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First Derivatives PLC   -  FDP   

Interim results for the six months ended 31.08.19

Released 07:00 05-Nov-2019

RNS Number : 2294S
First Derivatives PLC
05 November 2019
 

5 November 2019

First Derivatives plc

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

Interim results for the six months ended 31 August 2019

FD (AIM: FDP.L, Euronext Growth: FDP.I) today announces its results for the six months ended 31 August 2019. 

 

Financial Highlights

Six months to 31 August

2019

2018

Change

Revenue

£116.7m

£105.6m

+11%

Gross profit

£48.0m

£43.9m

+9%

Adjusted EBITDA*

£22.0m

£18.1m

+22%

Profit before tax

£8.4m

£7.6m

+12%

Reported diluted EPS

24.2p

21.7p

+11%

Interim dividend per share

8.5p

7.7p

+10%

Net debt**

£60.2m

£24.2m

 

 

*Adjusted for share-based payments and acquisition costs; H1 2020 adjusted EBITDA (excluding impact of IFRS 16): £20.2m (+12%)

**Excluding lease obligations under IFRS 16

 

Business Highlights

·   Software revenue up 13% to £71.4m (H1 2019: £63.1m), driven by 19% growth in recurring software license revenue

·   Multiple contract wins across both software and managed services and consulting providing confidence in our outlook, including notable deals signed with a major Japanese bank for the global roll-out of a next generation e-FX platform built on Kx and multi-year assignments across our managed services and consulting business

·   Software revenue from Industry increased by 45% to £4.4m (H1 2019: £3.1m); while at an early stage we have achieved substantial progress across a number of strategic enterprise and partnership opportunities, some of which we expect to close and announce during H2

·   Managed services and consulting revenue up 7% to £45.2m (H1 2019: £42.5m) with our long-term, strategic client relationships and market-leading services enabling continued growth

·   Completion of the acquisition of the minority shareholdings in Kx Systems, taking 100% ownership, funded by new financing facilities which provide flexibility to support the Group's growth plans

·   Strong pipeline and momentum going into the second half provide us with confidence in the Group's full year performance.

Seamus Keating, Executive Chairman of FD, commented: "We successfully executed on our strategy during the period, signing a number of key contracts across our business, and making strong progress towards securing landmark contracts in the markets we are targeting across Industry. We continue to progress our search for a new CEO following the passing in July of our founder, Brian Conlon, and we will provide an update when the process is complete.

 

Our financial performance was solid, and we are encouraged by the growing momentum through the period that provides confidence in achieving another year of strong growth, in line with consensus forecasts*."

 

*The Group believes consensus revenue and adjusted EBITDA (excluding the impact of IFRS 16) forecasts for the year to 29 February 2020 to be £242.9m and £43.8m respectively.

 

For further information, please contact:

First Derivatives plc

Seamus Keating, Executive Chairman

Graham Ferguson, Chief Financial Officer

Ian Mitchell, Head of Investor Relations

+44(0)28 3025 2242

www.firstderivatives.com

 

 

Investec Bank plc

(Nominated Adviser and Broker)

Andrew Pinder

Carlton Nelson

Sebastian Lawrence

+44 (0)20 7597 5970

 

 

Goodbody (Euronext Growth Adviser and Broker)

David Kearney

Don Harrington

Finbarr Griffin

+353 1 667 0420

 

 

FTI Consulting

Matt Dixon

Dwight Burden

Darius Alexander

Niamh Fogarty

+44 (0)20 3727 1000

 

 

About FD

FD is a global technology provider with more than 20 years of experience working with some of the world's largest finance, technology, automotive, utility, manufacturing and energy institutions. The Group's Kx technology, incorporating the kdb+ time-series database, is a leader in high-performance, in-memory computing, streaming analytics and operational intelligence. Kx delivers the best possible performance and flexibility for high-volume, data-intensive analytics and applications across multiple industries. FD operates from 15 offices across Europe, North America and Asia Pacific, including its headquarters in Newry, and employs more than 2,400 people worldwide.

 

For further information, please visit www.firstderivatives.com and www.kx.com 
 

Business Review

The Group has delivered a solid financial performance for the period, in which revenue increased by 11% to £116.7m with adjusted EBITDA increasing by 22% to £22.0m, as we continue to invest in our long-term growth strategy. The period was notable for the strategic progress achieved across our markets but overshadowed by the loss of our founder, Brian Conlon.

 

In our Kx business, we continued to build on our leading position in FinTech, with 18% growth in recurring revenue and the signing of notable contracts that will further contribute to revenue growth in future periods; we posted strong underlying growth in our MarTech business; and in Industry we saw initial revenue from a number of contracts and partnership agreements won in prior periods, while making progress with others that we expect to close and announce during the second half of the financial year.

 

In our managed services and consulting business we recorded 7% growth as we transitioned some staff from the successful completion of multi-year implementation projects onto new assignments, while investing in public cloud training. We have achieved a number of notable contract wins during the year to date, and we continue to be well placed to assist our clients with both their 'run the bank' and 'change the bank' programmes.

 

We employ more than 2,400 people, whose combined talents are directed at serving our existing and potential clients. With the combination of a proven strategy, world-class technology targeting a vast addressable market and a talented and committed workforce, we continue to face the future with confidence.

 

Kx platform

Kx is a technology platform that enables the analysis of vast quantities of data, both real-time and historic, at cost and performance levels unmatched by competing solutions. Kx offers a flexible solution - at its core the platform comprises the kdb+ database, with its highly efficient 600kb footprint, and an enterprise layer designed to maximise analytic performance while providing vital functions such as security, control and visualisation. The platform provides all the integration and development tools required to enable a third party, such as an OEM partner or a direct customer, to build their own customised applications. This approach enables these third parties to deliver a solution that meets their specific business needs while benefitting from Kx's performance (Kx is typically orders of magnitude faster than competing solutions), efficiency (including lower hardware and power costs), and flexibility (with deployment options ranging from the edge, to on-premise, cloud and hybrid architectures). The stability of our platform, which is tried and tested across some of the most demanding industries in the world, is also a differentiator, providing competitive advantage against emerging technologies that cannot demonstrate the resilience achieved by Kx.

 

The Kx platform also provides the Group with the ability to develop applications where the business case is compelling. Our domain expertise in FinTech, garnered over more than twenty years, has enabled us to build applications that target areas such as market surveillance, regulatory reporting, algorithmic trading and liquidity management. We continue to seek opportunities to develop new applications; in those markets where we lack sufficient reach or domain expertise we will continue to target partnership agreements with systems integrators and OEMs who will be responsible for sales and delivery, supported by us. This approach reduces risk and enables deeper engagement across a wider range of potential customers than the Group could achieve under a solely direct sales model.

 

 

 

Research and development

Our R&D continues to focus around three key themes - improving the performance of our technology, growing its addressable market and making it easier to adopt.

 

Improving performance. We released a new version of our platform with more than 100 new features, which included improved security capabilities, increased support for Kafka and Python and improvements to ease the deployment of the platform. The new version also included increased functionality for our visualisation solution, Kx Dashboards. Our commitment to making Kx the leading platform for AI was reinforced by new features and performance improvements including enhanced integration with Python's Pandas library.

 

Growing addressable market. During the period, to encourage greater use of our technology within organisations, we made our developer tools available to all our enterprise customers as part of their existing license agreements. This move has been particularly well received, leading to multiple training requests and adding expansion opportunities with existing customers to our sales pipeline. We also released a number of our software tools as free and open source versions, including tools that make it easier to integrate Kx with other enterprise technology platforms as well as tools aimed at the developer community at large. Our aim is to increase adoption of our Kx technology and enable as wide a community as possible to understand the potential of Kx to meet their big data challenges.

