ncc group plc half-yearly report for the six months ended 30 november 2014€¦ · 30-11-2014 ·...

NCC GROUP PLC HALF-YEARLY REPORT 2014 1

NCC GROUP PLC HALF-YEARLY REPORT FOR THE SIX MONTHS ENDED 30 NOVEMBER 2014

2 NCC GROUP PLC HALF-YEARLY REPORT 2014


Highlights 4

Half-Yearly Management Report 6

Operational Review 13

Independent Review Report by KPMG LLP 22

Group Condensed Income Statement 25

Group Condensed Statement of Comprehensive Income 26

Group Condensed Statement of Financial Position 27

Group Condensed Statement of Cash Flows 28

Group Condensed Statement of Changes in Equity 29

Notes to the Half-Yearly Report 30

Statement of Directors’ Responsibilities 44

Company Information 45

CONTENTS



HIGHLIGHTS


£62.3mGroup revenue increased 15% to £62.3m (£54.0m in 2013) - 17% on a constant currency basis

41%US revenue growth of 41% on a constant currency basis

£14.3mGroup adjusted operating profits* excluding Domain Services grew by 14% to £14.3m (£12.6m in 2013)

£12.1mGroup adjusted pre-tax profit* increased 5% to £12.1m (£11.4m in 2013)

1.30pInterim dividend up 14% to 1.30p (1.14p in 2013)

47%International revenue now 47% (39% in 2013) of Group revenue

£12.4mGroup adjusted operating profit* up by 6% to £12.4m (£11.8m in 2013)

£11.1mReported operating profit was £11.1m (£11.6m in 2013)

4.50pAdjusted fully diluted earnings* per share increased 6% to 4.50p (4.24p in 2013)

105%Cash conversion ratio 105% of operating profit (104% in 2013)

£15.4mEscrow achieving strong revenue growth of 4% to £15.4m (£14.8m in 2013)

£8.9mEscrow adjusted operating profits* up by 6% to £8.9m (£8.4m in 2013)

£46.9mAssurance revenues increasing by 20% (15% in 2013) to £46.9m (£39.1m in 2013)

£7.7mAssurance adjusted operating profits* up 23% to £7.7m (£6.3m in 2012)

£14.9mDomain Services expanded by £14.9m acquisition of Open Registry (20 January 2015)

Purchase of .trust and sale of .secure completed

Financial Operational

£57.2mTotal Group orders and renewals up 11% totalling £57.2m (£51.4m in November 2013) for the current financial year

With Open Registry, Domain Services is now able to offer end to end, secure domain service capabilities

* Operating profit is adjusted for amortisation of acquired intangibles, exceptional items and share based payment charges. Pre-tax profit is adjusted for these items and the unwinding of the discount on the acquisitions’ contingent consideration

Outlook


OVERVIEW

Group revenue in the first half increased by 15% to £62.3m (£54.0m in 2013), or 17% on a constant currency basis, with good growth coming from both the Assurance and Escrow divisions. All growth was organic.

International revenue, the majority of which is derived from the US, has continued to grow strongly and is now 47% (39% in 2013) of total Group revenue.

Group adjusted operating profit increased by 6% to £12.4m (£11.8m in 2013). Escrow operating profit grew by 6% to £8.9m (£8.4m in 2013) and Assurance by 23% to £7.7m (£6.3m in 2013). Good operational cost control within Domain Services saw expenditure at £1.9m (£0.8m in 2013).

Domain Services has completed a number of key developments, .trust was bought whilst after the period end .secure was sold. The division’s capabilities were significantly enhanced by the acquisition of Open Registry for up to £14.9m on 20 January 2015. Open Registry Domain Services, as it is now known, provides backend registry operations to brand customers as well as registrar and trademark validation services. The division is now able to provide a secure end-to-end solution for all customers’ domain needs.

Group adjusted diluted earnings per share improved 6% to 4.50p (4.24p in 2013). The Board has continued its progressive dividend policy, increasing the interim dividend by 14% to 1.30p (1.14p in 2013).

The Group continues to be highly cash generative with the ratio of operating cash flow before interest and tax being 105% of operating profits (104% in 2013). Net debt at the end of the period was £31.3m (£26.2m in 2013) against existing facilities of £45m at the period end. In January 2015 this facility was increased to £60m.


RevenueGroup revenue was £62.3m (£54.0m in 2013) with international revenue now making up 47% (39% in 2013) of total Group revenue. Escrow accounted for 25% of NCC Group’s total revenue (27% in 2013) with Assurance representing 75% (73% in 2013).

The table below summarises revenue by division, including their key business areas.

FINANCIAL REVIEW

2014Six months

ended30 November

2013Six months

ended30 November

%Change

%Constant currency

£000 £000

Revenue by business segment

Escrow UK 11,314 10,824 5 -

Escrow Europe 1,553 1,634 (5) 2

Escrow USA 2,520 2,353 7 11

Total Escrow 15,387 14,811 4 5

Security Consulting 36,155 27,185 33 35

Web Performance and Software Testing

10,783 12,003 (10) (10)

Total Assurance 46,938 39,188 20 21

Total Revenue 62,325 53,999 15 17


On a constant currency basis European and US Escrow growth would be 2% and 11% respectively and 21% for total Assurance revenue growth.

Within Assurance, the Security Consulting unit, grew by 32% in the UK and Europe and 35% in North America, 41% on a constant currency basis.

The table below provides an analysis of the Group’s revenue by geographical market where the customer is based. It highlights the significant increase in the scale of the US operations that make up the majority of the rest of the world revenue.

