REG - Blancco Tech Grp PLC - Preliminary Results <Origin Href="QuoteRef">BLTGB.L</Origin> - Part 1
RNS Number : 2638KBlancco Technology Group PLC20 September 201620 September 2016
BLANCCO TECHNOLOGY GROUP PLC
PRELIMINARY RESULTS FOR THE YEAR ENDED 30 JUNE 2016
Blancco Technology Group Plc (AIM:BLTG, "Blancco" or the "Group") is pleased to announce its results for the year ended 30 June 2016.
Financial Highlights
Revenue increased by 49% to 22.4 million (2015: 15.0 million), with organic growth being 35%. On a constant currency basis revenue increased by 46% to 21.9 million
Adjusted Operating Profit before corporate costs (as defined in note 16) increased by 41% to 7.6 million (2015: 5.4 million), and on a constant currency basis has increased by 37% to 7.4 million. Operating loss is 0.4 million (2015: 1.6 million)
Adjusted operating cash flow (as defined in note 16) of 6.0 million (2015: 4.1 million) with cash conversion of 98% (2015: 103%). Operating cash flow is 4.0 million (2015: 1.6 million)
Adjusted earnings per share (as defined in note 16) from continuing operations of 5.63p (2015: 2.84p). Basic loss per share from continuing operations is 3.69p (2015: 3.84p)
Net cash at the year-end of 1.0 million (2015: 7.8 million), reflecting investment in the Software Group to set the business on the best path for 2017, including the acquisition of Xcaliber and investment in new greenfield sites and buy out of minority interests in some of the sales offices
Recommended final dividend of 1.34p per share (2015: 3.35p) rebased for the go-forward Software business. Total dividend for the year is 2.0p (2015: 5.0p), with the Board intending to adopt a progressive dividend policy moving forwards
Operating Highlights
Growth in Live Environment Erasure invoiced sales, increasing 188% to 2.3 million
Growth in other Blancco product lines of Mobile (42% to 3.7 million) and IT and other (44% to 17.4 million) in 2016
Increase in average revenue per client by 17% to 51,600. The number of sales worth in excess of 100,000 won in the year was 32, an increase of 53%
Strengthening of the senior team including appointments of Richard Stiennon as Chief Strategy Officer, and Steve Holton as the President and Chief Revenue Officer
Appointment of a new CFO, Keith Butcher, bringing over five years of software experience to the Group
Acquisition of Tabernus in September 2015, contributing to North America revenue growth of 146%
Acquisition of Xcaliber Technologies (increase in the Group's stake from 49% to 100%) with the subsequent win of a large mobile diagnostics contract with AT&T, and roll-out to more than 5,500 stores
Disposal of the Repair Services Business for 103.5 million, with a return of funds to shareholders via tender offer of 50 million
Matthew Peacock, Non-Executive Chairman of Blancco, said
"Blancco has delivered another strong year of growth against a backdrop of transformation at the Group level, with the disposal of the Repair Services Business. We have continued to invest in our products and our team, both organically and by acquisition, and have developed a clear strategic plan to achieve a step change in our penetration of the very large market for data erasure."
Chairman's Statement
I am pleased to introduce Blancco Technology Group's first full year results, for the year ending 30 June 2016. These results show strong improvements in revenue, operating result and earnings per share, which gives the Board confidence in the Group's new focus. The signature event of 2016 has undoubtedly been the change in the primary business activity of the Group from electronic repair services to data erasure and mobile diagnostics software. The results are reported and explained in Pat Clawson's first Chief Executive Officer's review below.
Over 2011 to 2016 the Group built its electronic repair services business, Regenersis, into one of the leading operators in its sector, with a broad geographical footprint capable of attracting the largest brands as its clients. The Board determined towards the end of financial year 2015 that it was the right time to realise value for these operations and to refocus the Group entirely on its software business. The optimal route to achieve this was clearly a disposal of the repair services business to another repair sector consolidator which saw considerable strategic value in the transaction. In February, we announced a sale and purchase agreement with Communications Test Design, Inc., ("CTDI") for a cash consideration of 103.5 million (79.9 million). This transaction was completed 4 April 2016, and the Regenersis Plc entity was renamed Blancco Technology Group Plc (LON: BLTG) on 6 April 2016.
The disposal led to a 50 million return of capital to investors in May 2016, and leaves Blancco well resourced to exploit the opportunities in its sector. Most importantly, shareholders now have an undiluted exposure to the Software business. Blancco has demonstrated exceptional margins and revenue growth, attributable to its outstanding market position and the fast growing markets which it serves. Year on year revenue growth for the data erasure business was 29% in 2015 and 44% in 2016. These growth rates reflect the growing demand for data erasure due to compliance and security drivers, continued investments in sales and marketing, as well as complementary "bolt on" type acquisitions.
With the new focus on software has come changes to the composition of the Board. In October 2015, we welcomed a new non-executive director, Thomas Skelton. Thomas has deep software experience - he is currently the CEO of Surescripts, a US healthcare software business, and was previously a non-executive director of Micro Focus Plc. Ian Powell has retired from the Board and from his role as CEO of the Repair Services Business, and I would like to thank him for his role in the growth and subsequent disposal of this business.I announced in May 2016 my intention to become non-executive, retaining my role as Chairman of the Board, while Pat Clawson becomes the group's CEO. Keith Butcher joined the Group as CFO on 19 September 2016, taking over from Jog Dhody, who will resign from the Group following an orderly handover.
The outlook for the Group is positive, with continued strong demand for our data erasure and mobile diagnostics software, and an even stronger management team following several senior hires in 2016.
Matthew Peacock
Non-executive Chairman
CEO's Statement
I am pleased to report that Blancco Technology Group delivered strong results in 2016. Our revenue of 22.4 million (2015: 15.0 million), represented an increase of 49%. Adjusted Operating Profit before corporate costs was 7.6 million (2015: 5.4 million) a rise of 41%. Adjusted earnings per share from continuing operations were 5.63 pence, an increase of 92% on the 2015 earnings per share of 2.84 pence.
Data erasure products contributed 21.7 million (2015: 15.0 million) and comprised 97% of our revenue. Our mobile diagnostics business, arising from the acquisition of Xcaliber, generated 0.7 million in additional revenue in the period since it was consolidated in January. Several contracts were closed at the end of 2016 that will make mobile diagnostics a larger contributor to overall revenue in 2017 and beyond.
Further details of these results, including the effect of discontinued operations and currency movements, are contained in the Group Review.
In these first annual results as a standalone software business, we also set out our strategic goals and approach. Our stated goal is to be the de facto standard in data erasure and mobile diagnostics globally. Today, we are the clear market leader in data erasure. However it is equally clear that the vast majority of occasions in which a data erasure should be performed still pass without an erasure happening. So, our strategy is about increasing awareness of data erasure, and increasing the accessibility of data erasure. As our strategy report sets out, we believe that this requires a new appetite for partnership: with our large clients; with the information security consulting industry; and especially with large enterprise service providers who control workflows in which erasure is - or should be - a simple tick in a box.
Acquisitions update
In September 2015 we acquired a data erasure competitor, Tabernus, for $12 million (7.7 million), bringing us market leadership in the important US market. While Blancco's historic roots were in Finland and Europe, the US is home to a large proportion of the global businesses which Blancco serves. Its software and cloud giants control a vast potential market of data erasure occasions which we want to access in the future.
In January and March 2016 the Group acquired the remaining 51% of mobile diagnostics provider Xcaliber Technologies, for $5.2 million (3.6 million), of which $4.7 million (3.3 million) is contingent on future revenue targets. This acquisition has enabled Blancco to improve its proposition to the smartphone remarketing sector, where data erasure and device diagnostics are adjacent process steps. It has also opened up a new market with the mobile network operators, who are seeking converged consumer-facing support and erasure solutions. In addition, Xcaliber maintains research and development facilities in Pune, India, adding innovative and low cost development capabilities to the Group, with a deep expertise in Android and iOS. The expansion of the Group's R&D function should allow greater product development for both erasure and diagnostics products in order to drive the business forward.
The Group continued to invest in its non-fully owned offices, acquiring a 100% stake in Blancco Australasia in August 2016, and planned further investments during quarter one and quarter two of 2017. The investments provide greater cross selling opportunities in these regions as we now have full access to these markets.
Operational update
During 2016, we saw positive momentum in the sales of our Live Environment Erasure product. The benefit of managing data erasure continuously in a live storage environment, as opposed to on a one-off basis at the device decommissioning stage, is very significant for our clients and therefore for Blancco. The technology has been in development for over 10 years and is now starting to gain traction in the market. In 2016, invoiced sales grew to 2.3 million compared to 0.8 million in the prior year. We are now targeting large data center operators, who are well positioned to promote live environment erasure to their enterprise clients. Market education over 2017 will be a key priority.
The Group has grown its mobile erasure invoiced sales by 42% in 2016 to 3.7 million (2015: 2.6 million), and the acquired Xcaliber business complemented the mobile erasure product with sales of an additional 0.7 million for the SmartChk diagnostic products. In May 2016, following a successful pilot, we won a contract to provide in-store SmartChk diagnostics across AT&T's retail network in the USA. The roll-out has been successfully delivered with tablet kiosks deployed to over 5,500 stores in under six weeks. This contract is a landmark win for the business, being the first large-scale deployment and reference case for the technology, and taking the business to positive run-rate profitability.
