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Craneware plc   -  CRW   

Final Results

Released 07:00 03-Sep-2019

RNS Number : 9721K
Craneware plc
03 September 2019
 

 

 

Craneware plc

("Craneware", "the Group" or the "Company")

 

Final Results

 

3 September 2019 - Craneware (AIM: CRW.L), the market leader in Value Cycle software solutions for the US healthcare market, announces its audited results for the year ended 30 June 2019.

 

Financial Highlights (US dollars)

·      Revenue increased 6% to $71.4m (FY18: $67.1m)

·      Adjusted EBITDA1.  increased 11% to $24.0m (FY18: $21.6m)

·      Profit before tax of $18.3m (FY18: $18.9m) the reduction being as a result of $1.2m one-off costs related to a significant proposed acquisition that the Board decided not to enter into during the year

·      Basic adjusted EPS2. increased 5% to $0.633 (FY18: $0.602) and adjusted diluted EPS increased to $0.620 (FY18: $0.591)

·      Renewal rate remains above 100% by dollar value

·      Three Year Total Visible Revenue of $200.1m (FY18 same 3 year period: $191.0m)

·      Operating cash conversion at 63% of Adjusted EBITDA - further $8.5m collected post year end - equating to 98% conversion

·      Cash at year-end of $47.6m (FY18: $52.8m) after having returned $8.5m to shareholders via dividends

·      Proposed final dividend of 15.0p (19.05 cents) (FY18: 14.0p, 18.48 cents) per share giving a total dividend for the year of 26.0p (33.02 cents) (FY18: 24.0p, 31.68 cents) per share

 

1.  Adjusted EBITDA refers to earnings before interest, tax, depreciation, amortisation, exceptional costs and share based payments.

2.  Adjusted Earnings per share (EPS) calculations allow for the tax adjusted acquisition costs and share related transactions together with amortisation on acquired intangible assets.             

 

Operational Highlights

 

·    Ongoing transition of the US healthcare market to value-based care, supporting Craneware's software product suite

·      Sales in the year amounted to $63.1m (FY18: $98.6m, FY17: $54.0m)

·      Sales of Trisus Enterprise Value Platform products represented 13% of new sales in the year (FY18: 4%)

·      Healthy sales mix, with 45% of sales relating to new customers

·      Continued investment in R&D and innovation to capitalise on growing market opportunity

·    Supportive market environment, with existing customers and wider healthcare market responding positively to the enhanced solution set delivered on the Trisus platform

 

 Outlook

 

·      We continue to sign contracts with hospitals of all sizes and have had a strong start to the year

·      Confident outlook, supported by strong sales pipeline

 

Keith Neilson, CEO of Craneware plc commented,

 

"The ongoing transition to value-based care is a powerful underlying driver for our software, as healthcare providers seek the means not only to survive but thrive in this new era. We are committed to providing our customers with the tools they require to continue to deliver outstanding care to their communities and are passionate about the central role we will play in this substantial evolution of the US healthcare market.

 

"While growth in the year was lower than originally anticipated, renewal levels remained strong and our Trisus related sales and revenues continued to increase, providing us with a strong platform for the future. We have entered the new financial year with an uptick in sales momentum.

 

"We are focused on the delivery of our growing opportunity and have the correct strategy to succeed. With growing levels of contracted future revenue, strong operating margins, healthy cash balances and a growing sales pipeline, we look to the coming years with confidence and high levels of excitement for the opportunity ahead."

 

 

 

For further information, please contact:

 

 Craneware plc

Peel Hunt        

Investec Bank

Alma

 

(NOMAD & Joint Broker)

(Joint Broker)

(Financial PR)

+44 (0)131 550 3100

+44 (0)20 7418 8900

+44 (0)20 7597 5970

+44 (0)203 405 0205

Keith Neilson, CEO

Dan Webster

Patrick Robb

Caroline Forde

Craig Preston, CFO

George Sellar

Sebastian Lawrence

Hilary Buchanan

 

Guy Pengelley

Henry Reast

Helena Bogle

 

 

 

About Craneware

 

Craneware enables healthcare providers to improve margins and enhance patient outcomes so they can continue to provide quality outcomes for all.

 

Craneware is the leader in automated Value Cycle solutions that help US Healthcare provider organisations discover, convert and optimise assets to achieve best clinical outcomes and financial performance. Founded in 1999, Craneware is headquartered in Edinburgh, Scotland with offices in Atlanta and Pittsburgh employing over 350 staff. Craneware's market-driven, SaaS solutions normalise disparate data sets, bringing in up-to-date regulatory and financial compliance data to deliver value at the points where clinical and operational data transform into financial transactions, creating actionable insights that enable informed tactical and strategic decisions. To learn more, visit craneware.com and thevaluecycle.com.

 

 Learn more at www.craneware.com.

 

 

 

 

Chairman's Statement

 

2019 saw Craneware celebrate its 20th birthday. From an idea in 1999 to use software to automate the maintenance of a hospital's central database of billing codes, Craneware has grown to become a trusted partner to over a third of all US hospitals, its software providing insight into an increasing number of areas in their businesses. The Company has continued to make good progress against its long-term strategy: to build upon its central position to profoundly impact healthcare, by providing data and applications to improve margins and enhance patient outcomes. The fundamentals of the business remain strong, and the opportunity significant.

 

Although lower than originally anticipated, revenue increased 6% to $71.4m (FY18: $67.1m) and adjusted EBITDA increased 11% to $24.0m (FY18: $21.6m). The Group had cash reserves at the end of the year of $47.6m, after having returned $8.5m to shareholders via dividends, while also investing a further $9.6m in the development of new products.

 

Sales in the year amounted to $63.1m (FY18: $98.6m, FY17: $54.0m). These sales add another layer to our visible future revenue, which now stands at over $200m for the three year period to 30 June 2022. Renewal levels continued to be comfortably within our historic norms, at 101%.

 

Central to the Group's growth strategy in recent years has been the evolution of its product suite from on premise point solutions to a comprehensive cloud-based platform, the Trisus Enterprise Value Platform. Trisus will enable Craneware's customers to harness the power of the wealth of data generated across all areas of the hospital. It sits as the intelligence layer across all other software systems, delivering the information required to improve financial and operational performance.

 

The first product on the Trisus platform was launched at the beginning of FY18, and a further three have been launched in the financial year under review. It would now appear that the speed with which we launched these latter three products caused some temporary "indigestion" both within our sales team and our customer base which we are systematically working through.  The response to Trisus from our customers continues to be extremely positive, with the vast majority now interacting with the platform via the Trisus Bridge, a connector layer linking their existing on-premise Craneware solutions to the enhanced functionality of Trisus in the cloud.

 

Alongside our strategies for technology innovation and organic growth, we continue to monitor potential acquisitions. With our healthy cash balance and a $50m funding facility in place, we have the resources to execute should an appropriate acquisition target arise. As in prior years, strict criteria continued to be applied to evaluating potential acquisition targets ensuring that they would enhance our hospital footprint, data sets or our product roadmap so that they are quickly accretive to both the financial and operational strength of the Group. No target consistently met this high bar in more than one of these areas in the year.

 

The Board continues to look to the future with confidence. Craneware has a significant and growing sales pipeline, which the team is focused on converting. The market's requirement for greater insight into cost, margin and the value being derived from healthcare is as high, if not higher, than ever. The Trisus platform differentiates us from other healthcare solutions vendors, providing substantial benefits for our customers and making a meaningful impact on the value of healthcare as a whole. This will result in extensive improvements to the financial effectiveness of US hospital providers and thereby drive significant customer demand for Craneware solutions in the future.

 

When I joined Craneware as Chairman at the time of the Initial Public Offering in 2007, it was clear that the Company had exciting prospects and its success would be determined by how well the Company could execute. It is very pleasing to see the progress Craneware has made over the last 20 years, especially its ability to continue to evolve, identify opportunities and more importantly capitalise on them. The Company is entering a new phase and I feel that now is an appropriate time for me to hand the "baton" on to a new Chairperson at the forthcoming AGM in November 2019, and as such I will not be seeking re-election. The search for my successor has already begun and we will update shareholders at the appropriate juncture.