FINANCIAL REVIEW continued

2014Six months

ended30 November

2013Six months

ended30 November

%Change

£000 £000

Revenue by geographical destination

UK 33,309 33,011 1

Rest of Europe 6,328 4,066 56

Rest of the world 22,688 16,922 34

Total Revenue 62,325 53,999 15


ProfitabilityGroup adjusted operating profit, before amortisation of acquired intangible assets, exceptional items, share-based payments and the unwinding of the discount on acquisitions, increased by 6% to £12.4m (£11.8m in 2013).

Group adjusted operating profit is after the £1.9m (£0.8m in 2013) expensed in respect of the continued investment in Domain Services. Excluding these costs, Group adjusted operating profit increased by 14% to £14.3m (£12.6m in 2013).

The Group adjusted operating profit margin was 20% (22% in 2013) as a result of the continued growth of Assurance, which has lower margins than Escrow and the impact of the expensed Domain Services investment.

Assurance and Escrow operating margin improved to 17% (16% in 2013) and 58% (57% in 2013) respectively.

2014Six months

ended30 November

2013Six months

ended30 November

£000 £000

Operating profit by business segment

Group Escrow 8,889 8,366

Assurance Testing 7,747 6,283

Domain Services (1,887) (799)

Segment operating profit 14,749 13,850

Head office costs (2,300) (2,066)

Operating profit before amortisation of acquired intangibles, charges for share based payments and exceptional items

12,449 11,784

Amortisation of intangible assets Group Escrow (420) (355)

Amortisation of intangible assets Assurance (464) (925)

Share based payments (338) (605)

Operating profit before exceptional items 11,227 9,899

Exceptional items (158) 1,685

Operating profit 11,069 11,584



Profitability (continued) The Group’s operating profit before exceptional items grew by 14%. The small exceptional cost related to the ongoing legal action with the former provider of the failed Group SAP IT solution in 2012. In the prior year an exceptional profit was reported due to £1.9m of earn out consideration from a previous acquisition no longer becoming payable.

The Group’s reported pre-tax profit was £10.6m (£11.1m in 2013) after the inclusion of the unwinding of the discount on the acquisitions contingent consideration, amortisation of acquired intangible assets, share based payments and exceptional items.

Taxation The tax charge for the six months ended 30 November 2014 is 21% (22% in 2013) of profit before tax and is based upon the expected tax rate for the full year.

The expected rate reflects the continued reduction in the UK corporate tax rates and the US tax treatment of Domain Services costs.

Earnings per share The adjusted basic earnings per share from operations increased by 7% to 4.6p (4.3p in 2013) and reported basic earnings per share from operations were 4.0p (4.2p in 2013).

The table below analyses the effect on the Group’s basic earnings per share of the amortisation of acquired intangibles, unwinding of the discount on contingent consideration for acquisitions, the effect of the exceptional items and share based payments.

The adjusted fully diluted earnings per share from continuing operations increased 6% to 4.5p (4.2p in 2013) whilst reported fully diluted earnings per share was 4.0p (4.1p in 2013).

2014Six months

ended30 November

2013Six months

ended30 November

pence pence

Basic EPS

Group earnings per share - unadjusted 4.0 4.2

Amortisation of acquired intangibles 0.4 0.5

Exceptional items 0.1 (0.6)

Share based payments 0.1 0.2

Adjusted basic EPS 4.6 4.3



DividendsIn line with a continuing progressive dividend policy, the Board is paying an interim dividend of 1.30p (1.14p in 2013), an increase of 14%. This will be paid on 27 February 2015 to shareholders on the register at the close of business on 30 January 2015, with an ex-dividend date of 29 January 2015.

This represents cover of 3.1 times (3.7 times in 2013) based on basic earnings from continuing operations and cover of 3.5 times on an adjusted basic earnings on continuing operations basis (3.7 times in 2013).

Cash & fundingOperating cash flow before interest and tax, as a ratio to operating profits of £11.1m, remained strong at 105% (104% in 2013). The Group remains committed to strong balance sheet management and borrowing only for affordable value enhancing acquisitions and the expansion of suitably considered service lines.

The Group had net debt of £31.3m (£26.2m in 2013) at the period end against facilities of £45m.

On 20 January 2015 the Group acquired the Open Registry group of companies for £14.9m (€19.5m) of which £7.9m (€10.3m) was paid on completion.

The Group increased its banking facilities to £60m comprising a £55m revolving credit facility and a £5m overdraft on the same terms.

A deferred consideration payment of £0.7m for FortConsult will be paid during the second half of the financial year.

Capital expenditure increased to £9.7m (£4.5m in 2013) as the Group continued its investment in Domain Services with capital expenditure in that Division of £4.1m. The Group also continued to invest in the new Group IT system (£1.2m) and spent £1.8m on the refurbishing and opening of new offices.



Group Escrow

Escrow remains the cornerstone of the Group’s profitability and cash generation. All of the Escrow businesses offer substantial margins, a high degree of recurring revenue due to the contract renewal rates, as well as notably strong cash conversion characteristics.

Group Escrow revenue increased by 4% (7% in 2013) to £15.4m (£14.8m in 2013) or 5% on a constant currency basis. Global verification revenues continued the trend seen in the second half of the last financial year and grew by 8% to £3.7m (£3.4m in 2013).

Group recurring revenues through the renewals process will grow to £18.3m this financial year (£18.1m in 2013).

Group Escrow operating profitability grew by 6% (8% in 2013) to £8.9m (£8.4m in 2013).

The division was strengthened by the appointment of a new divisional Group Managing Director on 1 June 2014. The division is expected to actively increase headcount in all its sales locations in the next six months.