Our traditional end of life erasure products, which cover PCs, Servers and other IT equipment, also generated good growth in invoiced sales of 44% to 17.4 million (2015: 12.1 million).
Geographically, growth was strongest in North America, which expanded sales by 146% to 9.6 million (2015: 3.9 million). The organic growth rate was 121%, while additionally we acquired Tabernus sales in the region of 1.0 million. We made management changes following the buy-out of our minority partner in the US and the acquisition of Tabernus, which led to improvements in marketing, sales and service operations generally.
The Asia Pacific (APAC) region also delivered good growth in the year, up 45% to 5.8 million (4.0 million). A large portion of this growth was generated by mobile erasure sales in Japan, as well as the first sales of integrated erasure and diagnostics technology. Further potential has been identified in China and the Group has opened new locations in this territory to capitalize on early opportunities.
The European business posed some challenges in 2016, growing at 8% in the year to 8.1 million (2015: 7.5 million). The region was weak in the take up of new technologies in the mobile and live environment spaces. The focus of efforts on the US, as well as the movement of head office and many senior management roles to the region, undoubtedly had a negative effect on momentum in this region in 2016. We are investing in strengthening these sales operations in 2017.
The Tabernus team has been fully integrated operationally into the Blancco organisation. Xcaliber's commercial team in the USA has also been operationally integrated, while the Xcaliber development operations based in India remain operationally distinct.
Strategy Update
In 2016 we completed an extensive strategic review. This identified important new initiatives for the business. The most important insight gained from this review was that we need to lead the market in driving erasure awareness and in making erasure more accessible for enterprises to adopt it in a systematic way. If we achieve this, the market should open up dramatically for us. This belief is captured in our new strategic mission statement of becoming the de facto standard in data erasure and mobile diagnostics.
While continuing to grow our business in the IT Asset Disposition (ITAD) sector we see the greatest opportunities in the enterprise, data centre, and mobile network operator verticals. We already have several large customers that have deployed our enterprise erasure products throughout their desktop and datacenter environments. These deployments have led to substantial recurring revenue. The Group is the only provider of certified data erasure products supported by services and the market is thinly penetrated to date.
Building a Partner Business Development Function
Most potential enterprise erasure happens within the workflows of other enterprise service providers. These include IT Value Added Resellers (VARs), who provision and manage IT solutions for enterprises, and Managed Service Providers (MSPs), who deliver services such as applications, networking, data storage and security solutions over networks or the Cloud. In a congested IT security environment, Chief Information Officers prefer to work with a small number of large, trusted VARs and MSPs. They also prefer erasure solutions which are integrated into these platforms. Data centres provide a target market for us, where our live environment erasure products are particularly relevant.
To date, Blancco has predominantly adopted a direct sales model, led by local teams, and based on the sale of standalone Blancco erasure products for license (per erasure) or subscription payments. This model continues to be a successful one and will remain a key pillar of our route to market. Partner channel development will act as a complementary sales route into markets in which we have not historically secured a strong foothold.
We will also build a robust global partner business development function which seeks to provide integrated data erasure to enterprises within the ecosystems of VAR and MSP partners. Steve Holton, our new President and Chief Revenue Officer, brings extensive experience of building successful software partnerships and channel sales.
Thought Leadership, Regulation, and Market Education
In addition to sales training in each region we are executing on a strategy of market education. As the industry leader it is in Blancco's interest to establish thought leadership by participating in industry events, publishing guides and best practices, and continuing our PR and lobbying efforts with systematic campaigns. Data erasure is not prioritised by most of the large software and security analyst firms, often only mentioned as a function of ITADs. Major regions, including the UK, EU, and US, are active in legislating new data protection laws but require assistance in their efforts to understand data erasure requirements. Richard Stiennon, our new Chief Strategy Officer and a respected thought leader in the information security space, brings to the Group a new level of expertise in this area.
Mobile Diagnostics
The market for consumer data erasure is expanding rapidly through the mobile network operators. They increasingly seek to provide erasure solutions to their customer base, especially around the smartphone upgrade occasion. Our recent acquisition of Xcaliber Technologies and its SmartChk smartphone diagnostics product gives us a stronger platform in mobile erasure. It is also opening up a large opportunity in smartphone diagnostics. The synergy with our data erasure business occurs in at least three areas:
(1) Mobile network operators want self-help consoles in their stores. These perform smartphone diagnostics and smartphone erasure in one package (as well as equivalent solutions delivered through call centre and online support channels);
(2) Smartphone remarketing companies want to perform both erasure and diagnostics on used devices prior to resale;
(3) Maintaining a deep expertise in the Android and iOS operating systems in important to both erasure and diagnostics.
Strategically, we have identified the mobile network operators as a key partnership for us, alongside the enterprise market and the data center market. Our pipeline of new business in this vertical is strong.
M&A
The primary source of our growth is organic. However, we will continue to engage in M&A activity for prospective growth via acquisition, should the right opportunity arise. Such opportunities will help enhance the Group's market position and footprint in new geographies or complementary product offerings.
TechnologyUpdate
In March 2016, we were awarded US Patent No. 9286231 for our Solid State Drive (SSD) erasure method, in addition to the European patent awarded in July 2015. In our view, this is the only universal method to reliably erase the broad range of different brands and models of SSD drive available in the market. SSD drives, typically used in premium-priced laptops and other IT equipment, including servers, are rapidly growing their share of the storage market.
Legislation and regulatory change is driving the need for digital data destruction globally. The EU Global Data Protection Regulation (GDPR) and the "Right to be forgotten" is calling for data erasure in a number of ways and reaches beyond Europe to North America and APAC. The International Organisation for Standardisation (ISO) standards ISO 27001, 27018 and 27040 include specific call-outs for the erasure of digital data for the protection of customers. We are also seeing spot regulation within specific industries, including banking and finance, the Payment Card Industry (PCI), federal government and healthcare.
Building on our recent success with patenting our SSD erasure technology we have established a programme to cultivate our technology innovation and increase the number of patents filed. This strategy protects our market and provides a defensive portfolio to ward off future challenges to our technology position.
We are also standardising our product development processes across regions so that we can stay agile and bring product enhancements to market quickly.
Blancco Management Console is a product we have developed to centrally manage licences and reports for secure erasure. A central management console is critical to growing an enterprise business strategy. Each data erasure product can integrate with the management console and Application Programming Interfaces (APIs) are being developed to enhance integration with third party products. The product is available as a stand alone software solution or as a service through Blancco Cloud.
Our product development roadmap also includes new projects related to integration and API improvements, and to the management features required to deliver a successful partnering strategy.
In 2016 we have created and are tracking a programme to enhance our product and process certifications. We already have a wide set of global certifications including CESG in the UK, ISO 15408 and NATO. Certifications serve as a barrier to entry for new entrants in the field, thus they enhance our defensive position. They are also required by many enterprise prospects so are a required investment.
Leadership Update
In 2016 we continued to focus on building out our top team, to bring in the skills and experience required to execute our strategy.
I am excited by the addition of Steve Holton to our team. As our President and Chief Revenue Officer (from July 2016) he is responsible for building and scaling the Group's global sales team to drive continued revenue growth. Steve is an experienced software industry veteran and has 20 years of experience selling B2B software solutions. Most recently, he was SVP of Worldwide Sales and Customer Success for mobile enterprise security company, Good Technologies. He grew this from a $200 million organisation into a highly valued company that was acquired by BlackBerry (NASDAQ: BBRY) for $425 million in September 2015.
Since joining, Steve has further enhanced his team by bringing in Matt Sturges, VP of Global Business Development and Channel Sales who will be responsible for our partner oriented route to market. Matt brings 11 years of experience in channel and direct sales roles at Apple, generating substantial revenue growth through partner channels.
As we focus the Group on growth in the Americas and in enterprise erasure globally, we look to Richard Stiennon to lead the company's overall corporate strategy. This includes long-term strategic planning, product positioning, public affairs, industry analyst relations, joint ventures and industry partnerships. Richard is a former VP Research for industry analyst firm Gartner, Inc. and has held executive positions at Fortinet, and Webroot Software.
In 2016 Khalid Elibiary, the former president of Tabernus, took on the role of VP of R&D and Customer Experience. Khalid brings to the role his considerable expertise in growing a successful data erasure business and will lead our product teams in technology innovation as we extend our critical IP assets.
Outlook
The outlook for 2017 is positive. New market regulations surrounding data management and a very thinly penetrated market for secure data erasure means that increased marketing and thought leadership, should lead to continued healthy increases in revenue while maintaining the favourable gross margins and profits associated with the pure play software business of the Group.
We have seen no impact of the UK's intended exit from the European Union on our business. We are confident that the fundamental drivers of growth in our business are strong.
We remain confident in market expectations for 2017 as we continue to penetrate the still nascent markets for both data erasure and mobile device diagnostics.
Pat Clawson
Chief Executive Officer
Enquiries:
Blancco Technology Group Plc +44 (0) 20 3657 7000
Pat Clawson, Chief Executive Officer
Jog Dhody, Chief Financial Officer
Peel Hunt LLP (Nominated Adviser and Broker) +44 (0) 20 7418 8900
Richard Kauffer
Euan Brown
Panmure Gordon (UK) Limited (Joint Broker) +44 (0) 20 7886 2500
Dominic Morley, Corporate Finance
Charles Leigh Pemberton, Corporate Broking
Tulchan Communications +44 (0) 20 7353 4200
Tom Murray
Results
The financial performance of the business is summarised as follows:
Revenue of 22.4 million (2015: 15.0 million, growth 49%);
Adjusted Operating Profit before corporate costs of 7.6 million (2015: 5.4 million, growth 41%);
Adjusted Operating Profit after corporate costs of 6.1 million (2015: 4.0 million, growth 53%);
Adjusted Operating Profit margin of 27% after corporate costs (2015: 27%).
