4)p 2.4p
--------------------------- ----- -------- ------------ --------- -------- ------------ ---------
Consolidated Statement of comprehensive
income
for the year ended 31 May 2017
2017 2016
GBPm GBP'm
(Loss)/profit for the
year (56.6) 6.3
------------------------------------------- ---- ------- ------
Items that may be reclassified
subsequently to profit
or loss (net of tax)
Foreign exchange translation
differences 17.9 9.7
------------------------------------------- ---- ------
Total comprehensive (loss)/income
for the year, net of tax (38.7) 16.0
------------------------------------------- ---- ------- ------
Attributable to:
------------------------------------------- ---- ------
Equity holders of the
parent (38.7) 16.0
------------------------------------------- ---- ------- ------
Consolidated statement of financial position
at 31 May 2017
Notes 2017 2016
GBPm GBPm GBPm GBPm
Non-current assets
Intangible assets 9 267.6 297.3
Plant and equipment 10 18.3 12.7
Investments 0.4 0.6
Deferred tax assets 13 4.2 5.3
--------------------------------- ----- ----- ----- ----- -----------
Total non-current assets 290.5 315.9
--------------------------------- ----- ----- ----- ----- -----------
Current assets
Trade and other receivables 11 66.7 66.4
Inventories 1.1 0.3
Cash and cash equivalents 12.3 20.7
--------------------------------- ----- ----- ----- ----- -----------
Total current assets 80.1 87.4
Total assets 370.6 403.3
--------------------------------- ----- ----- ----- ----- -----------
Current Liabilities
Trade and other payables 14 29.7 31.6
Provisions 14 1.5 -
Consideration on acquisitions 14 12.9 3.5
Deferred revenue 15 35.6 36.3
Current tax payable 3.0 1.2
--------------------------------- ----- ----- ----- ----- -----------
Total current liabilities 82.7 72.6
--------------------------------- ----- ----- ----- ----- -----------
Non-current liabilities
Deferred tax liability 13 14.2 15.5
Provisions 16 3.5 0.4
Consideration on acquisitions 16 2.1 18.5
Interest bearing loans 56.0 33.4
--------------------------------- ----- ----- ----- ----- -----------
Total non-current liabilities 75.8 67.8
--------------------------------- ----- ----- ----- ----- -----------
Net Assets 212.1 262.9
--------------------------------- ----- ----- ----- ----- -----------
Equity
Issued capital 2.8 2.8
Share premium 148.0 147.3
Merger reserve 42.3 42.3
Retained earnings (7.1) 62.5
Reserve for own shares - (0.2)
Currency translation reserve 26.1 8.2
--------------------------------- ----- ----- ----- ----- -----------
Total equity attributable
to equity holders of the parent 212.1 262.9
--------------------------------- ----- ----- ----- ----- -----------
These financial statements were approved by the Board of
Directors on 18 July 2017 and were signed on its behalf by:
Brian Tenner
Interim Chief Executive
NCC Group plc
4627044
Consolidated statement of cash flows
for the year ended 31 May 2017
Notes 2017 2016
GBPm GBPm
Cash inflow for the year before changes in
working capital 17 33.8 37.3
Increase in trade and other receivables (2.3) (15.1)
Decrease in trade and other payables 0.2 0.9
Cash generated from operating activities before
interest and tax 31.7 23.1
Interest paid (1.9) (2.0)
Income taxes paid (1.8) (7.3)
----------------------------------------------------- ----- ------ ------
Net cash generated from operating activities 28.0 13.8
Cash flows from investing activities
Purchase of plant and equipment 10 (11.0) (4.6)
Capital contribution for property, plant and
equipment 16 3.7 -
Proceeds from disposal of property 0.4 -
Software and development expenditure 9 (7.4) (8.9)
Acquisition of businesses (28.4) (78.5)
Cash acquired with subsidiaries 12 1.9 1.8
Cash disposed of from sale of subsidiaries 5 (1.7) -
Proceeds from sale of subsidiaries 1.7 -
Net cash generated in investing activities (40.8) (90.2)
Cash flows from financing activities
Pu
rchase of own shares - (0.1)
Proceeds from the issue of ordinary share
capital 0.7 123.8
Draw down / (repayment) of borrowings 18.9 (33.5)
Equity dividends paid (12.8) (10.3)
----------------------------------------------------- ----- ------ ------
Net cash used in financing activities 6.8 79.9
----------------------------------------------------- -----
Net (decrease)/increase in cash and cash equivalents 17 (6.0) 3.5
----------------------------------------------------- ----- ------ ------
Cash and cash equivalents at beginning of
year 20.7 16.4
Effect of foreign currency exchange rate changes (2.4) 0.8
----------------------------------------------------- ----- ------ ------
Cash and cash equivalents at end of year 12.3 20.7
----------------------------------------------------- ----- ------ ------
Reconciliation of net change in cash and cash
equivalents to movement in net debt
2017 2016
GBPm GBPm
(Decrease)/increase in cash and cash equivalents (6.0) 3.5
Change in net debt resulting from cashflows (18.9) 33.5
Foreign currency translation differences on
cash and cash equivalents (2.4) 0.8
Foreign currency translation differences on
borrowings (3.7) 0.1
Change in net debt during the year (31.0) 37.9
-------------------------------------------------- ------ ------
Net debt at start of year (12.7) (50.6)
-------------------------------------------------- ------ ------
Net debt at end of year (43.7) (12.7)
-------------------------------------------------- ------ ------
Net debt comprises 2017 2016
GBPm GBPm
Cash and cash equivalents 12.3 20.7
Total borrowings (Note 21) (56.0) (33.4)
Net debt (43.7) (12.7)
-------------------------------------------------- ------ ------
Statements of changes of equity
for the year ended 31 May 2017
Group
Issued Currency Reserve
Share Share Merger Translation for Retained
capital Premium Reserve reserve own Earnings Total
shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 June
2015 2.3 24.0 42.3 (1.5) (0.5) 65.1 131.7
Profit for the year - - - - - 6.3 6.3
Adjustment to currency
translation reserve
from sale of subsidiary
companies - - - 0.1 - - 0.1
Foreign currency
translation differences - - - 9.6 - - 9.6
--------- ---------- ---------- ------------- -------- ----------- --------
Total comprehensive
income for the year - - - 9.7 - 6.3 16.0
--------- ---------- ---------- ------------- -------- ----------- --------
Transactions with
owners recorded
directly in equity
Dividends to equity
shareholders - - - - - (10.3) (10.3)
Share based payment
transactions - - - - - 1.1 1.1
Current and deferred
tax on share based
payments - - - - - 0.6 0.6
Shares issued 0.5 123.3 - - - - 123.8
Purchase of own
shares - - - - 0.3 (0.3) -
Total contributions
by and distributions
to owners 0.5 123.3 - - 0.3 (8.9) 115.2
--------- ---------- ---------- ------------- -------- ----------- --------
Balance at 31 May
2016 2.8 147.3 42.3 8.2 (0.2) 62.5 262.9
--------- ---------- ---------- ------------- -------- ----------- --------
Issued Currency Reserve
