RNS Number : 5676S
System1 Group PLC
07 November 2019
Press Release
7 November 2019
System1 Group PLC (AIM: SYS1)
("System1" or "the Group" or "the Company")
Unaudited interim results for the six months ended 30 September 2019
System1, the marketing services group, today announces its results for the six-month period ended 30 September 2019 ("H1").
6 months ended 30 September Unaudited
2019
2018
£m
Restated for IFRS 16*
Previously reported*
Revenue
13.73
13.18
13.18
Gross Profit
11.59
10.80
10.80
Underlying Overheads
(9.19)
(8.90)
(8.88)
Normalised Profit Before Tax
2.40
1.90
1.92
Ad Ratings operating costs
(1.10)
(1.09)
(1.09)
Share Based Payments
0.10
-
-
Exceptional Credit
-
0.25
0.25
Profit Before Tax
1.40
1.06
1.08
Highlights
o
4% growth in Revenue to £13.73m (2018/19: £13.18m), 2% in constant currency
o
7% growth in Gross Profit to £11.59m (2018/19: £10.80m), 4% in constant currency
o
26% growth in Normalised Profit Before Tax (excluding Ad Ratings costs) to £2.40m (2018/19: £1.90m*)
o
33% growth in Profit Before Tax (including Ad Ratings costs) to £1.40m (2018/19: £1.06m*)
o
34% growth in Profit After Tax (including Ad Ratings costs) to £0.89m (2018/19: £0.67m*)
o
33% growth in diluted Earnings Per Share to 6.9p (2018/19: 5.2p*)
o
£1.17m investment in Ad Ratings, of which £0.23m has been capitalised and £0.94m expensed (the £1.10m of Operating Expenditure in the table above includes £0.16m of amortisation)
o
£4.10m Cash at 30 September 2019 and no debt (31 March 2019: £4.32m and no debt)
o
Maintaining interim dividend at 1.1 pence (2018/19: 1.1 pence)
* The Company has implemented IFRS 16 (leases) and as a result restated its prior year results.
Commenting on the Company's results, John Kearon, CEO of System1, said:
"We continue to build out our new world class Agency by leveraging our unique, Advertising Effectiveness IP, data and services. At a time of much change sales, profits and industry profile are growing steadily."
The Company can be found at www.system1group.com.
The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.
For further information, please contact:
System1 Group PLC
+44 20 7043 1000
John Kearon, Chief Executive Officer
James Geddes, Chief Financial Officer
investorrelations@system1group.com
Canaccord Genuity Limited
+44 20 7523 8000
Simon Bridges/Andrew Potts
INTERIM STATEMENT
Introduction
Gross Profit, our main top-line measure, grew by 7% in H1 (4% in constant currency) to £11.59m, building on the 4% growth in H2 of last year. Operating profit margins have also increased. Normalised Profit Before Tax (excluding AdRatings and Share Based Payments) has grown by 26% and Profit Before Tax (after AdRatings and Share Based Payments) by 34%. Note that the Company has implemented IFRS 16 and as a result, restated its results for the comparative period (six months ended 30 September 2019), but the impact on the P&L is small. The Company's balance sheet is strong, with cash at half-year end of £4.10m and no indebtedness (other than office leases).
Importantly for future growth, the Company has continued to invest significant amounts in its AdRatings database and services, in its IT infrastructure, and in senior management talent.
Longer Term Context
We operate in most of the world's largest market research geographies and have very large global multinationals as clients. Our market share in those sectors of the market in which the Company competes is small, and we have only a small percentage of the spend of our large, global clients. We therefore have a large untapped addressable market.
The Company is acknowledged as being among the intellectual leaders in our field: measuring the commercial quality of advertising through our market research techniques. Our mission, as 'THE Effectiveness Agency' is to empower marketeers to create world class advertising and prove its value to their business. Our goal is to turn System1's intellectual leadership into commercial leadership, and create a much larger business.
We have spent the last 12-18 months building the world's most predictive advertising effectiveness database of short and long-term profitability (AdRatings), substantially upgrading our IT infrastructure and digitising our products as a foundation to better scaling the business. We have also strengthened the management team's ability to deliver and run a significantly larger business. The Company has made progress in H1.