 

I would like to thank all our employees across the UK and US for their hard work throughout my 12 years of tenure and special thanks to my colleagues on the Board. Equally, I thank our customers and shareholders for their ongoing support.

 

George Elliott

Chairman

2 September 2019

 

 

 

Strategic Report

 

20 years ago we were the first to market with a software tool to automate the management of the chargemaster. Building from an initial customer base of just a handful of hospitals, we have grown to providing three families of solutions, aimed at improving the value that can be achieved from every dollar spent on healthcare. Now being used in approximately a third of all US hospitals, our journey continues as we continue to grow that customer base and widen our impact on the value that each of those customers can deliver to their patients. Throughout this time, we have been committed to being at the forefront of innovation within a hospital's finance function and in recent times have turned our attention to improving our hospital customers' operational efficiency. Once more it has been impressive to see the outstanding work carried out by our innovation, delivery and development teams, ensuring we further our reputation as thought-leaders and innovators in our field. 

 

This commitment to innovation saw us launch the Trisus Enterprise Value Platform, a cloud-based financial and operational management platform specifically designed to address the challenges arising in the new era of value-based care. The Trisus platform provides insight into all areas of financial and operational risk within a hospital, sitting as an intelligence layer across a myriad of other software systems, extracting data, normalising it and then applying analytical tools to help improve hospital performance.

 

This powerful platform has been built from the bottom up, enabling the migration of our existing customers from their on premise solutions into the cloud with the development of several new solutions built on the substance of our legacy products. We are just at the start of our Trisus journey and are excited by the sizeable and significantly growing opportunity ahead of us.

 

Market - the move to value-based care continues at pace

 

The US healthcare market continues to transition from a fee-for-service reimbursement model, towards value-based care, aiming to redress the current imbalance in the US between spend and outcomes. The US has the highest spend per capita on healthcare but ranks only 37th in the world for outcomes.

 

Healthcare providers across the country are being asked by the government and the insurance companies to justify the care they provide or risk the withholding of payment. Meanwhile healthcare consumers are expecting a greater transparency on costs and the ability to 'shop around' for the services they require. An example of the growing pressures on hospitals includes the introduction in June 2019 of an Executive order from the President of the United States to drive greater transparency in pricing and quality. As a result of these market shifts, US hospital management teams require a greater level of insight than ever before into the costs and value being derived from the care they provide. They need to understand where their organisations are at financial risk, so that they can protect their margins, to ensure they are in a position to continue to deliver quality care to their communities both now and in the future. 

 

The proportion of value-based care payments is increasing each month, as the industry moves to this new reimbursement model. From data compiled by the Catalyst for Payment Reform group, in 2010, 1 to 3% of all payor contracts had a value-based care or quality driven modifying metric for payment. In the last two years this has rapidly increased as confirmed by many of the largest US healthcare insurance companies. Aetna, Inc. recently confirmed that approximately 53% of their 2018 claims payments were made to value-based providers and they are committed to increasing that number to 75% by 2020. United Health Group is currently paying more than 60% of their claims via value-based contracts and Anthem, Inc. underlined the size of spend they now have associated with value-based contracts, stating they currently have more than 66% of their total medical spend tied to payment innovation contracts. Their Enhanced Patient HealthCare (EPHC) program of private value-based care is one of the largest nationally, having grossed $1.8bn of savings for Anthem clients since 2014.

 

It is clear that value-based care is here for the long-term. However, the ultimate success of value-based care will be reliant on the industry having access to granular data and insightful analytics to identify opportunities to deliver better value. As a result, the US healthcare analytics sector is forecast by US research firm MarketsandMarkets to grow 27.3% CAGR from $9.0bn in 2017 to $29.8bn by 2022. This is a large, growing opportunity for Craneware given our specialism in helping hospitals better understand and manage revenue and cost through data-driven solutions.

 

Strategy

 

Product innovation to revolutionise healthcare finance and expand our addressable market

 

Our strategy is to continue to build on our established market-leading position in revenue cycle solutions to expand our product suite coverage of the Value Cycle. The Value Cycle describes the full life cycle of optimising every opportunity to achieve the best outcome for the best cost.  It includes traditional revenue components such as pricing, charge capture, claims performance and compliance, but also addresses additional dimensions, such as: quality of care, patient satisfaction and engagement, clinical outcomes, operational efficiency and risk management.

 

We will continue to follow a 'land and expand' customer strategy. We will use the breadth of our product suite and depth of our long-term product vision to bring new customers into the Group, at increasing average contract sizes, while seeking opportunities to sell additional products to our existing customer base. In the long-term, we believe we have the opportunity to increase average annual licence fees up to 10x through much broader adoption of the Trisus platform tied directly to an ongoing and increasing ROI model for our customers. Our customers' success will be our success.

 

Demonstrable and compelling ROI

 

Each of our products has the ability to deliver many times over its cost in terms of protected or increased revenue or margin for our customers, in the first year alone.

 

Strong competitive position

 

The focus of the new products we are developing is to target 'green field' opportunities, where there is little or no existing competition. The breadth of our offering, combined with 20 years of data within a sophisticated cloud platform, provides us with a strong competitive position across our target product areas.

 

Working in partnership with customers

 

Our innovation is being carried out alongside our customers, to ensure we are providing them with the tools they need, addressing the key areas of risk in their operations. Our high levels of customer renewals, consistently high customer support scores and longevity of customer relationships demonstrate the partnership role we have with our customers.

 

Investing in R&D to fulfil our vision

 

Our investment in R&D will continue to grow, in line with revenue growth, as we fulfil our vision for Trisus. We are required to capitalise a certain proportion of this investment relating to the products where clear future revenue potential has been identified and therefore are deemed to be an asset to the business.  We are delighted to report that in the three months since launch, the Trisus Pricing Analyser product has already covered its development costs through the total value of contracts signed, demonstrating both the quality of the development work and its relevance to the market.

 

Potential to augment organic growth through acquisitions

 

The Board continues to assess acquisition opportunities to complement the Group's organic growth strategy and increase its product coverage of the Value Cycle. The Board adheres to rigorous criteria to evaluate acquisition opportunities, including quality of earnings, customer relationships, strategic fit and product offering. In addition to the Group's cash reserves, an undrawn $50 million funding facility provides the Group with available resources to carry out strategic acquisitions if, and when, these criteria are met. Areas for consideration include: competitors who bring market share; businesses with complementary data sources or products; and international companies with complementary product suites of benefit to our customers, who do not have a foothold in the US. The Group reviewed a substantial transaction during the year that appeared to meet several of these criteria. However, following extensive due diligence and legal process over several months, it was decided that there was not sufficient assurance of enhanced shareholder value to merit progressing with the transaction.

 

Annuity SaaS business model provides a strong foundation for the business

 

We sign long-term, multi-year contracts, based on the annuity SaaS model, providing the business with high levels of revenue visibility and the comfort to be able to continue to invest in innovation. As we introduce new solutions on the Trisus platform we continue to see some variability in contract lengths, however as anticipated the key renewal dollar value statistics remains comfortably above the middle of our historic range.

 

The business benefits from strong SaaS economics, with the lifetime value of the current contract base significantly higher than the cost of acquiring customers.

 

Product Roadmap

 

We continue to make progress in all areas of our product roadmap: the development of our cloud-based Trisus Enterprise Value Platform; the continued evolution and support of our existing market-leading product suite as we migrate to Trisus; and the development of new products to sit upon the Trisus platform. All of these solutions will increase our coverage of the key areas of the Value Cycle and therefore increase our addressable market.

 

Trisus Enterprise Value Platform

 

This cloud-based platform provides an expanding suite of solutions focused on healthcare providers to identify and take action on risks related to revenue, cost and compliance, leading to optimised operations within the Healthcare provider. It is designed to be versatile and expandable, growing alongside our customers as the healthcare industry continues to evolve. The platform provides an environment to gather, process, and deliver data across the continuum of care with an open architecture and common components, allowing for synergies between applications.