Share Share Merger Translation for Retained
capital Premium Reserve reserve own Earnings Total
shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 June
2016 2.8 147.3 42.3 8.2 (0.2) 62.5 262.9
Profit for the year - - - - - (56.6) (56.6)
Foreign currency translation
differences - - - 17.9 - - 17.9
Total comprehensive
income for the year - - - 17.9 - (56.6) (38.7)
--------- ---------- ---------- ------------- -------- ----------- --------
Transactions with
owners recorded directly
in equity
Dividends to equity
shareholders - - - - - (12.8) (12.8)
Share based payment
transactions - - - - - 0.2 0.2
Current and deferred
tax on share based
payments - - - - - (0.4) (0.4)
Shares issued - 0.7 - - - - 0.7
Purchase of own shares - - - - 0.2 - 0.2
Total contributions
by and distributions
to owners - 0.7 - - 0.2 (13.0) (12.1)
--------- ---------- ---------- ------------- -------- ----------- --------
Balance at 31 May
2017 2.8 148.0 42.3 26.1 - (7.1) 212.1
--------- ---------- ---------- ------------- -------- ----------- --------
Notes
(forming part of the financial statements)
1 Accounting policies
Basis of preparation
NCC Group plc ("the Company") is a company incorporated in the
UK. The Group financial statements consolidate those of the Company
and its subsidiaries (together referred to as the "Group"). The
parent company financial statements present information about the
Company as a separate entity and not about the Group.
These financial statements have been approved for issue by the
Board of Directors on 18 July 2017.
The financial information set out herein does not constitute the
Company's statutory financial statements for the year ended 31 May
2017 or the year ended 31 May 2016 but is derived from those
financial statements. Statutory financial statements for 2016 have
been delivered to the Registrar of Companies, and those for 2017
will be delivered in due course. The auditors have reported on
those statutory financial statements; their report was (i)
unqualified, (ii) did not include references to any matters to
which the auditors drew attention by way of emphasis without
qualifying their report, and (iii) did not contain statements under
sections 498(2) or 498(3) of the Companies Act 2006.
In accordance with EU law (IAS Regulation EC 1606/2002), the
group financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRS') adopted for
use in the EU as at 31 May 2017 ('adopted IFRS'), International
Financial Reporting Interpretations Committee ('IFRIC')
interpretations and those parts of the Companies Act 2006
applicable to companies reporting under IFRS. The preliminary
results consolidate those of the Company and its subsidiaries.
The Group financial information has been prepared in accordance
with International Financial Reporting Standards ("IFRS") as
adopted for use within the European Union and in accordance with
the accounting policies included in the Annual Report for the year
ended 31 May 2016. A number of new standards and amendments to
existing standards were effective for the financial year ended 31
May 2017. None of these have had a material impact. A number of
standards, amendments and interpretations have been issued and
endorsed by the EU, but which are not yet effective and accordingly
the Group has not yet adopted. The cumulative impact of the
adoption of these standards is not expected to significant.
Basis of measurement
The consolidated financial statements have been prepared on the
historical cost basis except for consideration payable on
acquisitions that is measured at fair value.
Functional and presentation currency
The Group and Company financial statements are presented in
millions of Pounds Sterling (GBPm) and all values are rounded to
one decimal place except when otherwise indicated.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Strategic Report. The financial position of the
Group, its cash flows, liquidity position and borrowing facilities
are described in the Business and Financial.
The Group funds its strategic acquisitions and meets its day to
day working capital requirements via a multi-currency revolving
credit facility of GBP80.0m, a GBP25.0m multi-currency term loan
that amortises by GBP2.5m every six months and an overdraft of
GBP5m. At 31 May 2017, the amount drawn down under the facilities
was GBP56.0m. This facility was agreed in November 2015 and is due
for renewal in November 2020.
The Directors have reviewed the trading and cash flow forecasts
of the Group as part of their going concern assessment and have
taken into account reasonable downside sensitivities which reflect
uncertainties in the current operating environment. The possible
changes in trading performance show that the Group is able to
operate within the level of the banking facilities and as a
consequence, the Directors believe that the Group is well placed to
manage its business risks successfully. After making enquiries, the
Directors have a reasonable expectation that the company and the
Group have adequate resources to continue in operational existence
for a period of at least twelve months. Accordingly, they continue
to adopt the going concern basis in preparing the annual report and
accounts.
2 Segmental information
The Group is organised into the following two reporting segments
(2016: three) Escrow and Assurance each of which is separately
reported. While revenue and profitability are monitored by
individual business units within these operational segments it is
only at the operating segment level that resource allocation
decisions are made. Performance is measured based on segment
profit, which comprises segment operating profit excluding
amortisation of intangible assets, share based payment charges and
exceptional items. Interest and tax are not allocated to business
segments and there are no intra-segment sales.
Segmental analysis 2017
Escrow Assurance Domain Head Group
Office
GBPm GBPm GBPm GBPm GBPm
Revenue 37.2 204.7 2.6 - 244.5
Cost of sales (2.0) (155.9) (2.3) - (160.2)
Gross profit 35.2 48.8 0.3 - 84.3
G&A before Adjustments (17.1) (104.4) (4.5) (11.7) (137.7)
------------------------------------------ ------- ---------- ------- -------- --------
Operating profit 18.1 (55.6) (4.2) (11.7) (53.4)
Adjustments* 1.0 72.2 4.2 3.5 80.9
------------------------------------------ ------- ---------- ------- -------- --------
Adjusted operating profit 19.1 16.6 - (8.2) 27.5
------------------------------------------ ------- ---------- ------- -------- --------
Depreciation of PP&E 0.2 2.9 - 2.1 5.2
Amortisation of software and capitalised
development costs - 1.7 - 1.8 3.5
------------------------------------------ ------- ---------- ------- -------- --------
Adjusted EBITDA 19.3 21.2 - (4.3) 36.2
------------------------------------------ ------- ---------- ------- -------- --------
*Adjustments includes the results of Domain Services,
individually significant items and other adjustments (Note 3).