We have continued to develop AdRatings, which provides ratings of the creative quality, together with the media spend, of all TV adverts in the UK and the US since 2017, in the main industries in which our clients operate. We have four interconnected goals, and taking each in turn:
1. Build the World's largest, and most predictive and validated database of short and long-term advertising effectiveness and use our data to prove the multiplier effect of creativity on business's investment in advertising. We have further enlarged the number of adverts in the database and it now contains the ratings of 42,646 adverts, and is increasing every day as new adverts are aired. There are other sources of advert ratings available, but none to our knowledge where the ratings correlate with long-term profitability, in the way ours does. From analyses within our AdRatings database, Orlando Wood, our Chief Innovation Officer, wrote a book - "Lemon" - which was recently published by the IPA (viewed by many as the world's foremost independent authority on advertising effectiveness).
Lemon is the IPA's centrepiece at its 2019 UK Ad Effectiveness week. We are unaware of any other competing Agency who has such high profile thought leadership in our field of Advertising and Brand effectiveness. Lemon sets out why advertising effectiveness has been in decline over the last few decades and what it will take to reverse the decline at a profound level - and it has received wide industry endorsement. For example, Rory Sutherland, Vice Chairman of Ogilvy said of it: "Any book which finds evidence everywhere from Hans Holbein to the Honey Monster is good by me. But this is an extraordinary and wonderful book, with implications that go far beyond advertising and research".
2. Brand the database and publish our next-day data on any UK or US advert being discussed in the industry press, to drive System1's 'Fame', together with positive feelings towards us, and associate the Company with advertising effectiveness. We believe that this brand-building work derived from our database sets us apart from our competitors. We are increasing the functionality of AdRatings continuously, and currently developing a free mobile App (Hi-5) to make our Creative ratings more widely accessible.
3. Win new clients in our core business. AdRatings has already been a factor in our 18% H1 Comms growth, as well as in our gaining much greater access to marketing leaders in large multinationals, some of whom are exploring the potential benefits to their business of the AdRatings service together with related System1 AdTesting products.
4. Sell subscription revenue. We have a small number of subscribers to date. We have been focussed primarily on building the asset and its branding value and believe that subscriptions will follow.
Across the business as a whole, we are investing ever more in Talent. During H1 we recruited 2 new members to our management team: Karen Wolfe (formerly Vice President Customer Success at Nielsen), as Chief Commercial Officer, and Jon Evans, (formerly UK Marketing Director at Lucozade Ribena Suntory) as Chief Marketing Officer. They follow Stefan Barden (Board Adviser - previously CEO of Wiggle) and Mark Beard (Chief Information Officer - formerly Group Head of IT at Wiggle) who joined during the course of last year.
Over H1 we have continued to build our IT capability and now have a highly skilled IT team of 14, significantly larger and more experienced than was the case 2 years ago. More generally, we have taken early steps to establish a Data and Data Science capability more widely within the business.
Financial Performance
H1 sales growth is not yet on the trajectory we are aspiring to, but we believe we are on the right path. Importantly, Gross Profit from Communications, our core product area, grew 18%.
Gross Profit
2018/19
2019/20
£m
Q1
Q2
H1
Q1
Q2
H1
Growth
Comms
1.55
1.51
3.06
1.56
2.05
3.61
18%
Brand
0.81
0.92
1.73
0.74
0.89
1.63
-6%
Innovation
2.53
2.78
5.31
2.84
2.29
5.13
-3%
Other
0.25
0.34
0.59
0.57
0.50
1.07
81%
Agency
0.08
0.03
0.11
0.01
0.12
0.13
18%
AdRatings
-
-
-
0.01
0.01
0.02
NM
5.22
5.58
10.80
5.73
5.86
11.59
7%
The Company has reclassified certain product offerings from 'Other' to 'Innovation' in the current period. The comparative figures have been restated accordingly.
Underlying Overhead Costs (excluding AdRatings) were up 3%. Of that we have invested approximately £0.29m in the upgrading of our IT infrastructure, digitisation of our products and strengthening of the management team. Notwithstanding this investment, productivity improvements have enabled increased profit margins: Normalised Profit Before Tax as a percentage of Revenue was 17% in H1 (up from 14% in H1 of the prior year).
£m
Growth
Gross Profit
11.59
7%
Overhead Costs
(9.19)
3%
Normalised Profit Before Tax*
2.40
26%
AdRatings Operating Costs
(1.10)
Share Based Payments
0.10
Profit Before Tax
1.40
32%
* Normalised Profit Before Tax represents Profit Before Tax prior to AdRatings expenditure and share based payments.