Operating loss was 0.4 million (2015: operating loss 1.6 million). Reduction in operating loss was due to increased revenues and the reduction of exceptional M&A costs relative to the prior year.
Adjusted operating cash flow was 6.0 million (2015: 4.1 million), with a cash conversion of 98% (2015: 103% conversion) relative to Adjusted Operating Profit. Net cash at the end of the period was 1.0 million (2015: 7.8 million).
Key financials
2016
2015
'm
'm
Invoiced Revenue
24.4
15.5
Revenue
22.4
15.0
Adjusted Operating Profit before corporate costs
7.6
5.4
Adjusted Operating Profit after corporate costs
6.1
4.0
Operating loss
(0.4)
(1.6)
Adjusted Operating Profit margin % before corporate costs
33.9%
36.0%
Adjusted Operating Profit margin % after corporate costs
27.2%
26.7%
Operating margin %
(1.8)%
(7.1)%
Segmental Results
Year ended
Year ended
30 June
2016
30 June 2015
'million
'million
Revenue
Erasure
21.7
15.0
Diagnostics
0.7
-
Total
22.4
15.0
Divisional Adjusted Operating Profit
Erasure
7.6
5.4
Diagnostics
-
-
Total
7.6
5.4
Corporate costs (continuing operations)
(1.5)
(1.4)
Total Adjusted Operating Profit
6.1
4.0
Discontinued Revenue
151.9
187.6
Discontinued divisional Adjusted Operating Profit
9.7
15.2
Corporate costs (discontinued operations)
(3.4)
(3.8)
Total discontinued Adjusted Operating Profit
6.3
11.4
Group Review
The continuing business consists of the Erasure and Diagnostics divisions. The Erasure division includes the Blancco business which enables customers to test, diagnose, repair and repurpose IT devices with certified software. The Diagnostics division holds our SmartChk product, obtained and developed as part of the Xcaliber acquisition, which provides consistent, accurate and measurable diagnostics of smartphones and tablets.
The revenues and Adjusted Operating Profit of these divisions comprise the Group's continuing operations as presented in the financial statements
The discontinued business comprises the Group's depot repair facilities and its mobile phone insurance activities. The Repair Services Business was sold in April 2016, and therefore the above figures include only 9 months of trading.
An agreement to sell the Digital Care insurance business to Mazovia Capital was reached on 19 September and therefore the above figures include the full year results for that business.
The total result for the year, including the impact of the required accounting for discontinued operations was a loss of 24.2 million (2015: 5.1 million profit).
The full results of the discontinued business are presented in note 7.
Erasure division
The Erasure division includes Blancco, acquired in April 2014, the global market leader data erasure software, and the bolt-on acquisitions of SafeIT (acquired September 2014) and Tabernus (acquired September 2015). Both acquisitions have been fully integrated onto the Blancco platform.
The Erasure division revenue increased to 21.7 million (2015: 15.0 million), of which 1.5 million was generated by the acquisition of Tabernus. The organic growth of 35% was predominantly driven by the growth in the strategically important North American region and the LEE product group.
Adjusted Operating Profit before corporate costs was 7.6 million, at a margin of 33.9%, compared to a margin of 36.0% in 2015. The Adjusted Operating Profit margin has reduced slightly in the current period. The decline in margin is a result of investment in new strategic headcount in order to drive future revenue growth.
Financial and operational highlights included:
Acquisition and integration of Tabernus, which further enhances the Group's market footprint both geographically, through its strong position in the US market, and through the addition of new product lines to the Group's portfolio.
Strong growth in the strategically important North American region, with invoiced sales growing by 146%.
A new distribution agreement signed in the United Arab Emirates, opening new sales channels to the technology centre of the Middle East.
Acquisition of the remaining share capital of Blancco Australasia which was not already owned, bringing the Group's share to 100%
Expansion into new geographies in India and China, allowing us to generate new revenue streams from these high growth economies.
Strong growth in the Live Environment Erasure product sales, which represents a more sophisticated erasure method in customers' networked storage environments, allowing real time and "live" data erasure in addition to the end of life erasure offered by the business' existing product range.
Grant of European and US patents for our SSD erasure method
Diagnostics division
The Diagnostics division is made up of Xcaliber Technologies, a smartphone diagnostics software business. The Group increased its stake in this business from 49% to 100% during the financial year.
The Diagnostics division generated revenue for the Group for the first time this year, having previously been a non-consolidated associate at 49% ownership. Revenues for the six month period since acquisition were 0.7 million. On a pro-forma basis, Xcaliber generated revenues of 1.3 million in the full year period, which represents growth from prior year revenues of 0.3 million. This growth has been achieved through the transition of the business from a start up development proposition to a self-sufficient sales generative organisation.
The division recorded adjusted operating profit of nil for the period, compared to a pro-forma loss of 1.5 million for the prior year. The improvement in profitability to break even is led by the ramp up of new customer contracts in this period.
Financial and operational highlights included:
Integration and cross selling of the diagnostics product with the traditional erasure product giving customers a more sophisticated all in one data erasure and diagnostics management tool
Commencement of large contract with AT&T which has resulted in a roll out of the diagnostics tool into over 5,500 stores in the US
Revenue Recognition
The Group monitors its sales performance by tracking Invoiced Revenue, which is a measure of the level of business won in the year. This differs from the reported revenue figures as IFRS revenue recognition requires the business to defer the revenue earned on software subscriptions - which have a defined term - over the term of the contract.
This had an adverse impact on revenue in the period in which the sale was made, as the revenue is held on the balance sheet and released in future periods as the contract is fulfilled. The impact is shown below:
2016
2015
'm
'm
Invoiced Revenue
24.4
15.5
Net revenue deferral of subscription sales
(2.0)
(0.5)
Reported revenue
22.4
15.0
The increase in revenue deferral in 2016 is a result of both the increase in absolute sales generated in comparison to the prior year, and an increase in the number of corporate deals signed up, which are typically high value subscription deals over a number of years.
The total deferred revenue for the continuing Group at 30 June 2016 was 4.8 million (2015: 2.4 million) which represents revenue to be recognised in future periods.
Corporate costs
Corporate costs of 1.5 million (2015: 1.4 million) increased slightly. The cost base represents the costs associated with running the central function, and the run rate of these costs has decreased significantly compared to the previous year as the disposal of the Repair Services Business has resulted in a reduction in required resource.
Currency hedging activities and constant currency
One of the risks that the Group faces by doing business in overseas markets is currency fluctuations. In order to manage the Group's exposure to this, the CFO conducts a quarterly review of the Group's currency hedging activities and makes a formal recommendation for any changes to the Board every half year by exception.
The Group is well diversified across a number of currencies, with sterling representing only around 10% of revenues. Over the course of 2016, sterling has weakened against the main overseas currencies in which the Group trades, predominantly the Euro (comprising 20% of revenues), US Dollar (comprising 30%) and Japanese Yen (comprising 20%). This was compounded in June 2016 following the UK's decision to leave the European Union, at which point the Euro and US Dollar rates fell by 11% and 8% respectively. This has generated a foreign exchange benefit as the overseas earnings are now worth more in sterling terms.
The exchange rates applied at the year end are as follows:
30 June
2016
30 June
2015
Euro
1.20
1.41
US Dollar
1.33
1.57
Japanese Yen
136.50
191.97
A comparison of actual results to results restated at expected exchange rates is presented below:
Year ended
30 June 2016
Year ended
30 June 2016
Actual
Constant
Results
Currency
'million
'million
Invoiced Revenue
24.4
23.8
Revenue
22.4
21.9
Divisional Adjusted Operating Profit
7.6
7.4
Group Adjusted Operating Profit
6.1
5.9
Adjusted earnings per share (pence)
5.63
5.34
Basic earnings per share (pence)
(3.69)
(3.98)
The Group implements forward contracts for payments and receipts, where the amounts are large, are not denominated in the local country's functional currency, where the timing is known in advance, and where the amount can be predicted with certainty. In addition, the Group undertakes natural hedges by structuring and paying future earn-outs on acquisitions in the acquired company's local currency.
The Group has a mix of business across 10 main currencies which provides smoothing of currency movements in any one country through a portfolio effect. The cash and loan balances held in different currencies provide a natural hedge.
The Group does not undertake any cash flow or profit hedging activities to insulate from currency movements in respect of overseas earnings, specifically the conversion of its largely non-sterling generated income into the Group's reporting currency, sterling.
No other hedging activities are undertaken in respect of tangible and intangible fixed assets, working capital (such as stock, debtors, or creditors), or other balance sheet items, as these are generally small in nature in any one individual country.
Disposal of Repair Services Business
On 4 April 2016, the Group completed the disposal of 100% of the issued share capital of Regenersis (Depot) Services Limited and its subsidiaries to CTDI Repair Services Limited for cash consideration of 103.5 million (79.9 million).
The disposal represents the Group's Repair Services Business and signifies the point at which the Company transitioned to a pure play software business. The result of this business for the period was a loss of 8.3 million (2015: 8.4 million profit) as detailed in note 7.