Segmental analysis 2016
Escrow Assurance Domain Head Group
Office
GBPm GBPm GBPm GBPm GBPm
Revenue 35.3 168.9 4.9 - 209.1
Cost of sales (1.7) (123.9) (3.8) - (129.4)
Gross profit 33.6 45.0 1.1 - 79.7
G&A before Adjustments (14.4) (30.7) (17.2) (6.0) (68.3)
------------------------------------------ ------- ---------- ------- -------- --------
Operating profit 19.2 14.3 (16.1) (6.0) 11.4
Adjustments* 0.9 11.5 15.6 0.3 28.3
------------------------------------------ ------- ---------- ------- -------- --------
Adjusted operating profit 20.1 25.8 (0.5) (5.7) 39.7
Depreciation of PP&E 0.2 2.0 - 1.5 3.7
Amortisation of software and capitalised
development costs - 0.7 - 0.9 1.6
------------------------------------------ ------- ---------- ------- -------- --------
Adjusted EBITDA 20.3 28.5 (0.5) (3.3) 45.0
------------------------------------------ ------- ---------- ------- -------- --------
The revenue classified as adjustments relates to Domain services
(Note 6).
There are no customer contracts which account for more than 10%
of segment revenue.
2017 2016
GBPm GBPm
Revenue by geographical destination
UK 140.1 122.2
Rest of Europe 37.5 34.1
Rest of the World 66.9 52.8
------------------------------------ ----- -----
Total revenue 244.5 209.1
------------------------------------ ----- -----
3 Individually significant items
Individually significant items and other adjustments have been
presented in a separate column in the consolidated income statement
to provide users of the accounts with a reconciliation to the
Group's separately reported non-GAAP results.
The Group separately identifies items as "individually
significant items". As permitted by IAS1 'Presentation of financial
statements', an item is disclosed separately if it is considered
unusual by its nature or scale, and is of such significance that
separate disclosure is required to fairly present the financial
performance of the Group.
Adjustments 2017 2016
GBPm GBPm
Domain results (Note 5) 0.2 1.4
Profit on sale of subsidiary companies
(Note 5) (1.2) -
Amortisation of acquired intangible assets
(Note 9) 10.3 6.8
Individually significant items (see below) 71.0 18.9
Share based payments 0.6 1.2
Discount on acquisition consideration 0.5 0.6
------------------------------------------- ----- ------
Adjustment to loss before taxation 81.4 28.9
------------------------------------------- ----- ------
The revenue, cost of sales and general and administrative
expenses in the current and prior year relate to Domain services.
The prior year treatment of the Domain trading loss has been
amended to be consistent with the current year treatment as an
adjusting item in calculating non-GAAP measures. The profit on sale
of subsidiary companies relates to the disposal of the Open
Registry Group in January 2017 for a net profit GBP1.2m (Note
5).
Individually significant items 2017 2016
GBPm GBPm
Goodwill impairment:
* Fox-IT (24.3) -
* Accumuli (24.3) -
* Web Performance (5.7) -
* Open Registry - (11.9)
Intangible asset impairment:
* Capitalised development costs (5.7) (6.8)
* Software costs (2.0) -
------------------------------------------- ------ ------
Impairment of intangible assets (62.0) (18.7)
------------------------------------------- ------ ------
Acquisition related costs (0.8) (2.3)
Adjustments to consideration (2.9) 4.7
Restructuring costs (1.3) (2.6)
Onerous property leases (1.3) -
Vacation pay (1.8) -
Impairment of fixtures and fittings (0.9) -
Other (9.0) (0.2)
------------------------------------------- ------ ------
Total - individually significant items (71.0) (18.9)
------------------------------------------- ------ ------
Acquisition related costs of GBP0.8m (2016: GBP2.3m) consist of
fees incurred in relation to the acquisitions of Payment Software
Company Inc on 28 September 2016 and Virtual Security Research LLC
on 11 November 2016 (note 12). In the prior period, the costs
relate to fees incurred in relation to the acquisition of Fox-IT
Holdings BV.
The adjustment to consideration of a GBP2.9m charge relates to
foreign exchange revaluation differences on the carrying value of
consideration in the prior year of GBP4.7m income relate to the net
gains related to the re-assessment of the Open Registry contingent
consideration and an adjustment to the consideration payable for a
previous Accumuli plc acquisition.
A goodwill impairment of GBP54.3m (2016: GBP11.9m) has been
recognised in respect of the CGU's for Fox-IT Holdings BV, Accumuli
plc and Web Performance (Note 9). The underlying drivers for these
impairments are discussed in more detail in the performance review
sections of the Strategic Report.
The directors have assessed the carrying value of intangible
assets and concluded that the carrying values of certain
capitalised development and software costs are impaired (Note 11).
Accordingly, a write down of GBP5.7m (2016: GBP6.8m) has been
recognised in respect of capitalised development costs (GBP3.2m)
and in respect of the .trust domain name (GBP2.5m). In addition,
residual Domain Services software with a book value of GBP2.0m has
been written off in full. In the prior year, the intangible asset
write down of GBP6.8m relates to the impairment of capitalised
costs for redundant technology.
The group has incurred restructuring costs of GBP1.3m (2016:
GBP2.6m) relating to the exit payments to the former Chief
Executive (as shown in the Remuneration Report) and other members
of senior management. In addition, professional fees in relation to
the Strategic Review and retention bonuses paid to former employees
of Accumuli plc were also incurred. As previously reported NCC
became responsible for paying these bonuses on acquisition of the
Accumuli group. In the year to 31 May 2016, restructuring costs
included Accumuli plc retention bonuses, severance costs and other
costs associated with the wind down of the Domain Services
division.
The onerous property lease charge of GBP1.3m (2016: GBPnil) is
in respect of double running costs of empty properties. The GBP1.8m
charge for vacation pay relates to previous financial periods and
this is described in more detail in the Audit Committee Report. Of
the total charge, GBP0.5m relates to the prior year with the
balance relating to prior years up to 31 May 2015 with no
significant charge in any one year. The GBP0.9m (2016: GBPnil)
impairment of fixtures and fittings relates to items in the current
head office which will be obsolete after the relocation later this
year.
