REG - Hargreaves Lansdown - Annual Financial Report <Origin Href="QuoteRef">HRGV.L</Origin> - Part 1
RNS Number : 9423ZHargreaves Lansdown PLC23 September 2015Hargreaves Lansdown plc
Annual Financial Report For The Year Ended 30 June 2015
The company has now approved its Annual Report and Accounts for 2015.
This Annual Financial Report announcement contains the information required to comply with the Disclosure and Transparency Rules, and extracts of the Directors' Report forming part of the full financial statements.
The financial information set out below does not constitute the Company's statutory accounts for the year ended 30 June 2015. The annual report and accounts will be available from 23 September 2015 on the Company's website www.hl.co.uk/investor-relations. Copies of the audited financial statements are also available from the registered office at One College Square South, Anchor Road, Bristol, BS1 5HL.
A copy of the Company's statutory accounts for the year ended 30 June 2015 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.
Extract from Chief Executive's Review
We are pleased to present our results for the year ended 30 June 2015, once again reporting excellent growth in AUA and clients.
Headlines
The year to 30 June 2015 was characterised by continued substantial new asset and client flows into Hargreaves Lansdown's services, successful navigation of regulatory changes, and the announcement and implementation of exciting new initiatives.
Despite known headwinds, profit before tax remained robust at 199.0 million for the year. Our business also continued to grow strongly. Net new business was 6.1 billion, representing organic growth in Assets Under Administration (AUA) of 13%. We welcomed 84,000 net new clients, leading to an increase in client numbers of 13% to 736,000.
After a relatively muted first half of the year, the six months to 30 June 2015 exceeded both expectations for new business and last year, with net new business for the six months of 3.8 billion (first half of FY2015: 2.3 bn).
Hargreaves Lansdown remains the largest business of its type in the UK, with 35.0% of the direct investment market at 31 March 2015 (Source: Platforum*), up from 33.6% in September 2014. Concerns about potential competitive pressure have proved unfounded. Hargreaves Lansdown has continued to increase its share in major markets, including new flows into Stocks and Shares ISAs, up from 10.9% for the tax year to 5 April 2014 to 14.1% for the year to 5 April 2015, and UK execution only stockbroking** (up from 22.5% to 24.2%). Our new initiatives, particularly new fund launches, also proved very successful.
Continued high service levels were rewarded not only through record new clients and assets, but also continuing high asset retention of 93.4% (2014: 93.3%) and through receipt of many awards. Hargreaves Lansdown has won no less than 35 awards during the last two years.
Hargreaves Lansdown's 2015 results
Profit before tax for the year was 199.0 million, a fall of 5% on last year's 209.8 million. Whilst clients and assets again grew substantially, profit faced several headwinds - our decision to reduce charges for clients (reduced revenue by approximately 20m versus 2014); lower interest margins on client cash (reduced revenue by approximately 17m versus 2014); lower stock markets as the FTSE All Share fell 0.8% in the year; an unexpected temporary hiatus in foreign exchange trading income (c3.5m); and a charge for a contribution to the Financial Services Compensation Scheme to cover the failings of less reputable companies (a cost of 4.4m versus 0.8m in 2014). The impact of these headwinds will be less pronounced, or in the case of the foreign exchange trading income will not be repeated at all, in 2016.
We also report an 18% increase in client assets under administration from 46.9 billion to 55.2 billion. It is remarkable to note that in just 2 years client assets have grown by over 51%, from 36.4 billion in June 2013 to 55.2 billion at 30 June 2015. Net new business for the year was 6.1 billion (2014: 6.4 bn) with market movement and other factors increasing assets at year end by a further 2.2 billion. An additional net new 84,000 investors (2014: 144,000) became clients during the year, taking total active clients for Vantage and advised services combined to 736,000. As many clients have more than one account, the total number of accounts held with Hargreaves Lansdown surpassed 1 million during the year.
In the year to 30 June 2014 the FTSE All-Share index advanced 9.4%, and we welcomed 42,000 new clients related to Initial Public Offerings (IPOs), especially relevant in 2014 being the extraordinary interest in the Royal Mail Share Offer. By comparison, the year to 30 June 2015 saw the FTSE All Share fall 0.8%, weighed down at various points by factors such as the Scottish Independence referendum and fears of Greek exit from the Eurozone. Stock market performance always influences new business and revenue and IPO activity was also less prevalent. Set in this context the year's asset gathering was excellent. Net new Vantage business in ISAs was 2.6 billion (2014: 2.2bn), up 18% and SIPPs 2.3 billion (2014: 2.1bn) up 10%. Fund and Share account net new business was 1.1 billion (2014: 1.8bn), down 39%, aptly demonstrating the effect of markets and IPOs which tend to primarily affect investing appetite in non-tax wrapped general accounts.
Attracting and retaining assets and clients through key distribution channels, and delivery of service excellence continue to be primary drivers of growth. Client retention and satisfaction of 93.4% (2014: 93.3%) and 95.7% (2014: 92.3%) respectively are testament to our quality of service and value for money.
A key part of our strategy is to grow complementary capabilities including fund management, pension drawdown and other services that will provide clients with further "one stop shop" investing options, and hence increase AUA and clients and therefore revenue and profit.
Perhaps the most immediate success within this strategy has been our fund management expansion. During the year we launched HL UK Growth, HL Asia and Emerging Markets, and HL European Multi Manager funds, to add to our existing five multi-manager funds. In less than 6 months, by 30 June 2015 the three new funds had attracted a combined 418 million of assets. These new launches allied to growth in our existing funds takes total funds under Hargreaves Lansdown's management to 5.6 billion (2014 4.3bn).
In June 2015 we also launched HL Portfolio+, a straightforward investing service based around our multi-manager funds and a simple online selection process. Although early days, interest in this service has been promising.
Our preparations made for the "pension freedoms" announced by the Chancellor during the year meant that when this legislation was introduced on 6 April 2015 Hargreaves Lansdown was one of the few companies able to offer a comprehensive array of pension services allowing clients to take advantage of the freedoms. This effort was rewarded, with 1.6 billion of net new pension business in the six months to 30 June 2015, a 33% rise on the same period for 2014.
The interest rate environment remains depressed, and therefore income from cash balances remained low. However, in April 2015 we completed changes to our SIPP which allowed us to place client money on term deposit, a significant development as over 50% of client cash is held in the SIPP. This allowed us to increase both revenue and interest rates we pay to clients holding cash in their SIPP. Interest income should further recover when interest rates increase. However, in the short term we continue to experience subdued margins on cash balances.
Our Corporate Vantage service continues to expand, with 256 schemes live or in implementation (2014: 211). This increase in schemes has been accompanied by a 32% increase in Corporate Vantage assets, which now stand at 1.3 billion. Although this project remains long-term in nature we remain satisfied with its continued success. Growth in the first half of the year was constrained by the effect of new auto-enrolment on our key markets, with many companies focusing on achieving compliance rather than selecting new schemes. Once that period abated, the second half of the year was much stronger, with 32 schemes added in the second half compared to 22 for the corresponding period in 2014.
2015/2016 market outlook
There continue to be some welcome signs of a return to stronger economic trading conditions. As we saw during the year under review, this does not necessarily always translate into higher stock market levels. Stock market performance is a key factor for our results and we believe markets are likely to continue to be influenced by the performance of Asian economies, particularly China, with the potential for occasional reprises of Eurozone issues and the influence of geopolitical events. However we believe value exists in a number of key stock markets, particularly Europe and Japan.
We are also pleased to note that the benefits of saving and investing now feature more regularly as key aspects of government policy and this is likely to enhance the attractiveness of investing and the future growth of our company. We therefore remain optimistic about the future.
Group outlook
Given our excellent performance and reduced headwinds, looking forward we intend 2016 to show a return to healthy profit growth, even taking into account expenditure on launching new services.
Having successfully absorbed 2014's regulatory changes, particularly the Retail Distribution Review (RDR), we have been able to deploy staff and resources on improving the business. The largest development in train is to deliver new cash and Peer-to-Peer lending services to clients. This development remains on track and we expect to bring it to market in the second half of 2016.
Given the success of our fund management business, further fund launches are planned, alongside a number of other improvements to the already excellent services we offer within the group. Once we have sufficient track record to evaluate the success of our new Portfolio+ service, we will consider whether to further expand our stable of simple online investing tools, sometimes referred to as "robo-advice."
Whilst Hargreaves Lansdown has the scale and resources to deal with rising costs posed by ever-increasing regulation, technology and servicing expectations, these factors are an increasing challenge for a number of firms in our industry. Two transactions, one in June 2015 and the other in July 2015 have been entered into with third party companies who wished to transfer their books of business to Hargreaves Lansdown post year-end. These transactions combined could in due course add up to 430 million of client assets and 12,000 clients. We believe further opportunities may present themselves in future as the need for scale becomes ever more vital.
The impact of regulation and government policy
The retail distribution review, the biggest structural change to our industry for many years, has now been implemented and has had time to bed in. Looking forward, we see the direct investment market continuing to grow.