 

Ease of adoption. We delivered a series of initiatives to expand the use of Kx on the public cloud, which aims to simplify Kx deployment. We launched 'Kx on demand' on both the Amazon Web Services Marketplace and Google Cloud Launcher and we also achieved 'advanced partner' status with Amazon Web Services, following investment in staff training. We are committed to enabling our clients to adopt Kx wherever it is needed - from chip to edge to cloud.

 

We have also partnered with Intel in the period to support the release of Optane DC Persistent Memory, a technology that delivers improved memory and storage performance and which promises significant performance gains for enterprise analytics. Following our work with Intel, Kx supports Optane DC natively and we are working with Intel on joint marketing initiatives to communicate the advantages that Kx and Optane DC can deliver when combined.

 

Taken together, these initiatives are boosting our technology's performance, enabling us to increase our total addressable market and ease the adoption and integration of Kx within our clients' technology infrastructure, thereby driving revenue and profit growth.

 

Business development

 

FinTech

FinTech software continued to deliver strong growth, with total revenue up by 11% to £44.6m and recurring license revenue up by 18% to £15.8m, representing 35% of total FinTech software revenue (H1 2019: 33%). Growth came from continued demand for solutions such as regulatory and risk reporting, market surveillance and trading analytics. Using Kx as a platform for these solutions enables our clients to improve the quality and integrity of their data, allowing them to generate more revenue, increase their operational efficiency and to meet regulatory scrutiny in a timely and cost-effective manner.

 

We continue to see our clients evaluate and prepare to move their data operations to the public cloud, attracted by opportunities for development agility and innovation combined with the ability to cope with peaks in compute resource demands. FD is well placed to assist with this transformation, which we expect to be a multi-year strategic shift in technology delivery and which offers the potential to drive significant growth in our revenue from both FinTech software and managed services and consulting.

 

During the period we signed a number of significant new multi-year contracts, which will underpin growth in future periods. These included one of our largest ever deals, developing a next generation FX trading platform for a major Japanese bank, where Kx will become an integral component of the bank's global FX trading; a contract for Kx to power an AI-based pricing engine and trading platform, using our data refinery product for rapid deployment; the displacement of a competitor at a European bank for the capture of fixed income and FX data; and the sale of a range of our products to a bank based in the Middle East.

 

We have a strong pipeline across a range of products and geographies, including areas such as surveillance / financial crime and our data refinery platform.

 

MarTech

Revenue from MarTech increased by 13% to £22.4m with 52% of this revenue derived from subscription contracts (H1 2019: 49%). Our solution, powered by Kx and branded as MRP Prelytix, is the only enterprise-class B2B predictive Account-Based Marketing (ABM) platform. It delivers predictive analytics derived from billions of data points, ingested in real-time, enabling clients to dynamically activate a wide range of sales and marketing tactics informed by real-time insights.

 

The unique insights provided by MRP Prelytix and our constant technical innovation of the platform resulted in MRP Prelytix being recognised within its industry through the award of 'Best Overall ABM Solution' at the 2019 MarTech Breakthrough Awards. In addition, industry analysts Ovum published a report in which MRP Prelytix was named as a 'Leader' in ABM, noting that MRP's "thoughtful integrated use of artificial intelligence within ABM is going to create many opportunities for sales and marketing organizations to better engage with their target account portfolio."

 

This technical and market leadership translated into additional direct sales during the period as well as the emergence of new sources of revenue through global media agency and channel partners, which represent potentially significant revenue streams for our platform.

 

We continue to sign new clients on a subscription basis while a number of existing clients increased their use of the platform based on the strong return on investment they had achieved in prior periods. Technology companies continue to form the core of our client base in MarTech, as exemplified through a significant new client win with a large semi-conductor manufacturer. However, our platform is applicable to a wide range of industries and we were pleased to sign new clients across a range of industries, including several additions in financial services and a sizable deal for a global management consultancy business.

 

During the period we also broadened and deepened the capabilities of our MRP platform. We introduced new functionality, including content syndication driven by MRP Prelytix, which extend our reach deeper into clients by working with their agency partners to capture more of their total sales and marketing spend. These initiatives are expected to generate additional revenue in future periods while increasing the appeal of our platform as a comprehensive lead generation solution.

 

These additional direct and agency deals began to contribute to our revenue during H1 and were more than sufficient to offset the loss of a significant customer which was the subject of a corporate restructuring in early 2019 and which significantly cut its marketing expenditure as a result. We saw revenue build through the period and are pleased with our momentum into H2 and beyond.

 

Industry

Kx technology's performance and total cost of ownership advantages have enabled us to generate considerable interest across a number of high value markets where data volumes and velocity present significant challenges. Our strategy is to seek predictable, long-term revenue streams, such as OEM and revenue share agreements, while securing direct sales that establish our position within our target industry markets. This means revenues are tempered in the current investment phase, but in the longer term should deliver strong, predictable growth across a range of markets.

 

Our industry revenue grew by 45% to £4.4m in the period (H1 2019: £3.1m), with recurring revenue up by 12%.  Growth came from the progression of the OEM and partnership agreements closed in prior periods as successful implementation of our software was achieved in these new markets.  We are pleased with the high level of interest we are seeing across industries in the adoption of our software, resulting from a continued focus on marketing, development and sales expansion efforts.  Importantly, during the period we progressed a number of high-value opportunities relating to both potential partnership and OEM agreements as well as direct sales. Notable progress during the period included:

 

·   Automotive - Following our appointment last year as Innovation Partner to Aston Martin Red Bull Racing (AMRBR), we have continued to make progress, signing a contract during the period with a further high-profile F1 team for the use of Kx to support in-race telematics. We continue to see opportunities for other F1 teams to adopt Kx, with these engagements offering the potential to push Kx deeper into the automotive ecosystem generally. We are generating significant interest across the automotive industry and continue to progress opportunities across engineering, design, telemetry and connected cars.

·   Utilities - We have made progress on a number of large-scale, long-term contract bids to deliver Kx as a platform within utilities, working alongside our partner CGI, which counts many of the world's leading utilities as customers. We continue to work to deliver a next-generation electricity information exchange for Fingrid, the transmission system operator for Finland, through which we are building intellectual property that we will be able to re-use in future Kx deployments. We expect numerous utility market participants to upgrade their systems in the coming years and, while the bid process for such deals is lengthy, we believe we are well placed to generate significant long-term revenues from this market.

·   Smart manufacturing - Our previously announced OEM agreements with a Fortune 500 provider of precision manufacturing equipment and with BISTel, a leading South Korean provider of smart manufacturing solutions, continue to develop in line with our expectations. Both OEMs are using Kx for Sensors and kdb+ to enable more rapid decision making based on vast quantities of sensor data, ultimately to assist their customers improve production yields. This is a use case that resonates through smart manufacturing and is enabling us to progress a pipeline of direct and OEM sales opportunities.

 

After the period end, we have made further progress towards securing a number of high-profile partnership and OEM agreements across multiple use cases, some of which we expect to be able to close and announce during H2. We are also in late stage discussion with several significant direct prospects which, if signed, could contribute to current year revenue. We see this anticipated growth in commercial agreements as a natural evolution of our sales process, with lengthy initial sales cycles as we penetrate new markets, which allows Kx to establish itself and generate a pipeline of opportunities with other participants in the market.