 

We are particularly pleased to note how both our existing customer base and the wider healthcare provider market have responded positively to the technological evolution of the Craneware solution set, delivered on the Trisus platform. The Trisus Bridge, the connector layer linking our customers' existing on-premise Craneware solutions to the advanced functionality of Trisus in the cloud has proven a valuable introduction to customers on the potential benefits the platform can offer them. Greater than 95% of our customer base is now submitting at least part of their data to the Trisus platform via the Trisus Bridge.  Over 90% of our existing customers have converted or are in the process of converting to Single Authorisation via the Trisus platform which is the first step for significant migration to the platform from within our user base. We are confident the remaining customers will make this step over the coming months.  These positive metrics bode well for the future transition to Trisus.

 

We now have four products live on Trisus: Trisus Claims Informatics, Trisus Supply, Trisus Pricing Analyzer and Trisus Healthcare Intelligence, with the latter three all entering full marketing mode through the course of the year.

 

We are executing on a roadmap to migrate all our solutions onto the Trisus platform and continue to look for innovative combinations of our data sets into new unique product offerings. As part of this roadmap we expect to see further hybrid solutions combining: the best of existing software regardless of the development origin, including outside of Craneware; elements of the Trisus platform; new Trisus products; and new early adopter Trisus enabled versions of other existing solutions.

 

Trisus® Healthcare Intelligence

 

Trisus® Healthcare Intelligence is a decision support tool that integrates revenue, cost, clinical and hospital operational information for each patient encounter, throughout the journey of their medical condition. It accumulates all patient costs from patient activities and services consumed during their care to allow the healthcare provider to optimise hospital operations. The aim of the tool is to provide our customers with an understanding of the true cost of care by understanding all the elements of every episode of care given to their patients so they can identify what most affects financial and clinical outcomes and put in place improvement programmes to effect those changes.

 

Most hospitals' accounting systems account for cost in aggregate and average these, allocating costs on a volumetric basis. This structure, while useful in a fee-for-service system and for basic forecasting, financial projections and budgeting, does not adequately support the shift to a quality-centric healthcare delivery system that provides true value, where a greater degree of insight and thereby more granularity of the data is required.

 

Healthcare Intelligence is therefore a vital component within the emerging value cycle solutions market, representing a market opportunity several times larger than that of our existing product portfolio.

 

We now have three existing customers on multi-year contracts for the solution with a growing pipeline of additional opportunities. Our initial customers for this solution are using it to improve the operations of their hospitals and working with Craneware to provide use cases that can be utilised across future customers and in marketing the products further.

 

The benefits already being delivered to these organisations is meaningful. Within two small sub-groups of observation status patients at a medium-sized acute care hospital in the Northeast, the implementation of Trisus Healthcare Intelligence Cost Analytics and Decision Support found that the hospital had been under-reimbursed by up to $1m over a 9-month period. This was due to the patients' status not being correctly upgraded despite the higher levels of treatments they received. 

 

At a medium-sized acute care hospital in the Midwest, an analysis of two Diagnosis Related Groups identified one sample with a significant margin loss per case. Margin was being lost due to the hospital applying a particular reimbursement code, where another, just as applicable, code would have more accurately reflected the level and cost of care provided.  It was identified that the change of code, and an increase in certain efficiencies, would have resulted in additional revenue of up to $1.4m for just this one sample of patients.

 

From the pipeline of opportunities that have grown for this product we are very pleased with the effectiveness of our investment in this product area and believe that we will be able to report that we will see a return on this investment within a relatively short period of time.

 

Sales and Marketing

 

The positive sales momentum experienced in the first half of the year was impacted as the market digested the release of three new Trisus products. While this situation began to rectify towards the end of the year, it caused our level and timing of sales for the year to be below our initial expectations. The added options presented to customers towards the end of their contract negotiation caused additional product reviews, discussion of new pricing options and revised legal contracts, thereby extending the signing process.

 

Our annuity SaaS business model protects the business to a certain extent from 'lumpy' licence sales, although the timing of sales directly impacts the revenue growth of the Company in any one year (and for the subsequent period) through delayed subscription revenue and lower service revenue recognisable in the period. These factors are being successfully worked through, with a strong level of sales secured at the start of the year. For our growing number of future opportunities, we have devised strategies to mitigate these factors, such as more standardised legal frameworks and Service Level Agreements for our cloud based solutions.   

 

We continued to sign contracts with hospitals of all sizes and have continued to do so in the first few months of the current year, having had a strong start to the year and the sales pipeline continues to grow.

 

Our sales in the year continued to support our 'land and expand' strategy, with 45% of sales in the year coming from new customers, providing a foundation for future growth, and the remaining 55% being additional products to existing customers both as they are renewing their existing licences and throughout the life of their original contracts.  Pharmacy ChargeLink has also continued its leading performance from last year.

 

Whilst the launch of our new Trisus products did lead to some sales indigestion, we have seen early positive signs from the market to these products.  As a result, sales of Trisus products represented 13% of our new sales in the year increasing from 4% in the prior year.

 

 

Financial Review

 

Revenue grew 6% to $71.4m (FY18: $67.1m) and adjusted EBITDA grew 11% to $24.0m (FY18: $21.6m).  Whilst this growth is lower than we originally anticipated, we have continued to make progress in the year which includes making significant investments into our Trisus Enterprise Value Platform and the products that both sit on and interact with this platform.  Our three year revenue visibility KPI has crossed the record level of over $200m of visible revenue for the three year period to 30 June 2022 against which we can plan our future investments and we maintain a strong balance sheet with healthy cash reserves to support our future growth.

 

It is especially pleasing to be able to report continuing momentum with our Trisus strategy.  In addition to the three new products launched in the year (making a total of four Trisus products now being generally available), we have over 95% of our customer base interacting in some way with the Trisus platform through our Trisus Bridge and the total proportion of our new sales being Trisus products has increased to 13% of our total new sales from 4% in Financial Year 2018. 

 

The total value of contracts signed in the year was $63.1m (FY18: $98.6m, FY17: $54.1m).  A contributing factor to this result being below that of the prior year has been both the timing and contract lengths of our underlying sales. As previously detailed, with the launch of three new Trisus products in the year we experienced 'indigestion' within both our own direct sales teams and our customer base. In addition, as anticipated, the average contract length for new sales reduced from five to four years, in line with our Trisus migration strategy. We continue to renew our existing customers at over 100% dollar value and do not attribute any increasing risk to this variability in contract length during this migration period.

 

We have continued to see new sales successes in the year, signing $33.3m of new total contract value with new and existing customers. Within these new sales there has been a healthy mix between sales to new customers and sales of additional products to existing customers.  45% of our new sales have been with new hospitals customers which further expand our hospital footprint and provide further future cross selling opportunities.  With the remaining 55% of our new sales coming from our existing customer base taking further products from our portfolio, these additional cross selling activities occur both as our customers renew their contracts (representing 41% of new sales) as well as throughout the life of their existing contracts (representing 14% of new sales). 

 

At the end of an existing customer's initial licence period, or at a mutually agreed earlier date, we renew our licences with our customers. These renewals contributed an additional $29.8m to sales in the period.  By renewing these contracts, we are sustaining our underlying revenue base, onto which we are then layering new hospital sales.  It is for this reason we measure our renewal rates by dollar value. We do this by measuring the 'last annual value' of all customers due to renew in the current year and compare it to actual value these customers renew at (in total), including up-sell and cross-sell.  This metric for the FY19 is 101%.

 

As demonstrated by the numbers reported above, and as a result of our business model, "sales" and "revenue" have very different meanings to the Group and are not interchangeable. In fact, only a small proportion of the revenue resulting from any sale made in the year will be recognised in the year of sale.  Instead the vast majority of revenue resulting from any sale is recognised over future years, supporting future growth.