Unusually the year's biggest changes arose not from regulation but from government policy, particularly around pensions. In the budget the Chancellor announced what has become known as the "pension freedoms," allowing the UK public more access to their pension investments and more options for funding their retirement. As well as supporting these changes Hargreaves Lansdown has been uniquely well-placed to benefit from them, being one of the biggest providers of drawdown services as well as the U.K.'s largest independent annuity broker. Through a considerable amount of hard work our company was in a position to offer clients full access to the freedoms from their inception on 6 April 2015 and we have benefited from considerable new pension business as a result. We hope this trend continues in 2016.
Following on from the positive public response to the pension freedoms, subsequent government policy has also brought more encouragement for saving and investing. The government has introduced the ability for Child Trust Funds (CTFs) to be transferred to Junior ISAs, and a 5,000 tax-free dividend allowance. Whilst these have been to some extent offset by changes to pensions tax relief and dividend taxation for wealthier investors, overall the package of changes have been positive and benefit the majority of our investors, further assisting us in encouraging investment amongst the UK public.
Regulation is a continuous theme in financial services, and addressing regulatory change continues to take up a considerable amount of our time and resources. However, Hargreaves Lansdown is well-placed to address these challenges and whilst there are always further regulatory changes coming down the track, we do not expect them to have as material an impact as those of the last 18 months.
Corporate citizenship
Hargreaves Lansdown is an ethical company and champion of the retail investor. We campaign tirelessly on behalf of retail investors to improve their lot and their wealth.
We continue to encourage price competition within the fund industry which has resulted in reduced costs of both active and passive funds for investors. We have negotiated market leading discounts on some of the best UK funds to the benefit of our clients. The ability for CTFs to be transferred to Junior ISAs allows more than 6 million children to potentially benefit from lower charges, better service and returns. This change is also something we have campaigned for over a considerable period and we were delighted to see it come to pass.
Other campaigns have included making it easier and quicker for investors to transfer their investments and pensions from one provider to another, campaigning for better pensions access, which means we welcome the Chancellor's approach of greater freedoms for pension investors at retirement, and we continue to challenge HMRC on the issue of taxation of loyalty bonuses, the so called "discount tax". A successful challenge would see money being returned to investors.
Hargreaves Lansdown will again pay its corporate taxes in full in the UK, and we shall continue to seek to be a role model for how financial services companies deliver a great service, reputable behaviour and profitability in harmony with the UK public.
Conclusion
I would like to thank our clients, shareholders, staff and my fellow directors in what has once again been a very busy year of significant progress. The support and dedication they have shown has delivered another set of great results.
*As issued by The Platforum UK D2C Guide July 2015. ** Stockbroking data from Compeer Limited XO Quarterly Benchmarking Report Quarter 2 2015
Ian Gorham
Chief Executive
9 September 2015
Extract from Business Review
In a muted year for both stock markets and retail investing the key performance metrics of gathering assets and clients have remained strong, primarily because of our continued excellent service and value provided. Although the headwinds of post-RDR pricing and lower interest margins on cash have impacted revenue and profits this year, the underlying performance of the business has been strong, remains highly profitable and provides a solid basis for returning to profit growth.
Assets Under Administration (AUA) and new business inflows
During the year the value of total AUA has increased by 18%. The Group achieved net new business inflows of 6.1 billion, and the positive impact of the rise in investment markets and other growth factors increased client assets by a further 2.2 billion. Total AUA can be broken down as follows:
At 30 June 2015 ('billion)
At 30 June 2014 ('billion)
% Movement
Vantage Assets Under Administration (AUA)
52.3
44.2
+18%
Assets Under Administration and Management (AUM)
- Portfolio Management Service (PMS)
2.9
2.6
+12%
- Multi-Manager funds held outside of PMS
2.9
1.9
+53%
AUM Total
5.8
4.5
+29%
Less:
Multi-Manager funds (AUM) included in Vantage AUA
(2.9)
(1.9)
+53%
Total Assets Under Administration
55.2
46.9
+18%
Net new business in the Vantage SIPP, ISA and Fund & Share account was respectively 2.3 billion, 2.6 billion and 1.1 billion (2014: 2.1 billion, 2.2 billion, 1.8 billion), in total 6.0 billion (2014: 6.1 billion). The SIPP increase of 10% was driven by an increased number of SIPP clients making more contributions and transfers of other pensions to Vantage. In addition the new pension freedoms, introduced from 6 April 2015, have contributed to a particular increase year-on-year in net new business. The ISA increase of 18% was driven by increased transfers into Vantage as clients look to consolidate their ISA investments in one place. The ability to transfer Child Trust Funds to the Vantage Junior ISA from 6 April 2015 has also provided a boost with 60m of transfers in just 3 months. In contrast the Vantage Fund & Share account decreased by 39%. As this account has no tax benefits and no caps on contributions it tends to be impacted by investor confidence and market sentiment. It often serves as a destination for investment once clients have used their tax wrapper accounts and also serves as the first point of call when withdrawing cash. Unlike last year there was not nearly the same level of IPO activity driving new business flows within the Fund and Share account. In addition there has been a significant increase this year in value of transfers from this account into the SIPP and ISA accounts as clients utilise tax benefits.
PMS has grown by 12%, although net new business within PMS slowed significantly to 72 million (2014: 304 million) as the option of investing in Vantage portfolios was preferred.
Market growth was again a positive contributor to AUA with Vantage market growth being 2.0 billion (2014: 4.0 billion) and PMS 169 million (2014: 198 million). Over the year to 30 June 2015 the FTSE All-Share index fell by 0.82%, although the average month-end level of the FTSE All-Share index was 2.0% higher versus 11.9% higher in 2014.
The first half of the year was rather muted for both stock markets and retail investing, however, net new business was still a creditable 2.25 billion. This was down on the prior year comparison of 2.80 billion which enjoyed the dual boost of both rising stock markets and interest created by various IPOs and in particular the Royal Mail share offer.
The second half of the year is typically our busiest as the tax year-end is an important driver of new business. This year was no exception with a record 3.8 billion of net new business in the second half versus 3.6 billion for the prior year comparative. This year benefited from the three HL Multi-Manager fund launches, the new pension freedoms from 6 April 2015 and the ability to transfer Child Trust Funds into Junior ISAs. The comparative was boosted by the TSB IPO and Woodford fund launches both of which took place in June 2014 and resulted in c293m of new business. The strong second half was particularly pleasing given the relatively benign investment backdrop, with investor confidence declining and markets showing little growth. This performance is testament to the value our clients place on our continued excellent service and the additional new products and services we provide.
Cash deposit rates on offer from banks have remained at historically low levels. Those seeking a higher return continue to turn to alternative investment options such as funds and shares, which offer higher yields and potential capital growth. This factor continues to spur clients to divert more of their savings into investments in Vantage. Because the options available to the UK investors for readily available online cash products are limited we are currently developing a range of cash management services including cash broking and Peer to Peer lending which we expect to be launched in the second half of 2016. This will give us new services for cash and once launched should help attract additional assets from existing clients and new clients who primarily want better returns on cash.
More clients are investing through Hargreaves Lansdown than ever before. In total we now administer investments for 736,000 clients (2014: 652,000, +13%) across 1,024,000 accounts (2014: 920,000, +11%).
Divisional performance
The Group is organised into three core operating divisions:
- Vantage: represents 75% of Group operating profit.
- Discretionary and Managed: represents 20% of Group operating profit.
- Third Party and Other services: represents 5% of Group operating profit.
Vantage
As highlighted in the Chief Executive's Review, during the year we faced significant headwinds on interest earned on client money and on the margin we made on investment funds held by clients. The base rate of interest remained at its historic low of 0.5% for a sixth consecutive year. Combined with the FCAs restrictions on the use of term deposits for client money as from 1 July 2014, this served to drive down the revenue margin on client money to 0.53% (2014: 0.91%). This year was also the first full year under the RDR pricing regime and as previously flagged there will be a decline in the revenue margin on funds from the implementation date of March 2014 until April 2016 when all renewal commissions still received from fund management groups relating to pre-RDR funds will be passed on fully to clients. The revenue margin for funds held on the Vantage platform in the year was 0.46% (2014: 0.52%). From April 2016, barring any other changes, we would expect the net revenue margin earned on funds to be c0.42%-0.43%.
A third factor affecting Vantage revenue was the restructuring of the collection method for overseas foreign exchange income relating to overseas trading by clients. A decision was made to bring this activity in-house using our own foreign exchange service. The new collection method, a change required at short notice, will give us better control and long term robustness over this income and will also allow us to pass on the benefits of the resulting efficiencies in reduced overseas trading costs for many clients. The development work necessitated a hiatus in collecting this income over the second half of the year, with a one-off revenue reduction in stockbroking commission estimated at 3.5m for the six months to 30 June 2015. The work was completed in July 2015 and foreign exchange revenue returned to normal.
The Vantage division's net revenue decreased by 1.0 million from 221.0 million to 220.0 million. Although there was an 18% growth in AUA this year, plus the impact of a full year's income on assets gathered during the previous year, it was not enough to offset the headwinds mentioned above. Interest on client money fell from 33.7 million to 24.2 million; stockbroking commission fell from 39.0 million to 35.4 million and revenue from funds, despite the 22% increase in fund AUA across the year, only increased by 7% from 128.0 million to 136.7 million.
The 6.0 billion of net new business inflows, or 'organic growth', represented 14% growth in Vantage assets this year (2014: 18%).