On 19 September 2016 the Group reached an agreement to sell the Digital Care business to Mazovia Capital for initial contingent consideration of 1.2 million (1.0 million) with a further contingent earn out of 3.3 million (2.8 million) payable over 2 to 3 years. These proceeds will be reinvested into the Software business.
Acquisition of Tabernus
In September 2015, Blancco acquired 100% of the share capital of Tabernus LLC and Tabernus Europe Limited, a privately owned provider of software erasure. With the majority of its revenue in the US, Tabernus is the USA market leader for this business. The consideration was $12 million (7.7 million) comprising cash payment of $10 million (6.4 million) funded through the Group revolving credit facility and $2 million (1.3 million) in contingent cash consideration payable after three years.
Acquisition of Xcaliber
On 4 January 2016, the Group acquired 27% of the issued share capital of Xcaliber Technologies LLC for a consideration of $0.5 million (0.3 million), funded through the Group revolving credit facility, bringing the Group's share of this business to 76%.
At the point of acquisition, the Group was required to present a disposal of its investment interest in Xcaliber and has consolidated the results of Xcaliber from this date. At the point of acquisition, a non-cash loss on disposal of the equity investment of 1.3 million was realised.
On 17 March 2016, the group acquired the remaining share capital of Xcaliber Technologies LLC which it did not already own for an initial cash consideration of $0.5 million (0.3 million) and a further estimated earn out payment of $4.7 million (3.3 million), payable over 3 years depending on the business achieving certain revenue targets. On completion, an additional $0.4 million (0.3 million) was used to settle outstanding debts to the seller.
Acquisition of Non-controlling Interest in Blancco Australasia
On 17 August 2016, the Group acquired the remaining 49% it did not already own of the issued share capital of Blancco Australasia Pty. The consideration of AU$0.1 million (0.1 million) was funded through the Group's cash reserves.
Exceptional Acquisition and Restructuring Costs
The Group has undertaken acquisitions in the period which have incurred exceptional acquisition expenses. In addition, the Group has pursued the buy out of some of the remaining Blancco sales offices which it does not currently 100% own.
Acquisition costs amounted to 1.3 million (2015: 2.4 million), predominantly relating to the acquisitions of Tabernus and Xcaliber.
Exceptional restructuring costs in the continuing business amounted to nil (2015: 0.1 million).
In the discontinued business, the M&A costs totalled 9.6 million (2015: 0.6 million) and relate to the disposal of the Repair Services and Digital Care businesses and subsequent tender process leading to the return of 50 million of capital to shareholders.
The restructuring costs in the discontinued business were 1.5 million (2015: 0.6 million) and relate to the costs of restructuring the Group in preparation for sale, as well as subsequent downsizing of central functions.
Amortisation of internally generated R&D Expenditure
Amortisation of internally generated intangible assets which have been generated by the Group is presented within Adjusted Operating Profit. This represents the charge for internal development costs of the Group's R&D team. The activity of the R&D team is split between research and administration activity which is not eligible for capitalisation, and development time which is required to be capitalised under IFRS.
The charge for the year is 0.5 million (2015: 0.1 million) and is increasing over time due to the accumulation of capital expenditure since the acquisition of Blancco in April 2014. The Group is continuing to invest greater amounts each year in its development activities and amortises the expenditure over the period the product is expected to last, generally four years. The amortisation is therefore currently lagging behind the development expenditure capitalised.
Amortisation of Acquired Intangibles
Amortisation of acquired intangible assets acquired as part of the Group's previous M&A activity was 2.5 million (2015: 2.0 million).The cost has increased in the year primarily due to the acquisition of intangible assets on the Tabernus and Xcaliber acquisitions.
Share Based Payments
Share based payments charge was 1.2 million (2015: 0.4 million) and includes both the straight line accounting charge for the Group's remaining share incentive plans as well as the charge for the options granted under the Software long term incentive scheme.
The charge is based on the expected growth in value of the business at the end of the award vesting period, in comparison to the valuation on inception. A charge of 0.5 million (2015: nil) is recorded in respect of the scheme representing the accumulated growth in value for the participants.
Details of these schemes can be found in the Annual Report and Accounts.
Net Financing Expense
Net financing expense was 0.9 million (2015: 0.8 million). Included within the financing costs are:
The unwind of the time value of money on the deferred consideration payable in future periods for the Group's acquisitions, which represents a non-cash charge of 0.3 million (2015: 0.2 million).
The impact of revaluation of deferred consideration payable in non-sterling currencies. The impact of Brexit and subsequent weakening of sterling resulted in a non-cash charge of 0.3 million in the current period.
The cost associated with the Group's banking facility of 0.3 million (2015: 0.4 million), reduced slightly due to the lower facility available for the continuing Group.
Other interest cash costs of nil (0.2 million).
The finance income represents the interest earned on cash holdings around the Group.
Taxation
The total tax charge was 0.7 million (2015: 0.9 million).
Earnings per share
Adjusted earnings per share for the continuing business were 5.63 pence (2015: 2.84 pence). The growth has been driven by the growth in profits for the continuing business in the year.
Basic loss per share for the continuing business was 3.69 pence (2015: 3.84 pence). The increased sales and improved profitability representing cash inflow for the group was offset by the one off non-cash loss on disposal booked on the Xcaliber acquisition.
Cash and Working Capital
Year
ended
Year
ended
30 June 2016
30 June 2015
'm
'm
Adjusted operating cash flow before movement in working capital and exceptionals
6.9
4.2
Movement in working capital and exceptionals
(0.9)
0.5
Movement in provisions
-
(0.4)
Adjusted operating cash flow
6.0
4.1
Net interest payments
(0.2)
(0.4)
Tax paid
(0.6)
(0.6)
M&A payments
(1.1)
(1.4)
Exceptional payments
-
(0.1)
Net cash from operating activities - continuing operations
4.1
1.6
Net capital expenditure
(2.5)
(1.8)
Acquisition of subsidiaries, associates and other investments, net of cash acquired
(7.8)
(4.4)
Net cash flow from sale of subsidiaries and share buy backs
18.8
-
Net cash flow from share issues, option vesting and dividend payments
(3.1)
(6.9)
Other movements
(1.3)
(2.0)
Cash flow on discontinued operations
(15.0)
0.7
Total cash flow
(6.8)
(12.8)
Net cash
1.0
7.8
We closed the year with net cash of 1.0 million (2015: 7.8 million). This reduction is primarily as a result further investment in new locations in Asia, Europe and the Middle East as well as the acquisition of the new Xcaliber Diagnostics business, all of which should drive growth in 2017.
Discontinued cash flow
The disposal of the repair business generated proceeds of 79.9 million, the majority of which was used to fund the return of cash to shareholders via the buy back and subsequent cancellation of shares in May 2016.
The business incurred exceptional costs totalling 11.1 million in connection with this disposal and the restructuring of the Repair Services Business which took place prior to its disposal. The net cash flow for the discontinued business for the year, including the sale of the Repair Services business, the return of funds to shareholders and the trading cash flow was a 3.8 million inflow.
Continuing cash flow
Adjusted operating cash flow of 6.0 million (2015: 4.1 million) and operating cash inflow of 4.1 million (2015: 1.6 million) were both higher than in previous periods, primarily driven by the increase in profit. The cash conversion for the year was 98% (2015: 103%), which saw an increase in working capital in the second half of the year. This is driven by four factors:
The move in the mix of business towards volume customers and away from subscription customers; where subscription customers pay up front for the contract. The mix reduction in these customers paying cash up front has resulted in lower cash generation relative to profits.
Increasing levels of sales with large corporate customers, who generally carry larger credit terms.
The business recording a significant amount of sales towards the end of the reporting period, which was 73% higher than the prior year, therefore the cash flows associated with these sales were deferred to FY17.
For the first time, diagnostics sales, which are generally with larger corporations over longer credit terms.
Tax paid was 0.6 million (2015: 0.6 million).
Net interest paid was 0.2 million (2015: 0.4 million). The majority of the interest expense recorded in the Income Statement is non-cash, as it relates to the impact of changes in current value of future payables.
The Group has continued to invest in the development and enhancement of its erasure and diagnostics tools. Capital expenditure and R&D increased to 2.5 million (2015: 1.8 million).
Expenditure on tangible assets, including leasehold improvements and technical equipment, and software licences amounted to 0.2 million (2015: 0.1 million).
Capital development expenditure on R&D activities amounted to 2.3 million (2015: 1.7 million). During the year, the spend comprised software development across the erasure portfolio of products, customer specific product development, and investment in new diagnostics.
The spend has included work to bring the product up to the specification to obtain patents in the UK and US alongside its worldwide certifications, with further investment in patent protection remaining a management focus.
Investment was specifically directed towards integrating the Blancco product onto the new hardware platform acquired with Tabernus. In addition, we have continued to develop the mobile product, developing and releasing a new version in 2016 following the initial product launch in 2015.
We have developed the SmartChk diagnostics product, acquired with Xcaliber, to integrate this into a Depot repair network for our existing customers, as well as developing a combined erasure-diagnostics solution for the market from our existing portfolio.
These investments have allowed the business to better target products towards larger customers where the business has already seen benefit in 2016, and going forward for cloud customers and data centres who require more complex erasure solutions.
Net Cash
Year end net cash comprised gross borrowings of 3.7 million denominated in sterling (2015: 4.6 million in sterling and euros), cash and cash equivalents of 4.8 million (2015: 12.1 million) and deferred arrangement fees of nil (2015: 0.3 million).