In November 2014 Escrow UK prices were increased slightly ahead of inflation and mainland Europe and US are following in the second half of the financial year.

Escrow UK

The first half of the financial year saw a good performance in the traditionally quieter period. Even though the rate of growth was slightly lower, the performance was reassuringly strong as UK revenue grew 5% (7% in 2013) to £11.3m (£10.8m in 2013).

The underlying termination rate fell to about 11% (12% in 2013), the first change in six years. There has been no discernible change in the reasons for termination.

Escrow Europe & Escrow USA

Escrow Europe revenues were £1.6m (£1.6m in 2013), although on a constant currency basis, this would have shown 2% growth. The business has a new General Manager and the European teams are now stable.

Escrow USA revenue increased by 7% (8% in 2013) to £2.5m. On a constant currency basis this would have been a very satisfying 11% growth, with strong performances from both Atlanta and San Francisco.

OPERATIONAL REVIEW


OPERATIONAL REVIEW continued

Assurance DivisionDespite the Group’s decision to relinquish a number of low margin software testing contracts, Assurance revenue increased by 20% to £46.9m (£39.2m in 2013). Within Assurance, Security Consulting grew by 32% in the UK and Europe and 35% in North America, which is 41% on a constant currency basis.

During the half year, operating profits for the division increased 23% to £7.7m (£6.3m in 2013).

The Group now has one of the largest multi-national accredited security testing teams of consultants in the industry with over 325 members. The Division employs over 700 globally, with a new team currently being formed in Spain where some extremely talented security consultants reside, who are capable of working across Europe. This further enhances the Division’s capability to offer complete international support to multi-national organisations seeking to improve their information security.

For Assurance, staff retention and recruitment remain the most important issues. The careful balancing of paid-for utilisation, quality of deliverable work and research ensures that employee churn in the security team is consistently and significantly less than the 10% staff churn Group target and significantly less than 30% which is regarded as normal in skilled IT environments. Adopting this approach also ensures the Group’s exemplary reputation remains intact, which is one of the key draws for new employees.

The Group has a very good reputation for security research as well as for the delivery of web applications, vulnerability assessments and forensics, in addition to being a leading provider of managed security services.

The Group actively promotes a responsible disclosure policy for both paid for and self-funded vulnerability research. In the last 12 months, Group employees uncovered 170 new vulnerabilities, of which 70 were classified as being of critical or high importance. To date, developers and software owners have fixed only five of them. In addition 11 white papers and 36 new security tools were released.

The managed services provided by the Group, the forerunner of the security monitoring service offered in Domain Services, currently runs over 5,000 application, infrastructure and monitoring scans per month. This equates to monitoring over 80,000 live IP addresses monthly or over five million annually. Currently this service is identifying over 160,000 incidents a month, which is five times as high as this time last year.

The web monitoring, performance and load testing business continued to perform strongly. It achieved a recurring revenue rate above 91% (90% in 2013) as businesses continue to recognise the importance of their website to their business prospects.



Security marketplaceThe growth of the information security market place remains very strong as cyber crime and data breaches proliferate with reports of corporate breaches hitting the headlines on a daily basis. Details of widespread security vulnerabilities such as Heartbleed, Shellshock and Poodle have been revealed.

If ever there had been any doubt about nation state capability, the visible exposure of the North Korean attack on Sony, and the follow up responses and reprisals, confirmed the reality of global cyber warfare.

The reappearance of hacktivists, who disrupted both Sony and Microsoft gaming platforms during the holiday season, served as a timely reminder that theft of IP and property, digital vandalism and hacktivism is both malicious and disruptive. Defending against the damage and disruption is expensive, time consuming and can paralyse organisations.

The breaches suffered by the US companies Target and Home Depot are still being globally replicated. In the UK last year more than 80% of large organisations experienced a security breach. According to the 2014 Information Security Breaches Survey commissioned by the UK Department for Business, Innovation & Skills the worst breaches cost large organisations, on average £0.6m - £1.2m, which is an increase of 33% - 50% on last year.

For small businesses the average cost increased by 60% to on average £65k - £115k. The poll found that 59% expect there to be more breaches over the next year.

Despite the almost daily reporting of hacks and data breaches in the UK, the general public is still largely in the dark about what data of theirs has been compromised or about what to do to safeguard their data. The proliferation of generic Top Level Domains (gTLDs) will present more opportunities for on-line fraud along with the weakening potency of anti-virus software, which is no longer capable of providing an active defence. Real investment is required by organisations and government agencies.

From the “Trust in The Internet” survey conducted by IDG, commissioned by NCC Group which surveyed 10,000 people in North America and the UK, 77% of people confirmed that they do not feel very safe when shopping or banking online. Full details are available on www.nccgroup.com.

The poll also revealed that 62% of respondents are more concerned about online security now than they have ever been, while 23% of people are doing less online due to their security concerns. Significantly 59% of respondents said they are uncomfortable sharing sensitive financial and personal information when they shop and interact with organisations online.

Concurringly, 64% of consumers believe that they are likely to end up a victim of a security breach within the next 12 months, while 84% of people believe companies should compensate customers financially for their loss if they experience a breach.

The backdrop of falling consumer confidence and weakening defences is an ideal market for both the Assurance Division and Domain Services Division to thrive in.



Domain ServicesThe Group has made considerable progress in this area and is now able to provide an end-to-end secure domain solution service. The development of the technical capability and the infrastructure to deliver the .trust community has progressed very well. It is on track, ahead of the initial cost estimates and is nearing completion.

The recent acquisition of Open Registry considerably strengthens the Group’s ability to offer a very secure unique service complementing the provision of .trust.