The increase in AUA derived from stock market and other growth factors was 5% (2014: 12%). The combined impact of organic growth and market growth resulted in SIPP AUA growing by 22%, ISA by 21% and assets in the Fund and Share account by 10%.
Included within the Fund and Share account is a significant holding in Hargreaves Lansdown plc shares which decreased in value by 8% during the year. Excluding Hargreaves Lansdown shares, the growth in Fund and Share AUA was 16%.
As at 30 June 2015, the value of assets within the Vantage ISA was 20.7 billion (30 June 2014: 17.1 billion), the Vantage SIPP was 16.4 billion (30 June 2014: 13.4 billion) and the Vantage Fund and Share Account was 15.2 billion (30 June 2014: 13.8 billion).
During the year the number of active Vantage clients increased by 84,000 to 727,000. Total clients include 50,000 active Corporate Vantage scheme members across 248 live schemes and 43,000 Junior ISA clients. Junior ISA clients were up from 25,000 last year helped by the fact that as from 6 April 2015 Child Trust Funds could be transferred across to Junior ISAs. We now administer 231,000 SIPP accounts, 515,000 ISA accounts and 256,000 Fund and Share accounts on behalf of our clients.
21% more clients contributed to their SIPP than in the year to 30 June 2014, with the average new contribution into a Vantage SIPP this year increasing by 8% to 8,921. The number of clients subscribing to their Vantage Stocks and Share ISA decreased by 1%, however the average subscription increased by 24% to 10,153.
Clients continued to transfer SIPP, ISA and other investments held elsewhere into our Vantage service. The value of transfers-in increased this year by a significant 19%. More clients sought to consolidate their investments and benefit from the advantages of having them all held in one place with a company they trust.
Clients continued to have a relatively low weighting in cash and were prepared to take more risk given the continued low interest rates available on cash. The composition of assets across the whole of Vantage at 30 June 2015 was 10% cash (30 June 2014: 9%), 34% stocks and shares (30 June 2014: 36%), and 56% investment funds (30 June 2014: 55%). The slight increase in cash weighting occurred post the tax year-end as clients contributed to their accounts but deferred investment because of reduced investor confidence.
A number of our clients make regular contributions into their ISA, SIPP or Fund and Share accounts. The 'Regular Savers' service has been growing steadily since being introduced 12 years ago, and as at 30 June 2015 we had 105,000 clients (2014: 81,000) saving a total of 34.4 million (2014: 28.2 million) each month by way of direct debit instruction. Our Corporate Vantage service has the potential to significantly increase the value of regular monthly savings and Corporate Vantage clients currently subscribe an additional 15.7 million each month.
We handled over 10.7 million dealing instructions on behalf of 727,000 clients. Our website (www.hl.co.uk) and apps were visited 87.7 million times, an increase of 20% on the previous year.
Vantage clients transacted 7.4 million fund deals (2014: 6.3 million) and 3.4 million share deals in the year (2014: 3.0 million). No charge is made to our clients for dealing in investment funds and therefore fund dealing does not generate revenues. Share deals are made up of client driven deals and automated deals such as dividend income reinvestment and regular savings. The threshold for dividend reinvestment was lowered from 50 to 10 as from 1 June 2014 and consequently the volume of automated deals has increased significantly this year. Client driven deals totalled 2.8 million compared to 2.7 million last year. Despite the overall increase in dealing volumes stockbroking commission fell by 3.6m to 35.4 million as a result of the temporary loss in overseas foreign exchange income explained above.
Discretionary and Managed
The Discretionary division earns recurring income on underlying investments held in the Group's Portfolio Management Service (PMS), and on investments in the Group's Multi-Manager funds. Net revenue in the Discretionary division increased by 17% from 44.9 million to 52.4 million. The increase in AUM helped to increase management fee and ongoing advice income. In addition following the implementation of RDR from 1 March 2014, the annual management fee charged on the HL Multi-Manager funds of 0.75% has been retained wholly within the discretionary division. Pre-RDR a 0.5% intra-group renewal commission was paid into Vantage in respect of Vantage client fund holdings. The net impact is an effective increase in revenue to the discretionary division and a reduction in Vantage.
The value of assets managed by Hargreaves Lansdown through its own range of multi-manager funds and PMS increased by 26% to 5.8 billion as at 30 June 2015 (2014: 4.6 billion). The growth in assets was driven by net new business of 0.9 billion combined with a market increase of 0.3 billion. During the second half of the year three new multi-manager funds were successfully launched helping to attract new clients and assets. The three new funds are "UK Growth", "European" and "Asia and Emerging Markets" and provide further geographical and sector diversification to the existing range. In the short time since launch these three funds have grown to a combined value of 418m. Their popularity since launch along with the continued growth of the existing five funds is an endorsement of the investment expertise and service we provide.
Our Portfolio Management Service generates revenue from initial and ongoing advice fees, as clients are supported through our team of financial advisers. As at 30 June 2015 the Group had 102 financial advisers (30 June 2014: 102).
Third Party and Other Services
Third party and other services net revenues fell 16% during the year, from 26.0 million to 21.8 million.
The key reason for the decline has been the full year impact of the reduction in annuity volumes brokered following pension reforms introduced in the Government's March 2014 budget and hence the commission income received. The reforms have introduced greater flexibility in terms of how people access their pension savings and as a result the demand for annuities has declined. Annuity income has fallen from 4.7m in 2014 to 1.9m this year. As annuity volumes have declined we have seen an increase in clients moving into Income Drawdown and the associated recurring revenue streams from this service are within the Vantage division.
Revenue from our Funds Library service (through the provision of fund data and research services) increased by 0.4 million to 6.4 million. The service has experienced underlying growth in client numbers and funds which has helped to increase the recurring revenue across a range of the services provided.
The total revenues from Hargreaves Lansdown Currency and Markets (CFDs, spread betting and currency services) were marginally up at 4.2m as increased numbers of clients utilise these additional services, particularly the currency service, driving transactional volumes higher.
Third party business has been in decline over recent years. Although the Group continues to act as an intermediary for some third party corporate pension schemes there is a focus on our own Corporate Vantage services which means that we expect that third party business will continue to decline. Indeed for the year, third party corporate income other than annuities fell by 1.7million to 3.0 million.
IT and systems
We continue our successful approach of managing a continuous programme of improvement around our dedicated IT platform. The bespoke nature of our systems architecture enables us to deliver ongoing improvements in a successful manner. Our services continue to evolve and include the introduction of our Retirement Planner, Portfolio+ and Watchlists, to name just a few. Improvements are co-ordinated with significant strategic investments to ensure capacity, security and processing capabilities are scalable in the years ahead.
Extract from Financial Review
Net revenue growth from strong AUA inflows offset by known margin headwinds led to a small increase in revenue for the year. Operating cost increased primarily because of planned strategic investment leading to higher depreciation, as well as an unforeseen significant FSCS levy.
Financial performance
Year ended
30 June 2015
Year ended
30 June 2014
% movement
'million
'million
Revenue
395.1
358.4
+10%
Commission payable / loyalty bonus
(100.9)
(66.5)
+52%
Net revenue
294.2
291.9
+1%
Other operating costs
Total FSCS levy
(91.7)
(4.4)
(83.1)
(0.8)
+10%
Total FSCS levy
(4.4)
(0.8)
+450%
Operating profit
198.1
208.0
-5%
Non-operating income
1.0
1.8
-44%
Profit before taxation
199.0
209.8
-5%
Taxation
(41.8)
(47.1)
-11%
Profit after taxation
157.2
162.7
-3%
Basic earnings per share (pence)
33.2
34.5
-4%
Diluted earnings per share (pence)
33.1
34.2
-3%
The Business review on pages 5 to 7 contains information about the performance of the Group, in particular further information about Assets Under Administration (AUA), new business inflows and the performance of the three divisions - Vantage, Discretionary & Managed, and Third Party & Other services and the markets they operate in.
Total revenue
As highlighted last year, following the implementation of the RDR we now focus on the net revenue of the Group. This measure provides a better indication of year-on-year comparative performance. Total net revenue was up 1% for the year. Benefits from record levels of AUA, strong net new business, new active clients and transaction volumes were largely offset by the headwinds of low interest rates and changes to fund pricing plus a reduction in annuity income in the Third Party & Other Services division.
Vantage net revenue decreased fractionally for the reasons explained in the Business Review on page 6. Interest on client money fell 9.5 million and although the revenue earned on investment funds held by clients increased by 8.7 million the margin fell from 0.52% to 0.46%. The Discretionary division only has a negligible amount of interest revenue. The growth in AUM and net new business in this division drove a strong 17% growth in revenue. Third party and other services net revenue fell principally as we focus less on third party business and because of the reduction in annuity commission following pension reforms introduced in the March 2014 budget. Other services such as foreign currency and Funds Library continue to show underlying growth and we would expect these revenue sources to continue to grow.
Net Revenue
% movement
Year ended
30 June
2015
'million
Year ended
30 June
2014
'million
Vantage
+0%
220.0
221.0
Discretionary
+17%
52.4
44.9
Third Party and Other services
-16%
21.8
26.0
Total net revenue
+1%
294.2
291.9
Average levels of AUA were up 18% in the Vantage division. The assets held in Vantage can be held by clients in investment funds, shares and other stock, and cash. The net revenue margin earned on each asset class varies.