 

Managed services and consulting

Revenue from managed services and consulting was £45.2m, an increase of 7% on the prior period (H1 2019: £42.5m). FD has more than 20 years of experience providing services to leading capital markets firms, training and developing our consultants in-house through industry-recognised programmes to equip them with data science skill sets and an understanding of how capital markets firms use technology to underpin their business. We provide support for mission-critical systems, assist clients with regulatory change initiatives and assist in the delivery of both "run-the-bank" and "change-the-bank" projects across our client base.

 

While the long-term and strategic nature of our client relationships provides high levels of visibility in our managed services and consulting activities, growth during the period was below that experienced in recent years. This was expected and was due to a combination of two multi-year third party vendor implementations completing successfully at the start of our financial year, with the staff involved moving onto other projects through the period and weaker economic conditions impacting client decision making, with demand in London soft but balanced by increased demand in Europe and UK regional centres and our near shore activities

 

Notwithstanding economic uncertainty, we secured a number of contract wins during the period, particularly around regulatory compliance and reporting in Europe. We have also expanded the range of third-party vendor technologies we support and developed some additional propositions that we believe will be attractive to our clients and increase our addressable market.  

 

As a result, irrespective of any improvement in economic conditions, we expect growth to accelerate in our traditionally stronger H2. Our confidence is underlined by a number of multi-year contracts signed in recent months which include:

 

·   The implementation of an application rationalisation and migration programme for a regional division of a major investment bank, representing a new customer win in a competitive bid process.

·   Delivering a multi-year programme of regulatory-driven projects and an application upgrade for a North American bank.

·   Providing implementation and delivery services under a new agreement with a third-party independent software vendor, provided by FD on a near-shore basis with considerable growth potential.

 

Given our high levels of ongoing visibility and recent contract wins we are confident that our multi-year track record of growth in our managed services and consulting business will continue, led by our commitment to quality and excellence in our financial services, vendor services, regulatory and managed services practices. Furthermore, we believe there are a number of large-scale projects ready to be initiated when economic conditions and macro uncertainty improve, which provides confidence in the longer-term growth capabilities in managed services and consulting.

 

CEO Succession

As announced on 29 July, FD's founder and CEO Brian Conlon passed away during the period. Under our succession planning, a process to appoint a successor was initiated and Non-Executive Chairman Seamus Keating was appointed Executive Chairman to guide the business through that process and oversee the Executive Committee in the interim period. The CEO recruitment process is a priority for the Group and a further update will be provided in due course.

 

People

The Group employs more than 2,400 people, unchanged from the same time last year as we have focused on consolidating our position following record levels of recruitment in recent years. Our graduate recruitment and training programme attracts a vibrant team and equips them with high levels of in-demand skills. During the period FD was awarded a Charter Mark by Diversity Mark NI for our work on diversity and inclusion, while more than 500 of our staff commenced cloud certification training to enhance our capabilities across the business as our interactions with public cloud providers such as AWS, Google and Azure continue to deepen.

 

We have also extended our recruitment and development efforts with programmes aimed at providing apprenticeships for school leavers as they work towards their chosen degree. Retention rates remain in line with prior periods and are significantly higher than the industry average, driven by our commitment to continued training and development programmes, a rewarding career path and a fair remuneration and reward system.

 

Current trading and outlook

We move into the second half of our financial year with good momentum across the business. The investment programme in recent years has generated a strong pipeline of opportunities across our business, and we remain confident of securing contracts across the markets we are targeting within industry. Combined with a solid performance in H1 this provides confidence in the achievement of full year results in line with consensus forecasts.

 

 

Financial Review

The table below highlights the components of revenue growth across the Group along with an analysis of gross profit. The analysis also shows our revenue and growth by vertical market.

 

Revenue and Gross Margin Analysis (£m)

 

H1 2020

H1 2019

Change

H1 2020

H1 2019

Change

H1 2020

H1 2019

Change

 

H1 2020

H1 2019

Change

Software by sector

Total Software 

FinTech Revenue

MarTech Revenue

Industry

 

1.9

6.3

(69%)

-

-

1.2

0.3

253%

Perpetual

3.2

6.6

(52%)

15.8

13.3

18%

11.7

9.8

20%

0.8

0.7

12%

Recurring

28.3

23.8

19%

17.7

19.6

(10%)

11.7

9.8

20%

2.0

1.1

92%

Licenses

31.5

30.4

3%

 

 

 

 

 

 

 

 

 

Cost of sales

    (6.0)

(5.0)

  20%

 

 

 

 

 

 

 

 

 

Gross profit

25.4

25.4

-

 

 

 

 

 

 

 

 

 

Gross margin

81%

84%

(3%)

 

 

 

 

 

 

 

 

 

 

 

 

 

26.9

20.7

30%

10.7

10.0

7%

2.4

2.0

20%

Services

40.0

32.7

22%

 

 

 

 

 

 

 

 

 

Cost of sales

(28.3)

(23.4)

21%

 

 

 

 

 

 

 

 

 

Gross profit

11.7

9.3

26%

 

 

 

 

 

 

 

 

 

Gross margin

29%

28%

1%

 

 

 

 

 

 

 

 

 

 

 

 

 

44.6

40.3

11%

22.4

19.8

13%

4.4

3.1

45%

Revenue

71.4

63.1

13%

 

 

 

 

 

 

 

 

 

Cost of sales

(34.3)

(28.4)

21%

 

 

 

 

 

 

 

 

 

Gross profit

37.2

34.7

7%

 

 

 

 

 

 

 

 

 

Gross margin

52%

55%

(3%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed services and consulting by sector

Total Managed services and consulting

FinTech Revenue

MarTech Revenue

Industry

 

45.2

42.5

7%

-

-

-

-

-

 -

Revenue

45.2

42.5

7%

 

 

 

 

 

 

 

 

 

Cost of sales

(34.4)

(33.3)

3%

 

 

 

 

 

 

 

 

 

Gross profit

10.8

9.2

18%

 

 

 

 

 

 

 

 

 

Gross margin

24%

22%

2%

Sector Totals 

FinTech Revenue

MarTech Revenue

Industry

 

 

89.8

82.7

9%

22.4

19.8

13%

4.4

3.1

45%

Revenue

116.7

105.6

11%

 

 

 

 

 

 

 

 

 

Cost of sales

(68.7)

(61.7)

11%

 

 

 

 

 

 

 

 

 

Gross profit

48.0

43.9

9%

 

 

 

 

 

 

 

 

 

Gross margin

41%

42%

-

EBITDA and net margin profit analysis 

 

 

 

 

 

 

 

 

 

R&D

(5.6)

(4.9)

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales expense

(17.2)

(15.8)

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating expense

(7.6)

(9.0)

(16%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adj. EBITDA ex cap

17.6

14.2

23%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalised R&D

4.4

3.8

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adj. EBITDA

22.0

18.1

22%

 

 

 

 

 

 

 

 

 

Adj. EBITDA margin

19%

17%

2%

                           

Revenue and Margins

Group revenue increased organically by 11% to £116.7m (H1 2019: £105.6m) driven by continued strong growth in recurring software revenue, balanced by a reduction in perpetual software license revenue and lower growth in managed services and consulting. As a result of this mix, gross margin reduced slightly to 41% (H1 2019: 42%).