We invested a total of £1.17m in AdRatings in H1, of which £0.94m is classified as Operating Cost and £0.23m Capex (the £1.08m of Operating Expenditure in the table above includes £0.16m of depreciation). We anticipate investing a similar amount in H2. We plan to continue to manage discretionary spend dynamically - be it Capex or Opex, and whether in AdRatings or in other areas of the business - mindful of our high-growth objective and our cash resources. The business can accommodate around £2.0-2.5m of growth investment (including investment in AdRatings) from its operating cash flows at the current run-rate, and we view this as a guide to the cash resources at our disposal for discretionary spend.
Dividends
In line with our dividend policy we are maintaining the interim dividend at the same 1.1 pence per share we paid last year, which in aggregate amounts to £0.14m. We are keeping this policy under review.
Tax
The Company's effective tax rate is 37% of Profit Before Tax - similar to the prior year. This is high in the context of the corporation tax rate of 19% in the UK and the Federal corporation tax rate of 21% in the US (the Company's two largest markets). It is due to the high levels of AdRatings cost incurred in the UK (where tax rates are low) without, as yet, associated UK revenue.
Earnings per Share
The Company's share base has not changed over the period, so earnings per share has grown in line with Profit After Tax. Fully diluted earnings per share has grown 33% and basic earnings per share 34%.
The Company has significant stock options which could dilute basic earnings per share in the future. However vested options represent a relatively modest 3% of the Company's voting shares. Unvested options (and conditional share awards) are more significant at 12%. These have been awarded under the Company's long-term incentive plan for its senior team, and only vest in the event of significant growth over the next five years. Minimum vesting (one third of the options) vest when Gross Profit exceeds £39.5m and maximum vesting when Gross Profit exceeds £77.1m. There is no vesting at Gross Profit levels below £39.5m (full details are set out in the Company's 2018/19 Annual Report). Given these performance targets, the dilution suffered by shareholders on vesting will be offset many times over by the value created.
The performance targets are also illustrative of the ambitions of the management team and the growth strategy being pursued.
Cash
We generated Operating Cash Flow pre-financing (and pre AdRatings) of £1.67m. This represents 99% of Normalised Profit After Tax (pre-AdRatings and Share Based Payments), which is in line with our normal high cash conversion percentage. After the investment of £1.17m in AdRatings, and payment of £0.8m in dividends, our cash balance reduced from £4.32m on 31 March 2019 to £4.10m on 30 September 2019. A summary of our cash flow is below:
£m
Profit Before Tax (before AdRatings)
2.49
Tax paid
(0.17)
Movement in payables
(0.98)
Movement in receivables
0.37
Other working capital movements, Capex, and non-cash adjustments
* Operating Cash Flow pre-financing is our key cash flow performance indicator, and we include office lease costs in calculating this. However, under IFRS 16, office lease costs are treated as a financing activity, and therefore shown as such in our Consolidated Cash Flow Statement.
Balance Sheet
We do not usually have much movement on our balance sheet, with no borrowings, relatively small amounts of fixed assets, no goodwill and stable working capital. However, implementation of the new accounting standard, IFRS 16, means that Property, Plant and Equipment and Non-Current Liabilities have increased significantly to reflect the new accounting treatment for office leases. Nonetheless, it makes little difference to the Income Statement, and there is no economic impact.
Outlook
We continue to have limited short-term revenue visibility, so, as always, it is difficult to predict how the year will unfold. Nevertheless, we continue to believe that the business is making progress and in the longer term has high upside potential driven by its AdRatings asset and the more general digitisation of the business.