Investment funds on average represented 56% of Vantage AUA and the net revenue margin earned was 0.46% (2014: 0.56%). The reduction related to the full-year impact of the new RDR pricing implemented in March 2014 which had only a part year impact in the prior year. Reducing pricing on funds helped make investing in them cheaper for our clients. This was in accordance with our long-term strategy of lowering the cost of investing for our clients over time which in turn helps retain existing clients and attract new clients and assets. The pre-RDR net margin on funds was 0.60% while post RDR it has trended down to 0.46%. Looking ahead the net revenue margin will continue to trend down as we move through the transition phase of RDR until April 2016 when any renewal commissions still received from fund management groups relating to pre-RDR funds will be passed on fully to clients. From this point, barring any other changes, we would expect the net revenue margin earned on investment funds to be c0.42%-0.43%.
Shares on average represented 34% of Vantage AUA. The revenue margin on shares and other stock was 0.29% (2014: 0.35%). The decrease in margin has been caused by the temporary hiatus in overseas foreign exchange income on overseas trading in the second half of the year (as highlighted on page 6). In addition we have caps in place on share charges in the SIPP and Stocks and Share ISA accounts once holdings are above 44,444 in the SIPP and 10,000 in the ISA. This causes a slight dilution to the margin over time as clients grow their portfolio of shares.
Cash on average represented 10% of Vantage AUA. As expected, the interest revenue margin earned on cash balances has fallen significantly during the year from an average of 0.91% in FY2014 to an average of 0.53% in FY2015.The FCA's restrictions on the use of term deposits of greater than 30 days, for client money from 1 July 2014, served to reduce the revenue margin on cash. As highlighted in last year's annual report we set out to mitigate the impact of these restrictions by amending SIPP cash to be held in trustee arrangements. From 20 April 2015 we began to place client monies held in SIPPs on term deposits again. The new arrangements have allowed us to offer higher interest rates for clients in the SIPP whilst also helping to boost the margin and revenue we earn. Based on the current base rate we anticipate the cash interest margin for the financial year 2016 to be in the range of 0.50%-0.60%.
However, following a period of unprecedented low interest rates in the UK, sentiment suggests that within the next 12 months the Bank of England may start to increase interest rates. Such a move should have a positive effect on the interest revenue margin.
Total operating costs
Total operating costs are made up of those management control plus certain other costs such as the Financial Services Compensation Scheme (FSCS) levies that are outside our control.
Year ended 30 June
2015
Year ended
30 June
2014
% movement
'million
'million
Commission payable / loyalty bonus
101.0
66.5
+52%
Other operating costs:
Staff costs
53.1
51.3
+4%
Marketing and distribution costs
12.7
11.3
+12%
Office running costs
4.3
4.2
+2%
Depreciation, amortisation & financial costs
5.1
3.0
+70%
Other costs
16.5
13.3
+24%
Other operating costs
91.7
83.1
+10%
Total FSCS levy
4.4
0.8
+450%
Total operating costs
197.1
150.4
+31%
Commission payable is primarily the portion of renewal income which the Group receives on investment funds held in Vantage and is rebated to clients as a 'loyalty bonus'. This is deducted from revenue to calculate net revenue. Following the implementation of the RDR in March 2014 the amounts paid back to clients were significantly increased as commission income was replaced by platform fees.
Other than commission payable, staff costs remain our largest expense.
The number of staff employed on a full-time equivalent basis (including directors) at 30 June 2015 was 970, and the average number of staff during the year was 914, an increase of 15%. The increase in staff numbers resulted from increased investment in IT and web services, the development and running of new services, along with recruitment of additional telephone based financial advisors and administrative staff to deal with the growing volume of account openings, transfers and helpdesk calls.
Group marketing and distribution spend increased by 12%, from 11.3 million to 12.7 million and includes the costs of printing and sending information and newsletters to existing and potential clients, media advertising, online marketing and client incentives. This year saw the launch of 3 new HL Multi-Manager Funds, the launch of the HL Retirement Planner embracing the new pension freedoms and the launch of HL Portfolio+ which have all given rise to increased marketing and advertising costs.
A key strategic focus for the business remains our use of mobile and digital media. We continue to invest significantly in paid search traffic, cost per click relationships, HLTV and smart phone and tablet apps. These have also contributed to additional cost this year but have served to reinforce our strength in digital media which helps drive client and asset recruitment.
Depreciation has increased significantly following the increase in capital expenditure, primarily on IT hardware and software for our core in-house systems over the past three years.
Other costs which include dealing costs, insurance, computer maintenance, external administration charges and irrecoverable VAT increased by 3.2 million or 24%. These increases are a result of the increased size and scale of the business and enhancement to the services we have provided.
FSCS levy
Costs relating to the Financial Services Compensation Scheme ("FSCS") are beyond our control. The FSCS is the compensation fund of last resort for customers of authorised financial services firms. All authorised firms are required to contribute to the running of the scheme and the cost of compensation payments. Contributions to the scheme are proportional to the amount of eligible income of a firm, rather than its risk profile or track record of running a compliant service. As such, as a large business we may be required to make a significant contribution to the cost of compensation on investments we have never recommended or been involved with. FSCS costs increased from 0.8 million to 4.4 million this year. The FSCS levy is calculated and applied to companies on a formulaic basis to cover the costs of other defaulting regulated firms in the market and does not reflect any wrongdoing on our part. The amount raised under the scheme has been greatly increased this year and hence Hargreaves Lansdown's portion of this levy has increased accordingly.
Taxation
The charge for taxation decreased in line with lower profits to 41.8 million from 47.1 million. The effective tax rate fell from 22.4% in 2014 to 21.0% in the current period due to the standard UK corporation tax rate falling from 23% to 20% since the start of the prior period, with the 2015 applicable rate being 20.75% (2014: 22.5%). In total, taxation of 0.7 million has also been credited directly to equity and relates to share-based payments.
The Group's policy on corporate taxes is to be transparent in our activities; we prefer not to engage in aggressive, artificial or sophisticated tax planning activities, and we actively engage with the UK tax authorities both on corporate taxes and tax issues affecting our clients.
Earnings per share (EPS)
The diluted EPS decreased by 3% from 34.2 pence to 33.1 pence. EPS is calculated as the earnings for the year divided by the total weighted average fully diluted number of shares, including those held by the Employee Benefit Trust (the "EBT").
Pension schemes
There were no changes to the defined contribution pension scheme in the year, with staff and directors participating on equal terms. Pension costs are recognised as an expense when the contribution is payable.
Capital expenditure
Capital expenditure, primarily on IT hardware and software, totalled 5.5 million this year, compared with 7.6 million last year. It primarily relates to the cyclical replacement of hardware and the continuation of the project to enhance the capacity of our key administration systems. Last year included a significant investment in hardware which has not had to be repeated this year.
All of our core systems are developed and maintained in-house and as such we have significant IT resource dedicated to IT support and development. For the year ended 30 June 2015 an average of 102 staff (2014: 86) were employed in developing our systems with most of their related costs expensed within staff costs. Any costs relating to the development of new systems have been capitalised and will be depreciated over the useful economic life of the new system once implemented. In the year we capitalised 1.20 million of staff costs (2014: 1.04 million).
Statement of financial position and cash flow
The Group is soundly financed with a strong balance sheet. This is an important strength which in addition to being attractive to clients provides both resilience and flexibility. The Group is highly cash generative and the cashconversion ratio measured by the operating cash flows as a percentage of operating profits remained high at 107%.
Group cash balances totalled 216.8 million at the end of the year. The only significant cash outflows from profit have been the second interim ordinary and special dividends totalling 117.7 million paid in September 2014 and an interim dividend of 34.4 million paid in April 2015.
Capital is defined as the total of share capital, share premium, retained earnings and other reserves. Total capital at 30 June 2015 was 237.1 million (2014: 228.3m) and this capital is managed via the net assets to which it relates. The Group has four subsidiary companies authorised and regulated by the Financial Conduct Authority (FCA). These firms have capital resources at a level which satisfies both their regulatory capital requirements and their working capital requirements and, as a Group, maintain significant headroom over the regulatory minimum. Further disclosures are published in the Pillar 3 document on the Group's website at www.hl.co.uk.
Increase in counterparty balances
In accordance with market practice, certain balances with clients, Stock Exchange member firms and other counterparties are included in the balance sheet. These balances fluctuate according to the volume and value of recent trading. At the year-end, trade receivables and trade payables included counterparty balances of 363.2 million (2014: 242.9 million) and 361.9 million (2014: 241.1 million) respectively.
Dividends
The Board remains committed to a progressive dividend policy, and have declared a second interim (final) ordinary dividend of 14.30 pence and a special dividend of 11.40 pence per ordinary share. These dividends will be paid on 30 September 2015 to all shareholders on the register at the close of business on 18 September 2015. This brings the total dividends in respect of the year to 33.0 pence per ordinary share (2014: 32.00p), an increase of 3%. This total ordinary dividend pay-out equates to 65% (2014: 65%) of post-tax profits, with a further 34% (2014: 28%) of post-tax profits paid by way of special dividend. Any special dividend in future years will depend upon future cash requirements and therefore may vary.