 

Our continued investment in the Group's operations resulted in an increase in sales and marketing cost of 9%, building on the 21% increase seen in FY 2019, as we added new sales and pre-sales staff to expand our market reach. Research and development costs increased by 15%, in line with recent periods, as we continued to deliver improvements in our software's performance and interoperability for the benefit of our growing client base. Other operating expenses increased by 2% reflecting the Group's fiscal discipline.

 

Software

Total software revenue increased by 13% to £71.4m and represented 61% of total Group revenue (H1 2019: 60%). While total software license revenue increased by 3%, this included a 52% fall in perpetual license revenue and a 19% gain in recurring license revenue as we focused on growing our high-quality recurring revenue. Perpetual license revenue is lumpy and difficult to predict and the prior year represented a strong comparator period. We expect H2 to deliver an increased level of perpetual license revenue over H1, given the status of our advanced pipeline.

 

Software revenue from FinTech increased by 11% to £44.6m, reflecting a 10% decline in license revenue (18% increase in recurring license revenue offset by a 69% decrease in perpetual licenses) and 30% growth in services revenue. Our software services, comprising implementation, managed services and development work for our Kx clients, have been in high demand during the period as the use cases for our technology continue to expand as further reliance is placed on our technology stack.

 

Total revenue from MarTech was up by 13% to £22.4m, driven by continued growth in subscription revenue, which was up by 20% to £11.7m, and a 7% increase in services revenue. For the first time, revenue from software subscriptions formed the majority of MarTech revenue and we continue to expect the subscription component of the mix to trend upwards. Momentum increased through the period, driven by new client wins and additional revenue streams, and we are confident of ongoing good growth in MarTech.

 

Software revenue from Industry increased by 45% to £4.4m. Our short-term performance in this is driven by the level of perpetual license revenue which, from a low base, was up 253% in the period as some of our previous OEM and partner wins moved into production. We have maintained our focus on obtaining revenue share agreements, particularly through OEM agreements, accepting perpetual deals only where necessary. While slower to generate revenue in early periods, we are confident this approach will result in larger ongoing royalty-style payments to the Group in future periods as products and solutions with "Kx Inside" are brought to market by our clients and partners. Recurring revenue grew by 12% in the period and we expect H2 to show growth on H1 in both recurring and perpetual license revenue.

 

Software gross margin decreased slightly from 55% to 52%, driven by the reduction of high margin perpetual license revenue in the mix. Software license gross margin fell to 81% (H1 2019: 84%) and license revenue was 44% of total software revenue (H1 2019: 48%). Software services gross margin grew marginally to 29% (H1 2019: 28%) as utilisation increased in the period. We invested to grow the Kx services team in H1 and will continue to invest in H2 to support the expansion of our technology across our markets.

 

Managed services and consulting

Managed services and consulting revenue increased by 7% to £45.2m while delivering gross margins of 24%, up from 22% in the prior period. While revenue growth was lower than in recent periods due to the reasons discussed in the Business Review, our high level of visibility in this business enabled us to match our recruitment requirements to growth levels and therefore increase margins. Based on current activity levels we anticipate another year of double-digit revenue growth and have increased our recruitment in recent months in line with future growth expectations.

 

Profit before tax

Reported profit before tax increased by 12% to £8.4m (H1 2019: £7.6m). Adjusted profit before tax increased by 6% to £13.3m (H1 2019: £12.6m) held back by increased interest costs following the completion of the acquisition of the minority interest in Kx Systems Inc. The calculation of adjusted profit before tax is detailed below.

 

 

H1 2020

 

H1 2019

 

£m

 

£m

 

 

 

 

Reported profit before tax

8.4

 

7.6

 

 

 

 

Adjustments for:

 

 

 

Amortisation of acquired intangibles

1.9

 

1.8

Share-based payment and related costs

1.6

 

1.5

Acquisition costs, associate disposal costs and changes in deferred consideration

0.9

 

1.6

Loss on foreign currency translation

0.5

 

-

Share of loss of associate

-

 

-

 

 

 

 

 

 

 

 

Adjusted profit before tax

13.3

 

12.6

 

 

 

 

 

Other income, which relates mostly to employment and training incentive grants, was £0.1m for the period, down from £0.4m in the prior year period.

 

The Group continued to invest in research and development to maintain its technology lead, with total R&D up 15% to £5.6m. Net capitalisation of R&D decreased by 23% in the period, as detailed below:

 

H1 2020

 

H1 2019

 

Movement

 

£m

 

£m

 

 

Research and development costs:

 

 

 

 

 

Expensed during the period

1.2

 

1.1

 

12%

Capitalisation of product development costs

4.4

 

3.8

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

Total research and development

5.6

 

4.9

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

Amortisation of R&D

(4.0)

 

(3.3)

 

22%

 

 

 

 

 

 

Net capitalisation of R&D

0.4

 

0.6

 

(23%)

 

 

IFRS 16

The Group has implemented IFRS 16, the new accounting standard dealing with leases, using the modified retrospective method applied from 1 March 2019. The impact of the new standard is to move the charge on the income statement for operating leases from operating costs to depreciation and interest, while on the balance sheet there is an asset recognising the right of use and a future lease liability within both current and non-current liabilities.

 

These impacts are detailed in note 1 to the statement.

 

Earnings per share

Reported profit after tax increased by 12% to £6.6m (H1 2019: £5.9m) and reported diluted earnings per share increased by 11% to 24.2p per share (H1 2019: 21.7p).

 

The adjusted profit after tax for the period of £10.9m (H1 2019: £10.6m) represented growth of 3%. The major factors impacting earnings per share growth were a higher interest charge and an increase in the Group's adjusted tax rate to 18.0% (H1 2019: 16.0%).

 

The calculation of adjusted profit after tax is detailed below:

 

 

H1 2020

 

H1 2019

 

£m

 

£m

 

 

 

 

Reported profit after tax

6.6

 

5.9

 

 

 

 

Adjustments from profit before tax

4.9

 

5.0

Tax effect of adjustments and US tax reform

(0.6)

 

(0.4)

 

 

 

 

 

 

 

 

Adjusted profit after tax

10.9

 

10.6

 

 

 

 

 

 

 

 

Weighted average number of ordinary shares (diluted)

27.5m

 

27.3m

 

 

 

 

Adjusted EPS (fully diluted)

39.6p

 

38.7p

 

The fully diluted average number of shares in issue increased to 27.5m (H1 2019: 27.3m) as additional existing share options were exercised. This resulted in adjusted fully diluted earnings per share of 39.6p, representing growth of 2% for the period (H1 2019: 38.7p).

 

Balance sheet

Total assets increased by 17% to £317.7m (H1 2019: £272.3m). The purchase of the minority interest in Kx Systems for $53.8m in cash in June 2019 impacted the balance sheet by eliminating the liability due to the minority interest shareholders. The result of this transaction saw interest costs increase in the period as new loans were drawn in U.S. dollars. This transaction, along with the implementation of IFRS 16, saw non-current loans and borrowings increase by £61.4m.

 

In February 2019 the Group announced it had secured new financing facilities comprising a term loan of £65m and a revolving loan facility of a further £65m, replacing the existing facilities on improved terms. While the Group is comfortable operating at this level of indebtedness, it is expected that the current level of net debt represents the peak and should reduce in future periods, driven by operating cash flow, subject to other strategic activities that may be undertaken in future periods.

 

Other financial assets, which includes equity investments, increased to £15.4m (FY 2019: £13.7m) reflecting the lower increase in funding provided for venture companies during the period.

 

Deferred revenue at the period end was up 9% at £17.5m (H1 2019: £16.1m), arising from the continued growth in recurring license revenue in the period.