 

Through our business model and resulting revenue recognition, the Group ensures that it is focused on building its underlying annuity revenue base to deliver sustainable growth.

 

IFRS 15 & Our Business Model

 

IFRS 15 "Revenue from contracts with customers" is effective for accounting periods that began on or after 1 January 2018 and as such this new standard has been adopted in the current year.  Under this standard revenue is recognised using a five-step model, requiring the transaction price for each identified contract to be apportioned to separate performance obligations arising under the contract.  Revenue is recognised either when the performance obligation in the contract has been performed (point in time recognition) or over time as control of the performance obligation is transferred to the customer.

 

The new contracts we sign with our customers provide a licence for the customer to access specified products throughout their licence period. This licence period on average, for a sale to a new customer, has historically been five years. In calculating averages, we only take the contract length up to the first renewal point/break clause for that specified product. 

 

Under the Group's 'Annuity SaaS' business model we have always recognised software licence revenue and any minimum payments due from our 'other route to market' contracts evenly over the life of the underlying contract term.

 

As well as the incremental licence revenues we generate from each new sale, we normally expect to deliver an associated professional services engagement to assist our customers.  This engagement focuses on embedding the software within the customers' core processes to maximise the value the software can bring to them. This revenue is typically separately identifiable from the licence and is recognised as we deliver the service to the customer, usually on a percentage of completion basis. The nature and scope of these engagements will vary depending on both our customers' needs and which of our solutions they have contracted for. As a result of the nature of professional services engagement, the period over which we deliver the services and consequently recognise the associated revenue will vary, however we would normally expect to recognise this revenue over the first year of the contract.   In any individual year, we would normally expect around 10% to 20% of revenues reported by the Group to be from services.

 

Our Annuity SaaS business model and the revenue recognition methodology we have historically adopted is consistent with the aims and requirements of IFRS15 and as such our adoption of this standard in the current financial year has not resulted in any material difference to how we recognise and report our revenues.

 

Sales, Revenue and Revenue Visibility

 

The table below shows the total value of contracts signed in the relevant years, split between sales of new products (to both new and existing hospital customers) and the value of renewing products with existing customers at the end of their current contract terms, and how these sales have translated into reported revenue in the corresponding year.

 

Fiscal Year

2015

2016

2017

2018

2019

 

$m

 

$m

$m

$m

$m

Reported Revenue

44.8

49.8

57.8

67.1

71.4

 

 

 

 

 

 

New Product Sales

35.9

58.6

35.4

71.3

33.3

Renewals*

37.0

23.7

18.6

27.3

29.8

Total Contract Value (TCV)

72.9

82.3

54.0

98.6

63.1

 

*  During the product migration to the Trisus Platform we anticipate and have experienced variability in the average contract length in any single reporting period which will impact the Total Contract Values reported

** As the Group signs new customer contracts for between three to nine years, the number and value of customers' contracts coming to the end of their term ("renewal") will vary in any one year. This variation, along with whether customers auto-renew on a one year basis or renegotiate their contracts for up to a further nine years, will impact the total contract value of renewals in that year

 

As the majority of the revenue resulting from sales in any one year is recognised over future years, the financial statements do not fully reflect the valuable 'asset' that is contracted, but not yet recognised, revenue. As such, at every reporting period, the Group presents its "Revenue Visibility".  This KPI identifies revenues which we reasonably expect to recognise, as of the first day of the new Fiscal Year, over the next three year period, based on sales that have already occurred.

 

Through this metric we can demonstrate how the underlying annuity base of revenue continues to build as we sign new multi-year contracts with our customers and at the end of these contracts by, on average, renewing these customers at 100% of dollar value.  In producing this KPI we assume customers will renew at 100% of dollar value as they fall due, which again is why we report our dollar value of renewals at each reporting period.  Our historical norms for this metric being between 85% and 115%, with the longer term average being above 100%.

 

The Three Year Revenue Visibility KPI is a forward looking KPI and therefore will always include some judgement.  To help assess this, we separately identify different categories of revenue to better reflect any inherent future risk in recognising these revenues.  This Three Year Visible Revenue metric includes:

 

•           future revenue under contract

•           revenue generated from renewals (calculated at 100% dollar value renewal)

•           other recurring revenue

 

Future revenue under contract is, as the title suggests, subject to an underlying contract and therefore once invoiced will be recognised in the respective future years (subject to future collection risk that exists with all revenue). Renewal revenues are contracts coming to the end of their original contract term (e.g. five years) and will require their contracts to be renegotiated and renewed for the revenue to be recognised. As this category of revenue is assumed to renew at 100% of dollar value, we consistently monitor and publish this KPI (at each reporting period) to ensure the reasonableness of this assumption.  The final category, other recurring revenue, is revenue that we would expect to recur in the future but is monthly or transactional in its nature and as such there is increased potential for this revenue not to be recognised in future years, when compared to the other categories.

 

The Group's total visible revenue for the three years as at 30 June 2019 (i.e. visible revenue for FY20, FY21 and FY22) identifies $200.1m of revenue which we reasonably expect to benefit the Group in this next three year period. This visible revenue breaks down as follows:

 

·      future revenue under contract contributing $140.2m of which $60.0m is expected to be recognised in FY20, $46.0m in FY21 and $34.2m in FY22

·      revenue generated from renewals contributing $59.2m; being $7.3m in FY20, $19.9m in FY21 and $32.0m in FY22

·      other revenue identified as recurring in nature of $0.7m

 

Gross Margins

 

Typically, we expect the gross profit margin to be between 90% to 95% reflecting the incremental costs we incur to obtain the underlying contracts, including sales commission contract costs which are charged in line with the associated revenue recognition. The gross profit for FY19 was $67.0m (FY18: $63.7m) representing a gross margin percentage of 93.8% (FY18: 94.9%) which continues to be within our historical range.  This reflects the correct matching of these incremental costs with the associated revenue being recorded.

 

Earnings

 

The Group presents an adjusted earnings figure as a supplement to the IFRS based earnings figures. The Group uses this adjusted measure in its operational and financial decision-making as it excludes certain one-off items, so as to focus on what the Group regards as a more reliable indicator of the underlying operating performance. We believe the use of this measure is consistent with other similar companies and is frequently used by analysts, investors and other interested parties.

 

Adjusted earnings represent operating profits excluding costs incurred as a result of acquisition and share related activities (if applicable in the year), share related costs including IFRS 2 share based payments charge, interest, depreciation and amortisation ("Adjusted EBITDA").

 

This fiscal year we incurred $1.2m (FY18: nil) of professional and other fees relating to a significant proposed acquisition that ultimately the Board decided not to enter into in the year under review.  Whilst these costs have impacted our cash generation in FY19, they are non-recurring in nature and outside of our normal operations, as such we have adjusted earnings for these amounts in presenting Adjusted EBITDA.

 

Adjusted EBITDA has grown in the year to $24.0m (FY18: $21.6m) an increase of 11%. This reflects an Adjusted EBITDA margin of 33.6% (FY18: 32.2%). This is consistent with the Group's continued approach to making investments in line with the revenue growth whilst monitoring our overall EPS growth. 

 

Operating Expenses

 

We continually invest in the future growth of the Group.  Our customers are facing a market that continues to evolve towards value-based economics and the Group is in a unique position with its Value Cycle strategy to help them meet the challenges of these new reimbursement models.  If we are to deliver on our potential to both support our customers in this evolving market place and address the market opportunity available to us, we must ensure we are building a scalable business that can meet the future challenges our growth will bring.

 

To do this the Group continues to invest in all areas of the business in line with revenue growth whilst also takes opportunities where they arise, to accelerate investments that will generate further growth whilst continually managing to ensure the efficiency of the investments we make.  The increase in net operating expenses (to Adjusted EBITDA) of 2% to $43.0m (FY18: $42.0m) reflects the balanced approach taken in the current year between continued investment and delivering returns from previous investments in new products as we start to see revenue and the associated impact the resulting amortisation charge has on earnings. 