Dividend per share
2015
2014
Change
Interim dividend paid
7.30p
7.00p
+4%
Second interim dividend declared
14.30p
15.39p
-7%
Total ordinary dividend
21.60p
22.39p
-4%
Special dividend declared
11.40p
9.61p
+19%
Total dividend for the year
33.00p
32.00p
+3%
An arrangement exists under which the Hargreaves Lansdown EBT has agreed to waive all dividends.
Simon Cleveland
Interim Chief Financial Officer
9 September 2015
Principal risks and uncertainties
Like all businesses, the Group faces a number of potential risks which, if not properly controlled, could hinder the successful implementation of its strategy and have a material impact on the long-term performance. The Board believes that a successful risk management framework balances risk and reward. The Board has responsibility for risk management and internal control, further details of which can be found in the Corporate Governance statement.
Last year we specifically highlighted the risk and uncertainty relating to interest earned on cash deposits as a result of the FCAs Policy Statement PS14/9 setting out changes to the client assets sourcebook (CASS) which restricted the use of term deposits greater than 30 days for client money from 1 July 2014. As anticipated this created a significant revenue headwind in the year but as described in the Financial Review on page 21 since 20 April 2015 we transferred SIPP cash to a trustee arrangement which has served to mitigate much of the impact.
Also highlighted last year was the impact of the FCAs "platform rules" (Policy Statement PS13/1) resulting in a transition from commission income to platform fees that clients pay directly to us for our services. The rules were implemented on 1 March 2014. Transitional rules apply enabling us to continue to earn some commission on existing platform assets until 5 April 2016 after which any commissions received will be passed entirely on to the client. Where we still receive commission the vast majority is now passed back to our clients in the form of a significantly higher loyalty bonus. The impact of these rules mean there is a downward trend on the margin earned on funds held by clients from implementation on 1 March 2014 up to 6 April 2016 when we anticipate the margin earned will be 0.42%-0.43%.
The following table summarises the principal risks and uncertainties that are inherent within both the Group's business model and the market in which we operate along with the high level controls and processes through which we aim to mitigate them. The risk factors mentioned below do not purport to be exhaustive as there may be additional risks that the Group has not yet identified or has deemed to be immaterial that could have a material adverse effect on the business. Any of the risks below could cause reputational damage if they materialise.
Risk
Mitigating Factors/Controls
Financial Risks
Fluctuations in capital markets
Fluctuations in capital markets may adversely affect trading activity and/or the value of the Group's assets under administration or management, from which we derive revenues.
The Group model comprises high levels of both recurring platform revenue and transaction-based income
A high proportion of the assets under administration are held within tax-advantaged wrappers, meaning there is a lower risk of withdrawal
The Group model includes the ability to earn margin from cash management services when clients decide to shelter assets from market volatility
Liquidity
Lack of sufficient, readily realisable financial resources to meet the Group's obligations as they fall due or lack of access to liquid funds on commercially viable terms could lead to inability to pay clients and regulatory breaches.
Hargreaves Lansdown is a highly cash generative business with a low working capital requirement
The Group operates a strict Treasury management policy, overseen by the Treasury Committee, which maximises return on capital whilst providing the ability to access sufficient liquid funds at short notice should this be necessary
Bank default
Given the current economic climate and in particular the unprecedented problems faced by banks, the Group must protect against the risk that a bank could fail.
We manage this risk by placing deposits only with a range of highly credit-rated institutions, in accordance with the Treasury Policy and overseen by the Treasury Committee
The Treasury Committee monitors the counterparties' credit ratings on a regular basis
Interest rates
Reduction in interest rates or regulatory changes affecting interest income could lead to a decline in earnings.
The size and diversity of client cash balances we have gives us scope to develop alternative cash services which could alleviate margin pressure (see page 12).
Prudential risk
The risk that the Group may hold insufficient regulatory capital resources in order to meet FCA Threshold Condition requirements.
HL undertakes ongoing capital adequacy assessments to ensure that it maintains financial resources of sufficient scale and quality at all times. These assessments include risk-based stress testing to model the impact of extreme scenarios on the Group's own funds. This process is overseen by the Risk Committee on behalf of the Board.
Operational
Cybercrime, fraud or security breaches in respect of the Group's information, data, software or information technology systems
Failure to protect against cybercrime, fraud or security breaches could result in loss of data or inability to maintain our systems resulting in client detriment
Accredited to version 3 of the Payment Card Industry standard
Dedicated Information Security and Fraud teams in place
Formal security policies and procedures in place with ongoing programme of monitoring to check adherence
All data securely stored and replicated across multiple sites and managed by HL staff
Programme of penetration and vulnerability testing in place
Security Operations team combined with third party real-time monitoring of network
Various external reviews undertaken of the IT environment
Advanced malware protection in place
Changing markets and increased competition
The Group operates in a highly competitive environment and our continued profitability depends on having an appropriate strategy to respond to these pressures and trends and continue to provide a high standard of service to our clients.
The Group has a strong market position with pricing power
Ability to react quickly due to having full control over our flexible in-house platform, with substantial development project teams in place
The Group is client-focused with an emphasis on client service and has a high level of client satisfaction
IT change management controls in place including, where appropriate, oversight by Group Strategy Board and steering committees
Regular market share and competitor analysis undertaken which enables us to be responsive to the needs of our clients
Disruption to business
Physical business continuity event or catastrophic loss of systems, undiscovered systems errors or other external event could cause disruption to our business and result in inability to perform core business activities or reduction in client service.
High level of resilience built into daily operations
Ongoing project to upgrade and enhance our IT operating platform
Business Continuity and Disaster Recovery plans in place and tested regularly
Separate business continuity/disaster recovery site available 24/7
Dual hosting of all critical servers, telecommunications and applications
Large, experienced in-house team of IT professionals and established name suppliers
Monitoring of critical devices and systems in place
Outsourcing & Third Parties
A provider of significant outsourced services may fail to meet appropriate standards or become unable to deliver agreed service, resulting in failure to deliver appropriate levels of service or meet regulatory expectations.
Due diligence undertaken as part of selection process for key providers, with contracts in place for each
Alternative providers identified for contingency purposes
Programme of ongoing monitoring in place including annual Compliance visits
Key personnel
Failure to recruit or retain appropriately skilled and experienced staff may have a material adverse effect on the Group's operations and implementation of its strategy.
Career development path in place including talent management programme
Continuous programme of SAYE and share option schemes to incentivise staff and encourage retention
Contracts for relevant roles have restrictive covenants and enhanced notice periods are in place for key staff
Support and encouragement for taking relevant qualifications
Compliance
Regulatory
Failure to comply with current, new or revised regulations or failure to prevent inappropriate conduct by staff could result in fines, legal action or regulatory sanctions.
Strong governance including Board oversight, independent Compliance, Compliance Monitoring and Internal Audit functions
Strong compliance culture geared towards FCA focus on consumer outcomes, supported by appropriate performance incentives
Formal policies and procedures that govern how we operate compliantly
Management Information to demonstrate compliance
Close interaction with the FCA on all regulatory changes
Professional Indemnity Insurance to mitigate losses
Independent risk management function
Directors' Responsibility Statement
The following is extracted from page 66 of the 2015 Annual Report and Accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. The statement relates solely to the Company's 2015 Annual Report and Accounts and is not connected to the extracted information set out in this announcement. The names and functions of the Directors making the responsibility statement are set out on page 34 and 35 of the full Annual Report and Accounts.
The Directors confirm to the best of their knowledge:
the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
the directors' report contained in the Governance section of the annual report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Consolidated Income Statement
Note
Year ended
30 June
2015
(Unaudited)
'000
Year ended
30 June
2014
(Audited)
'000
Revenue
2
395,137
358,393
Commission payable
(100,949)
(66,526)
Staff costs
(53,117)
(51,280)
Other operating costs
(38,603)
(31,734)
FSCS costs
(4,417)
(832)
Operating profit
198,051
208,021
Investment revenue
4
987
1,768
Other losses
-
(3)
Profit before tax
199,038
209,786
Tax
5
(41,789)
(47,052)
Profit after tax
157,249
162,734
Attributable to:
Equity shareholders of the parent Company
156,664
162,091
Non-controlling interest
585
643
157,249
162,734
Earnings per share
Basic earnings per share (pence)
7
33.2
34.5
Diluted earnings per share (pence)
7
33.1
34.2
The results relate entirely to continuing operations.