Dividend
In line with our stated dividend policy, the Board is recommending a final dividend of 1.34 pence per ordinary share to be paid on 7 December 2016 to shareholders on the register on 4 November 2016. This gives a full year dividend of 2.0 pence per ordinary share, which has been rebased following the sale of the repair services business. The Board intends to adopt a progressive dividend policy which reflects the long term earnings and cash flow potential of the Group.
Post Year-end Events
On 17 August 2016, the group acquired the remaining 49% of the share capital of Blancco Australasia Pty Ltd that it did not already own for a cost of AU$ 0.1 million (0.1 million). The consideration was funded through the Group's cash reserves.
On 19 September 2016 we reached an agreement to sell the Digital Care business to Mazovia Capital for initial contingent consideration of 1.2 million (1.0 million) with a further contingent earn out of 3.3 million (2.8 million) payable over 2 to 3 years. These proceeds will be reinvested into the Software business.
Key Performance Indicators
The Group has a range of performance indicators, both financial and non-financial, to monitor and manage the business and ultimately to improve performance. The Group's key performance indicators ("KPIs") are outlined below:
Year
endedYear ended
Commentary
Key financials
30 June 2016
30 June 2015
Invoiced Sales ('m)
24.4
15.5
Invoiced Sales is an important KPI for the Group as it measures the actual sales closed and invoiced in the period, before any IFRS deferral of revenue. It is a key metric for how the salesforce has grown the underlying business of the Group
Geography (Regional proportion of invoiced sales)
North America
40%
25%
North America is a strategically important location for the Group and focus is on growing our presence in this location. The significant growth has resulted from an increased presence in the market and investment in sales resources
Europe
35%
49%
Asia and ROW
25%
26%
100%
100%
Product type (Proportion of invoiced sales)
LEE
10%
5%
The Group is expanding its product range through the acquisition and development of new services, most notably LEE (through SafeIT). The Group has seen growth in this area in the year as the product is further developed for our customer's needs.
Mobile
16%
16%
IT and Other
74%
79%
100%
100%
Trailing 12 month client retention rate*
91%
81%
The rate at which customers are repeating business is high and improving demonstrating the value our products provide.
Our customers spend increasing amounts with us year on year, showing the additional value our wide product range holds
.
Trailing 12 month sales repeat rate*
113%
103%
Average annual spend per customer* ('000)
51.6
44.1
End of year headcount
Admin
21
24
We continue to invest in headcount, through R&D development of our products and our salesforce to generate new business. Our R&D team expanded following the Xcaliber acquisition in the year.
R&D
107
30
Sales
87
81
215
135
* for customers spending over 10k per year
Consolidated Income Statement
Year ended
Year ended
30 June
2016
30 June
2015
Note
'000
'000
Continuing operations revenue
2
22,387
15,014
Divisional operating profit
2
7,605
5,382
Corporate costs
(1,516)
(1,359)
Adjusted Operating Profit
2
6,089
4,023
Acquisition costs
3
(1,343)
(2,414)
Exceptional restructuring costs
4
-
(67)
Amortisation of intangible assets
(2,494)
(2,026)
Share-based payments
(1,167)
(371)
Group operating profit/(loss)
1,085
(855)
Loss on disposal of Xcaliber investment following acquisition
8
(1,314)
-
Share of results of associates and jointly controlled entities
(155)
(746)
Operating loss
(384)
(1,601)
Finance income
6
68
48
Unwinding of contingent consideration
(292)
(171)
Revaluation of contingent consideration
(293)
-
Other finance costs
(416)
(672)
Finance costs
6
(1,001)
(843)
Loss before tax
(1,317)
(2,396)
Taxation
(649)
(869)
Loss for the period
5
(1,966)
(3,265)
Discontinued operations
Post tax results from discontinued operations
7
(22,198)
8,382
(Loss)/profit for the period
(24,164)
5,117
Attributable to:
Equity holders of the Company
(24,838)
5,404
Non-controlling interest
674
(287)
(Loss)/profit for the period
(24,164)
5,117
Earnings per share
Continuing Operations:
Basic
8
(3.69 p)
(3.84 p)
Diluted
8
(3.69 p)
(3.84 p)
Discontinued Operations:
Basic
8
(31.03 p)
10.81 p
Diluted
8
(31.03 p)
10.81 p
Total Group:
Basic
8
(34.72 p)
6.97 p
Diluted
8
(34.72 p)
6.97 p
Consolidated Statement of Other Comprehensive Income
Year
ended
Year
ended
30
June2016
30 June 2015
'000
'000
(Loss)/profit for the period
(24,164)
5,117
Other comprehensive income - amounts that may be reclassified to profit or loss in the future:
Exchange differences arising on translation of foreign entities
2,542
(3,786)
Total comprehensive (loss)/income for the period
(21,622)
1,331
Attributable to:
Equity holders of the Company
(22,296)
1,618
Non-controlling interests
674
(287)
Total comprehensive (loss)/income for the period
(21,622)
1,331
Consolidated Balance Sheet
30 June
2016
30 June
2015
Note
'000
'000
Assets
Non-current assets
Goodwill
42,821
83,157
Other intangible assets
24,071
27,041
Investments in jointly controlled entities and associates
-
1,850
Other Investments
-
61
Property, plant and equipment
430
6,355
Deferred tax
-
622
67,322
119,086
Current assets
Inventory
116
9,480
Trade and other receivables
8,901
34,556
Cash
4,769
12,143
Assets held for sale
7
4,804
-
18,590
56,179
Total assets
85,912
175,265
Current liabilities
Trade and other payables
(14,237)
(40,471)
Contingent consideration
(2,213)
(1,734)
Current tax liability
(2,264)
(642)
Provisions
(1,569)
(372)
Liabilities held for sale
7
(3,038)
-
(23,321)
(43,219)
Non-current liabilities
Borrowings
13
(3,727)
(4,357)
Other payables
(954)
-
Contingent consideration
(3,196)
(3,994)
Deferred tax
(1,844)
-
Provisions
(3,782)
(1,029)
(13,503)
(9,380)
Total liabilities
(36,824)
(52,599)
Net assets
49,088
122,666
Equity
Ordinary share capital
1,164
1,581
Share premium
-
51,737
Merger reserve
4,034
4,034
Capital redemption reserve
417
-
Translation reserve
(434)
(7,115)
Retained earnings
42,950
72,191
Total equity attributable to equity holders of the Company
48,131
122,428
Non-Controlling interest reserve
957
238
Total equity
49,088
122,666
Pat Clawson Jog Dhody
Chief Executive Officer Chief Financial Officer
Company number: 05113820
Consolidated Statement of Changes to Equity
Share capital
Share premium
Merger reserve
Translation reserve
Retained earnings
Non-controlling interest reserve
Capital redemption reserve
Total
'000
'000
'000
'000
'000
'000
'000
'000
Balance as at 30 June 2014
1,581
121,737
4,034
(3,329)
5,820
570
130,413
Comprehensive income:
Profit for the year
-
-
-
-
5,404
(287)
-
5,117
Other comprehensive income:
Exchange differences arising on translation of foreign entities
-
-
-
(3,786)
-
-
-
(3,786)
Transactions with owners recorded directly in equity:
Recognition of share based payments
-
-
-
-
914
-
-
914
Dividends paid
-
-
-
-
(3,381)
-
-
(3,381)
Other transactions:
Acquisition of non-controlling interest without a change in control
-
-
-
-
(2,938)
-
-
(2,938)
Reserves transfer on acquisition of non-controlling interest
-
-
-
-
45
(45)
-
-
Purchase of Company's own shares
-
-
-
-
(3,673)
-
-
(3,673)
Conversion of share premium account
-
(70,000)
-
-
70,000
-
-
-
Balance as at 30 June 2015
1,581
51,737
4,034
(7,115)
72,191
238
-
122,666
Comprehensive income:
Loss for the year
-
-
-
-
(24,838)
674
-
(24,164)
Transfer of translation reserve on disposal of subsidiary
-
-
-
4,139
-
-
-
4,139
Other comprehensive income:
Exchange differences arising on translation of foreign entities
-
-
-
2,542
-
-
-
2,542
Transactions with owners recorded directly in equity:
Recognition of share based payments
-
-
-
-
757
-
-
757
Dividends paid
-
-
-
-
(3,071)
-
-
(3,071)
Other transactions:
Acquisition of non-controlling interest without a change in control
-
-
-
-
(3,046)
-
-
(3,046)
Conversion of share premium account
-
(51,737)
-
-
51,737
-
-
-
On acquisition of subsidiary
-
-
-
-
-
(43)
-
(43)
Reserves transfer on acquisition of non-controlling interest
-
-
-
-
(88)
88
-
Repurchase and cancellation of Company's own shares
(417)
-
-
-
(50,692)
-
417
(50,692)
Balance as at 30 June 2016
1,164
-
4,034
(434)
42,950
957
417
49,088
Consolidated Cash Flow Statement
Year
ended
Year
ended
30 June 2016
30 June 2015
Note
'000
'000
(Loss)/profit for the period
(24,164)
5,117
Adjustments for:
Results of discontinued operations
7
22,198
(8,382)
Net finance charges
933
795
Tax expense
649
869
Depreciation on property, plant and equipment
113
29
Amortisation of intangible assets
668
195