 

 

Cash generation and net debt

The Group generated £16.4m of cash from operating activities before taxes paid (H1 2019: £13.5m) representing 74% conversion of adjusted EBITDA (H1 2019: 74%). The Group typically has a stronger H2 cash generation profile as it benefits from the billing and collection of the majority of the Group's recurring revenue, while H1 sees larger payments out in the form of taxation and dividend payments in addition to staff bonuses.

 

At the period end, net debt was £60.2m (H1 2019: £24.2m). The factors impacting the movement in net debt are summarised in the table below:

 

H1 2020

 

H1 2019

 

£m

 

£m

 

 

 

 

Opening net debt (excluding lease liabilities)

(16.1)

 

(16.2)

 

 

 

 

Operating cash flow

16.4

 

13.5

Taxes paid

(3.0)

 

(3.7)

Dividends paid

(5.1)

 

(4.3)

Capital expenditure: property, plant and equipment

(1.2)

 

(2.5)

Capital expenditure: intangible assets

(4.4)

 

(3.8)

Deferred consideration paid

-

 

(4.1)

Acquisition of subsidiaries

(43.0)

 

-

Investments

(1.0)

 

(3.3)

Issue of new shares

3.6

 

2.6

Finance leases

(1.6)

 

-

Interest, foreign exchange and other

(4.8)

 

(2.3)

 

 

 

 

Closing net debt

(60.2)

 

(24.2)

 

 

 

 

 

The Group assists innovative start-up and scale-up businesses seeking to use the power of Kx, in return for a revenue share. In some cases we inject seed capital to help launch the business and bring solutions to market quickly. The table below summarises the investments made in such companies to date as well as the maximum future commitment and the revenue generated for the Group. Future commitments to these businesses are typically payable only if certain pre-determined challenging performance milestones are achieved. In H1 2020 the Group advanced £1.0m in equity and loans to its new and existing venture agreement companies with a maximum further commitment of up to £1.9m across all 21 venture agreements.

 

H1 2020

 

H1 2019

 

Total to date

 

 

 

 

 

 

Number of venture agreements in period

3

 

4

 

21

Equity and loans advanced (£m)

1.0

 

3.3

 

17.7

Outstanding commitment (£m)

1.9

 

2.7

 

 

 

 

 

 

 

 

Revenue share agreements

4

 

4

 

20

Revenue recognised for software services (£m)

0.4

 

0.9

 

5.6

Licenses recognised under revenue share agreements (£m)

0.1

 

0.0

 

0.8

 

 

 

Dividend

The Board has declared an interim dividend of 8.50p per share (H1 2019: 7.70p per share) which will be paid on 5 December 2019 to those shareholders on the register on 15 November 2019.

 

 

Consolidated income statement (unaudited)

Six months ended 31 August 2019

 

 

 

2019

 

2018

 

Note

£'000

 

£'000

Revenue

2 & 3

 

 

 

Software licenses and services

 

71,441

 

63,111

Managed services and consulting

 

45,235

 

42,463

Total revenue

 

116,676

 

105,574

 

 

 

 

 

Cost of sales

2

 

 

 

Software licenses and services

 

(34,286)

 

(28,399)

Managed services and consulting

 

(34,411)

 

(33,293)

Total cost of sales

 

(68,697)

 

(61,692)

 

 

 

 

 

Gross profit

 

47,979

 

43,882

 

 

 

 

 

Operating costs

 

 

 

 

Research and development costs

 

(5,605)

 

(4,883)

Of which capitalised

 

4,425

 

3,833

Sales and marketing costs

 

(17,244)

 

(15,785)

Administrative expenses

 

(18,874)

 

(19,337)

Impairment (loss)/gain on trade and other receivables

 

(200)

 

249

Other income

 

121

 

364

Total operating costs

 

(37,377)

 

(35,559)

 

 

 

 

 

Operating profit

 

10,602

 

8,323

 

 

 

 

 

Acquisition costs and changes in contingent deferred consideration

 

871

 

1,582

Share-based payment and related costs              

 

1,578

 

1,543

Depreciation and amortisation

 

7,083

 

4,774

Amortisation of acquired intangible assets

 

1,850

 

1,846

Adjusted EBITDA

 

21,984

 

18,068

 

 

 

 

 

Finance income

 

14

 

1

Finance expense

 

(1,628)

 

(714)

Loss on foreign currency translation

 

(548)

 

(46)

Net finance costs

 

(2,162)

 

(759)

 

 

 

 

 

Share of loss of associate, net of tax

 

(8)

 

(6)

Profit before taxation

 

8,432

 

7,558

 

 

 

 

 

Income tax expense 

 

(1,791)

 

(1,626)

 

 

 

 

 

Profit for the period

 

6,641

 

5,932

 

 

 

Pence

 

Pence

Earnings per share

5

 

 

 

Basic

 

25.2

 

23.0

Diluted

 

24.2

 

21.7

 

The Group has initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.
 

 

Consolidated statement of changes in equity (unaudited)

Six months ended 31 August 2019

 

 

Share
capital

Share
premium

Merger reserve

Share
option
reserve

Fair value reserve

Currency translation adjustment

Retained
earnings

Total
equity

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

 

 

Balance at 1 March 2019

131

79,726

8,118

10,744

3,587

3,944

36,560

142,810

Impact of changes in accounting policy - see note 1

 

-

 

-

 

-

 

-

 

-

 

-

 

399

 

399

Restated balance at 1 March 2019

131

79,726

8,118

10,744

3,587

3,944

36,959

143,209

Total comprehensive income for the period

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

-

6,641

6,641

Other comprehensive income

 

 

 

 

 

 

 

 

Net exchange gain on net investment in foreign subsidiaries

-

-

-

-

-

10,563

-

10,563

Net exchange loss on hedge of net investment in foreign subsidiaries

-

-

-

-

-

(4,840)

-

(4,840)

Net change in fair value of equity investments at FVOCI

-

-

-

-

-

-

-

-

Total comprehensive income for the period

-

-

-

-

-

5,723

6,641

12,364

Transactions with owners of the Company

 

 

 

 

 

 

 

 

Tax relating to share options

-

-

-

1,026

-

-

-

1,026

Exercise of share options

2

4,579

-

(976)

-

-

-

3,605

Issue of shares as contingent deferred consideration

 

-

 

1,096

 

-

 

-

 

-

 

-

 

-

 

1,096

Share-based payment charge

-

-

-

737

-

-

-

737

Dividends to owners of the Company

-

-

-

-

-

-

(5,084)

(5,084)

Balance at 31 August 2019

133

85,401

8,118

11,531

3,587

9,667

38,516

156,953

 

The Group has initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

 

 

Consolidated statement of changes in equity (unaudited)

Six months ended 31 August 2018

 

 

Share
capital

Share
premium

Merger reserve

Share
option
reserve

Fair value reserve

Currency translation adjustment

Retained
earnings

Total
equity

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

 

 

Balance at 1 March 2018

128

81,286

-

14,341

-

(6,874)

49,218

138,099

Impact of correction of reserves classification1

-

(8,118)

8,118

-

-

8,588

(8,588)

-

Impact of changes in accounting policy2

-

-

-

-

-

-

(1,002)

(1,002)

Restated balance at 1 March 2018

128

73,168

8,118

14,341

-

1,714

39,628

137,097

Total comprehensive income for the period

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

-

5,932

5,932

Other comprehensive income

 

 

 

 

 

 

 

 

Net exchange gain on net investment in foreign subsidiaries

-

-

-

-

-

6,076

-

6,076

Net exchange loss on hedge of net investment in foreign subsidiaries

-

-

-

-

-

(1,588)

-

(1,588)

Net change in fair value of equity investments at FVOCI

-

-

-

-

-

-

-

-

Total comprehensive income for the period

-

-

-

-

-

4,488

5,932

10,420

Transactions with owners of the Company

 

 

 

 

 

 

 

 

Tax relating to share options

-

-

-

1,307

-

-

-

1,307

Exercise of share options

2

2,565

-

-

-

-

-

2,567

Change in measurement of NCI put

-

-

-

-

-

-

(9,346)

(9,346)

Share-based payment charge

-

-

-

645

-

-

-

645

Dividends to owners of the Company

-

-

-

-

-

-

(4,383)

(4,383)

Balance at 31 August 2018

130

75,733

8,118

16,293

-

6,202

31,831

138,307

 

1 See note 33 in the Group's financial statements for the period ended 28 February 2019 for details of restatement relating to reserves classification.