Consolidated Statement of Comprehensive Income
Year ended
30 June
2015
(Unaudited)
'000
Year ended
30 June
2014
(Audited)
'000
Profit for the financial year
157,249
162,734
Total comprehensive income for the financial year
157,249
162,734
Attributable to:-
Owners of the parent
156,664
162,091
Non-controlling interest
585
643
157,249
162,734
Consolidated Statement of Changes in Equity
Attributable to the owners of the parent
Share capital
Share premium account
Capital redemption reserve
Shares held by EBT reserve
EBT reserve
Retained earnings
Total
Non-controlling interest
Total Equity
'000
'000
'000
'000
'000
'000
'000
'000
'000
At 1 July 2013 (audited)
1,897
8
12
(21,457)
13,648
202,514
196,622
523
197,145
Total comprehensive income
-
-
-
-
-
162,091
162,091
643
162,734
Employee Benefit Trust:-
Shares sold in the year
-
-
-
10,123
-
-
10,123
-
10,123
Shares acquired in the year
-
-
-
(4,887)
-
-
(4,887)
-
(4,887)
EBT share sale
-
-
-
-
(103)
-
(103)
-
(103)
Employee share option scheme:-
Share-based payments expense
-
-
-
-
-
2,016
2,016
-
2,016
Current tax effect of share-based payments
-
-
-
-
-
3,848
3,848
-
3,848
Deferred tax effect of share-based payments
-
-
-
-
-
56
56
-
56
Dividend paid (Note 6)
-
-
-
-
-
(142,013)
(142,013)
(575)
(142,588)
At 30 June 2014 (audited)
1,897
8
12
(16,221)
13,545
228,512
227,753
591
228,344
Total comprehensive income
-
-
-
-
-
156,664
156,664
585
157,249
Change to non-controlling interest
-
-
-
-
-
(964)
(964)
(103)
(1,067)
Employee Benefit Trust:-
Shares sold in the year
-
-
-
5,203
-
-
5,203
-
5,203
Shares acquired in the year
-
-
-
(2,000)
-
-
(2,000)
-
(2,000)
EBT share sale
-
-
-
-
(841)
-
(841)
-
(841)
Employee share option scheme:-
Share-based payments expense
-
-
-
-
-
2,109
2,109
-
2,109
Current tax effect of share-based payments
-
-
-
-
-
1,305
1,305
-
1,305
Deferred tax effect of share-based payments
-
-
-
-
-
(592)
(592)
-
(592)
Dividend paid (Note 6)
-
-
-
-
-
(152,071)
(152,071)
(572)
(152,643)
At 30 June 2015 (unaudited)
1,897
8
12
(13,018)
12,704
234,963
236,566
501
237,067
The share premium account represents the difference between the issue price and the nominal value of shares issued.
The capital redemption reserve relates to the repurchase and cancellation of the Company's own shares.
The Shares held by the Employee Benefit Trust ("the EBT") reserve represents the cost of shares in Hargreaves Lansdown plc purchased in the market and held by the Hargreaves Lansdown plc Employee Benefit Trust to satisfy options under the Group's share option schemes.
The EBT reserve represents the cumulative gain on disposal of investments held by the Hargreaves Lansdown EBT. The reserve is not distributable by the Company as the assets and liabilities of the EBT are subject to management by the Trustees in accordance with the EBT trust deed.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Non-controlling interests consist of the minority's proportion of the net fair value of the assets and liabilities acquired at the date of the original business combination and the non-controlling interest's change in equity since that date. The non-controlling interest represents a 22% shareholding in Library Information Services Limited, a subsidiary of the Company.
Consolidated Statement of Financial Position
Note
At 30 June
2015
(Unaudited)
'000
At 30 June
2014
(Audited)
'000
ASSETS
Non-current assets
Goodwill
1,333
1,333
Other intangible assets
4,614
2,828
Property, plant and equipment
11,990
12,679
Deferred tax assets
11
6,118
6,750
24,055
23,590
Current assets
Trade and other receivables
9
411,705
303,863
Cash and cash equivalents
10
216,753
201,238
Investments
8
909
874
Current tax assets
-
29
629,367
506,004
Total assets
653,422
529,594
LIABILITIES
Current liabilities
Trade and other payables
12
397,262
280,922
Provisions
-
32
Current tax liabilities
18,861
20,049
416,123
301,003
Net current assets
213,244
205,001
Non-current liabilities
Provisions
232
247
Total liabilities
416,356
301,250
Net assets
237,067
228,344
EQUITY
Share capital
13
1,897
1,897
Share premium account
8
8
Investment revaluation reserve
-
-
Capital redemption reserve
12
12
Shares held by Employee Benefit Trust reserve
(13,018)
(16,221)
EBT reserve
12,704
13,545
Retained earnings
234,963
228,512
Total equity, attributable to the owners of the parent
236,556
227,753
Non-controlling interest
501
591
Total equity
237,067
228,344
Consolidated Statement of Cash Flows
Note
Year ended
30 June
2015
(Unaudited)
,000
Year ended
30 June
2014
(Audited)
,000
Cash generated from operations
14
212,991
213,741
Income tax paid
(41,603)
(46,720)
Net cash generated from operating activities
171,388
167,021
Investing activities
Interest received
896
1,646
Dividends received from investments
91
122
Purchases of property, plant and equipment
(2,590)
(5,018)
Purchase of intangible assets
(2,887)
(2,569)
Purchase of non-controlling interest in subsidiary
(1,067)
-
Purchase of available-for-sale investments
(35)
(262)
Net cash used in investing activities
(5,592)
(6,081)
Financing activities
Purchase of own shares in EBT
(2,000)
(4,887)
Proceeds on sale of own shares in EBT
4,362
10,019
Dividends paid to owners of the parent
(152,071)
(142,013)
Dividends paid to non-controlling interests
(572)
(575)
Net cash used in financing activities
(150,281)
(137,456)
Net increase in cash and cash equivalents
15,515
23,484
Cash and cash equivalents at beginning of year
201,238
177,754
Cash and cash equivalents at end of year
10
216,753
201,238
Notes to the Financial Statements
1. General information
Hargreaves Lansdown plc (the "Company") and ultimate parent of the Group is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006 whose shares are publicly traded on the London Stock Exchange. The address of the registered office is One College Square South, Anchor Road, Bristol, BS1 5HL, United Kingdom. The nature of the Group's operations and its principal activities are set out in the Business Review.
These financial statements are presented in pounds sterling which is the currency of the primary economic environment in which the Group operates and are rounded to the nearest thousand.
The consolidated financial statements contained in this preliminary announcement do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial statements are extracted from the 2015 Group financial statements which have yet to be signed and have not yet been delivered to the Registrar of Companies. The audit of the statutory accounts for the year ended 30 June 2015 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting. The financial information included in this preliminary announcement has been based on the Company's financial statements which are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU. The principal accounting policies are set out in the Group's 2015 statutory accounts.
The report of the auditors on the financial statements for the year ended 30 June 2014, which were prepared in accordance with IFRS as adopted for use in the EU, was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under section 498 (2) or 498 (3) of the Companies Act 2006. The financial statements for the financial year ended 30 June 2014 have been delivered to Companies House.
2. Revenue
Revenue represents commission receivable from financial services provided to clients, interest income on client money and management fees charged to clients. It relates to services provided in the UK and is stated net of value added tax. An analysis of the Group's revenue is as follows:
Revenue from services:
Year ended
30 June
2015
'000
Year ended
30 June
2014
'000
Recurring income
329,900
287,293
Transactional income
58,816
65,118
Other income
6,421
5,982
Total revenue
395,137
358,393
Recurring income principally comprises renewal income, management fees, platform fees and interest income on client money. Transactional income principally comprises commission earned from stockbroking transactions. Other income principally represents the amount of fees receivable from the provision of funds data services and research through Library Information Services Ltd to external parties.
Following the implementation of the Retail Distribution Review ("RDR") on 1 March 2014, total revenue earned from investment funds held by clients significantly increased as a new platform fee was introduced. At the same time commission income is being received from the fund management groups on funds purchased by clients before the RDR implementation date. Where we still receive commission on these pre RDR or "legacy funds" the vast majority is now passed back to our clients in the form of a significantly higher loyalty bonus which is shown within commission payable in the income statement.
3. Segment information
The Group is organised into three business segments, namely the Vantage Division, the Discretionary Division and the Third Party/Other Services Division. This is based upon the Group's internal organisation and management structure and is the primary way in which the Chief Operating Decision Maker (CODM) is provided with financial information. The CODM has been identified as the Board of Executive Directors.
The 'Vantage' division represents all activities relating to our direct to private investor platform.
The 'Discretionary/Managed' division is focused on the provision of managed services such as our Portfolio Management Service (PMS) and range of Multi-Manager funds.
The 'Third Party/Other Services' division includes activities relating to the broking of third party investments and pensions, certificated share dealing and other niche services such as currency, CFD's and spread betting. In this division, clients' investments are not administered within the Group.
The 'Group' segment contains items that are shared by the Group as a whole and cannot be reasonably allocated to other operating segments.
Segment expenses are those that are directly attributable to a segment together with the relevant portion of other expenses that can reasonably be allocated to the segment. Gains or losses on the disposal of available-for-sale investments, investment income, interest payable and tax are not allocated by segment.
Segment assets and liabilities include items that are directly attributable to a segment plus an allocation on a reasonable basis of shared items. Corporate assets and liabilities are not included in business segments and are thus unallocated. At 30 June 2015 and 2014, these comprise cash and cash equivalents, short-term investments, tax-related and other assets or liabilities.
Consolidation adjustments relate to the elimination of inter-segment revenues at arm's length prices, balances and investments in group subsidiaries required on consolidation.