John Kearon James Geddes
Chief Executive Officer Chief Financial Officer
5 YEAR SUMMARY - HALF YEAR
(£000s unless specified otherwise)
Unaudited
6 months to 30 Sep
6 months to 30 Jun
2019/20
2018/19
2017/18
2016
2015
2014
Ex AR*
Inc AR*
Ex AR*
Inc AR*
Financial KPIs
Revenue
13,704
13,725
13,182
13,182
13,822
13,043
11,610
11,197
growth
4%
4%
-5%
-5%
-10%
12%
4%
4%
Gross Profit
11,568
11,589
10,802
10,802
11,394
10,685
9,254
8,719
growth
7%
7%
-5%
-5%
-9%
15%
6%
3%
Administrative Costs
9,023
10,125
8,584
9,674
10,554
9,018
8,080
7,183
growth
5%
5%
-19%
-8%
8%
12%
12%
-%
Profit Before Tax
2,485
1,404
2,147
1,057
846
1,650
1,139
1,520
growth
16%
33%
154%
25%
-70%
45%
-25%
17%
Profit After Tax
890
666
542
1,054
763
1,018
growth
34%
23%
-70%
38%
-25%
17%
EPS - diluted
6.9p
5.2p
4.2p
7.9p
5.6p
7.5p
growth
33%
24%
-69%
41%
-25%
12%
Operating Cash Flow **
498
(1,378)
(604)
810
565
(147)
Cash balance
4,104
3,552
3,495
5,183
5,286
2,528
Dividend (interim)
1.1p
1.1p
1.1p
1.1p
1.0p
1.0p
growth
-
-
-
10%
-
11%
Special dividend
-
-
26.1p
-
-
12.0p
Share buy-backs
-
-
-
1,768
-
1,531
Non-financial KPIs
Number of clients
246
230
229
232
244
225
growth
7%
-
-1%
-5%
8%
6%
Gross profit per project
16.6
17.1
18.2
18.3
20.7
18.3
growth
-3%
-6%
-15%
-12%
13%
-12%
Average headcount
145
140
172
155
160
145
growth
4%
-19%
12%
-3%
10%
6%
Gross profit per head
80
77
66
69
58
60
growth
4%
17%
-1%
19%
-3%
-3%
* Ex AR means: excluding AdRatings. Inc AR means: including AdRatings.
** Operating Cash Flow means: before dividends and share buy-backs but inclusive of property lease payments
5 YEAR SUMMARY - ANNUAL
£000s unless specified otherwise
12 months to 31 Mar
12 months to 31 Dec
2018/19
2017/18
2016/17
2016
2015
2014
Ex AR*
Inc AR*
Unaudited
Unaudited
Audited
Unaudited
Unaudited
Audited
Audited
Financial KPIs
Revenue
26,896
26,899
26,939
32,801
31,236
25,184
24,645
growth
-%
-%
-18%
27%
24%
2%
1%
Gross profit
22,047
22,050
22,231
26,984
25,643
20,250
19,410
growth
-1%
-1%
-18%
29%
27%
4%
2%
Administrative costs
17,833
20,050
20,246
20,676
19,414
15,704
15,109
growth
-11%
1%
-2%
30%
24%
4%
-3%
Profit Before Tax
4,079
1,865
1,992
6,279
6,200
4,501
4,286
growth
105%
-6%
-68%
25%
38%
5%
21%
Profit After Tax
1,212
1,213
4,029
3,968
3,032
2,897
growth
-%
-70%
19%
31%
5%
19%
EPS - diluted
9.4p
9.5p
31.1p
30.3p
22.7p
21.3p
growth
-1%
-69%
22%
33%
7%
14%
Operating Cash Flow**
(421)
1,838
6,603
6,337
2,696
3,157
Cash balance
4,315
5,784
8,266
7,754
6,365
5,347
Dividend (interim & final)
7.5p
7.5p
7.5p
7.5p
4.5p
4.3p
growth
-%
-%
67%
67%
5%
10%
Special dividend
-
26.1p
12.0p
12.0p
-
12.0p
Share buy-backs
(3)
1
3,141
3,195
948
1,938
Non-financial KPIs
Number of clients
251
204
224
223
243
235
growth
23%
-9%
-4%
-8%
3%
5%
Gross profit per project
16.5
20.0
23.0
22.6
19.6
20.0
growth
-18%
-13%
19%
15%
-2%
-%
Average headcount
145
165
161
157
158
152
growth
-12%
2%
3%
-1%
4%
10%
Gross profit per head
152
135
168
163
128
128
growth
13%
-20%
25%
27%
-%
-7%
* Ex AR means: excluding AdRatings. Inc AR means: including AdRatings.