 

As detailed in the Operating Review, product innovation and enhancement continues to be core to the Group's future; as such we continue to invest significant resource in this area as we build out the Trisus platform and the portfolio of products that will be part of this platform.  We continue our Build, Buy or Partner strategy to build out this portfolio of products, recognising 'Build' is often the best way forward. We undertake the development of innovative new products whilst maintaining our current product offerings and ensuring they remain market-leading.  As a result of this investment the total cost of development in the year was $20.0m (FY18: $17.9m), a 12% increase which is ahead of our revenue growth and reflective of the opportunities in the market for our products. 

 

From this total investment we have capitalised projects that will bring future economic benefit to the Group including the development of the new product offerings ("Build"), e.g.  new Trisus products; the Trisus Bridge extension of the Trisus platform and our new cost analytics and Healthcare Intelligence products.  With the significant investment into our development and product management teams we have ensured costs relating to expanding and training the new teams are not capitalised.  As a result the total amount capitalised in the year was $9.6m (FY18: $4.7m).

 

Amounts capitalised represent investment in our future.  They are an efficient and cost effective way to further build out our Value Cycle strategy. We expect to see both the levels of development expense and capitalisation continue at the current trends as we progress with building out this solution set. As specific products are made available to relevant customers, the associated amounts capitalised are charged to the Group's income statement over their estimated useful economic life.

 

Cash and Bank Facilities

 

An area of focus will always be our ability to convert our earnings into cash.  To this end we set ourselves a target in this area, to convert 100% conversion of our earnings into cash.  In prior years we have exceeded this target, in FY18 reaching 153% conversion (or approximately $11m over our 100% conversion target).  This success though inevitably has a knock on effect; as we expect a long term average of 100%, the success in FY18 impacted the cash collection in FY19.  This impact was further compounded by the proportion of our second half sales that occurred late in that half and as a result were not due for collection at the end of the fiscal year, resulting in lower cash collections in the year and a higher year end debtors balance.  As a result of these two factors, and the acquisition costs of $1.2m detailed above, our adjusted EBITDA to cash conversion in the year was 63%.  Whilst below our own target, we have collected a further $8.5m of our year end debtors.  Had these collections been included we would have delivered a 98% cash conversion in the current year.

 

During the year we have returned $8.5m to our shareholders via dividends.  As a result of all these factors, we retain cash reserves of $47.6m (FY18: $52.8m).

 

This significant level of cash reserves and our balance sheet strength allows us to fund acquisitions should suitable opportunities arise.  To supplement these reserves, the Group retains a funding facility from the Bank of Scotland of up to $50m.  Whilst no draw down of this facility occurred in the year, the Group continues to investigate strategic opportunities to add to the Value Cycle strategy.

Balance sheet

 

The Group maintains a strong balance sheet position. The level of trade and other receivables has increased in comparison to the prior year. This is a result of the factors identified above that impacted our cash collection in the year. 

 

IFRS 15 "Revenue from contracts with customers" also addresses how reporting entities should treat incremental contract costs such as sales commissions.  It is again pleasing to report that adoption of this standard has not resulted in any changes to our accounting treatment in this area.  The sales commissions we pay are based on the total value of the contract sold; however for the purposes of the Statement of Comprehensive Income, a lower proportion of revenue from the contract value is recognised in the year. 

 

As a result we charge an equivalent percentage of the sales commission, thereby properly matching revenue and incremental expense.  The resulting deferred contract asset of $7.3m (FY18: $7.5m) is the balance to be charged to the Group's income statement as we recognise the associated revenue.  As we only pay the sales commission upon receipt of the first annual payment from the customer, we remain cash flow positive from any new sale.

 

Deferred income levels reflect the amounts of the revenue under contract that we have invoiced and/or been paid for in the year, but have yet to recognise as revenue. This balance is a subset of the total visible revenue we describe above and reflected through our three year visible revenue metric.

 

Deferred income, accrued income and the prepayment of sales commissions all arise as a result of our Annuity SaaS business model described above and we will always expect them to be part of our balance sheet. They arise where the cash profile of our contracts does not exactly match how revenue and related expenses are recognised in the Statement of Comprehensive Income. Overall, levels of deferred income are significantly more than any accrued income and the prepayment of sales commissions, we therefore remain cash flow positive in regards to how we account for our contracts.

 

Currency

 

The functional currency for the Group, and cash reserves, is US dollars. Whilst the majority of our cost base is US-located and therefore US dollar denominated, we have approximately one quarter of the cost base situated in the UK, relating primarily to our UK employees which is therefore denominated in Sterling. As a result, we continue to closely monitor the Sterling to US dollar exchange rate, and where appropriate consider hedging strategies. The average exchange rate throughout the year being $1.2945 as compared to $1.3472 in the prior year.

 

Taxation

 

The Group generates profits in both the UK and the US. The overall levels are determined by both the proportion of sales in the year and the level of professional services income recognised.  The Group's effective tax rate remains dependent on the applicable tax rates in these respective jurisdictions. In the current year the effective tax rate has been affected by share options issued and exercised in the year which reduced the tax charge by $0.4m (FY18: $1.4m) and R&D tax relief of $0.4m (FY18: $0.3m) which further reduced the tax charge.  As such the current year effective tax rate is 18% (FY18: 17%).

 

EPS

 

In the year being reported adjusted EPS has seen the benefit of the increased levels of Adjusted EBITDA combined with the effective tax rate reported above, offset by an increase in both the amortisation and share based payment charges, and as such has increased 5% to $0.633 (FY18: $0.602) and adjusted diluted EPS has increased to $0.620 (FY18: $0.591).

 

Dividend

 

The Board proposes a final dividend of 15p (19.05 cents) per share giving a total dividend for the year of 26p (33.02 cents) per share (FY18: 24p (31.68 cents) per share). Subject to approval at the Annual General Meeting, the final dividend will be paid on 19 December 2019 to shareholders on the register as at 29 November 2019, with a corresponding ex-Dividend date of 28 November 2019.

 

The final dividend of 15p per share is capable of being paid in US dollars subject to a shareholder having registered to receive their dividend in US dollars under the Company's Dividend Currency Election, or who register to do so by the close of business on 29 November 2019. The exact amount to be paid will be calculated by reference to the exchange rate to be announced on 29 November 2019. The final dividend referred to above in US dollars of 19.05 cents is given as an example only using the Balance Sheet date exchange rate of $1.2695/£1 and may differ from that finally announced.

 

Outlook

 

The ongoing transition to value-based care is a powerful underlying driver for our software, as healthcare providers seek the means not only to survive but thrive in this new era. We are committed to providing our customers with the tools they require to continue to deliver outstanding care to their communities and are passionate about the central role we will play in this substantial evolution of the US healthcare market.

 

While growth in the year was lower than originally anticipated, renewal levels remained strong and our Trisus related sales and revenues continued to increase, providing us with a strong platform for the future. We have entered the new financial year with an uptick in sales momentum.

 

We are focused on the delivery of our growing opportunity and have the correct strategy to succeed. With growing levels of contracted future revenue, strong operating margins, healthy cash balances and a growing sales pipeline, we look to the coming years with confidence and high levels of excitement for the opportunity ahead.