The Group now has the ability to provide a trusted secure domain environment by operating a number of complementary capabilities including backend operator (registry), a corporate registrar, third party data escrow to all parts of the market and anti-abuse monitoring as required by ICANN.

The Group completed the purchase of .trust and has seen it progress through the orderly ICANN process to becoming a live domain on the Internet. So far it has passed pre-delegation testing and is currently part way through the 90 days name collision process.

The sunrise period is open for customers to register early their interest in .trust domains, but as the service is being sold on a targeted approach to specific brands, this is not expected to yield any issues.

The .trust domain is expected to be live by the end of February and when it is, the Group will be the first organisation to move to the domain with its website becoming www.nccgroup.trust.

The Group is now solely focussed on .trust, having reached, on 3 December 2014, a suitable financial arrangement to relinquish its interest in the .secure domain that had been applied for. The proceeds from relinquishing .secure will be used against capitalised development costs incurred to date.

The total anticipated capital expenditure and operating costs are likely to be around £9.5m in this financial year (£8.3m at 31 May 2014).

To date the Group has capitalised £9.6m (£5.0m at 31 May 2014) of development costs for this project which relates to the cost of the domain, product and infrastructure design, cost and construction, know-how and filing of patents.

During the period £1.9m has been expensed (£0.8m at 30 November 2014).

The Group remains on track to launch the service at the end of Q1 2015.


Roll out of .trust & background to acquisition of Open RegistryThe strategy for Domain Services is based primarily around the provision of .trust as a domain. Behind that stands the Group’s high bar Technical Policy. This forms the basis for organisations to set their security policy. NCC Group’s unique multi tool based monitoring service has been developed to monitor and report compliance.

This approach is aimed at those organisations that are brand aware, have a substantial Internet presence and whose business is reliant upon the two-way passage of information between organisations or individuals using the Internet. This covers retail and financial organisations, especially those who have high levels of consumer traffic, but also companies who have frequent interaction with their supply chain.

Moving to .trust is a significant step for organisations to contemplate. Internally there are multiple stakeholders to persuade and convince, although within most organisations awareness of the changes taking place in the domain world is still low or non-existent. This lack of understanding is not just specific to .trust but is common to all of the new domains as demonstrated by the much slower than anticipated global take up rate of new domain extensions by companies and individuals.

Awareness is highest amongst the 600 brands who have registered for their own domain, but despite the fact that a number are beginning to be delegated, most remain unclear of what to use them for.

Equally, there are many who are aware of the changes taking place, who have not registered their brand or name for a myriad of reasons, including, becoming aware of the process too late, consciously deciding not to or because they were unable to as their name contained a generic word or city name.

These are also potential candidates for .trust as they recognise the need to protect their brand and remove confusion from their customers.

The three main issues confronting an organisation contemplating joining the .trust community are; can it meet the security policy standards set; what are its competitors doing; and does it want to be the first member of the community. Within this comes the subset of questions concerning their current .com estate as well as owning, applying for or using their own domains or other generics.

The approach applied to these clients therefore has to be consultative. This typically also brings out other areas of domain control that they have not considered, which slows the decision making process further, such as which of the other multitude of domains that exist should they be considering.



Roll out of .trust & background to acquisition of Open Registry (continued)

Currently the Group is engaged in detailed discussions with approximately 30 organisations about joining the community. From these, it has become apparent that the decision making process is considerably slower and more involved than was first thought, and this has not been helped by the extended time it has taken to be get .trust live.

The Group has introduced more steps to allow organisations to get the full benefit of .trust in component stages.

To that end customers are now able to secure their .trust domain for a fee as a placeholder and then look at all of the next stages without committing directly to joining the community. Further a number of customers are looking to use the unique monitoring service against their existing estate to provide them a comprehensive security monitoring service, whilst they formulate their domain strategy.

This approach is being equally applied to monitoring brands’ domains for organisations. Consequently it is likely that the revenue streams will be delivered in Domain Services, although not necessarily immediately as was first thought.

A number of the Group’s customers now want to be prepared for the next application process and will want to apply for their own domain names, as well as having their entire domain services requirements looked after by a single entity.

In order to provide this service, the Group acquired the Open Registry to expand its offering to cover not only the application process but all the registry, registrar and consultancy services that are required. These complement the Group’s capabilities in security, domain abuse monitoring and escrow services.

The services that can be offered by NCC Group Domain Services are end to end. This is unique in an emerging and confused market place, and gives the Group a significant advantage to take the opportunities as they initially slowly arise.

Group IT Systems The Group’s replacement IT system is now partially operational. Some of the benefits are already beginning to be seen, although it will take a further 12 months to complete the project around all the Group’s international offices.

The contractual dispute with the third party implementer, who was responsible for the failed SAP project in 2012, Ciber UK, continues. The Group remains committed to pursuing robustly all reasonable and appropriate steps to receive a suitable recompense.



The Group remains focused on risk mitigation and delivering client peace of mind, by providing a complementary range of services that has the width and depth to provide multinational clients with a total solution to their information security issues.

The approach of all three Divisions remains unchanged; to develop the business by a combination of acquisitions of earnings enhancing, high quality businesses, with strong organic growth, all focused away from areas of discretionary expenditure.

The Escrow businesses expect annual renewals to be £18.3m (£18.1m in November 2013) in this financial year, based on termination rates at 11%. The Escrow verification testing worldwide order book stands at £2.3m (£2.7m in November 2013). Assurance order books have improved to £29.8m (£23.8m in November 2013) and have £6.8m of monitoring renewals forecast for the current financial year (£6.8m in November 2013).