** Operating Cash Flow means: before dividends and share buy-backs but inclusive of property lease payments
CONDENSED CONSOLIDATED INCOME STATEMENT
for the 6 months ended 30 September 2019
Note
6 monthsto
30 Sep 2019 Unaudited
30 Sep 2018 *Restated for IFRS16 Unaudited
Consultancy
Ad Ratings
Total
Consultancy
Ad Ratings
Total
£000
£000
£000
£000
£000
£000
Revenue
4
13,704
21
13,725
13,182
-
13,182
Cost of sales
(2,136)
-
(2,136)
(2,380)
-
(2,380)
Gross profit
4
11,568
21
11,589
10,802
-
10,802
Administrative expenses
(9,023)
(1,102)
(10,125)
(8,584)
(1,090)
(9,674)
Operating profit/(loss)
2,545
(1,081)
1,464
2,218
(1,090)
1,128
Finance expense
(60)
-
(60)
(71)
-
(71)
Profit/(loss) before taxation
4
2,485
(1,081)
1,404
2,147
(1,090)
1,057
Income tax (expense)/credit
(719)
205
(514)
(598)
207
(391)
Profit/(loss) for the financial period
1,766
(876)
890
1,549
(883)
666
Attributable to equity holders of the Company
1,766
(876)
890
1,549
(883)
666
*Prior period comparatives have been restated for the transition to IFRS 16
Earnings per share attributable to equity
holders of the Company
Basic earnings per share
5
7.1p
5.3p
Diluted earnings per share
5
6.9p
5.2p
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the 6 months ended 30 September 2019
6 monthsto 30 Sep 2019 Unaudited
6 monthsto 30 Sep 2018 *Restated for IFRS 16 Unaudited
£000
£000
Profit for the financial period
890
666
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss
Exchange differences on translating foreign operations
171
63
Other comprehensive income for the period, net of tax
171
63
Total comprehensive income attributable to equity holders
1,061
729
*Prior period comparatives have been restated for the transition to IFRS 16
CONDENSED CONSOLIDATED BALANCE SHEET
as at 30 September 2019
Note
30 Sep2019 Unaudited
31 Mar2019 *Restated for IFRS 16 Unaudited
£000
£000
ASSETS
Non-current assets
Property, plant and equipment
8
2,630
2,847
Intangible assets
9
916
814
Deferred tax asset
277
299
3,823
3,960
Current assets
Contract costs
180
208
Trade and other receivables
6,539
6,907
Income tax recoverable
90
431
Cash and cash equivalents
4,104
4,315
10,913
11,861
Total assets
14,736
15,821
EQUITY
Capital and reserves attributable to equity holders of the Company
Share capital
10
132
132
Share premium account
1,601
1,601
Merger reserve
477
477
Foreign currency translation reserve
405
234
Retained earnings
4,554
4,580
Total equity
7,169
7,024
LIABILITIES
Non-current liabilities
Provisions
600
610
Finance lease payable
1,851
2,412
2,451
3,022
Current liabilities
Provisions
314
225
Finance lease payable
846
510
Trade and other payables
3,504
4,506
Contract liabilities
452
534
5,116
5,775
Total liabilities
7,567
8,797
Total equity and liabilities
14,736
15,821
*Prior period comparatives have been restated for the transition to IFRS 16
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the six months ended 30 September 2019
Note
6 monthsto 30 Sep 2019 Unaudited
6 monthsto 30 Sep 2018 *Restated for IFRS 16 Unaudited
£000
£000
Net cash generated from / (used by) operations
7
1,550
(244)
Tax paid
(171)
(304)
Net cash generated from / (used by) operating activities
1,379
(548)
Cash flows from investing activities
Purchase of property, plant and equipment
(36)
(22)
Purchase of intangible assets
(263)
(246)
Net cash used by investing activities
(299)
(268)
Net cash flow before financing activities *
1,080
(816)
Cash flows from financing activities
Interest received
-
1
Finance lease payments
(23)
(23)
Inception of new property leases
229
202
Interest paid on office leases
(60)
(72)
Property lease payments *
(728)
(670)
Dividends
(804)
(802)
Net cash used by financing activities
(1,386)
(1,364)
Net decrease in cash and cash equivalents
(306)
(2,180)
Cash and cash equivalents at beginning of period
4,315
5,784
Exchange losses on cash and cash equivalents
95
(52)
Cash and cash equivalents at end of period
4,104
3,552
* Prior period comparatives have been restated for the transition to IFRS 16. Under IFRS 16 office lease costs are now treated as a "financing activity" (rather than as an operating activity, as was the case previously). Office lease costs are therefore not now included within "Net cash flow before financing activities" (the Company's key cash flow performance indicator). "Net cash flow before financing activities", adjusted for office leases, known by the Company as "Operating Cash Flow" is shown below:
6 monthsto 30 Sep 2019 Unaudited
6 monthsto 30 Sep 2018 Unaudited
£000
£000
Net cash flow before financing activities
1,080
(815)
Net cash outflow for property and finance leases
(582)
(563)
Operating Cash Flow
498
(1,378)
A summary of cash flow before financing activities, separating out AdRatings is presented below.