The tax effect in the income statement relating to the
individually significant items recognised is:
2017 2016
GBPm GBPm
Goodwill impairment (breakdown shown
below):
- -
* Fox-IT
- -
* Accumuli
- -
* Web Performance
- -
* Open Registry
Intangible asset impairment (breakdown
shown below):
* Capitalised development costs (1.4) (2.3)
- -
* Domain name
------------------------------------------- ----- ------
Impairment of intangible assets (1.4) (2.3)
------------------------------------------- ----- ------
Acquisition related costs (0.3) (0.2)
Adjustments to deferred and contingent
consideration 0.1
Restructuring costs (0.3) (0.6)
Onerous property leases (0.2) -
Vacation pay (0.5) -
Impairment of fixtures and fittings - -
Other individually significant items (1.2) (0.8)
------------------------------------------- ----- ------
Total (2.6) (3.1)
------------------------------------------- ----- ------
4 Expenses and auditors' remuneration
2017 2016
GBPm GBPm
(Loss)/profit before taxation is stated after
charging/ (crediting):
Amounts receivable by auditors and their associates
in respect of:
Audit of these financial statements - -
Audit of financial statements of subsidiaries
pursuant to legislation 0.2 0.1
------------------------------------------------------ ----- -----
Total audit 0.2 0.1
------------------------------------------------------ ----- -----
Review of interim financial statements - -
Total fees 0.2 0.1
Depreciation of property, plant and equipment
(Note 10) 5.2 3.7
Impairment of fixtures and fittings* (Note 10) 0.9 -
Amortisation and other amounts written off intangible
fixed assets:
Amortisation of software (Note 9) 2.0 1.6
Amortisation of development costs (Note 9) 1.5 -
Amortisation of acquired intangibles (Note 9) 10.3 6.8
Impairment of goodwill* 54.3 11.9
Impairment of capitalised development costs* 5.7 6.9
Impairment of software costs* 2.0 -
Operating lease rentals charged:
* Hire of property, plant and equipment 3.2 3.9
* Other operating leases 1.6 1.4
Research and development expenditure 1.7 2.2
Profit on sale of discontinued operation* 1.2 -
Profit on disposal of plant and equipment (0.1) (0.1)
------------------------------------------------------ ----- -----
*Included within individually significant items, Note 3.
The reclassification of costs relates to administrative salaries
and travel costs that were reported within cost of sales in the
prior year but have been reclassified to general and administrative
expenses in this years' consolidated income statement.
5 Domain services
In June 2016, the Board took the decision to close down the
activities of the Domain Services operating segment. During the
prior year, the development activities of Domain Services were
severely curtailed and the assets and business activities were
either shut down or sold in the current financial year. This
included the sale of the Open Registry group of companies
comprising Open Registry SA, ClearingHouse for Intellectual
Property SA, Nexperteam CVBA and Sensirius CVBA to external buyers
for a combined total consideration of EUR3.75m in January 2017,
EUR2.0m receivable in immediate cash and EUR1.75m as deferred
consideration, receivable in July 2018 at a fixed interest rate of
4%. A profit on disposal of GBP1.2m is recognised in the
consolidated income statement within individually significant items
(note 3).
The tables below provide an analysis of Domain Services
activities for revenue, EBITDA and profit before tax as these are
considered to be the most relevant to understanding underlying
business performance.
Results of Domain services 2017 2016
GBPm GBPm
Revenue 2.6 4.9
Expenses (2.7) (6.3)
EBITDA (0.1) (1.0)
Individually significant items - (18.7)
Depreciation and amortisation (0.1) (0.4)
-------------------------------- ----- ------
Profit before tax (0.2) (20.1)
-------------------------------- ----- ------
Gain recognised on sale 1.2 -
Profit/(loss) for the year 1.0 (20.1)
-------------------------------- ----- ------
Effect of the Open Registry Group sale on 2017 2016
assets and liabilities
GBPm GBPm
Intangible assets 0.1 0.1
Plant & Equipment 0.1 0.1
Trade and receivables 3.2 2.5
Cash and cash equivalents 1.6 1.3
Trade payables (5.2) (4.1)
Net liabilities (0.2) (0.1)
------------------------------------------- ----- -----
Consideration received, satisfied in cash 1.7 -
Cash disposed of (1.7) -
------------------------------------------- ----- -----
Net cash inflow - -
----------------------------------------------- ----- -----
6 Taxation
Recognised in the income statement
2017 2016
GBPm GBPm
Current tax expense
Current year 3.1 4.4
Adjustment to tax expense in respect of prior
periods - (0.5)
Foreign tax 0.9 0.8
----------------------------------------------- ----- -----
Total current tax 4.0 4.7
Deferred tax (note 13) (2.7) (1.6)
----------------------------------------------- ----- -----
Tax in income statement 1.3 3.1
----------------------------------------------- ----- -----
Reconciliation of effective tax rate
2017 2016
GBPm GBPm
Profit before taxation (55.3) 9.4
---------------------------------------------------- ------- -------
Current tax using the UK corporation tax
rate of 19% (2016: 20%) (11.0) 1.9
Effects of:
Items not taxable for tax purposes 12.3 2.0
Adjustment to tax charge in respect of prior
periods (0.4) (0.2)
Differences between overseas tax rates 0.2 (0.5)
Movements in temporary differences not recognised 0.6
Effect of rate change (0.4) (0.1)
---------------------------------------------------- ----------- -------
Total tax expense 1.3 3.1
-------------------------------------------------------- ------- -------
Current and deferred tax recognised directly in equity was a
debit of GBP0.2m (2016: charge of GBP0.6m). The UK Government has
announced that it intends to reduce the rate of corporation tax to
17% with effect from 1 April 2020. This was substantively enacted
in September 2016. As at the year end the impact of the anticipated
rate change is reflected in the tax provisions reported in these
accounts. Finance Act 2015 (No.2), which was substantively enacted
in October 2015, included provisions to reduce the rate of
corporation tax to 19% with effect from 1 April 2017. Accordingly,
the UK deferred tax balances which were valued at the rate of 19%
in the 31 May 2016 accounts have been revalued at the 17% rate in
these accounts where relevant.