Amortisation of acquired intangible assets
2,494
2,026
Share of losses and disposal of joint ventures and associates
1,469
746
Share-based payments expense
1,167
371
Operating cash flow before movement in working capital
5,527
1,766
Acquisition costs
1,343
2,414
Exceptional restructuring costs
-
67
Operating cash flow before movement in working capital and exceptional and acquisition costs
6,870
4,247
Increase in inventories
(41)
(19)
Increase in receivables
(4,749)
(250)
Increase in payables and accruals
4,169
1,462
Decrease in provisions
-
(373)
Cash generated from continuing operations
4,906
2,586
Acquisition costs payments
1,080
1,436
Exceptional restructuring payments
-
67
Adjusted operating cash flow
5,986
4,089
Interest received
68
48
Interest paid
(309)
(424)
Tax paid
(629)
(569)
Net cash inflow from operating activities - continuing operations
4,036
1,641
Net cash (outflow)/inflow from operating activities - discontinued operations
7
(10,890)
5,279
Net cash (outflow)/inflow from operating activities - continuing and discontinued operations
(6,854)
6,920
Cash flows from investing activities
Purchase of property, plant and equipment
(236)
(145)
Purchase and development of intangible assets
(2,282)
(1,651)
Acquisition of investment in an associate
-
(1,912)
Acquisition of subsidiaries, net of cash acquired
(7,485)
(2,450)
Payments made to acquire non-controlling interest
(345)
-
Net cash used in investing activities - continuing operations
(10,348)
(6,158)
Net cash from/(used in) investing activities - discontinued operations
7
65,399
(4,551)
Net cash from/(used in) investing activities - continuing and discontinued operations
55,051
(10,709)
Cash flows from financing activities
Dividends paid
(3,071)
(3,381)
Payment on vesting of share options
-
(80)
(Repayment)/drawdown of borrowings
(1,223)
4,066
Repurchase of shares
(50,692)
(3,550)
Net cash used in financing activities
(54,986)
(2,945)
Net cash used in financing activities - discontinued operations
-
-
Net cash used in financing activities - continuing and discontinued operations
(54,986)
(2,945)
Net decrease in cash and cash equivalents
(6,789)
(6,734)
Other non-cash movements - exchange rate changes
(585)
(1,918)
Cash and cash equivalents at the beginning of period
12,143
20,795
Cash and cash equivalents at end of period
4,769
12,143
Bank borrowings
(3,727)
(4,357)
Net cash
1,042
7,786
1.Basis of preparation
The financial information set out in this statement does not constitute the Group's statutory accounts for the years ended 30 June 2016 or 30 June 2015. The financial information is derived from those accounts for the year ended 30 June 2015 and from the draft version of those accounts of the year ended 30 June 2016. Statutory accounts for the year ended 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered in due course. The audit of the statutory accounts for the year ended 30 June 2016 is not yet complete. The Group's auditors have reported on the 30 June 2015 accounts; their report was unmodified, did not draw attention to any matters by way of emphasis without modifying their report and did not contain statements under s498 (2) or (3) of the Companies Act 2006. Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards ("IFRS") this announcement does not itself contain sufficient information to comply with IFRS.
2. Segmental reporting
As outlined in the Group Strategic Review, the Group's management structure is reported in two distinct divisions:
The Erasure division focuses on development and delivery of innovative solutions, and includes:
o Blancco, the global market leader data of erasure software.
o SafeIT, acquired in September 2014, the leading specialist cloud and networked data erasure business.
o Tabernus, acquired in September 2015, the US market leader of software erasure products.
Both SafeIT and Tabernus have been integrated into Blancco.
The Diagnostic division includes Xcaliber Technologies, a smartphone diagnostics software business. The Group held a 49% stake in this business at the start of the year, this increased to 76% in January 2016 when a further 27% was purchased and increased again in March to 100% when the Group purchased the final 24%.
Aftermarket Services represents the discontinued business and provided the Group's core repair services and insurance offering.
Year ended 30 June
2016
Year ended 30 June 2015
Continuing operations
'000
'000
Erasure revenue
21,659
15,014
Diagnostics revenue
1,017
136
Less: share of jointly controlled entity
(289)
(136)
Diagnostics revenue
728
-
Software revenue
22,387
15,014
Erasure
7,592
5,382
Diagnostics
13
-
Software Divisional Operating Profit
7,605
5,382
Corporate costs
(1,516)
(1,359)
Adjusted Operating Profit
6,089
4,023
Acquisition costs
(1,343)
(2,414)
Exceptional restructuring costs
-
(67)
Amortisation of intangible assets
(2,494)
(2,026)
Share-based payments
(1,167)
(371)
Group Operating profit/(loss)
1,085
(855)
Loss on disposal of Xcaliber investment following acquisition
(1,314)
-
Share of results of associates and jointly controlled entities
(155)
(746)
Operating loss
(384)
(1,601)
Finance income
68
48
Unwinding of discount factor on contingent consideration
(292)
(171)
Revaluation of contingent consideration
(293)
-
Other finance costs
(416)
(672)
Net finance cost
(933)
(795)
Loss before tax
(1,317)
(2,396)
Year ended 30 June 2016
Year ended 30 June 2015
Discontinued operations
'000
'000
Aftermarket Services revenue
151,901
187,550
Aftermarket Services Divisional Operating Profit
9,711
15,201
Corporate costs
(3,438)
(3,798)
Adjusted Operating Profit
6,273
11,403
M&A costs
(9,600)
(627)
Exceptional restructuring costs
(1,542)
(611)
Amortisation of intangible assets
(425)
(1,323)
Share-based payments
(714)
(160)
Operating (loss)/profit before disposal of subsidiaries
(6,008)
8,682
Loss on disposal of subsidiaries
-
(1,456)
Operating (loss)/profit
(6,008)
7,226
Finance income
20
95
Revaluation of contingent consideration
-
3,302
Unwinding of discount factor on contingent consideration
(342)
(763)
Other finance costs
(1,337)
(667)
Net finance (cost)/income
(1,659)
1,967
(Loss)/profit before tax
(7,667)
9,193
3. Acquisition costs
2016
2015
'000
'000
Acquisition costs and other M&A related costs
1,343
2,414
Acquisition costs relate to the M&A activity within the year, with the most significant costs relating to the acquisition of Tabernus and Xcaliber.
Deal costs not included above relate to the disposal of the Repair Services Business totalling 9.6 million for the period (2015: 0.6 million) as they are presented within discontinued operations.
4. Exceptional restructuring costs
2016
2015
'000
'000
Redundancies and restructuring
-
67
-
67
No exceptional restructuring costs have been recorded in the current period (2015: 0.1 million relating to integration activities).
Exceptional redundancy and restructuring costs not included above relate to the restructuring activities for the disposal of the Repair Services Business totalling 1.5 million for the period (2015: 0.6 million), as they are presented within discontinued operations.
5. (Loss)/profit for the year
Loss for the year (2015: profit) for the Group has been arrived at after charging/(crediting):
Year ended
30 June
2016
Year ended
30 June
2015
'000
'000
Depreciation of property, plant and equipment - owned
523
1,702
(Profit)/loss on disposal of property, plant and equipment
(33)
114
Amortisation of intangible assets
4,058
4,452
Cost of inventories recognised as an expense
81,753
91,372
Staff costs
51,554
60,368
Net foreign exchange loss/(profit)
1,308
(233)
The figures for the Group's continuing operations are as follows:
Year ended
30 June
2016
Year ended
30 June 2015
'000
'000
Depreciation of property, plant and equipment - owned
113
29
Loss on disposal of property, plant and equipment
-
-
Amortisation of intangible assets
3,162
2,221
Cost of inventories recognised as an expense
309
112
Staff costs
9,954
6,219
Net foreign exchange loss/(profit)
169
(273)
6. Finance costs and finance income
2016
2015
Continuing operations
'000
'000
Bank interest receivable and similar income
68
48
Interest payable on borrowings:
Bank loans and overdrafts
(377)
(436)
Other finance costs
(39)
(236)
Revaluation of contingent consideration
(293)
-
Unwind of discount factor on contingent consideration
(292)
(171)
Net finance cost
(933)
(795)
Contingent consideration was revalued following the UK decision to exit the European Union, which subsequently resulted in a weakening of the sterling against the US dollar, the currency in which the contingent consideration is denominated. The impact was an increase in the present value of the liability in sterling of 0.3 million.