 

 

Keith Neilson
Chief Executive Officer
2 September 2019

Craig Preston
Chief Financial Officer
2 September 2019

 

 

 

 

 

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2019

 

 

 

Total

Total

 

 

2019

2018

 

Notes

$'000

$'000

Continuing operations:

 

 

 

Revenue

3

71,401

67,067

Cost of sales

 

(4,394)

(3,407)

Gross profit

 

67,007

63,660

Operating expenses

4

(49,003)

(44,968)

Operating profit

 

18,004

18,692

 

 

 

 

Analysed as:

 

 

 

 

 

 

 

Adjusted EBITDA1

 

23,996

21,611

Share based payments

 

(1,296)

(663)

Depreciation of plant and equipment

 

(603)

(578)

Exceptional Aborted Acquisition Costs

 

(1,168)

-

Amortisation of intangible assets

 

(2,925)

(1,678)

 

 

 

 

Finance income

 

318

241

Profit before taxation

 

18,322

18,933

Tax on profit on ordinary activities

5

(3,337)

(3,136)

Profit for the year attributable to owners of the parent

 

14,985

15,797

Other comprehensive income / (expense)

 

 

 

Items that may be reclassified subsequently to profit or loss

 

 

 

Currency Translation movement

 

28

(10)

Total items that may be reclassified subsequently to profit or loss

 

28

(10)

Total comprehensive income attributable to owners of the parent

 

15,013

15,787

 

 

 

 

 

1.     Adjusted EBITDA is defined as operating profit before interest, tax, depreciation, amortisation, exceptional items and share based payments

 

 

Earnings per share for the year attributable to equity holders

 

 

Notes

2019

2018

Basic ($ per share)

7a

0.561

0.590

*Adjusted Basic ($ per share)

7a

0.633

0.602

 

 

 

 

Diluted ($ per share)

7b

0.550

0.579

*Adjusted Diluted ($ per share)

7b

0.620

0.591

 

 

* Adjusted Earnings per share calculations allow for the tax adjusted acquisition costs and share related transactions (if applicable in the year) together with amortisation on acquired intangible assets.

               

 

Statement of Changes in Equity for the year ended 30 June 2019

 

 

 

 

 

Consolidated Balance Sheet as at 30 June 2019

 

 

Notes

2019

2018

 

 

$'000

$'000

ASSETS

 

 

 

Non-Current Assets

 

 

 

Plant and equipment

 

1,274

1,223

Intangible assets

8

30,437

23,267

Trade and other receivables

9

4,946

5,275

Deferred tax

 

3,244

3,831

 

 

39,901

33,596

 

 

 

 

Current Assets

 

 

 

Trade and other receivables

9

18,789

12,503

Cash and cash equivalents

 

47,611

52,833

 

 

66,400

65,336

 

 

 

 

Total Assets

 

106,301

98,932

 

 

 

 

EQUITY AND LIABILITIES

 

 

 

 

 

 

 

Current Liabilities

 

 

 

Deferred income

 

37,849

35,371

Current tax liabilities

 

1,085

80

Trade and other payables

 

7,532

11,835

 

 

46,466

47,286

 

 

 

 

Total Liabilities

 

46,466

47,286

 

 

 

 

Equity

 

 

 

Share capital

10

535

534

Share premium account

 

20,022

19,777

Capital redemption reserve

 

9

9

Other reserves

 

3,549

2,084

Retained earnings

 

35,720

29,242

Total Equity

 

59,835

51,646

 

 

 

 

Total Equity and Liabilities

 

106,301

98,932

 

 

 

Statement of Cash Flows for the year ended 30 June 2019

 

 

 

Notes

2019

2018

 

 

$'000

$'000

 

 

 

 

Cash flows from operating activities

 

 

 

  Cash generated from operations

11

15,078

33,110

  Interest received

 

318

227

  Tax paid

 

(1,933)

(3,349)

    Net cash from operating activities

 

13,463

29,988

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

  Purchase of plant and equipment

 

(654)

(434)

  Capitalised intangible assets

 

(9,780)

(4,258)

    Net cash used in investing activities

 

(10,434)

(4,692)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

  Dividends paid to company shareholders

6

(8,497)

(7,817)

  Proceeds from issuance of shares

 

246

1,810

  Company share movement in employee benefit trust

 

-

(4,248)

  Buy back of ordinary shares

 

-

(15,378)

    Net cash used in financing activities

 

(8,251)

(25,633)

 

 

 

 

 

 

 

 

Net (decrease) / increase in cash and cash equivalents

 

(5,222)

(337)

 

 

 

 

Cash and cash equivalents at the start of the year

 

52,833

53,170

 

 

 

 

Cash and cash equivalents at the end of the year

 

47,611

52,833

 

 

 

Notes to the Financial Statements

 

General Information

 

Craneware plc (the Company) is a public limited company incorporated and domiciled in Scotland. The Company has a primary listing on the AIM stock exchange. The principal activity of the Company continues to be the development, licensing and ongoing support of computer software for the US healthcare industry.

 

Basis of Preparation

 

The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, International Financial Reporting Standards Interpretation Committee (IFRSIC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historic cost convention and prepared on a going concern basis. The applicable accounting policies are set out below, together with an explanation of where changes have been made to previous policies on the adoption of new accounting standards in the year, if relevant.

 

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

 

The Company and its subsidiary undertakings are referred to in this report as the Group.

 

1.   Selected principal accounting policies

 

The principal accounting policies adopted in the preparation of these accounts are set out below.  These policies have been consistently applied, unless otherwise stated.

 

Reporting currency

 

The Directors consider that as the Group's revenues are primarily denominated in US dollars the Company's principal functional currency is the US dollar. The Group's financial statements are therefore prepared in US dollars.

 

Currency translation

 

Transactions denominated in currencies other than US dollars are translated into US dollars at the rate of exchange ruling at the date of the transaction. The average exchange rate during the course of the year was $1.2945/£1 (2018: $1.3472/£1). Monetary assets and liabilities expressed in foreign currencies are translated into US dollars at rates of exchange ruling at the Balance Sheet date $1.2695/£1 (2018 : $1.31977/£1).  Exchange gains or losses arising upon subsequent settlement of the transactions and from translation at the Balance Sheet date, are included within the related category of expense where separately identifiable, or administrative expenses.

 

Revenue recognition

 

The Group follows the principles of IFRS 15, 'Revenue from Contracts with Customers', accordingly revenue will be recognised using the five-step model, requiring the transaction price for each identified contract to be apportioned to separate performance obligations arising under the contract.  Revenue is recognised either when; the performance obligation in the contract has been performed (point in time recognition) or over time as control of the performance obligation is transferred to the customer. 

 

Revenue is derived from sales of software licences and professional services including installation and training.

 

'White-labelling' or other 'Paid for development work' is generally provided on a fixed price basis and as such revenue is recognised based on the percentage completion or delivery of the relevant project. Where percentage completion is used it is estimated based on the total number of hours performed on the project compared to the total number of hours expected to complete the project. Where contracts underlying these projects contain material obligations, revenue is deferred and only recognised when all the obligations under the engagement have been fulfilled.

 

Revenue from standard licenced products are recognised from the point at which the customer gains control and the right to use our software. This right to use software will be for the period covered under contract and, as a result, the licenced software revenue will be recognised over the life of the contract. This policy is consistent with the Company's products providing customers with a service through the delivery of, and access to, software solutions (Software-as-a-Service ("SaaS")), and results in revenue being recognised over the period that these services are delivered to customers. Incremental costs directly attributable in securing the contract are charged equally over the life of the contract and as a consequence are matched to revenue recognised. Any deferred contract costs are included in both current and non-current trade and other receivables.

 

Revenue from all professional services is recognised when the performance obligation has been fulfilled and the services are provided. Where professional services engagements contain material obligations, revenue is recognised when all the obligations under the engagement have been fulfilled. Where professional services engagements are provided on a fixed price basis, revenue is recognised based on the percentage completion of the relevant engagement. Percentage completion is estimated based on the total number of hours performed on the project compared to the total number of hours expected to complete the project.

 

Software and professional services sold via a distribution agreement will normally follow the above recognition policies.

 

Should any contracts contain non-standard clauses, revenue recognition will be in accordance with the underlying contractual terms which will normally result in recognition of revenue being deferred until all material obligations are satisfied.  The Group does not have any contracts where a financing component exists within the contract.

 

The excess of amounts invoiced over revenue recognised are included in deferred income. If the amount of revenue recognised exceeds the amount invoiced the excess is included within accrued income.

 

Contract assets include sales commissions and prepaid royalties.  Contract liabilities include unpaid commissions and deferred income.

 

Exceptional costs

 

The Group defines exceptional items as costs incurred by the group which relate to material non-recurring costs.  These are disclosed separately where it is considered it provides additional useful information to the users of the financial statements.