6 monthsto 30 Sep 2019 Unaudited
6 monthsto 30 Sep 2018 Unaudited
£000
£000
Net cash generated from operating activities
2,321
543
Net cash used by investing activities
(67)
(22)
Net cash flow before financing activities (before AdRatings)
2,254
521
Net cash outflow for property and finance leases
(582)
(563)
Operating Cash Flow (before AdRatings)
1,672
(42)
Net cash flow used by AdRatings
(1,174)
(1,336)
Operating Cash Flow (after AdRatings)
498
(1,378)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the 6 months ended 30 September 2019
Share capital
Share premium account
Merger reserve
Foreign currency translation reserve
Retained earnings
Total
Unaudited and restated for IFRS 16
£000
£000
£000
£000
£000
£000
At 1 April 2019
132
1,601
477
234
4,580
7,024
Profit for the financial period
-
-
-
-
890
890
Other comprehensive income:
- currency translation differences
-
-
-
171
-
171
Total comprehensive income
-
-
-
171
890
1,061
Transactions with owners:
Employee share options scheme:
- value of employee services
-
-
-
-
(86)
(86)
- deferred tax debited to equity
-
-
-
-
(25)
(25)
Dividends paid to owners
-
-
-
-
(805)
(805)
-
-
-
-
(916)
(916)
At 30 September 2019
132
1,601
477
405
4,554
7,169
6 months ended 30 September 2018
At 1 April 2018
132
1,601
477
221
4,578
7,009
Transition to IFRS 16
-
-
-
-
(96)
(96)
At 1 April 2018
132
1,601
477
221
4,482
6,913
Profit for the financial period
-
-
-
-
666
666
Other comprehensive income:
- currency translation differences
-
-
-
63
-
63
Total comprehensive income
-
-
-
63
666
729
Transactions with owners:
Employee share options scheme:
- value of employee services
-
-
-
-
41
41
- current tax credited to equity
-
-
-
-
18
18
- deferred tax debited to equity
-
-
-
-
(100)
(100)
Dividends paid to owners
-
-
-
-
(802)
(802)
-
-
-
-
(843)
(843)
At 30 September 2018
132
1,601
477
284
4,305
6,799
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the 6 months ended 30 September 2019
1. General information
System1 Group PLC ("the Company") is United Kingdom resident, and its subsidiaries (together "the Group") provide marketing and market research consultancy services. The Company's shares are listed on the Alternative Investment Market of the London Stock Exchange ("AIM"). The address of the Company's registered office is Russell Square House, 10-12 Russell Square, London WC1B 5EH.
The Board of Directors approved this condensed consolidated interim financial information for issue on 7 November 2019.
The financial information set out in this interim report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006 and is unaudited. The Group's latest statutory financial statements were for the 12-month period ended 31 March 2019 and these have been filed with the Registrar of Companies. The auditor's report on those financial statements was unqualified and did not contain any statement under Section 498 of the Companies Act 2006.
2. Basis of preparation
This condensed consolidated interim financial information has been prepared in accordance with IAS 34, 'Interim financial reporting' as adopted by the European Union and on the going concern basis. This financial information should be read in conjunction with the financial statements for the 12-month period ended 31 March 2019, which have been prepared in accordance with IFRSs as adopted by the European Union.
3. Principal accounting policies
The principal accounting policies adopted are consistent with those of the financial statements for the 12-month period ended 31 March 2019, except for the first-time adoption of IFRS 16, 'Leases' which was adopted on 1 April 2019.
IFRS 16 replaced the existing guidance in IAS 17. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognise a lease liability reflecting future lease payments and a 'right-of-use asset' for virtually all lease contracts. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. The weighted average incremental borrowing rate applied to lease liabilities is 4.30%.