2 See note 1a in the Group's financial statements for the period ended 28 February 2019 for impact of changes in accounting policy relating to the adoption of IFRS 9 at 1 March 2018. The Group has also initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

 


 

 

Consolidated balance sheet (unaudited)

As at 31 August 2019

 

 

 

As at
31 August
2019

 

As at
31 August
2018

 

As at
28 February
2019

 

 

 

 

Restated1

 

 

 

Note

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Property, plant and equipment

6

32,597

 

8,691

 

10,162

Intangible assets and goodwill

 

160,559

 

156,996

 

151,965

Equity accounted investee

 

2,710

 

2,631

 

2,711

Other financial assets

 

15,374

 

3,870

 

13,706

Trade and other receivables

 

4,809

 

9,810

 

5,720

Deferred tax assets

 

17,367

 

20,223

 

15,352

Non-current assets

 

233,416

 

202,221

 

199,616

 

 

 

 

 

 

 

Trade and other receivables

 

61,516

 

57,065

 

57,915

Current tax receivable

 

2,655

 

-

 

1,461

Cash and cash equivalents

 

20,128

 

12,984

 

18,798

Current assets

 

84,299

 

70,049

 

78,174

 

 

 

 

 

 

 

Total assets

 

317,715

 

272,270

 

277,790

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Share capital

 

133

 

130

 

131

Share premium

 

85,401

 

75,733

 

79,726

Merger reserve

 

8,118

 

8,118

 

8,118

Shares option reserve

 

11,531

 

16,293

 

10,744

Fair value reserve

 

3,587

 

-

 

3,587

Currency translation adjustment reserve

 

9,667

 

6,202

 

3,944

Retained earnings

 

38,516

 

31,831

 

36,560

Equity attributable to shareholders

 

156,953

 

138,307

 

142,810

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Loans and borrowings

7

95,188

 

33,805

 

289

Trade and other payables

 

3,773

 

1,360

 

3,300

Deferred tax liabilities

 

11,153

 

10,382

 

10,827

Non-current liabilities

 

110,114

 

45,547

 

14,416

 

 

 

 

 

 

 

Loans and borrowings

7

8,094

 

3,339

 

34,998

Trade and other payables

8

37,392

 

75,689

 

77,546

Current tax payable

 

537

 

639

 

1,004

Employee benefits

 

4,625

 

5,966

 

5,945

Contingent deferred consideration

 

-

 

2,783

 

1,071

Current liabilities

 

50,648

 

88,416

 

120,564

 

 

 

 

 

 

 

Total liabilities

 

160,762

 

133,963

 

134,980

 

 

 

 

 

 

 

Total equity and liabilities

 

317,715

 

272,270

 

277,790

 

1 See note 33 and note 1a in the Group's financial statements for the period ended 28 February 2019 for details of restatement relating to reserves classification and impact of changes in accounting policy relating to the adoption of IFRS 9 at 1 March 2018 respectively. The Group has also initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

 

Consolidated cash flow statement (unaudited)

Six months ended 31 August 2019

 

 

2019

 

2018

 

£'000

 

£'000

 

 

 

 

Cash flows from operating activities

 

 

 

Profit for the period

6,641

 

5,932

Adjustments for:

 

 

 

Net finance costs

2,162

 

759

Depreciation of property, plant and equipment

3,086

 

1,495

Amortisation of intangible assets

5,847

 

5,125

Associate income

8

 

6

Increase in deferred consideration

-

 

842

Equity settled share-based payment transactions

1,578

 

1,543

Grant income

(121)

 

(364)

Tax expense

1,791

 

1,626

 

20,992

 

16,964

 

 

 

 

Changes in:

 

 

 

Trade and other receivables

(2,067)

 

(3,110)

Trade and other payables

(2,560)

 

(396)

Cash generated from operating activities

16,365

 

13,458

 

 

 

 

Taxes paid

(2,986)

 

(3,695)

Net cash from operating activities

13,379

 

9,763

 

 

 

 

Cash flows from investing activities

 

 

 

Interest received

14

 

1

Acquisition of subsidiary

(42,874)

 

-

Acquisition of other investments and associates

(668)

 

(437)

Increase in loans to other investments

(345)

 

(2,883)

Acquisition of property, plant and equipment

(1,239)

 

(2,465)

Acquisition of intangible assets

(4,425)

 

(3,833)

Deferred consideration paid (IFRS 3 purchase consideration)

-

 

(4,111)

Net cash used in investing activities

(49,537)

 

(13,728)

 

 

 

 

Cash flows from financing activities

 

 

 

Proceeds from issue of share capital

3,605

 

2,567

Drawdown of loans and borrowings

76,933

 

8,900

Repayment of borrowings

(35,210)

 

(1,766)

Payment of finance lease liabilities

(1,547)

 

(7)

Interest paid

(1,386)

 

(679)

Dividends paid

(5,107)

 

(4,316)

Net cash generated from financing activities

37,288

 

4,699

 

 

 

 

Net increase in cash and cash equivalents

1,130

 

734

Cash and cash equivalents at 1 March

18,798

 

12,365

Effects of exchange rate changes on cash held

200

 

(115)

Cash and cash equivalents at 31 August

20,128

 

12,984

 

The Group has initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

Notes to the Interim Results

 

1    Accounting policies

Basis of Preparation

The results for the six months ended 31 August 2019 are unaudited and have not been reviewed by the Company's Auditors. Except as described below they have been prepared on accounting bases and policies that are consistent with those used in the preparation of the financial statements of the Company for the year ended 28 February 2019.

 

The financial statements contained in this report do not constitute statutory accounts within the meaning of Section 477 of the Companies Act 2006. They have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union. The results for the period ended 28 February 2019 were prepared under International Financial Reporting Standards (IFRSs) as adopted by the EU ("adopted IFRSs") and reported on by the auditors and received an unqualified audit report. Full accounts for the period ended 28 February 2019 have been delivered to the Registrar of Companies.

 

Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

 

Changes in accounting policies

The following standards, amendments and interpretations were effective for accounting periods beginning on or after 1 March 2019 and these have been adopted in the Group financial statements where relevant:

·   IFRS 16 Leases;

·   Amendments to IAS 28 Long-term interests in Associates and Joint Ventures;

·   Annual Improvements to IFRS Standards 2015-2017 Cycle;

·   IFRIC 23 Uncertainty over income tax treatment.

 

The effects of applying IFRS 16 is described in further detail below. The other changes listed above did not result in material changes to the Group financial statements.