 

Intangible Assets

 

(a)  Goodwill

 

Goodwill arising on consolidation represents the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is capitalised and recognised as a non-current asset in accordance with IFRS 3 and is tested for impairment annually, or on such occasions that events or changes in circumstances indicate that the value might be impaired.

 

Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

 

(b)  Proprietary software

 

Proprietary software acquired in a business combination is recognised at fair value at the acquisition date. Proprietary software has a finite life and is carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the associated costs over their estimated useful lives of 5 years.

 

(c)  Contractual customer relationships

 

Contractual customer relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relations have a finite useful economic life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the customer relationship which has been assessed as up to 10 years.

 

(d)  Research and Development expenditure

 

Expenditure associated with developing and maintaining the Group's software products is recognised as incurred. Where, however, new product development projects are technically feasible, production and sale is intended, a market exists, expenditure can be measured reliably, and sufficient resources are available to complete such projects, development expenditure is capitalised until initial commercialisation of the product, and thereafter amortised on a straight-line basis over its estimated useful life, which has been assessed as 5 years. Staff costs and specific third party costs involved with the development of the software are included within amounts capitalised.

 

(e)  Computer software

 

Costs associated with acquiring computer software and licenced to-use technology are capitalised as incurred. They are amortised on a straight-line basis over their useful economic life which is typically three to five years.

 

Impairment of non-financial assets

 

At each reporting date the Group considers the carrying amount of its tangible and intangible assets including goodwill to determine whether there is any indication that those assets have suffered an impairment loss. If there is such an indication, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any) through determining the value in use of the cash generating unit that the asset relates to. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs.

 

If the recoverable amount of an asset is estimated to be less than its carrying amount, the impairment loss is recognised as an expense.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset. A reversal of an impairment loss is recognised as income immediately. Impairment losses relating to goodwill are not reversed.

 

 

 

Taxation

 

The charge for taxation is based on the profit for the period as adjusted for items which are non-assessable or disallowable. It is calculated using taxation rates that have been enacted or substantively enacted by the Balance Sheet date.

 

Deferred taxation is computed using the liability method.  Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted rates and laws that will be in effect when the differences are expected to reverse.  The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction that at the time of the transaction affects neither accounting nor taxable profit or loss.  Deferred tax assets are recognised to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilised.

 

Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.  Deferred tax assets and liabilities arising in the same tax jurisdiction are offset.

 

In the UK and the US, the Group is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options under each jurisdiction's tax rules.  As explained under "Share-based payments", a compensation expense is recorded in the Group's Statement of Comprehensive Income over the period from the grant date to the vesting date of the relevant options.  As there is a temporary difference between the accounting and tax bases a deferred tax asset is recorded.  The deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company's share price at the Balance Sheet date) with the cumulative amount of the compensation expense recorded in the Statement of Comprehensive Income.  If the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory rate, the excess is recorded directly in equity against retained earnings.

 

Share-based payments

 

The Group grants share options and / or conditional share awards to certain employees. In accordance with IFRS 2, "Share-Based Payments", equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured using the Black-Scholes pricing model or the Monte Carlo pricing model, as appropriately amended, taking into account the terms and conditions of the share-based awards. The fair value determined at the date of grant of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the number of shares that will eventually vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At the end of each reporting period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the Statement of Comprehensive Income, with a corresponding adjustment to equity. When the options are exercised and are satisfied by new issued shares, the proceeds received net of any directly attributable transaction costs are credited to share capital and share premium.

 

The share-based payments charge is included in net operating expenses and is also included in 'Other reserves'.

 

2.   Critical accounting estimates and judgements

 

The preparation of financial statements in accordance with IFRS requires the Directors to make critical accounting estimates and judgements that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next financial year are discussed below:-

 

·    Impairment assessment: - the Group tests annually whether Goodwill has suffered any impairment and for other assets including acquired intangibles at any point where there are indications of impairment. This requires an estimation of the recoverable amount of the applicable cash generating unit to which the Goodwill and other assets relate. Estimating the recoverable amount requires the Group to make an estimate of the expected future cash flows from the specific cash generating unit using certain key assumptions including growth rates and a discount rate. These assumptions result in no impairment in goodwill.

 

·    Provisions for income taxes: - the Group is subject to tax in the UK and US and this requires the Directors to regularly assess the applicability of its transfer pricing policy.

 

·    Capitalisation of development expenditure: - the Group capitalises development costs provided the aforementioned conditions have been met.  Consequently, the directors require to continually assess the commercial potential of each product in development and its useful life following launch.

 

 

3.   Revenue

 

The chief operating decision maker has been identified as the Board of Directors. The Group revenue is derived almost entirely from the sale of software licences and professional services (including installation) to hospitals within the United States of America. Consequently, the Board has determined that Group supplies only one geographical market place and as such revenue is presented in line with management information without the need for additional segmental analysis. All of the Group assets are located in the United States of America with the exception of the Parent Company's, the net assets of which are disclosed separately on the Company Balance Sheet and are located in the UK.

 

 

2019

2018

 

$'000

$'000

Software licencing

60,488

56,346

Professional services

10,913

10,721

Total revenue

71,401

67,067

 

Contract assets

 

The Group has recognised the following assets related to contracts with customers:

 

2019

2018

 

$'000

$'000

Prepaid commissions and royalties < 1 year

2,537

-*

Prepaid commissions and royalties > 1 year

4,946

-*

Total contract assets

7,483

-

 

*As permitted under the transitional provisions of IFRS 15, the transaction price allocated to contract assets at 30 June 2018 is not disclosed.

 

Contract assets are included within deferred contract costs and prepayments in the balance sheet.

 

Costs recognised during the year in relation to assets at 30 June 2018 were $2.4m.

 

 

 

 

Contract liabilities

 

The following table shows both the total contract liabilities and the aggregate transaction price allocated to performance obligations that are partially or fully unsatisfied at 30 June 2019 from software license and professional service contracts:

 

2019

2018

 

$'000

$'000

Software licencing

33,949

-*

Professional services

3,900

-*

Total contract liabilities

37,849

-

 

*As permitted under the transitional provisions of IFRS 15, the transaction price allocated to unsatisfied performance obligations at 30 June 2018 is not disclosed.

 

Contract liabilities are included within deferred income in the balance sheet.

 

Revenue of $35.2m was recognised during the year in relation to unsatisfied performance obligations as of 30 June 2018.

 

Management expects that 99% of the transaction price allocated to unsatisfied performance obligations as of 30 June 2019 will be recognised as revenue during the next reporting period ($37.5m). 

 

4.   Operating expenses

 

Operating expenses are comprised of the following:

 

 

 

2019

2018

 

$'000

$'000

Sales and marketing expenses

9,726

8,257

Client servicing

14,086

11,981

Research and development

10,405

13,174

Administrative expenses

8,723

8,736

Share-based payments

1,296

663

Depreciation of plant and equipment

603

578

Amortisation of intangible assets

2,925

1,678

Exceptional aborted acquisition costs*

1,168

-

Exchange (gain)

71

(99)

Operating expenses

49,003

44,968

 

* Exceptional items relate to legal and professional fees associated with an aborted potential acquisition.