Vantage
Discretionary
Third Party/
Other Services
Group
Consolidation Adjustment
Consolidated
'000
'000
'000
'000
'000
'000
Year ended 30 June 2015
Revenue from external customers
320,849
52,451
21,837
-
-
395,137
Commission payable
(100,879)
(15)
(55)
-
-
(100,949)
Total segment revenue
219,970
52,436
21,782
-
-
294,188
Depreciation and amortisation
3,537
355
488
-
-
4,380
Investment revenue
-
-
-
987
-
987
Other gains and losses
-
-
-
-
-
-
Reportable segment profit before tax
147,463
39,855
11,516
204
-
199,038
Reportable segment assets
398,52
35,022
13,159
249,380
(42,722)
653,421
Reportable segment liabilities
(387,092)
(24,966)
(409)
(44,458)
40,571
(416,354)
Net segment assets
11,490
10,056
12,750
204,922
(2,151)
237,067
Year ended 30 June 2014
Revenue from external customers
287,219
45,103
26,071
-
-
358,393
Commission payable
(66,299)
(159)
(68)
-
-
(66,526)
Inter-segment revenue
-
4,799
-
-
(4,799)
-
Total segment revenue
220,920
49,743
26,003
-
(4, 799)
291,876
Depreciation and amortisation
1,853
279
368
-
-
2,500
Investment revenue
-
-
-
1,768
-
1,768
Other losses
-
-
-
(3)
-
(3)
Reportable segment profit before tax
160,565
31,946
16,210
1,065
-
209,786
Reportable segment assets
264,894
27,631
16,720
237,673
(17,324)
529,594
Reportable segment liabilities
(243,230)
(13,200)
(13,249)
(46,744)
15,173
(301,250)
Net segment assets
21,664
14,431
3,471
190,929
(2,151)
228,344
Information about products/services
The Group's operating segments are business units that provide different products and services. The breakdown of revenue from external customers for each type of service is therefore the same as the segmental analysis above.
Information about geographical area
All business activities are located within the UK.
Information about major customers
The Group does not rely on any individual customer.
4. Investment revenue
Year ended
30 June
2015
'000
Year ended
30 June
2014
'000
Interest on bank deposits
896
1,646
Dividends from equity investment
91
122
987
1,768
5. Tax
Year ended
30 June
2015
'000
Year ended
30 June
2014
'000
Current tax: on profits for the year
41,749
46,723
Current tax: adjustments in respect of prior years
-
35
Deferred tax (Note 11)
41
235
Deferred tax: adjustments in respect of prior years
(1)
59
41,789
47,052
Corporation tax is calculated at 20.75% of the estimated assessable profit for the year to 30 June 2015 (2014: 22.5%).
In addition to the amount charged to the income statement, certain tax amounts have been charged or (credited) directly to equity as follows:
Year ended
30 June
2015
'000
Year ended
30 June
2014
'000
Deferred tax relating to share based payments
592
(56)
Current tax relating to share-based payments
(1,305)
(3,848)
(713)
(3,904)
Factors affecting tax charge for the year
It is expected that the ongoing effective tax rate will remain at a rate approximating to the standard UK corporation tax rate in the medium term. The standard UK corporation tax rate was reduced to 20% (from 21%) on 1 April 2015 and accordingly the Group's profits for this accounting period are taxed at an effective rate of 20.75%. Deferred tax has been recognised at 20%, being the rate substantially enacted at the balance sheet date. A deferred tax asset in respect of future share option deductions has been recognised based on the Company's share price as at 30 June 2015.
Factors affecting future tax charge
Any increase or decrease to the Company's share price will impact the amount of tax deduction available in future years on the value of shares acquired by staff under share incentive schemes. The Finance Act 2013 received Royal Assent on 17 July 2013 and will reduce the standard rate of UK corporation tax to 20% from 1 April 2015.
The charge for the year can be reconciled to the profit per the income statement as follow:
Year ended
30 June
2015
'000
Year ended
30 June
2014
'000
Profit before tax from continuing operations
199,038
209,786
Tax
41,302
47,205
- at the UK corporation tax rate of:
20.75%
22.50%
Items (allowable) / not allowable for tax
424
(396)
Effect of adjustments relating to prior years
(1)
94
Impact of the changes in tax rate
64
149
Tax expense for the year
41,788
47,052
Effective tax rate
21.0%
22.4%
6. Dividends
Year ended
30 June
2015
'000
Year ended
30 June
2014
'000
Amounts recognised as distributions to equity holders in the period:
2014 Second interim dividend of 15.39p (2013: 14.38p) per share
72,449
67,355
2014 Special dividend of 9.61p (2013: 8.91p) per share
45,248
41,734
2015 First interim dividend of 7.3p (2014: 7.0p) per share
34,374
32,924
Total dividends paid during the year
152,071
142,013
After the balance sheet date, the directors declared a second interim (final) ordinary dividend of 14.30 pence per share and a special dividend of 11.40 pence per share payable on 30 September 2015 to shareholders on the register on 18 September 2015. Dividends are required to be recognised in the financial statements when paid, and accordingly the declared dividend amounts are not recognised in these financial statements, but will be included in the 2016 financial statements as follows:
'000
2015 Second interim dividend of 14.30p (2014: 15.39p) per share
67,457
2015 Special dividend of 11.40p (2014: 9.61p) per share
53,803
Under an arrangement dated 30 June 1997 the Hargreaves Lansdown Employee Benefit Trust, which held the following number of ordinary shares in Hargreaves Lansdown plc at the date shown, has agreed to waive all dividends.
Year ended
30 June
2015
Year ended
30 June
2014
Number of shares held by the Hargreaves Lansdown Employee Benefit Trust
2,726,361
3,547,124
Representing % of called-up share capital
0.57%
0.75%
7. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in free issue during the period, including ordinary shares held in the EBT reserve which have vested unconditionally with employees.
Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares.
The weighted average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 1,010,928 at 30 June 2015 (2014: 179,414).
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
Earnings (all from continuing operations):
Earnings for the purposes of basic and diluted EPS - net profit attributable to equity holders of parent company
156,664
162,091
Number of shares:
Weighted average number of ordinary shares for the purposes of diluted EPS
473,716,102
474,365,495
Weighted average number of shares held by HL EBT which have not vested unconditionally with employees
(2,068,619)
(4,109,730)
Weighted average number of ordinary shares for the purposes of basic EPS
471,647,483
33
470,255,765
Earnings per share:
Pence
Pence
Basic EPS
33.2
34.5
Diluted EPS
33.1
34.2
8. Investments
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
At beginning of year
874
613
Purchases
35
261
At end of year
909
874
Comprising:
Current asset investment - UK listed securities valued at quoted market price
645
610
Current asset investment - Unlisted securities valued at cost
264
264
645,000 (2014: 610,000) of investments are classified as held at fair value through profit and loss and 264,000 (2014: 264,000) are classified as available-for-sale. Available-for-sale investments have been included at fair value where a fair value can be reliably calculated, with the revaluation gains and losses reflected in the investment revaluation reserve as shown in the Consolidated Statement of Changes in Equity, until sale when the cumulative gain or loss is transferred to the income statement. If a fair value cannot be reliably calculated by reference to a quoted market price or other method of valuation, available-for-sale investments are included at cost, with a fair value adjustment recognised upon disposal of the investment.
9. Trade and other receivables
At
30 June
2015
'000
At
30 June
2014
'000
Financial assets:
Trade receivables
380,803
262,257
Other receivables
1,460
6,039
382,263
268,296
Non-financial assets:
Prepayments and other accrued income
29,442
35,567
411,705
303,863
Trade and other receivables are measured at initial recognition at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. In accordance with market practice and IFRS, certain balances with clients, Stock Exchange member firms and other counterparties totalling 363.2 million (2014: 242.9 million) are included in trade receivables. These balances are presented net where there is a legal right of offset and the ability and intention to settle net. The gross amount of trade receivables is 457.1 million and the gross amount offset in the balance sheet with trade payables is 93.9 million. Other than counterparty balances trade receivables primarily consist of fees and amounts owed by clients and renewal commission owed by fund management groups.
10. Cash and cash equivalents
At
30 June
2015
'000
At
30 June
2014
'000
Restricted cash - balances held by EBT
7,602
4,471
Group cash and cash equivalent balances
209,151
196,767
216,753
201,238
Cash and cash equivalents comprise cash on hand and demand deposits held by the Group that are readily convertible to a known amount of cash. The carrying amount of these assets is approximately equal to their fair value.
At 30 June 2015 segregated deposit amounts held by the Group on behalf of clients in accordance with the client money rules of the Financial Conduct Authority amounted to 5,499 million (2014: 4,109 million). The client retains the beneficial interest in these deposits and accordingly they are not included in the balance sheet of the Group.
11. Deferred tax
The following are the major deferred tax assets recognised and movements thereon during the current and prior reporting years. Deferred tax has been recognised at 20%, being the rate in force at the balance sheet date.