In total, the Group’s orders and renewals for the current financial year have increased by 11% to £57.2m (£51.4m in November 2013), excluding the newly acquired Open Registry business.

The Group’s revenue has always been biased towards the second half of the financial year and this is expected to continue this year.

The expansion of service offerings within Domain Services substantially increases the Group’s ability to provide an end to end service to customers. The Group expects that this will see a strong take up of .trust domains in due course, following a process that will involve greatly improving customers’ web security in their existing web estate.

The Group is operating in growth markets and expects that the enhanced Domain Services division will start to see revenues delivered soon.

The Board remains very confident of a strong second half to the financial year.

CURRENT TRADING & OUTLOOK


The Group faces operational risks and uncertainties, which the Directors take all reasonable steps possible to mitigate, however the Directors recognise that they can never be eliminated completely.

The principal operational risks and uncertainties the Group faces include those in relation to the recruitment of additional staff to meet the Group’s ambitious growth plans, the occurrence of unforeseen difficulties in the integration of the current or future acquisitions the Group may enter into and the dependence on key executives and senior managers and the speed of adoption of new gTLD’s by customers and consumers globally.

There are no persons with whom the Company has contractual or other arrangements that are deemed to be essential to the Group.

PRINCIPLE RISKS & UNCERTAINTIES

Rob CottonChief Executive 22 January 2015


INDEPENDENT REVIEW REPORT TO NCC GROUP PLC

IntroductionWe have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 November 2014 which comprises the Group condensed income statement, the Group condensed statement of comprehensive income, the Group condensed statement of financial position, the Group condensed statement of changes in equity, the Group condensed statement of cash flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules (“the DTR”) of the UK’s Financial Conduct Authority (“the UK FCA”).

Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.


Directors’ responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2014 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 November 2014 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

INDEPENDENT REVIEW REPORT TO NCC GROUP PLC continued

Stuart Burdassfor and on behalf of KPMG LLP

Chartered Accountants 1 St Peter’s Square, Manchester, M2 3AE

22 January 2015


GROUP CONDENSED INCOME STATEMENT

Notes 2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000Continuing operations

Revenue 2 62,325 53,999 110,661

Cost of sales (42,779) (35,291) (71,193)

Gross profit 19,546 18,708 39,468

Administrative expenses before amortisation of acquired intangible assets, share based payments and exceptional items

(7,097) (6,924) (13,440)

Operating profit before amortisation, share based payments and exceptional items

12,449 11,784 26,028

Amortisation of acquired intangible assets (884) (1,280) (2,116)

Share based payments (338) (605) (1,108)

Exceptional items 3 (158) 1,685 1,268

Total administrative expenses (8,477) (7,124) (15,396)

Operating profit 2 11,069 11,584 24,072

Financial income - - 24

Finance expense excluding unwinding of discount (395) (344) (765)

Net finance expense excluding unwinding of discount (395) (344) (741)

Unwinding of discount effect relating to deferred consideration on business combinations

(65) (107) (120)

Financial expenses (460) (451) (885)

Net financing costs (460) (451) (861)

Profit before taxation 10,609 11,133 23,211

Taxation 4 (2,243) (2,448) (5,104)

Profit for the period 8,366 8,685 18,107

Attributable to equity holders of the parent company 8,366 8,685 18,107

Earnings per share from continuing operations 5

Basic earnings per share 4.0p 4.2p 8.7p

Diluted earnings per share 4.0p 4.1p 8.6p


GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Profit for the period 8,366 8,685 18,107

Other comprehensive income

Foreign exchange translation differences 1,171 (1,175) (1,968)

Total comprehensive income for the period

9,537 7,510 16,139

Attributable to:

Equity holders of the parent 9,537 7,510 16,139


GROUP CONDENSED STATEMENT OF FINANCIAL POSITION

Notes 201430 November

201330 November

201431 May

£000 £000 £000

Non-current assets

Intangible assets 7 118,478 104,398 110,064

Plant and equipment 8,045 5,453 6,244

Deferred tax assets 3,098 1,749 2,299

Total non-current assets 129,621 111,600 118,607

Current assets

Trade and other receivables 9 30,513 25,200 28,691

Cash and cash equivalents 6,987 7,527 11,212

Total current assets 37,500 32,727 39,903

Total assets 167,121 144,327 158,510

Equity

Issued capital 2,088 2,085 2,085

Share premium 23,935 23,551 23,634

Reserve for own shares (51) - (1,075)

Retained earnings 58,652 48,205 56,003

Currency translation reserve 120 (258) (1,051)Total equity attributable to equity holders of the parent 84,744 73,583 79,596

Non-current liabilities

Interest bearing loans 11 38,290 33,709 34,786

Other financial liabilities 438 531 484

Deferred tax liability 3,387 2,115 2,444Contingent consideration on acquisitions 1,024 - 1,001

Total non-current liabilities 43,139 36,355 38,715

Current liabilities

Trade and other payables 10 16,757 11,248 17,363Contingent consideration on acquisitions 745 4,288 2,940

Deferred revenue 17,690 16,391 17,207

Current tax payable 4,046 2,462 2,689

Total current liabilities 39,238 34,389 40,199

Total liabilities 82,377 70,744 78,914

Total liabilities and equity 167,121 144,327 158,510


GROUP CONDENSED STATEMENT OF CASH FLOWS

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Cash inflow from operating activitiesProfit for the period 8,366 8,685 18,107Adjustments for:Depreciation charge 1,182 998 2,092Share based charges (net of national insurance) 294 465 887