 

IFRS 16 Leases

The Group adopted IFRS 16 from 1 March 2019 using the modified retrospective method with the cumulative effect of initially applying the standard reflected as an adjustment to the opening balance of retained earnings as of 1 March 2019; as such, comparative information has not been restated to reflect the new requirements.

 

IFRS 16 changed lease accounting mainly for lessees and replaced the existing standard IAS 17.  An asset for the right to use the leased item and a liability for future lease payments is recognised for all leases, subject to limited exemptions for short-term leases and low-value lease assets. The costs of leases are recognised in profit or loss split between depreciation of the lease asset and a finance charge on the lease liability. This is similar to the accounting for finance leases under IAS 17, but substantively different to the accounting treatment for operating leases under which no lease asset or lease liability was recognised. IFRS 16 also includes an election which permits a lessee not to separate non-lease components (e.g. maintenance) from lease components and instead capitalise both the lease cost and associated non-lease costs.

 

The standard primarily affected the accounting for the Group as a lessee under operating leases. The application of IFRS 16 resulted in the recognition of additional assets and liabilities in the Group balance sheet and in the consolidated income statement and it replaced the straight-line operating lease expense with a depreciation charge for the right-of-use asset and an interest expense on the lease liabilities. The Group availed of the recognition exemption for short-term and low-value leases. The Group also elected to use the following practical expedients available on transition to IFRS 16:

·    not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into or modified before 1 March 2019;

·    use hindsight in determining the lease term;

·    apply a single discount rate to portfolios of leases with reasonably similar characteristics;

·    not to separate non-lease components, instead accounting for any lease and associated non-lease components as a single arrangement.

 

All right-of-use assets were measured at the amount of the lease liability on adoption. The Group's weighted average incremental borrowing rate applied to lease liabilities as at 1 March 2019 is 3.75%.

 

Details of the Group's accounting policies under IFRS 16 are set out below:

 

At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A lease conveys a right to control the use of an identified asset for a period of time in exchange for consideration. At inception or upon reassessment of the arrangement, the Group allocates the consideration for lease and non-lease components on the basis of their relative fair values. However, for certain leases of properties the Group has elected not to separate non-lease components and instead accounts for the lease and non-lease components as a single arrangement. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and by reducing the carrying amount to reflect the lease payments made. It is remeasured, with a corresponding adjustment to the right-of-use asset, when there is a change in the future lease payments. The lease liability is presented within loans and borrowings in the consolidated balance sheet.

 

The right-of-use assets is initially measured at cost, comprising the initial measurement of the corresponding lease liability, any lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The right-of-use asset is tested for impairment if there are any indicators of impairment. The right-of-use assets are presented within the same line item as that within which the corresponding underlying assets would be presented if they were owned - for the Group this is property, plant and equipment.

 

For short-term leases and leases of low-value assets lease payments are recognised in profit or loss on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. This expense is presented within other operating expenses in the consolidated income statement.

 

Prior to 1 March 2019 the policy was as follows:

 

i)    Operating lease payments

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense, over the terms of the lease.

 

ii)   Finance lease payments

Minimum lease payments made under finance leases are apportioned between the finance charge and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

iii)  Determining whether an arrangement contains a lease

At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset.

 

At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group's incremental borrowing rate.

 

Impact of conversion

The following table summarises the impact of transition to IFRS 16 on retained earnings at 1 March 2019.

 

Retained earnings

Impact of adopting IFRS 16 at 1 March 2019

 

£'000

a Property, plant and equipment: Recognition of property, plant and equipment

23,159

b Trade and other receivables: Rent prepayment adjustment

399

c Loan and borrowings non-current: Recognition of long-term lease liability

(19,988)

c Loan and borrowings current: Recognition of short-term lease liability

(3,171)

Impact at 1 March 2019

399

 

The following tables summarise the impacts of adopting IFRS 16 on the Group's interim income statement for the six months ended 31 August 2019 and the Group's interim balance sheet for each of the line items affected.

 

 

Impact on the consolidated income statement

 

 

 

Six months ended 31 August 2019 (unaudited)

Six months ended 31 August 2018 (unaudited)

 

As reported (IFRS 16)

 

 

 

Adjustments

Amounts without adoption of IFRS 16

Amounts without adoption of IFRS 16

 

£'000

£'000

£'000

£'000

 

 

 

 

 

Total revenue

116,676

-

116,676

105,574

Total cost of sales

(68,697)

-

(68,697)

(61,692)

Gross profit

47,979

-

47,979

43,882

 

 

 

 

 

Administrative expenses

(18,874)

(272)

(19,146)

(19,337)

Other operating costs

(18,503)

-

(18,503)

(16,222)

Total operating costs

(37,377)

(272)

(37,649)

(35,559)

 

 

 

 

 

Operating profit

10,602

(272)

10,330

8,323

 

 

 

 

 

Depreciation and amortisation

7,083

(1,557)

5,526

4,774

Other EBITDA adjustments

4,299

-

4,299

4,971

Adjusted EBITDA

21,984

(1,829)

20,155

18,068

 

 

 

 

 

Finance expense

(1,628)

272

(1,356)

(714)

Other finance costs

(534)

-

(534)

(45)

Net finance costs

(2,162)

272

(1,890)

(759)

 

 

 

 

 

Share of loss of associate, net of tax

(8)

-

(8)

(6)

Profit before taxation

8,432

-

8,432

7,558

 

 

 

 

 

Income tax expense

(1,791)

-

(1,791)

(1,626)

 

 

 

 

 

Profit for the period

6,641

-

6,641

5,932

 

 

Impact on the consolidated balance sheet

 

 

 

 

As at 31 August 2019

As at 31 August 2018

As at 28 February 2019

 

 

(unaudited)

(unaudited)

(audited)

 

 

 

 

 

As reported (IFRS 16)

 

 

 

Adjustments

Amounts without adoption of IFRS 16

Amounts without adoption of IFRS 16

Amounts without adoption of IFRS 16

 

Note

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

Property, plant and equipment

 

a

 

32,597

 

(22,332)

 

10,265

 

8,691

 

10,162

Other non-current assets

 

200,819

-

200,819

193,530

189,454

Non-current assets

 

233,416

(22,332)

211,084

202,221

199,616

 

 

 

 

 

 

 

Trade and other receivables

b

61,516

(697)

60,819

57,065

57,915

Other current assets

 

22,783

-

22,783

12,984

20,259

Current assets

 

84,299

(697)

83,602

70,049

78,174

 

 

 

 

 

 

 

Total assets

 

317,715

(23,029)

294,686

272,270

277,790

 

 

 

 

 

 

 

Retained earnings

 

38,516

(399)

38,117

31,831

36,560

Other equity

 

118,437

-

118,437

106,476

106,250

Equity attributable to shareholders

 

 

156,953

 

(399)

 

156,554

 

138,307

 

142,810

 

 

 

 

 

 

 

Loans and borrowings

c

95,188

(19,284)

75,904

33,805

289

Other non-current liabilities

 

14,926

-

14,926

11,742

14,127

Non-current liabilities

 

110,114

(19,284)

90,830

45,547

14,416

 

 

 

 

 

 

 

Loans and borrowings

c

8,094

(3,346)

4,748

3,339

34,998

Other current liabilities

 

42,554

-

42,554

85,077

85,566

Current liabilities

 

50,648

(3,346)

47,302

88,416

120,564

 

 

 

 

 

 

 

Total liabilities

 

160,762

(22,630)

138,132

133,963

134,980

 

 

 

 

 

 

 