 

 

 

 

5.   Tax on profit on ordinary activities

 

2019

2018

 

$'000

$'000

Profit on ordinary activities before tax

18,322

18,933

Current tax

 

 

Corporation tax on profits of the year

3,047

3,536

Adjustments for prior years

(113)

(305)

Total current tax charge

2,934

3,231

Deferred tax

 

 

Origination & reversal of timing differences

323

382

Adjustments for prior years

80

(8)

Change in tax rate

-

(469)

Total deferred tax charge / (credit)

403

(95)

 

 

 

Tax on profit on ordinary activities

3,337

3,136

 

 

The difference between the current tax charge on ordinary activities for the year, reported in the consolidated Statement of Comprehensive Income, and the current tax charge that would result from applying a relevant standard rate of tax to the profit on ordinary activities before tax, is explained as follows:

 

 

 

Profit on ordinary activities at the UK tax rate 19% (2018: 19%)

3,481

3,597

Effects of:

 

 

Adjustment for prior years

(33)

(313)

Change in tax rate

-

(469)

(Additional US taxes on profits 25% (2018: 32%)

54

1,137

R & D tax credit

(364)

(327)

Expenses not deductible for tax purposes

17

29

Origination and reversal of temporary differences

561

847

Deduction on share plan charges

(379)

(1,365)

Total tax charge

3,337

3,136

 

 

6.   Dividends

 

The dividends paid during the year were as follows:-

 

2019

2018

 

$'000

$'000

Final dividend, re 30 June 2018 - 18.48 cents (14 pence)/share

4,713

4,065

Interim dividend, re 30 June 2019 - 14.0 cents (11 pence)/share

3,784

3,752

Total dividends paid to Company shareholders in the year

8,497

7,817

 

Prior year:

Final dividend 14.71 cents (11.3 pence) / share

Interim dividend 13.5 cents (10 pence) / share

 

The proposed final dividend 19.05 cents (15 pence), as noted in the Financial Review section of the Strategic Report, for 30 June 2019 is subject to approval by the shareholders at the Annual General Meeting and has not been included as a liability in these accounts.

 

 

7.   Earnings per share

 

a)   Basic

 

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year.

 

 

2019

2018

Profit attributable to equity holders of the Company ($'000)

14,985

  15,797

Weighted average number of ordinary shares in issue (thousands)

26,691

  26,790

Basic earnings per share ($ per share)

0.561

   0.590

 

 

 

Profit attributable to equity holders of Company ($'000)

14,985

  15,797

Adjustments* ($'000)

1,914

       329

Adjusted Profit attributable to equity holders ($'000)

16,899

    16,126

Weighted average number of ordinary shares in issue (thousands)

26,691

  26,790

Adjusted Basic earnings per share ($ per share)

0.633

  0.602

 

*Relate to aborted acquisition costs, share related activities and amortisation of acquired intangibles if applicable in the year.  These adjustments are to focus on what the Group regards as a more reliable indicator of the underlying operating performance and are consistent with other similar companies.

 

b)   Diluted

 

For diluted earnings per share, the weighted average number of ordinary shares calculated above is adjusted to assume conversion of all dilutive potential ordinary shares.  The Group has one category of dilutive potential ordinary shares, being those granted to Directors and employees under the share option scheme.

 

 

2019

2018

Profit attributable to equity holders of the Company ($'000)

14,985

  15,797

Weighted average number of ordinary shares in issue (thousands)

26,691

 26,790

Adjustments for:- Share options (thousands)

555

       492

Weighted average number of ordinary shares for diluted earnings per share (thousands)

27,246

27,282

Diluted earnings per share ($ per share)

0.550

    0.579

 

 

 

Profit attributable to equity holders of Company ($'000)

14,985

  15,797

Adjustments* ($'000)

1,914

       329

Adjusted Profit attributable to equity holders ($'000)

16,889

    16,126

Weighted average number of ordinary shares in issue (thousands)

26,691

26,790

Adjustments for:- Share options (thousands)

555

 492

Weighted average number of ordinary shares for diluted earnings per share (thousands)

27,246

 27,282

Adjusted Diluted earnings per share ($ per share)

0.620

    0.591

 

*Relate to aborted acquisition costs, share related activities and amortisation of acquired intangibles if applicable in the year.  These adjustments are to focus on what the Group regards as a more reliable indicator of the underlying operating performance and are consistent with other similar companies.

 

 

8.   Intangible assets

 

Goodwill and Other Intangible assets

 

 

Goodwill

Customer

Proprietary

Development

Computer

 

 

 

Relationships

Software

Costs

Software

Total

 

$'000

$'000

$'000

$'000

$'000

Cost

 

 

 

 

 

 

At 1 July 2018

11,438

2,964

3,043

13,960

1,395

32,809

Additions

-

-

-

9,580

515

10,095

Disposals

-

-

-

-

-

-

At 30 June 2019

11,438

2,964

3,043

23,549

1,910

42,904

 

 

 

 

 

 

 

Accumulated amortisation

 

 

 

 

 

 

At 1 July 2018

 250

2,371

2,189

3,902

830

9,542

Charge for the year

-

330

429

1,796

370

2,925

Amortisation on disposals

-

-

-

-

-

-

At 30 June 2019

250

2,701

2,618

5,698

1,200

12,467

Net Book Value at 30 June 2019

11,188

263

425

17,851

710

30,437

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

At 1 July 2017

11,438

2,964

3,043

9,237

1,436

28,118

Additions

 -

 -

 -

4,732

368

5,100

Disposals

-

-

-

-

(409)

(409)

At 30 June 2018

11,438

2,964

3,043

13,969

1,395

32,809

 

 

 

 

 

 

 

Accumulated amortisation

 

 

 

 

 

 

At 1 July 2017

 250

2,042

1,976

3,046

959

8,273

Charge for the year

 -

329

213

856

280

1678

Amortisation on disposal

-

-

-

-

(409)

(409)

At 30 June 2018

 250

2,371

2,189

3,902

830

9,542

Net Book Value at 30 June 2018

11,188

593

854

10,067

565

23,267

 

In accordance with the Group's accounting policy, the carrying values of goodwill and other intangible assets are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill arose on the acquisition of Craneware InSight Inc.

The carrying values are assessed for impairment purposes by calculating the value in use of the core Craneware business cash generating unit.  This is the lowest level of which there are separately identifiable cash flows to assess the goodwill acquired as part of the Craneware InSight Inc purchase.

The key assumptions in assessing value in use are the discount rate applied, future growth rate of revenue and the operating margin.  These take into account the customer base and expected revenue commitments from it, anticipated additional sales to both existing and new customers and market trends currently seen and those expected in the future. 

The Group have assessed events and circumstances in the year and the assets and liabilities of the business cash-generating unit; this assessment has confirmed that no significant events or circumstances occurred in the year and that the assets and liabilities showed no significant change from last year.

After review of future forecasts, the Group confirmed the growth forecast next five years showed that the recoverable amount would continue to exceed the carrying value.  There are no reasonable possible changes in assumptions that would result in an impairment.

 

9.   Trade and other receivables

 

2019

2018

 

 

 

 

$'000

$'000

Trade receivables

15,415

9,215

Less: provision for impairment of trade receivables

(1,246)

(1,072)

Net trade receivables

14,169

8,143

Other receivables

308

230

Prepayments and accrued income

1,924

1,904

Deferred Contract Costs

7,334

7,501

 

23,735

17,778

Less non-current receivables:

-

-

Deferred Contract Costs

(4,946)

(5,275)

Current portion

18,789

12,503

 

10.  Share capital

 

 

2019

2018

 

Number

$'000

Number

$'000

Equity share capital

 

 

 

 

Ordinary shares of 1p each

50,000,000

1,014

50,000,000

1,014

 

 

Allotted called-up and fully paid

 

 

2019

2018

 

Number

$'000

Number

$'000

Equity share capital

 

 

 

 

Ordinary shares of 1p each

 

 

 

 

At 1 July

26,662,271

534

26,961,709

537

Cancelled, following purchase by Company of own shares

-

-

(628,869)

(9)

Allotted and issued in the year on exercise of employee share options

36,713

1

329,431

6

At 30 June

26,698,984

535

26,662,271

534

 

 

11.  Cash flow generated from operating activities

 

Reconciliation of profit before taxation to net cash inflow from operating activities

 

 

 

 

2019

2018

 

$'000

$'000

Profit before tax

18,322

18,933

Finance income

(318)

(241)

Depreciation on plant and equipment

608

578

Amortisation and Impairment on intangible assets

2,925

1,678

Share-based payments

1,296

663

Loss on disposals

-

10

Movements in working capital:

 

 

(Increase) / Decrease in trade and other receivables

(5,957)

1,881

Increase / (Decrease) in trade and other payables

(1,793)

9,608

Cash generated from operations

15,078

33,110

 

 

 


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