7 Dividends
2017 2016
GBPm GBPm
Dividends paid and recognised in the year 12.8 10.3
Dividends proposed but not recognised in the
year 8.7 8.7
------------------------------------------------- ------ ------
Dividends per share paid and recognised in
the year 4.65p 4.18p
Dividends per share proposed but not recognised
in the year 3.15p 3.15p
------------------------------------------------- ------ ------
8 Earnings per share
The calculation of adjusted earnings per share is based on the
following:
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
(Loss)/profit for the year from
continuing operations used for
basic and diluted earnings per
share (56.6) 6.3
---------------------------------------- ------ ----------- ------ -----------
Amortisation of acquired intangible
assets (Note 9) 10.3 6.8
Domain Services net result (1.0) 1.4
Individually Significant Items
(Note 3) 71.0 18.9
Unwinding of discount 0.5 0.6
Share based payments 0.6 1.2
Tax arising on the above items (6.3) (5.2)
75.1 23.7
---------------------------------------- ------ ----------- ------ -----------
Adjusted profit from continuing
operations used for adjusted earnings
per share 18.5 30.0
---------------------------------------- ------ ----------- ------ -----------
Number Number
of shares of shares
m m
Basic weighted average number
of shares in issue 276.3 254.6
Dilutive effect of share options - 3.5
---------------------------------------- ------ ----------- ------ -----------
Diluted weighted average shares
in issue 276.3 258.1
---------------------------------------- ------ ----------- ------ -----------
Adjusted basic EPS 6.7p 11.8p
---------------------------------------- ------ ----------- ------ -----------
In the prior year, the average market value of the Company's
shares for purposes of calculating the dilutive effect of share
options was based on quoted market prices for the period during
which the options were outstanding.
The prior year did not treat Domain Services as an adjusting
item as the decision to exit the business was taken after the end
of the financial year. To be consistent with the current year, the
prior year adjusting items have been amended to include the results
of Domain Services. The net impact was to increase the prior year
Adjusted EPS by 0.4p.
9 Intangible assets
Development Customer contracts
Software costs and relationships Goodwill Total
GBPm GBPm GBPm GBPm GBPm
Cost:
At 1 June 2015 18.4 8.7 47.8 155.7 230.6
Acquisitions through
business combinations 1.7 - 25.4 72.9 100.0
Additions - internally
developed 6.9 1.9 - - 8.8
Costs write down - (6.8) - - (6.8)
Effects of movements
in exchange rates - 0.4 3.0 7.6 11.0
At 31 May 2016 27.0 4.2 76.2 236.2 343.6
------------------------- -------- ------------- ------------------ -------- -----
Acquisitions through
business combinations - - 7.7 12.1 19.8
Additions - internally
developed 3.7 3.7 - - 7.4
Reclassification (11.1) 11.1 - - -
Disposal of subsidiaries (0.1) (3.4) - (3.5)
Effects of movements
in exchange rates 0.6 0.4 6.5 16.6 24.1
At 31 May 2017 20.2 19.3 87.0 264.9 391.4
------------------------- -------- ------------- ------------------ -------- -----
Accumulated amortisation and impairment losses:
At 1 June 2015 7.7 - 17.8 - 25.5
Charge for year 1.6 - 6.8 - 8.4
Impairment charge - - - 11.9 11.9
Effects of movements
in exchange rates - - 0.5 - 0.5
------------------------- -------- ------------- ------------------ -------- -----
At 31 May 2016 9.3 - 25.1 11.9 46.3
------------------------- -------- ------------- ------------------ -------- -----
Charge for year 2.0 1.5 10.3 - 13.8
Impairment charge 2.0 5.7 - 54.3 62.0
Reclassification (2.1) 2.1 - -
Effects of movements
in exchange rates - (0.2) 1.9 - 1.7
At 31 May 2017 11.2 9.1 37.3 66.2 123.8
Net book value:
At 31 May 2017 9.0 10.2 49.7 198.7 267.6
------------------------- -------- ------------- ------------------ -------- -----
At 31 May 2016 17.7 4.2 51.1 224.3 297.3
------------------------- -------- ------------- ------------------ -------- -----
Cash generating units (CGU's): Goodwill and intangible assets
are allocated to CGUs in order to be assessed for potential
impairment. CGUs are defined by accounting standards as the lowest
level of asset groupings that generate separately identifiable cash
inflows that are not dependent on other CGUs. Following the
Strategic Review, the Directors have reconsidered the CGUs within
the Group. The CGUs and the allocation of goodwill to those CGUs is
shown in the table below. The table also includes the discount rate
used to assess the NPV of the future cash flows of each CGU:
2017 2017
Cash generating units GBPm Discount
rate
Escrow UK 22.9 11.4%
Escrow Europe 8.3 11.8%
Escrow USA 7.3 14.9%
Total Escrow 38.5 -
Assurance USA 28.1 14.6%
PSC 9.8 14.5%
VSR 2.3 14.5%
UK Security Consulting 18.5 12.6%
Fox-IT 62.7 17.0%
Software Testing 8.0 12.5%
Web Performance 2.2 15.2%
Accumuli (known internally as MSS) 28.6 15.4%
------------------------------------- ------ ---------
Total Assurance 160.2 -
------------------------------------- ------ ---------
Total Group 198.7 -
------------------------------------- ------ ---------
In the prior year, the goodwill allocation and WACC rates for
each CGU (in brackets) were: Escrow UK GBP21.2m (10.1%), Escrow
Europe GBP6.4m (10.7%), Escrow USA GBP7.3m (12.9%), Assurance USA
GBP24.6m (15.0%) and European Security Services GBP164.8m
(11.2%).
The composition of the MSS business noted above (formerly known
as Accumuli) is slightly different from the Accumuli Group at
acquisition. One part of the Accumuli business, known as
RandomStorm, carried on identical activities to some parts of UK
Security Consulting. Those activities and their cash flows were
transferred to UK Security Consulting during the year and are no
longer separately managed or independent cash flows associated with
MSS. Those cash flows and their associated share of goodwill is
therefore included in the UK Security Consulting CGU.
During the year, the Group acquired Payment Software Company
Inc, a global payment and security consulting company and Virtual
Security Research LLC, (VSR) an information network and application
security consulting company.
When assessing impairment, the recoverable amount of each CGU is
based on value in use calculations. These calculations require the
use of estimates, specifically: pre-tax cash flow projections;
long-term growth rates; and a pre-tax market discount rate. Cash
flow projections are based on the Group's detailed annual operating
plan for the forthcoming financial year with assumptions applied
for expected revenue growth and costs to forecast years two to five
which are forecasts which have been approved by the Board. The
judgement on these assumptions is based on management's past
experience of growth and knowledge of the industry sectors and
markets. The projections beyond five years are forecast using an
estimated long-term growth rate of 2.5% (2015: 2.5%) which
represents management's best estimate of a long term annual growth
rate in EBITDA. A different set of assumptions may be more
appropriate in future years dependent on changes in the
macro-economic environment.