3. Principal accounting policies (continued)
A reconciliation of operating lease commitments as at 31 March 2019 to the lease liability is as follows:
£000
Operating lease commitments disclosed at 31 March 2019
5,505
Adjustment for forecast exercise of break clause
(2,211)
Effect of discounting
(443)
Lease liability recognised at 1 April 2019
2,851
Existing finance lease payables at 1 April 2019
71
Total finance lease payables at 1 April 2019
2,922
The Group has elected to apply the full retrospective approach to the transition to IFRS 16. The full retrospective approach requires the transition to be implemented with restatement of the prior year results as if IFRS 16 had always been applied. Adoption of the IFRS 16 has resulted in the recognition of Right of use assets and lease liabilities with a corresponding increase in depreciation charges and finance costs offset by a reduction in operating lease costs in the income statement. The implementation of IFRS 16 has made an insignificant impact on the net assets and profit before tax of the Group, as set out in note 12.
4. Segment information
The financial performance of the Group's geographic operating units ("Reportable Segments") is set out below. The Group defines its Consultancy business as Research and Advertising Agency.
6 months to30 Sep 2019
6 monthsto 30 Sep 2018*
Revenue
Gross profit
Operating profit/(loss)
Revenue
Gross profit
Operating profit/(loss)
£000
£000
£000
£000
£000
£000
Research
Americas
7,168
6,147
3,659
5,562
4,637
2,127
United Kingdom
2,605
2,201
743
2,753
2,277
807
Continental Europe
3,048
2,450
1,201
3,653
2,916
1,684
APAC
742
641
259
1,015
862
524
13,563
11,439
5,862
12,983
10,692
5,142
Advertising Agency
United Kingdom
141
129
16
199
110
(302)
Total Consultancy business
13,704
11,568
5,878
13,182
10,802
4,480
AdRatings
United Kingdom
12
12
(1,081)
-
-
(1,090)
Americas
9
9
-
-
-
-
21
21
(1,081)
-
-
(1,090)
13,725
11,589
4,797
13,182
10,802
3,750
*In the Annual Report for the year ended 31 March 2019, central delivery costs of £892k were allocated to central overheads in the segmental reporting. The comparable central delivery costs are included within the operating profit for reportable segments above for both periods presented.
4. Segment information (continued)
Segmental revenue is revenue generated from external customers and so excludes intercompany revenue and is attributable to geographical areas based upon the location in which the service is delivered. Segmental operating profit excludes allocation of central overheads relating to the Group's Operations, IT, Marketing, HR, Legal and Finance teams and Board of Directors.
All revenues are recognised when the research results are delivered to the client.
The split of business by research solution is set out below.
6 months to30 Sep 2019
6 monthsto 30 Sep 2018
Revenue
Gross Profit
Revenue
Gross Profit
£000
£000
£000
£000
Research
Communications (Ad Testing)
4,047
3,608
3,606
3,059
Brand (Brand Tracking)
2,311
1,628
2,363
1,726
Innovation*
5,824
5,135
6,166
5,316
Other services
1,381
1,068
848
591
13,563
11,439
12,983
10,692
Advertising Agency
141
129
199
110
Total Consultancy business
13,704
11,568
13,182
10,802
AdRatings
21
21
-
-
13,725
11,589
13,182
10,802
* The Group has reclassified certain product offerings from 'Other services' to Innovation in the current period, and the comparative period analysis has been restated accordingly.
A reconciliation of total operating profit for Reportable Segments to total profit before income tax is set out below.
Six months ended 30 Sep
2019
2018 Restated
£000
£000
Operating profit for Consultancy (Research and Agency)
5,878
4,840
Operating profit for AdRatings
(1,081)
(1,090)
Operating profit for Reportable Segments
4,797
3,750
Central overheads
(3,432)
(2,831)
Exceptional credit
-
250
Share based payments*
99
(41)
Operating profit
1,464
1,128
Finance expense
(60)
(71)
Profit before income tax
1,404
1,057
*Inclusive of associated social security
5. Earnings per share
(a) Basic earnings per share
Basic earnings per share is calculated by dividing profit attributable to equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period:
Six months ended 30 Sep
2019
2018 Restated
Profit attributable to equity holders of the Company (£000)
890
666
Weighted average number of Ordinary Shares in issue
12,576,617
12,520,502
Basic earnings per share
7.1p
5.3p
(b) Diluted earnings per share
Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding assuming conversion of all dilutive share options to Ordinary Shares:
Six months ended 30 Sep
2019
2018 Restated
Profit attributable to equity holders of the Company (£000)
890
666
Weighted average number of Ordinary Shares in issue
12,576,617
12,520,502
Share options
327,988
335,227
Weighted average number of Ordinary Shares for diluted earnings per share
12,904,605
12,855,729
Diluted earnings per share
6.9p
5.2p
6. Dividends
On 2nd August 2019 the Company paid a final dividend of 6.4 pence per share, amounting to £0.80m in respect of the 12-month period ended 31 March 2019. In December 2019, the Company will pay an interim dividend of 1.1 pence per share, amounting to £0.14m, in respect of the year ending 31 March 2020. This interim dividend is not recorded in these interim accounts.