7. Discontinued operations
Year
ended
Year
ended
30 June
2016
30 June
2015
'000
'000
Discontinued operations revenue
151,901
187,550
Divisional operating profit
9,711
15,160
Head office costs
(3,438)
(3,757)
Adjusted Operating Profit
6,273
11,403
Acquisition and disposal costs
(9,600)
(611)
Exceptional restructuring costs
(1,542)
(627)
Amortisation of intangible assets
(425)
(1,323)
Share-based payments
(714)
(160)
Operating (loss)/profit before disposal of subsidiaries
(6,008)
8,682
Loss on disposal of subsidiaries
-
(1,456)
Operating (loss)/profit
(6,008)
7,226
Revaluation of contingent consideration
-
3,302
Other finance income
20
95
Finance income
20
3,397
Unwinding of contingent consideration
(342)
(763)
Other finance costs
(1,337)
(667)
Finance costs
(1,679)
(1,430)
Profit/(loss) before tax
(7,667)
9,193
Taxation
(609)
(811)
Profit/(loss) for the period
(8,276)
8,382
Post tax loss on disposal of discontinued business
(13,922)
-
Post tax results from discontinued operations
(22,198)
8,382
The discontinued income statement includes both the Repair Services Business and the Digital Care Businesses. The loss on disposal relates solely to the Repair Services Business as the Digital Care Business was not sold by 30 June 2016. Assets and Liabilities included in the consolidated balance sheet as held for sale relate to the Digital Care Business and are as follows:
'000
Assets
Other intangible assets
1,479
Property, plant and equipment
123
Deferred Taxation
297
Inventory
31
Trade and other receivables
2,874
Total assets held for sale
4,804
Current liabilities
Trade and other payables
(3,038)
Total liabilities held for sale
(3,038)
The loss on disposal reconciliation for the disposal of the Repair Services business and Digital Care Sweden AB is as follows:
Repair Services
Business
Digital Care Sweden AB
Total
'000
'000
'000
Proceeds
79,914
-
79,914
Assets
Goodwill
49,816
-
49,816
Other intangible assets
5,118
68
5,186
Property, plant and equipment
7,894
-
7,894
Deferred Taxation
2,404
-
2,404
Inventory
9,857
24
9,881
Cash
9,777
619
10,396
Trade and other receivables
27,572
13
27,585
Total assets disposed
112,438
724
113,162
Liabilities
Trade and other payables
(20,001)
(298)
(20,299)
Deferred Consideration
(3,166)
-
(3,166)
Total liabilities disposed
(23,167)
(298)
(23,465)
Transfer of translation differences to Income Statement
3,292
847
4,139
Loss on Disposal
(12,649)
(1,273)
(13,922)
The arrangement for the disposal of Digital Care Sweden were that no proceeds were received but the new owners took on both the cash and the expected cost of the required rationalisation and restructuring subsequent to the acquisition.
On disposal of the Repair Services and Digital Care Sweden businesses, the Group is required to transfer accumulated foreign exchange differences from the translation reserve to the Income Statement. This charge amounted to 4.1 million and results predominantly from the strengthening of the Sterling relative to overseas currencies in the last 24 months.
The cash flows associated with the discontinued operations are as follows:
Year
ended
Year
ended
30 June
2016
30 June
2015
'000
'000
(Loss)/profit for the period
(8,276)
8,382
Adjustments for:
Net finance charges/(income)
1,659
(1,967)
Tax expense
609
811
Depreciation on property, plant and equipment
410
1,673
Amortisation of intangible assets
471
908
Amortisation of acquired intangible assets
425
1,323
Loss on disposal of subsidiary
-
1,456
Loss on disposal of property, plant and equipment
-
114
Share-based payments expense
714
160
Operating cash flow before movement in working capital
(3,988)
12,860
Increase in inventories
(495)
(358)
Decrease in receivables
809
1,333
Decrease in payables and accruals
(6,004)
(6,329)
Decrease in provisions
(222)
(1,451)
Cash (used in)/ from discontinued operations
(9,900)
6,055
Interest received
20
-
Interest paid
(655)
(382)
Tax paid
(355)
(394)
Net cash (outflow)/inflow from operating activities - discontinued operations
(10,890)
5,279
Cash flows from investing activities
Purchase of property, plant and equipment
(1,549)
(2,443)
Purchase and development of intangible assets
(1,575)
(3,098)
Proceeds from sale of property, plant and equipment
-
990
Acquisition of subsidiaries and payment of contingent consideration
(995)
-
Disposal of subsidiaries, net of cash disposed
69,518
-
Net cash from/(used in) investing activities - discontinued operations
65,399
(4,551)
8. Earnings per share (EPS)
Year ended
Year ended
30 June 2016
30 June 2015
Pence
Pence
Continuing operations
Basic earnings per share
(3.69 p)
(3.84 p)
Diluted earnings per share
(3.69 p)
(3.84 p)
Adjusted earnings per share
5.63 p
2.84 p
Diluted adjusted earnings per share
5.63 p
2.84 p
Discontinued operations
Basic earnings per share
(31.03 p)
10.81 p
Diluted earnings per share
(31.03 p)
10.81 p
Adjusted earnings per share
7.18 p
13.34 p
Diluted adjusted earnings per share
7.18 p
13.34 p
Total Group
Basic earnings per share
(34.72 p)
6.97 p
Diluted earnings per share
(34.72 p)
6.97 p
Adjusted earnings per share
12.82 p
16.18 p
Diluted adjusted earnings per share
12.82 p
16.18 p
Year ended
Year ended
30 June 2016
30 June 2015
Continuing operations
'000
'000
Loss for the period
(1,966)
(3,265)
(Profit)/loss attributable to non-controlling interests
(674)
287
Loss attributable to equity holders of the parent parpaparentCompany
(2,640)
(2,978)
Reconciliation to adjusted profit:
Unwinding of contingent consideration
292
171
Revaluation of contingent consideration
293
-
Acquisition costs
1,343
2,414
Amortisation of intangible assets
2,494
2,026
Exceptional restructuring costs
-
67
Exceptional bank charges
17
148
Share based payments
1,167
371
Loss on disposal of Xcaliber investment following acquisition
1,314
-
Tax impact of above adjustments
(251)
(14)
Adjusted profit for the period
4,029
2,205
Year ended
Year ended
30 June 2016
30 June 2015
Discontinued operations
'000
'000
Loss for the period
(22,198)
8,382
(Profit)/loss attributable to non-controlling interests
-
-
Loss attributable to equity holders of the parent parpaparentCompany
(22,198)
8,382
Reconciliation to adjusted profit:
Unwinding of contingent consideration
342
763
Revaluation of deferred consideration
-
(3,302)
Acquisition costs
9,600
626
Amortisation of intangible assets
425
1,323
Exceptional restructuring costs
1,542
611
Exceptional bank charges
793
482
Share based payments
714
160
Disposal of subsidiary
-
1,456
Disposal of discontinued operations
13,922
-
Tax impact of above adjustments
-
(155)
Adjusted profit for the period
5,140
10,346
Number of shares
'000s
'000s
Weighted average number of shares used to calculate earnings per share
- Basic
71,537
77,550
- Diluted
71,537
77,563
9. Acquisitions during the year
Acquisition of Tabernus
On 11 September 2015 the Group completed the acquisition of 100% of the issued share capital of Tabernus LLC and Tabernus Europe Limited for a headline price of $12 million, consisting of consideration of $11.7 million (7.7 million) and debt acquired of $0.3 million (0.2 million), which was funded though the Group's cash reserves. The debt was immediately settled on completion.
In the ten months to 30 June 2016, this acquisition has contributed total revenue of 1.5 million.
If the acquisition had been completed on the first day of the financial year, management estimates that the benefit to consolidated revenue for the year would have been 1.9 million.
The provisional book value and fair value of the assets acquired and liabilities assumed were as follows:
Book Value
'000
Fair Value adjustments and IFRS alignment
'000
Fair Value
'000
Intangible assets arising on consolidation
-
1,548
1,548
Property, plant and equipment
30
(30)
-
Deferred tax
-
32
32
Overdraft and other short term borrowings
(175)
-
(175)
Trade and other receivables
257
(42)
215
Trade and other payables
(163)
(1,677)
(1,840)
Net assets acquired
(51)
(169)
(220)
Goodwill
7,544
Total consideration
7,324
Satisfied by:
Cash paid
6,390
Deferred consideration
934
Total consideration
7,324
The Directors identified a number of adjustments that were required to the book values, following a review of all balance sheet categories. These adjustments include a write off of property, plant and equipment items (30,000), provision against doubtful debtors (42,000), provisions against litigations and claims and other unrecorded liabilities (1,677,000).
Under IFRS 3 "Business Combinations" separately identifiable intangible assets arising from the acquisition have been capitalised. These relate to technology of 583,000, customer contracts of 695,000 and marketing brand of 270,000. The key assumption used was the discount rate for future cash flows which was estimated at 12%.
Trade receivables acquired totalled 200,000 gross and there was no bad debt provision. The goodwill of 7,544,000 can be attributed to the anticipated growth of the Group, strategic benefits and workforce in place. The goodwill represents the synergies arising on the acquisition.
Contingent cash consideration
The acquisition includes an earn-out based on earnings, to be paid in September 2018. The estimated cash outflow at the time of settlement will be $2 million (1.3 million). A deferred liability of $1.4 million (0.9 million) has been established which represents the fair value at the acquisition date, using a discount rate of 12%. At 30 June 2016, the deferred liability was $1.8 million (1.1 million).
Acquisition of Xcaliber
On 4 January 2016 the Group acquired an additional 27% of the issued share capital of Xcaliber Technologies LLC for a consideration of $0.5 million (0.3 million) bringing the Group's share to 76%. At this point, the Group is required to account for a disposal of its investments previously held on the balance sheet and reflect ownership of the business, consolidating the results in the Income Statement and Balance Sheet from this date.
Xcaliber is a US based software business with a market leading mobile diagnostics technology which adds to our existing diagnostics offering in Europe, the US and globally.
In the six months to 30 June 2016, this acquisition has contributed total revenue of 700,000 and Adjusted Operating Profit of nil.
If the acquisition had been completed on the first day of the financial year, management estimates that the benefit to consolidated revenue for the year would have been 1.3 million and the benefit to consolidated Adjusted Operating Profit would have been nil.