The discount rates used are based on management's calculation of
the WACC using the capital asset pricing model to calculate the
cost of equity. Specific rates are used for each CGU in the value
in use calculation and the rates reflect management's assessment on
the level of relative risk in each respective CGU. The pre-tax
discount rates used in the value in use calculations are shown
above.
The Directors have considered a range of sensitivities. If the
discount rates used in each CGU were decreased or increased by 1%,
the total Net Present Value of future cash flows would increase by
GBP105m and decrease by GBP81m respectively. In the case of the
CGUs where goodwill has been impaired in the current year, or where
an impairment would potentially arise, the impairment amounts would
increase/ (decrease) as follows:
Discount Discount
rate 1% increase rate 1% decrease
2017 2017
Cash generating units GBPm GBPm
Fox-IT 9.1 (11.2)
MSS 2.6 (3.1)
Web Performance 0.8 (1.1)
Total for units with impairments 12.5 (15.4)
------------------------------------------------ ------------------ ------------------
Software Testing 0.2 (1.9)
------------------------------------------------ ------------------ ------------------
Total for units with impairments and Software
Testing 12.7 (17.3)
------------------------------------------------ ------------------ ------------------
10 Plant and equipment
Computer Plant and Fixtures
equipment equipment and fittings Motor vehicles Total
GBPm GBPm GBPm GBPm GBPm
Cost:
At 1 June 2015 14.6 0.4 9.7 0.4 25.1
Additions 3.2 - 1.3 0.1 4.6
Acquired as part
of business combination 0.9 - 1.0 - 1.9
Disposals (0.3) - - - (0.3)
Movement in foreign
exchange rates 0.2 - 0.2 - 0.4
------------------------- ---------- ---------- ------------- -------------- -------
At 31 May 2016 18.6 0.4 12.2 0.5 31.7
------------------------- ---------- ---------- ------------- -------------- -------
Additions 4.2 0.1 6.6 0.1 11.0
Acquired as part
of business combination 0.5 - - - 0.5
Disposals (0.3) (0.4) (0.2) (0.2) (1.1)
Movement in foreign
exchange rates 0.8 - 1.0 - 1.8
------------------------- ---------- ---------- ------------- -------------- -------
At 31 May 2017 23.8 0.1 19.6 0.4 43.9
------------------------- ---------- ---------- ------------- -------------- -------
Depreciation:
At 1 June 2015 11.3 0.4 3.9 0.1 15.7
Charge for year 1.9 - 1.7 0.1 3.7
Disposals (0.2) - - - (0.2)
Movement in foreign
exchange rates (0.1) - (0.1) - (0.2)
------------------------- ---------- ---------- ------------- -------------- -------
At 31 May 2016 12.9 0.4 5.5 0.2 19.0
Charge for year 3.3 - 1.9 5.2
Impairment - - 0.9 - 0.9
Acquired as part
of business combination 0.4 - - - 0.4
Disposals (0.3) (0.4) (0.2) (0.1) (1.0)
Movement in foreign
exchange rates 0.6 - 0.4 - 1.0
------------------------- ---------- ---------- ------------- -------------- -------
At 31 May 2017 16.9 - 8.5 0.1 25.5
------------------------- ---------- ---------- ------------- -------------- -------
Net book value:
At 31 May 2017 6.9 0.1 11.1 0.2 18.3
------------------------- ---------- ---------- ------------- -------------- -------
At 31 May 2016 5.7 - 6.7 0.3 12.7
------------------------- ---------- ---------- ------------- -------------- -------
The GBP0.9m impairment of fixtures and fittings in the current
head office property which is due for relocation later in the year
is recognised as an "other individually significant item" in the
consolidated income statement.
11 Trade and other receivables
Group Group Company Company
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
Trade receivables 40.9 39.4 - -
Prepayments 6.6 7.2 - -
Other receivables 1.5 - - -
Accrued income 17.7 19.8
Amounts owed by group undertakings - - 149.6 130.2
----------------------------------- ----- ----- ------- -------
66.7 66.4 149.6 130.2
----------------------------------- ----- ----- ------- -------
The ageing of trade receivables at the end of the reporting
period was:
Group
Gross Impairment Gross Impairment
2017 2017 2016 2016
GBPm GBPm GBPm GBPm
Not past due 19.8 - 25.0 -
Past due 0-30 days 12.1 - 9.0 -
Past due 31-90 days 7.7 - 4.7 -
Past due more than 90 days 2.0 (0.7) 1.4 (0.7)
---------------------------- ------ ----------- ------ -----------
41.6 (0.7) 40.1 (0.7)
---------------------------- ------ ----------- ------ -----------
The Company had no trade receivables (2016: GBPNil).
The Group establishes a provision for impairment that represents
its estimate of incurred losses in respect of specific trade
receivables. The movement in the provision for impairment was:
Group Group
2017 2016
GBPm GBPm
Balance at 1 June 0.7 0.3
(Utilised)/created in - 0.4
Balance at 31 May 0.7 0.7
----------------------- ------ ------
12 Acquisitions
Payment Software Company Inc
NCC Group Inc acquired Payment Software Company Inc, (PSC) a
company based in California, USA, on 28 September 2016. PSC is a
global payment and security consulting company, providing services
to organisations that require specialist compliance, forensics and
consulting support.
The consideration paid was $16.6m initial cash consideration
with contingent consideration payments of $1.9m, where the fair
values are based on the estimated cash outflows discounted using a
risk-adjusted discount rate, due on earn-out periods to 31 December
2017 and 31 December 2018. The two contingent payments are payable
in cash on the achievement of specific profit based performance
targets which we expect to be achieved based on current business
forecasts. Accordingly, the full contingent consideration liability
has been recognised at its fair value.