Amortisation of intangible assets 1,125 1,435 2,438Net financing costs 460 451 861(Profit)/loss on sale of plant and equipment (33) - 10Adjustments to contingent consideration - (1,894) (1,894)Income tax expense 2,243 2,448 5,104Cash inflow for the period before changes in working capital 13,637 12,588 27,605

Increase in trade and other receivables (1,790) (726) (3,414)(Decrease)/Increase in trade and other payables (164) (1,805) 4,661

Cash generated from operating activities before interest and tax 11,683 10,057 28,852

Interest paid (417) (423) (798)Income tax paid (715) (2,058) (4,489)Net cash generated from operating activities 10,551 7,576 23,565

Cash flows from investing activitiesInterest received - 23 24Acquisition of plant and equipment (2,732) (1,303) (3,237)Development expenditure (6,993) (3,192) (7,520)Acquisition of business net of cash acquired (2,260) (378) (4,249)Net cash used in investing activities (11,985) (4,850) (14,982)Cash flows from financing activitiesProceeds from the issue of ordinary share capital 304 475 558

Purchase of own shares - (1,048) (2,123)Draw down of borrowings 2,087 5,355 6,838Equity dividends paid (4,919) (4,403) (6,778)Net cash from financing activities (2,528) 379 (1,505)

Net (decrease)/increase in cash and cash equivalents (3,962) 3,105 7,078

Cash and cash equivalents at beginning of period 11,212 4,589 4,589

Effect of exchange rate fluctuations (263) (167) (455)Cash and cash equivalents at end of period 6,987 7,527 11,212


GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

Share capital

Share premium

Currency Translation

reserve

Reserve for own shares

Retained earnings

Total

£000 £000 £000 £000 £000 £000

Balance at 1 June 2013 2,075 23,086 917 - 44,392 70,470

Profit for the period - - - - 8,685 8,685Foreign currency translation differences - - (1,175) - - (1,175)

Total comprehensive income for the period - - (1,175) - 8,685 7,510

Transactions with owners recorded directly in equityDividends to equity shareholders - - - - (4,402) (4,402)Share based payment transactions - - - - 465 465Current and deferred tax on share based payments - - - - 113 113

Shares issued 10 465 - - - 475Purchase of own shares - - - - (1,048) (1,048)Total contributions by and distributions to owners 10 465 - - (4,872) (4,397)

Balance at 30 November 2013 2,085 23,551 (258) - 48,205 73,583

Balance at 1 June 2013 2,075 23,086 917 - 44,392 70,470

Profit for the period - - - - 18,107 18,107Foreign currency translation differences - - (1,968) - - (1,968)

Total comprehensive income for the period - - (1,968) - 18,107 16,139

Transactions with owners recorded directly in equityDividends to equity shareholders - - - - (6,778) (6,778)Share based payment transactions - - - - 887 887Current and deferred tax on share based payments - - - - 443 443

Shares issued 10 548 - - - 558Purchase of own shares - - - (1,075) (1,048) (2,123)Total contributions by and distributions to owners 10 548 - (1,075) (6,496) 7,013

Balance at 31 May 2014 2,085 23,634 (1,051) (1,075) 56,003 79,596

Balance at 1 June 2014 2,085 23,634 (1,051) (1,075) 56,003 79,596

Profit for the period - - - - 8,366 8,366Foreign currency translation differences - - 1,171 - - 1,171

Total comprehensive income for the period - - 1,171 - 8,366 9,537

Transactions with owners recorded directly in equityDividends to equity shareholders - - - - (4,919) (4,919)Share based payment transactions - - - - 294 294Current and deferred tax on share based payments - - - - (68) (68)

Shares issued 3 301 - 1,024 (1,024) 304Total contributions by and distributions to owners 3 301 - 1,024 (5,717) (4,389)

Balance at 30 November 2014 2,088 23,935 120 (51) 58,652 84,744


NOTES TO THE HALF-YEARLY REPORT

1. Accounting policies 31

2. Segmental information 33

3. Exceptional items 36

4. Taxation 37

5. Earnings per share 37

6. Dividends 38

7. Intangible assets 39

8. Capital expenditure 40

9. Trade and other receivables 40

10. Trade and other payables 40

11. Interest bearing loans 41

12. Acquisitions 42

13. Related party transactions 42

14. Post balance sheet events 43



1. Accounting policiesBasis of preparationThe Group condensed half-yearly financial statements for the six months ended 30 November 2014 have been prepared in accordance with IAS 34, “Interim Financial Reporting” as adopted by the EU.

As required by the Disclosure and Transparency Rules of the Financial Services Authority the financial information contained in this report has been prepared using the accounting policies applied for the year ended 31 May 2014. They do not contain all the information required for full annual financial statements and should be read in conjunction with the annual financial statements for the year ended 31 May 2014.

The financial statements of the Group for the year ended 31 May 2014 are available from the Company’s registered office, or from the website www.nccgroup.com.

The comparative figures for the financial year ended 31 May 2014 are not the company’s statutory accounts for that financial year. Those accounts, which were prepared under IFRS as adopted by the EU (“adopted IFRS”), have been reported on by the company’s auditors and delivered to the registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

NCC Group plc (“the Company”) is a company incorporated in the UK.

1. Accounting policiesSignificant accounting policiesThe accounting policies applied by the Group in these consolidated half-yearly financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 May 2014.

There are no IFRS or IFRIC interpretations effective for the first time this financial period that have had a material impact on the Group.


1. Accounting policies (continued) Going concernThe Group’s activities, together with the factors likely to affect its future development, performance and position are set out in the financial and operational reviews.

The Directors have reviewed the trading and cashflow forecasts as part of their going concern assessment including reasonable downside sensitivities which take into account the uncertainties in the current operating environment.