The provisional book value and fair value of the assets acquired and liabilities assumed at the 4 January 2016 were as follows:
Book Value
'000
Fair Value adjustments and IFRS alignment
'000
Fair Value
'000
Intangible assets arising on consolidation
-
1,835
1,835
Property, plant and equipment
31
-
31
Deferred tax
102
(146)
(44)
Cash
431
-
431
Trade and other receivables
520
(15)
505
Trade and other payables
(1,676)
(2,081)
(3,757)
Total net assets
(592)
(407)
(999)
Non-controlling interest
43
Net assets acquired
(956)
Goodwill
1,936
Total consideration
980
Satisfied by:
Cash paid
342
Disposal of 49% associate
638
Total consideration
980
A loss of 1.3 million was recognised on the disposal of the 49% interest on 4 January 2016 which was required to be accounted for immediately prior to the accounting for the acquisition.
The Directors identified a number of adjustments that were required to the book values, following a review of all balance sheet categories. These adjustments include provisions against litigations and claims and other unrecorded liabilities (2.1 million).
Under IFRS 3 "Business Combinations" separately identifiable intangible assets arising from the acquisition have been capitalised. These relate to technology 1,687,000, customer contracts of 38,000 and marketing brand of 111,000. The key assumption used was the discount rate for future cash flows which was estimated at 14%.
Trade receivables acquired totalled 240,000 gross and there was a 1,000 bad debt provision. The goodwill of 1,936,000 can be attributed to the anticipated growth of the Software group, strategic benefits and workforce in place.
On 17 March 2016 the Group completed the purchase of an additional 24% of the issued share capital of Xcaliber Technologies LLC for $0.5 million (0.3 million) bringing the Groups share to 100%. The acquisition was funded through the Group's cash reserves. On completion, all debts to companies associated with the seller were settled amounting to an additional cash outflow of $0.4 million (0.3 million).
The second investment was made to obtain the full ownership of the business from the previous partner, while the first was an investment to enhance the operations business, and accordingly the two transactions have been accounted for separately.
This investment represents the buy out of the non-controlling interest at this date, which does not require a fair value assessment as this was already completed on 4 January 2016. In accordance with IFRS 10 "Consolidated Financial Statements", the purchase price for the acquisition has been taken directly to the profit and loss reserve.
Contingent consideration
The investment on the 17 March 2016 includes an earn-out to be paid over various stages of the next 3 years. The estimated cash outflow at the time of settlement will be $4.7 million (3.3 million). A deferred liability of $3.8 million (2.7 million) has been established which represents the fair value at the investment date, using a discount rate of 14%. At 30 June 2016, the deferred liability was $3.8 million (2.9 million).
10. Cash flow - acquisition of subsidiaries net of cash acquired
Within the consolidated cash flow statement, the cash flow relating to acquisitions, net of cash acquired is reconciled as per the table below:
'000
Tabernus acquisition - initial cash consideration
6,390
Tabernus acquisition - overdraft
4
Tabernus acquisition - debt
171
Xcaliber acquisition - initial cash consideration
342
Xcaliber acquisition - cash acquired
(431)
Xcaliber acquisition - debt
287
Payment of contingent consideration on Blancco Sweden acquisition
722
Net cash flow - acquisition of subsidiaries, net of cash acquired
7,485
No cash or overdraft was acquired as part of the non-controlling interest buy outs since the cash balances were consolidated by virtue of the existing shareholding being a controlling stake.
Cash outflow on the buy out of the Xcaliber non-controlling interests was 0.3 million
11. Investments in Blancco sales offices
The Group's interest in the key Blancco erasure legal entities is as follows:
Company name
Ownership percentage of the Group as at 30 June 2016
Ownership percentage of the Group as at 30 June 2015
Country of incorporation
Blancco Oy Limited
100%
100%
Finland
Blancco UK Limited
100%
100%
England and Wales
Blancco Italy SRL
100%
100%
Italy
Blancco France SAS
51%
51%
France
Software Blancco S.A. de C.V. Mx
51%
51%
Mexico
Blancco US LLC
100%
100%
USA
Blancco Central Europe GmbH
100%
100%
Germany
Blancco Canada Inc
50%
50%
Canada
Blancco SEA Sdn Bhd
100%
100%
Malaysia
Blancco Australasia Pty Limited
100%
100%
Australia
Blancco Japan Inc
51%
51%
Japan
Blancco Sweden SFO
100%
100%
Sweden
SafeIT Security Sweden AB
100%
100%
Sweden
12. Dividends
2016
2016
2015
2015
'000
Pence per share
'000
Pence per share
Previous year final
2,565
3.35
2,118
2.68
Current year interim dividend
506
0.66
1,263
1.65
3,071
4.01
3,381
4.33
13. Bank borrowings
2016
2015
'000
'000
Due after more than one year:
Secured bank loan
3,727
4,357
Repayable:
In the first to second years inclusive
-
4,357
In the third to fifth years inclusive
3,727
-
The bank borrowing is secured on the majority of the Group's assets for the duration of the Revolving Credit Facility. The total facility available to the Group as at 30 June 2016 totalled 11.5 million (2015: 39.0 million), of which 3.7 million (2015: 4.6 million) had been drawn down in cash, resulting in an unutilised facility of 7.8 million (2015: 34.4 million). Borrowing costs of nil (2015: 0.3 million) are set-off against the amount owing at year end.
In September 2015, the Group extended the term of its banking facility with HSBC from October 2016 to October 2019, which gives Blancco clear certainty of funding over the next three years.
In April 2016, following the disposal of the Repair Services Business, the banking facility was renegotiated for the continuing software Group in order to provide an appropriate level of financing for the current profitability, which resulted in the reduction of the total available facility.
All banking covenants have been satisfied in the year and show headroom for the foreseeable future.
14. Subsequent Events
On 17 August 2016, the group acquired the remaining 49% of the share capital of Blancco Australasia Pty Ltd that it did not already own for a cost of AU$ 0.1 million (0.1 million). The consideration was funded through the Group's cash reserves.
On 19 September 2016 we reached an agreement to sell the Digital Care business to Mazovia Capital for initial contingent consideration of 1.2 million (1.0 million) with a further contingent earn out of 3.3 million (2.8 million) payable over 2 to 3 years. These proceeds will be reinvested into the Software business.
15. Related party transactions
Transactions between Blancco and its 100% subsidiaries, which are related parties, have been eliminated on consolidation. No disclosure of these transactions is required under IAS24.
Matthew Peacock, Executive Chairman, and Tom Russell, Non-executive Director, are associated with Hanover Investors Management LLP, and a fee is charged for their services as Executive Directors which is disclosed in the Directors' Remuneration Report.
They also have an indirect beneficial interest in the shares of the Group. At 30 June 2016, the combined holding of Hanover Investors Management LLP and its connected parties is 209,728 (2015: 5,217,651) ordinary shares equating to 0.36% (2015: 6.60%) of the issued share capital of the Company.
All transactions with Directors are included in the Directors' Remuneration Report, which is disclosed in the Annual Report and Accounts.
During the year fees amounting to 1,580,200 were paid for M&A related consultancy services provided by Hanover Investors Management LLP or its connected parties (2015: 540,000). At 30 June 2016 nil was outstanding in relation to these services (2015: 290,000).
These services were for corporate finance advisory and were fully contingent on the execution of the M&A deal in the year, including the acquisitions of Tabernus and Xcaliber (the latter in two stages), and the disposals of the Repair Services business and the Digital Care division.
These fees were benchmarked against fees paid to our other advisors, with the Board considering that Hanover offered the best alternative to any third parties based on the work performed for the Group on previous acquisitions. The nature of the services provided by Hanover included the following:
In respect of the acquisitions:
Management of deal timetable
Negotiation with the third parties and legal advisors
Negotiation on terms of the deals
In respect of the disposals Hanover's role was to take ownership of the execution of the deal in conjunction with our corporate advisor, William Blair, whose role it was to identify the most appropriate buyer of the business.
Property lease costs of 165,000 (2015: 188,000) were recharged to Hanover Investors Management LLP in the year, of which nil was outstanding at the year-end (2015: nil).
Management charges totaling 423,000 (2015: 430,000) were recharged to Xcaliber during the year of which nil (2015: 730,000) was still owed at the year end. The management charges in the current year relate to charges up to the acquisition date in January 2016 only, the prior period figures relate to the period from 1 July 2014 to 30 June 2015.
16. Definitions
Adjusted Operating Profit: Operating Profit stated before amortisation or impairment of acquired intangible assets, acquisition costs, exceptional restructuring costs, share-based payments and disposal of subsidiaries and associates. This is the key profit measure used by the Board to assess the underlying financial performance of the operating divisions and the Group as a whole.
Adjusted operating cash flow: Operating cash flow excluding taxation, interest payments and receipts, acquisition costs, and exceptional restructuring costs. This is the key operating cash flow measure used by the board to assess the underlying cash flow of the Group.
Adjusted earnings per share: Basic earnings per share excluding amortisation or impairment of acquired intangible assets, amortisation of bank fees, exceptional restructuring costs, acquisition costs, share-based payments, losses on disposal of investments and jointly controlled entities, unwinding of the discounted contingent consideration, adjustments to estimates of contingent consideration, and tax impacts of the above.'Adjusted earnings per share' is the key earnings per share measure used by the Board.
17. Notice of Annual General Meeting
The Annual General Meeting of the Company will be held at 12 noon on Tuesday 29 November 2016 at Shakespeare Martineau LLP, 60 Gracechurch Street, London EC3V 0HR.
18. Report and Accounts
Copies of the Annual Report and Accounts will be available from the Company's website - www.blancco.com from 5 October 2016. Copies will be sent to shareholders in due course and will be available from the registered office of60 Gracechurch Street, London EC3V.
This information is provided by RNSThe company news service from the London Stock ExchangeENDFR EADNNFDXKEAF
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