Fair values
Acquiree's identifiable net assets at the GBPm GBPm
acquisition date:
Intangible assets - acquired 5.7
Trade and other receivables 1.5
Deferred tax liability (2.0)
Cash 1.8
Creditors & accruals (1.2)
Net identifiable assets 5.8
Goodwill on acquisition 9.8
----------------------------------------------------------------- ----- -----------
Total consideration 15.6
----------------------------------------------------------------- ----- -----------
Satisfied by: Initial cash consideration 12.8
----------------------------------------------------------------- ----- -----------
Deferred cash consideration 3.0
----------------------------------------------------------------- ----- -----------
Finance discount on deferred consideration (0.2)
----------------------------------------------------------------- ----- -----------
15.6
---------------------------------------------------------------- ----- -----------
Net cash outflow 12.8
----------------------------------------------------------------- ----- -----------
Cash acquired (1.8)
----------------------------------------------------------------- ----- -----------
Net cash outflow excluding cash acquired 11.0
----------------------------------------------------------------- ----- -----------
The goodwill of GBP9.8m represents the benefits expected to be
generated from sales and profit growth from the wider NCC customer
base in the US market. The goodwill is not expected to be
deductible for tax purposes. Acquisition costs relating to
professional fees totalling GBP0.4m were incurred and are
recognised as individually significant items in the income
statement (note 3). The Group's consolidated income statement
includes eight month's post acquisition trading, with PSC Inc
contributing GBP5.9m revenue and GBP1.2m operating profit.
Virtual Security Research LLC
NCC Group Inc acquired Virtual Security Research LLC, (VSR) a
company based in Boston, Massachusetts, USA, on 11 November 2016.
VSR is an information, network and application security consulting
company providing services to corporate clients of varying sizes
primarily in the US Technology and Financial Services sectors.
The consideration paid was $3.7m initial cash consideration with
contingent consideration payments of $0.9m, where the fair values
are based on the estimated cash outflows discounted using a
risk-adjusted discount rate, due on earn out periods to 31 December
2017 and 31 December 2018. The two contingent payments are payable
in cash on the achievement of specific profit based performance
targets which we expect to be achieved based on current business
forecasts. Accordingly, the full contingent consideration liability
has been recognised at its fair value.
Fair values
Acquiree's identifiable net assets at the GBPm GBPm
acquisition date:
Intangible assets - acquired 2.0
Trade and other receivables 0.5
Cash 0.1
Creditors & accruals (0.7)
Net identifiable assets 1.9
Goodwill on acquisition 2.3
----------------------------------------------------- ---- -----------
Total consideration 4.2
----------------------------------------------------- ---- -----------
Satisfied by: Initial cash consideration 2.9
----------------------------------------------------- ---- -----------
Deferred cash consideration (no impact
from discounting) 1.3
----------------------------------------------------- ---- -----------
4.2
---------------------------------------------------- ---- -----------
Net cash outflow 2.9
----------------------------------------------------- ---- -----------
Cash acquired 0.1
----------------------------------------------------- ---- -----------
Net cash outflow excluding cash acquired 2.8
----------------------------------------------------- ---- -----------
The goodwill of GBP2.3m represents the benefits expected to be
generated from sales and profit growth from the wider NCC customer
base in the US market. The goodwill is expected to be deductible
for tax purposes. Acquisition costs relating to professional fees
totalling GBP0.2m were incurred and are recognised as individually
significant items in the income statement (note 3). The Group's
consolidated income statement includes six full months of
post-acquisition trading, with VSR contributing revenue of GBP1.1m
and operating profit of GBP0.5m.
Fox-IT Holdings BV
In the prior year, NCC Group (Solutions) Limited acquired Fox-IT
Holdings BV, a company based in the Netherlands. Fox-IT has a
leading market position in Europe for high-end Cyber Security
solutions and is a leading European provider of Advanced Incident
Response Services. Fox-IT's activities of Advanced Threat
Protection, Threat Intelligence and Web/Mobile Event Analytics,
High Assurance and Secure Infrastructure, provide further depth to
NCC's cyber and assurance services and growth opportunities from
new markets.
The consideration for the acquisition of Fox-IT was
EUR108,250,000 initial cash, with deferred payments due on each of
the first and second anniversaries of completion comprising,
EUR10,000,000 cash and EUR2,500,000 newly issued NCC Group plc
shares each. The first deferred payment was paid in November 2016
and the Directors agreed to make this payment fully in cash
consideration. Accordingly, a payment of EUR12,500,000 was made to
the former owners.
The acquisition had the following effect on the Group's assets
and liabilities:
Fair values
Acquiree's identifiable net assets at the GBP'000 GBP'000
acquisition date:
Plant and equipment 1.9
Intangible assets - development 1.7
Intangible assets - acquired 25.4
Trade and other receivables 7.3
Inventory 0.4
Deferred tax liability (6.0)
Cash 1.8
Creditors & accruals (7.5)
Deferred revenue (2.1)
Net identifiable assets 22.9
Goodwill on acquisition 70.9
-------------------------------------------------------------------- ------- -----------
Total consideration 93.8
-------------------------------------------------------------------- ------- -----------
Satisfied by: Initial cash consideration 76.6
-------------------------------------------------------------------- ------- -----------
Deferred cash consideration 14.4
-------------------------------------------------------------------- ------- -----------
Deferred issue of equity shares consideration 3.6
-------------------------------------------------------------------- ------- -----------
Finance discount on deferred consideration (0.8)
-------------------------------------------------------------------- ------- -----------
93.8
------------------------------------------------------------------- ------- -----------
Net cash outflow 76.6
-------------------------------------------------------------------- ------- -----------
Cash acquired (1.8)
-------------------------------------------------------------------- ------- -----------
Net cash outflow excluding cash acquired 74.8
-------------------------------------------------------------------- ------- -----------
The fair value of trade and other receivables represents GBP7.5m
of gross contractual receivables and a provision for doubtful debts
of GBP0.2m.
The goodwill of GBP70.9m represents the value to be generated
from cross-selling Fox-IT products and services to existing group
customers, sales growth from new customers in wider geographic
markets and from future product development using the knowledge and
expertise of the Fox-IT technical team. The goodwill is not
expected to be deductible for tax purposes. Acquisition costs
relating to professional fees totalling GBP1.9m were incurred and
are recognised as individually significant items in the income
statement account (note 3).
The Group's prior year consolidated income statement includes
six month's post acquisition trading, with Fox-IT contributing
GBP14.0m revenue and GBP1.3m operating profit. The combined results
of NCC and Fox-IT B.V. for the twelve month period ending 31 May
2016 were revenue of GBP218.2m and operating profit before
individually significant items of GBP30.5m.
The balances presented below are valued at the fair value of
amounts payable and in respect of contingent consideration on
acquisitions. The contingent consideration is stated at the maximum
amount payable as it is believed that on current trading
performance the full contingent consideration will be due.