Taking into account the above uncertainties and circumstances, the Directors formed a judgement that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

Accordingly they continue to adopt the going concern basis in preparing the Group’s condensed half-yearly financial statements for the period ended 30 November 2014.

Use of estimates and judgementsThe preparation of the consolidated half-yearly financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

In preparing the consolidated half-yearly financial statements, the significant judgements made by management in applying the Group’s accounting policies and key sources of estimated uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 May 2014.



2. Segmental informationThe Group is organised into three operating segments (30 November 2013: three): Group Escrow, Assurance and Domain Services each of which is separately reported.

Whilst revenue and profitability are monitored by individual business units within these operational segments it is only at the operating level that resource allocation decisions are made. Performance is measured based on segment profit, which comprises segment operating profit excluding amortisation of acquired intangible assets, share based payment charges and exceptional items. Interest and tax are not allocated to business segments and there are no intra-segment sales.

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Revenue by business segment

Escrow UK 11,314 10,824 22,507

Escrow Europe 1,553 1,634 3,285

Escrow USA 2,520 2,353 4,663

Total Group Escrow 15,387 14,811 30,455

Security Consulting 36,155 27,185 57,506

Web Performance and Software Testing 10,783 12,003 22,700

Total Assurance 46,938 39,188 80,206

Domain Services - - -

Total Revenue 62,325 53,999 110,661



2. Segmental information (continued)

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Operating profit by business segment

Group Escrow 8,889 8,366 18,056

Assurance 7,747 6,283 14,052

Domain Services (1,887) (799) (2,126)

Segment operating profit 14,749 13,850 29,982

Head office costs (2,300) (2,066) (3,954)

Operating profit before amortisation, share based payments and exceptional items

12,449 11,784 26,028

Amortisation of acquired intangible assets Group Escrow

(420) (355) (1,097)

Amortisation of acquired intangible assets Assurance

(464) (925) (1,019)

Share based payments (338) (605) (1,108)

Operating profit before exceptional items 11,227 9,899 22,804

Exceptional items (158) 1,685 1,268

Operating profit 11,069 11,584 24,072



2. Segmental information (continued)There are no customer contracts which account for more than 10% of segment revenue.

The table below provides an analysis of the Group’s revenue by geographical market where the customer is based.

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Revenue by geographical destination

UK 33,309 33,011 66,366

Rest of Europe 6,328 4,066 10,453

Rest of the World 22,688 16,922 33,842

Total Revenue 62,325 53,999 110,661



3. Exceptional itemsThe Group identifies separately items as “exceptional”. These are items which in the management’s judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.

Legal fees of £158,000 (30 November 2013: £209,000) are primarily in respect of legal advice received in relation to the Group’s claim to recover capitalised and other costs incurred as part of the Group’s IT system implementation which was terminated in May 2012. They have been included in exceptional items to be consistent with the treatment of these costs in previous years.

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Exceptional items and acquisition related costs

Legal fees (158) (209) (334)

Acquisition related costs - - (292)

Revision to estimates of contingent consideration

- 1,894 1,894

Total (158) 1,685 1,268



4. TaxationThe Group tax charge represents the estimated annual effective rate of 21% (30 November 2013: 22%) applied to the profit before tax for the period.

5. Earnings per shareThe calculation of earnings per share is based on the following:

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Profit for the period from continuing operations used for earnings per share

8,366 8,685 18,107

Amortisation of acquired intangible assets 884 1,280 2,116

Exceptional items 158 (1,685) (1,268)

Unwinding of discount 65 107 120

Share based payments 388 605 1,108

Tax arising on the above items (301) (44) (430)

Adjusted profit from continuing operations used for adjusted earnings per share

9,510 8,948 19,753

Number of shares

000’s

Number of shares 000’s

Number of shares 000’s

Basic weighted average number of shares in issue

208,811 208,385 208,154

Dilutive effect of share options 3,619 2,711 3,283

Diluted weighted average shares in issue 211,430 211,096 211,437



6. Dividends

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Dividends paid and recognised in the period 4,919 4,402 6,778

Dividends proposed but not recognised in the period

2,715 2,376 4,920

Dividends per share paid and recognised in the period

2.36p 2.12p 3.26p

Dividends per share proposed but not recognised in the period

1.30p 1.14p 2.36p



7. Intangible assets

Software Development costs

Customer contracts and relationships

Goodwill Total

£000 £000 £000 £000 £000

Net book value:

At 1 June 2013 2,225 1,457 9,809 92,189 105,680

Other acquisitions – internally developed

1,958 1,234 - - 3,192

Effects of movements in exchange rates

- (105) (532) (2,402) (3,039)

Amortisation (159) - (1,276) - (1,435)

At 30 November 2013 4,024 2,586 8,001 89,787 104,398

Acquisitions through business combinations

18 - 634 2,735 3,387


1,908 2,420 - - 4,328


- (32) (143) (871) (1,046)

Amortisation (163) - (840) - (1,003)

At 31 May 2014 5,787 4,974 7,652 91,651 110,064


2,863 4,130 - - 6,993


- 448 335 1,793 2,576

Amortisation (271) - (884) - (1,155)

At 30 November 2014 8,379 9,552 7,103 93,444 118,478



8. Capital expenditureAdditions to plant and equipment during the period ended 30 November 2014 amounted to £2,732,000 (30 November 2013: £1,303,000) and depreciation charged in the period amounted to £1,182,000 (30 November 2013: £998,000).