Accelerated tax depreciation
Share-based payments
Other deductible temporary differences
Total
'000
'000
'000
'000
Group
At 1 July 2013
447
5,173
1,368
6,988
(Charge)/Credit to income
(302)
11
(3)
(294)
Credit to equity
-
56
-
56
At 30 June 2014
145
5,240
1,365
6,750
Credit/(charge) to income
80
83
(203)
(40)
Charge to equity
-
(592)
-
(592)
At 30 June 2015
225
4,731
1,162
6,118
12. Trade and other payables
At
30 June
2015
'000
At
30 June
2014
'000
Financial liabilities:
Trade payables
362,808
242,153
Social security and other taxes
9,692
11,488
Other payables
12,176
16,385
384,676
270,026
Non-financial liabilities:
Accruals and deferred income
12,586
10,896
397,262
280,922
In accordance with market practice and IFRS, certain balances with clients, Stock Exchange member firms and other counterparties totalling 361.9 million (2014: 241.1 million) are included in trade payables.As stated in note 9 above, where we have a legal right of offset and the ability and intention to settle net, trade payable balances have been presented net. The gross amount of trade payables is 455.8 million and the gross amount offset in the balance sheet with trade receivables is 93.9 million.
Other payables principally comprise amounts owed to clients as a loyalty bonus and to staff as a bonus. Accruals and deferred income principally comprise amounts outstanding for trade purchases and revenue received but not yet earned on group pension schemes where an on-going service is still being provided.
13. Share capital
At
30 June
2015
'000
At
30 June
2014
'000
Authorised:
525,000,000 ordinary shares of 0.4p each
2,100
2,100
Issued and fully paid:
Ordinary shares of 0.4p each
1,897
1,897
Shares
Shares
Issued and fully paid:
Number of ordinary shares of 0.4p each
474,318,625
474,318,625
The Company has one class of ordinary shares which carry no right to fixed income.
14. Note to the consolidated statement of cash flows
Year ended
30 June
2015
'000
Year ended
30 June
2014
'000
Profit for the year after tax
157,249
162,734
Adjustments for:
Investment revenues
(987)
(1,768)
Income tax expense
41,789
47,052
Depreciation of plant and equipment
3,279
2,074
Amortisation of intangible assets
1,101
426
Loss on disposal
-
3
Share-based payment expense
2,109
2,016
Decrease in provisions
(47)
(125)
Operating cash flows before movements in working capital
204,493
212,412
Increase in receivables
(107,842)
(19,648)
Increase in payables
116,340
20,977
Cash generated from operations
212,991
213,741
15. Going concern
The Group maintains on-going forecasts that indicate continued profitability in the 2016 financial year. Stress test scenarios are undertaken, the outcomes of which show that the Group has adequate capital resources for the foreseeable future even in adverse economic conditions. The Group's business is highly cash generative with a low working capital requirement; indeed, the forecast cash flows show that the Group will remain highly liquid in the forthcoming financial year. The Directors therefore believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries, the Directors' expectation is that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing this preliminary results statement.
16. Related party transactions
The Company has a related party relationship with its subsidiaries, and with its directors and members of the Executive Committee (the "key management personnel"). Transactions between the Company and its key management personnel are disclosed below. Details of transactions between the Company and other related parties are also disclosed below.
Trading transactions
The Company entered into the following transactions with directors within the Hargreaves Lansdown Group and related parties who are not members of the Group:
During the years ended 30 June 2015 and 30 June 2014 the Company has been party to a lease with P K Hargreaves, a director until 14 April 2015, for rental of the old head office premises at KendalHouse. A ten-year lease was signed on 6 April 2011 for a rental of part of the building, to be used for disaster recovery purposes at a market rate rent of 105,000 per annum. No amount was outstanding at either year-end.
During the year the Company settled certain personal expenses on behalf of one director, all of which were subject to subsequent reimbursement from the director. At the year end the amount outstanding was nil (2014: 4,999).
On 7 November 2014, the Group agreed to purchase 30 shares in its subsidiary, Library Information Services Ltd (LIS), in an arm's length transaction; increasing the Group's share-holding from 75% to 78%. The shares were purchased from Stuart Louden the founder director of LIS and currently the only other shareholder, who is an employee of Hargreaves Lansdown Asset Management Limited. The price paid per share was 35,405. There is no readily available market for these shares and hence a valuation was arrived at based on a multiple of operating profit. The directors of Hargreaves Lansdown plc deemed this to be a fair price in the circumstances. The total amount paid was 1,062,150 and this was settled in cash on 17 December 2014.
During the years ended 30 June 2015 and 30 June 2014 the Group has provided a range of investment services in the normal course of business to shareholders on normal third party business terms. Directors and staff are eligible for a slight discount on some of the services provided.
Remuneration of key management personnel
The remuneration of the key management personnel of the Group, being those personnel who were either a member of the Board of a Group company or a member of the Executive Committee during the relevant year shown below, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
Short-term employee benefits
5,787
8,813
Post-employment benefits
378
590
Termination benefits
183
50
Share-based payments
924
1,141
7,272
10,594
In addition to the amounts above, 3 key management personnel (2014: 9) received gains of 3,685,000 (2014: 12,168,000) as a result of exercising share options. During the year awards under the long term incentive schemes were made to 9 key management personnel (2014: 10).
Included within the previous table are the following amounts paid to directors of the Company who served during the relevant year. Full details of directors' remuneration including numbers of shares exercised are shown in the Remuneration Committee report.
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
Short-term employee benefits
1,723
3,318
Post-employment benefits
83
108
Termination benefits
183
-
Share-based payments
170
278
2,159
3,704
In addition to the amounts above, directors of the Company received gains nil relating to the exercise of share options (2014: 9,016,000).
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
Emoluments of the highest paid director
1,392
2,036
No.
No.
Number of directors who exercised share options during the year
-
2
Number of directors who were members of money purchase pension schemes
2
2
Any amounts outstanding with related parties are unsecured and will be settled in cash. No guarantees have been given or received in respect of amounts outstanding. No provisions have been made for doubtful debts in respect of the amounts owed by the related parties.
Related party transactions
The Company has a related party relationship with its subsidiaries, and with its directors and members of the Executive Committee (the "key management personnel"). Transactions between the Company and its key management personnel are disclosed below. Details of transactions between the Company and other related parties are also disclosed below.
Trading transactions
The Company entered into the following transactions with directors within the Hargreaves Lansdown Group and related parties who are not members of the Group:
During the years ended 30 June 2015 and 30 June 2014 the Company has been party to a lease with P K Hargreaves, a director until 14 April 2015, for rental of the old head office premises at KendalHouse. A ten-year lease was signed on 6 April 2011 for a rental of part of the building, to be used for disaster recovery purposes at a market rate rent of 105,000 per annum. No amount was outstanding at either year-end.
During the year the Company settled certain personal expenses on behalf of one director, all of which were subject to subsequent reimbursement from the director. At the year end the amount outstanding was nil (2014: 4,999).
On 7 November 2014, the Group agreed to purchase 30 shares in its subsidiary, Library Information Services Ltd (LIS), in an arm's length transaction; increasing the Group's share-holding from 75% to 78%. The shares were purchased from Stuart Louden the founder director of LIS and currently the only other shareholder, who is an employee of Hargreaves Lansdown Asset Management Limited. The price paid per share was 35,405. There is no readily available market for these shares and hence a valuation was arrived at based on a multiple of operating profit. The directors of Hargreaves Lansdown plc deemed this to be a fair price in the circumstances. The total amount paid was 1,062,150 and this was settled in cash on 17 December 2014.
During the years ended 30 June 2015 and 30 June 2014 the Group has provided a range of investment services in the normal course of business to shareholders on normal third party business terms. Directors and staff are eligible for a slight discount on some of the services provided.
Remuneration of key management personnel
The remuneration of the key management personnel of the Group, being those personnel who were either a member of the Board of a Group company or a member of the Executive Committee during the relevant year shown below, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
Short-term employee benefits
5,787
8,813
Post-employment benefits
378
590
Termination benefits
183
50
Share-based payments
924
1,141
7,272
10,594
In addition to the amounts above, 3 key management personnel (2014: 9) received gains of 3,685,000 (2014: 12,168,000) as a result of exercising share options. During the year awards under the long term incentive schemes were made to 9 key management personnel (2014: 10).
Included within the previous table are the following amounts paid to directors of the Company who served during the relevant year. Full details of directors' remuneration including numbers of shares exercised are shown in the Remuneration Committee report.
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
Short-term employee benefits
1,723
3,318
Post-employment benefits
83
108
Termination benefits
183
-
Share-based payments
170
278
2,159
3,704
In addition to the amounts above, directors of the Company received gains nil relating to the exercise of share options (2014: 9,016,000).
Year ended 30 June 2015
Year ended 30 June 2014
'000
'000
Emoluments of the highest paid director
1,392
2,036
No.
No.
Number of directors who exercised share options during the year
-
2
Number of directors who were members of money purchase pension schemes
2
2
Any amounts outstanding with related parties are unsecured and will be settled in cash. No guarantees have been given or received in respect of amounts outstanding. No provisions have been made for doubtful debts in respect of the amounts owed by the related parties.
This information is provided by RNSThe company news service from the London Stock ExchangeENDFR PKNDKKBKDDCB
Recent news on Hargreaves Lansdown
See all newsREG - Hargreaves Lansdown - Director Declaration
AnnouncementREG - Hargreaves Lansdown - Trading Statement
AnnouncementREG - Hargreaves Lansdown - Director Declaration
AnnouncementREG - Hargreaves Lansdown - Director/PDMR Shareholding
AnnouncementREG - Hargreaves Lansdown - Director/PDMR Shareholding
Announcement