Total equity and liabilities

 

317,715

(23,029)

294,686

272,270

277,790

 

 

 

2    Segmental Reporting

Information about reportable segments

 

 

Managed services and consulting

Software

Total

 

2019 

2018 

2019 

2018 

2019 

2018 

 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

Revenue by segment

 

 

 

 

 

 

Revenue

45,235

42,463

71,441

63,111

116,676

105,574

Cost of sales

(34,411)

(33,293)

(34,286)

(28,399)

(68,697)

(61,692)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

10,824

9,170

37,155

34,712

47,979

43,882

 

 

 

 

 

 

 

 

Geographical location analysis

 

 

2019 

 

2018 

 

 

 

£'000

 

£'000

 

 

 

 

 

 

 

 

UK

31,272

 

29,891

 

 

Rest of Europe

21,920

 

17,483

 

 

North America

49,599

 

47,105

 

 

Asia Pacific

13,885

 

11,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

116,676

 

105,574

 

 

 

 

 

 

 

 

 

 

3    Revenue

Disaggregation of revenue

 

Managed services and consulting

Software

Total

 

2019 

2018 

2019 

2018 

2019 

2018 

 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

Revenue by industry

 

 

 

 

 

 

FinTech

45,235

42,463

44,565

40,252

89,800

82,715

MarTech

-

-

22,429

19,789

22,429

19,789

Other

-

-

4,447

3,070

4,447

3,070

 

45,235

42,463

71,441

63,111

116,676

105,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type of good or service

 

 

 

 

 

 

Sale of goods - perpetual

-

-

3,160

6,615

3,160

6,615

Sale of goods - recurring

-

-

28,293

23,823

28,293

23,823

Rendering of services

45,235

42,463

39,988

32,673

85,223

75,136

 

45,235

42,463

71,441

63,111

116,676

105,574

 

 

 

 

 

 

 

Timing of revenue recognition

 

 

 

 

 

 

At a point in time

-

-

3,160

6,615

3,160

6,615

Over time

45,235

42,463

68,281

56,496

113,516

98,959

 

45,235

42,463

71,441

63,111

116,676

105,574

 

4    Dividends

An Interim dividend of 8.50p per share will be made for the six months to 31 August 2019. This will be paid to shareholders on 5 December 2019 to shareholders on the register on 15 November 2019. The shares will be marked Ex-Dividend on 14 November 2019.

 

5    Earnings per Share

Basic earnings per share for the six months ended 31 August 2019 has been calculated on the basis of the reported profit after taxation of £6.6m (H1 2019: £5.9m) and the weighted average number of shares for the period of 26,396,587 (H1 2019: 25,767,759). This provides basic earnings per share of 25.2 pence (H1 2019: 23.0 pence).

 

Diluted earnings per share for the six months ended 31 August 2019 has been calculated on the basis of the reported profit after taxation of £6.6m (H1 2019: £5.9m) and the weighted average number of shares after adjustment for the effects of all dilutive potential ordinary shares 27,496,863 (H1 2019: 27,341,839). This provides diluted earnings per share of 24.2 pence (H1 2019: 21.7 pence).

 

The Board considers that adjusted earnings is an important measure of the Group's financial performance. Adjusted earnings in the period was £10,892k (H1 2019: £10,571k), which excludes the amortisation of acquired intangibles of £1,850k, (H1 2019: £1,846k) share-based payments of £1,578k (H1 2019: £1,543k), acquisition costs of £871k (H1 2019: £1,582k), loss on foreign currency translation of £548k (H1 2019: £46k), share of loss of associate £8k (H1 2019: £6k) and associated taxation impact of these adjustments of £604k (H1 2019: £384k). Using the same weighted average of shares as above provides adjusted basic earnings per share of 41.3 pence (H1 2019: 41.0 pence) and adjusted diluted earnings per share of 39.6 pence (H1 2019: 38.7 pence).

 

 

6    Property, plant and equipment

 

Leasehold

improvements

£'000

Plant and

equipment

£'000

Office furniture

£'000

Right-of-use

assets

£'000

Total

 

£'000

Cost

 

 

 

 

 

At 1 March 2019

5,092

16,151

1,201

-

22,444

Adjustment on initial application of IFRS 16

 

-

 

-

 

-

 

23,159

 

23,159

Additions

18

1,211

10

-

1,239

Exchange adjustments

76

620

10

762

1,468

At 31 August 2019

5,186

17,982

1,221

23,921

48,310

 

Depreciation

 

 

 

 

 

At 1 March 2019

2,099

9,425

758

-

12,282

Charge for the period

189

1,224

116

1,557

3,086

Exchange adjustments

45

258

10

32

345

At 31 August 2019

2,333

10,907

884

1,589

15,713

 

 

Leasehold

improvements

£'000

Plant and

equipment

£'000

Office furniture

£'000

Right-of-use assets

£'000

Total

 

£'000

Cost

 

 

 

 

 

At 1 March 2018

3,622

12,840

869

-

17,331

Additions

1,005

1,208

252

-

2,465

Exchange adjustments

38

7

4

-

49

At 31 August 2018

4,665

14,055

1,125

-

19,845

 

Depreciation

 

 

 

 

 

At 1 March 2018

1,696

7,357

564

-

9,617

Charge for the period

302

1,112

81

-

1,495

Exchange adjustments

6

35

1

-

42

At 31 August 2018

2,004

8,504

646

-

11,154

 

Carrying amounts

 

 

 

 

 

At 1 March 2018

1,926

5,483

305

-

7,714

At 31 August 2018

2,661

5,551

479

-

8,691

At 1 March 2019

2,993

6,726

443

-

10,162

At 31 August 2019

2,853

7,075

337

22,332

32,597

 

 

 

7    Loans and borrowings

 

31 August 2019 

 

31 August 2018 

 

28 February 2019 

 

 

£'000

 

£'000

 

£'000

 

Current liabilities

 

 

 

 

 

 

Secured bank loans

4,651

 

3,339

 

34,909

 

Lease liabilities

3,443

 

-

 

89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,094

 

3,339

 

34,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

Secured bank loans

75,638

 

33,805

 

-

 

Lease liabilities

19,550

 

-

 

289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95,188

 

33,805

 

289

 

 

 

 

 

 

 

 

 

8    Trade and other payables

 

 

31 August 2019 

 

31 August 2018 

 

28 February 2019 

 

£'000

 

£'000

 

£'000

Current liabilities

 

 

 

 

 

Trade payables

7,143

 

6,632

 

6,638

Other payables

11,117

 

9,852

 

10,191

Accruals

888

 

901

 

699

Deferred income

17,546

 

16,078

 

19,537

Government grants

698

 

899

 

390

NCI forward

-

 

41,327

 

40,091

 

 

 

 

 

 

 

 

 

 

 

 

 

37,392

 

75,689

 

77,546

 

 

 

 

 

 

 

 

31 August 2019 

 

31 August 2018 

 

28 February 2019 

 

£'000

 

£'000

 

£'000

Non-current liabilities

 

 

 

 

 

Government grants

2,729

 

1,360

 

2,597

Accruals

1,044

 

-

 

703

 

 

 

 

 

 

 

 

 

 

 

 

 

3,773

 

1,360

 

3,300

 

 

 

 

 

 

 

9    Interim Report

Copies can be obtained from the Company's head and registered office: 3 Canal Quay, Newry, Co. Down, BT35 6BP and are available to download from the Company's web site www.firstderivatives.com.


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Interim results for the six months ended 31.08.19 - RNS