2017 2016
Contingent consideration GBPm GBPm
FortConsult A/S - 1.8
Payment Software Company 2.8 -
Virtual Security Research 1.3 -
ArmstrongAdams Limited - 1.7
4.1 3.5
------------------------------------------- ------ ------
The amounts outstanding in May 2016 in
respect of FortConsult A/S and Armstrong
Adams Limited were paid in full during
the year
2017 2016
Deferred consideration GBPm GBPm
Fox-IT Holdings B.V. 10.7 18.5
10.7 18.5
------------------------------------------- ------ ------
13 Deferred tax assets and liabilities
Group
Recognised deferred tax assets and liabilities are attributable
to the following:
Assets Liabilities Net
2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Plant and equipment - - (1.9) (2.2) (1.9) (2.2)
Short term temporary
differences 1.4 1.8 - - 1.4 1.8
Intangible assets - - (12.3) (13.3) (12.3) (13.3)
Share based payments 0.3 0.8 - - 0.3 0.8
Tax losses 2.5 2.7 - - 2.5 2.7
Deferred tax asset/(liability) 4.2 5.3 (14.2) (15.5) (10.0) (10.2)
------------------------------- ---- ---- ------ ------ ------ ------
Movement in deferred tax during the year:
1 June Recognised Exchange Recognised 31 May
2016 in income differences in equity Acquisitions 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Plant and equipment (2.2) 0.3 - - - (1.9)
Short term temporary
differences 1.8 (0.4) 0.1 - - 1.4
Intangible assets (13.3) 3.1 (0.9) - (1.2) (12.3)
Share based payments 0.8 (0.1) - (0.4) - 0.3
Tax losses 2.7 (0.2) - - - 2.5
(10.2) 2.7 (0.9) (0.4) (1.2) (10.0)
--------------------- ------ ---------- ------------ ---------- -------------- ------
1 June Recognised Exchange Recognised 31 May
2015 in income differences in equity Acquisitions 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Plant and equipment (0.4) (1.8) - - - (2.2)
Short term temporary
differences 0.5 0.8 0.1 - 0.4 1.8
Intangible assets (9.7) 3.3 (0.5) - (6.4) (13.3)
Share based payments 0.5 (0.1) (0.1) 0.5 - 0.8
Tax losses 3.3 (0.6) - - - 2.7
(5.8) 1.6 (0.5) 0.5 (6.0) (10.2)
---------- ------------ ---------- --------------
The Group has recognised a deferred tax asset of GBP2.5m (2016:
GBP2.7m) on tax losses as management consider it probable that
future taxable profits will be available against it can be
utilised. The Group has not recognised a deferred tax asset on
GBP6.2m (2016: GBP5.7m) of tax losses carried forward due to
uncertainties over their future recovery.
Included in recognised and unrecognised tax losses are losses of
GBP2.9m that will expire in 2034 (2016: GBP3.5m). Other losses may
be carried forward indefinitely.
No deferred tax liability is recognised on temporary differences
of GBPnil (2016: GBP0.2m) relating to the unremitted earnings of
overseas subsidiaries as the Group is able to control the timing of
the reversal of these temporary differences and it is probable that
they will not reverse in the foreseeable future.
14 Trade and other payables
Group Group Company Company
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
Trade payables 4.3 7.9 - -
Consideration on acquisitions
(note 12) 12.9 3.5 - -
Non trade payables 6.7 7.6 - -
Accruals 18.7 16.1 - -
Property provisions (note
16) 1.5 - - -
Intercompany payables - - - 10.6
44.1 35.1 - 10.6
15 Deferred revenue
Group Group
2017 2016
GBPm GBPm
Deferred revenue 35.6 36.3
Deferred revenue consists of: Escrow agreements GBP13.5m (2016:
GBP13.2m), Assurance contracts GBP19.2m (2016: GBP17.1m), Website
monitoring and load testing agreements of GBP2.9m (2016: GBP3.4).
There are no Domain services deferred revenue contracts as the
entity was disposed of during FY17 (2016: GBP2.6m). The revenue has
been deferred and is released to the income statement over the
contract term in accordance with the Group's accounting policy.
16 Non-current liabilities
Group Group
2017 2016
GBPm GBPm
Secured and interest bearing
bank loan 56.0 33.4
Deferred tax (note 13) 14.2 15.5
Consideration on acquisitions
(note 12) 2.1 18.5
Property provisions 3.5 0.4
Total non-current liabilities 75.8 67.8
Total Property provisions of GBP5.0m represents capital
contributions of GBP3.7m towards fit out costs on the new
Manchester Head Office building and a rent free allowance of
GBP1.3m which is being amortised over the period of the lease. The
capital contribution provision of GBP3.7m will be released to the
Income Statement over the same period as the assets in question are
being depreciated (i.e. 10 years).
17 Cash and cash equivalents
Cash flow from operating activities Notes 2017 2016
GBPm GBPm
(Loss)/profit for the year (56.6) 6.3
Adjustments for:
Depreciation 10 5.2 3.7
Depreciation - individually significant item 3 0.9
Share based charges 0.6 1.1
Amortisation of intangible assets 9 13.8 8.4
Net financing costs 1.9 2.0
Profit on sale of plant and equipment 4 (0.1) (0.1)
Impairment of intangible assets 3 7.7 6.9
Impairment of goodwill 3 54.3 11.9
Other individually significant items 6.0 (6.0)
Profit on disposal of subsidiaries 5 (1.2) -
Income tax expense 6 1.3 3.1
--------------------------------------------- ----- ------ -----
Cash inflow for the year before changes in
working capital 33.8 37.3
--------------------------------------------- ----- ------ -----
At beginning Cash flow Non cash At end
of year items of
Year
GBPm GBPm GBPm GBPm
Cash and cash equivalents per
cash flow statement 20.7 (6.0) (2.4) 12.3
Non-cash items principally relate to the effects of foreign
currency.
18 Related party transactions
During the year corporate finance fees of GBP0.3m (2016:
GBP0.8m) and professional fees for services of Paul Mitchell of
GBPnil (2016: GBP37,500) as Non-Executive Chairman were paid to
Rickitt Mitchell & Partners Ltd. Paul Mitchell held the
positions of Non-Executive Chairman of NCC until 31 May 2017 and is
a Non-Executive Chairman of Rickitt Mitchell & Partners
Ltd.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR GUGDRIDBBGRI
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