9. Trade and other receivables

10. Trade and other payables

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Trade debtors 20,763 16,277 19,614

Prepayments and accrued income 9,750 8,923 9,077

30,513 25,200 28,691

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Trade creditors 3,652 2,630 2,973

Non trade payables 4,588 2,589 5,781

Accruals 8,517 6,029 8,609

16,757 11,248 17,363



11. Interest bearing loans

As at 30 November 2014, the Group had a multi-currency revolving credit facility of £40m (30 November 2013: £40m). The effective interest payable on drawn down funds as at 30 November 2014 was 1.6% above LIBOR (2013: 1.6%). Subsequent to the balance sheet date, in January 2015, a revision to the existing revolving credit facility was agreed with the Group’s bankers which increased the facility to £55m at the same interest rate. The facility is due for renewal in July 2016.

2014Six months

ended30 November

2013Six months

ended30 November

2014Year ended

31 May

£000 £000 £000

Secured bank loans 38,290 33,709 34,786

Analysed as:

Current - - -

Non-current 38,290 33,709 34,786

38,290 33,709 34,786



12. AcquisitionsMatasano Security LLCOn 1 August 2012 the Group acquired 100% of the partnership interests of Matasano Security LLC for a maximum consideration of £8.1m, of which up to a maximum of £4.1m was withheld subject to the achievement of performance criteria specified in the purchase agreement. The performance conditions were required to be satisfied by 31 July 2013 and 31 July 2014, with the contingent consideration payable in December 2013 and November 2014. During the period, £2.2m was paid in relation to the final settlement of the contingent consideration due on the acquisition of Matasano Security LLC.

FortConsultOn 2 May 2014 the Group acquired 100% of the share capital of FortConsult A/S for a maximum consideration of £4.0m, of which a maximum of £1.8m has been withheld subject to the achievement of performance criteria specified in the purchase agreement. The performance conditions are required to be satisfied by 30 April 2015 and 30 April 2016. The contingent consideration is to be paid in July 2015 and July 2016.

The fair value of the contingent consideration at the acquisition was £1.8m, this value is still considered appropriate and is based on the present value of future cash flows. Management expect the amount to be payable based on FortConsult’s predicted performance.

13. Related party transactionsThe Group’s key management personnel comprises the Directors of the Group.

NCC Group’s Non-Executive Chairman Paul Mitchell is a Director of Rickitt Mitchell & Partners Limited (Rickitt Mitchell) with whom the Group conducted business to the value of £37,500 (2013: £57,500). Rickitt Mitchell provides the services of the Non-Executive Chairman and an outsourced acquisition service, which facilitates the delivery of acquisition targets, which have been identified and approved by the Board.



14. Post balance sheet eventsOn 3 December 2014, the Group announced that it had resolved its contention for the application of the generic top level domain (“gTLD”)“ .secure” on acceptable terms to both parties to the application process.

The Group withdrew its application for the .secure gTLD in return for cash consideration from the other applicant.

A revision to the existing revolving credit facility was agreed with the Group’s bankers to increase the facility to £55m in January 2015. The facility is on the same terms and due for renewal in July 2016.

On 20 January 2015, the Group acquired the entire share capital of Open Registry S.A (Luxembourg), CHIP S.A. (Luxembourg), Nexperteam C.V.B.A (Belgium) and Sensirius C.V.B.A (Belgium) for a total consideration of €19.5m. Of this amount, €10.3m was paid in cash on completion and €9.2m is payable in cash depending on specific profit based performance targets on the first, second and third year anniversaries of the completion date. The companies’ principal activities are in the domain services segment. Further disclosures of the acquisition have not been included in this report as there has been insufficient time to obtain and review the relevant financial information from the companies and calculate the accounting treatments for the disclosure.



We confirm that to the best of our knowledge:− The condensed set of consolidated financial statements has been prepared in

accordance with IAS 34, “Interim Financial Reporting” as adopted by the EU;

− The half-yearly management report includes a fair review of the information required by:

− (a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the year; and

− (b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period and any changes in the related party transactions described in the last annual report that could do so.

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF-YEARLY REPORT

Rob CottonChief Executive

On behalf of the Board 22 January 2015


COMPANY INFORMATION

DirectorsPaul Mitchell Non-Executive Chairman

Rob Cotton Chief Executive

Atul Patel Finance Director

Debbie Hewitt MBE Senior Non-Executive Director

Thomas Chambers Non-Executive Director

SecretaryFelicity Brandwood

Registered officeManchester Technology Centre Oxford Road Manchester M1 7EF

Registered number4627044

Brokers and joint corporate finance advisersPeel Hunt LLP 120 London Wall London EC2Y 5ET

Canaccord Genuity Limited 88 Wood Street London EC2V 7QR

Joint corporate finance advisersRickitt Mitchell & Partners Limited Centurion House 129 Deansgate Manchester M3 3WR

AuditorsKPMG LLP 1 St Peter’s Square Manchester M2 3AE

Solicitors Eversheds LLP 70 Great Bridgewater Street Manchester M1 5ES

BankersThe Royal Bank of Scotland plc 6th Floor 1 Spinningfields Square Manchester M3 3AP

RegistrarsEquiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA


COMPANY LOCATIONS

North AmericaAtlantaAustinChicago

New York

San Francisco

Seattle

Sunnyvale

EuropeManchester - Head OfficeAmsterdamCheltenhamCopenhagenEdinburghLeatherheadLondonLuxembourgMilton Keynes MunichZurich

AustraliaSydney

NCC GROUP PLC HALF-YEARLY REPORT 2014 48www.nccgroup.com

ncc group plc half-yearly report for the six months ended 30 november 2014€¦ · 30-11-2014 ·...

Documents