7. Net cash generated from/(used by) operations
Six months ended 30 Sep
2019
2018 Restated
£000
£000
Profit before taxation
1,404
1,057
Depreciation
608
571
Amortisation
160
15
Finance expense
60
71
Share-based payment (credit)/charge
(86)
41
Decrease/(increase) in contract costs
28
(17)
Decrease/(increase) in receivables
368
(1,405)
Decrease in payables
(930)
(476)
Decrease in contract liabilities
(82)
(224)
Exchange differences on operating items
20
123
Net cash generated from/(used by) operations
1,550
(244)
8. Property, plant and equipment
For the 6 months ended 30 September 2019:
Right-of-use assets
Furniture, fittings and equipment
Computer hardware
Total
£000
£000
£000
£000
At 1 April 2019
Cost
5,286
553
1,285
7,124
Accumulated depreciation
(2,666)
(422)
(1,189)
(4,277)
Net book amount
2,620
131
96
2,847
6 months ended 30 September 2019
Opening net book amount
2,620
131
96
2,847
Additions
260
-
36
296
Disposals
(31)
-
-
(31)
Foreign exchange
122
2
2
126
Depreciation charge for the year
(533)
(37)
(38)
(608)
Closing net book amount
2,438
96
96
2,630
At 30 September 2019
Cost
5,541
561
1,346
7,448
Accumulated depreciation
(3,103)
(465)
(1,250)
(4,818)
Net book amount
2,438
96
96
2,630
8. Property, plant and equipment (continued)
For the 6 months ended 30 September 2018 (restated for IFRS 16):
Right-of-use assets
Furniture, fittings and equipment
Computer hardware
Total
£000
£000
£000
£000
At 1 April 2018
Cost
5,018
562
1,160
6,740
Accumulated depreciation
(1,863)
(359)
(1,094)
(3,316)
Net book amount
3,155
203
66
3,424
6 months ended 30 September 2018
Opening net book amount
-
203
66
269
Adjustment on transition to IFRS 16
3,154
-
-
3,154
Additions
202
-
22
224
Disposals
-
(2)
-
(2)
Foreign exchange
155
5
2
162
Depreciation charge for the year
(492)
(39)
(40)
(571)
Closing net book amount
3,019
167
50
3,236
At 30 September 2018
Cost
5,378
554
1,205
7,137
Accumulated depreciation
(2,359)
(387)
(1,155)
(3,901)
Net book amount
3,019
167
50
3,236
For the 12 months ended 31 March 2019 (restated for IFRS 16):
Right-of-use assets
Furniture, fittings and equipment
Computer hardware
Total
£000
£000
£000
£000
At 1 April 2018
Cost
5,018
562
1,160
6,740
Accumulated depreciation
(1,863)
(359)
(1,094)
(3,316)
Net book amount
3,155
203
66
3,424
12 months ended 31 March 2019
Opening net book amount
-
203
66
269
Adjustment on transition to IFRS 16
3,154
-
-
3,154
Additions
320
1
106
427
Disposals
-
(2)
-
(2)
Foreign exchange
121
3
1
125
Depreciation charge for the year
(975)
(74)
(77)
(1,126)
Closing net book amount
2,620
131
96
2,847
At 31 March 2019
Cost
5,286
553
1,285
7,124
Accumulated depreciation
(2,666)
(422)
(1,189)
(4,277)
Net book amount
2,620
131
96
2,847
9. Intangible assets
Intangible assets of £916,000 (31 March 2019: £814,000) include £885,000 of costs capitalised in respect of the development of the Company's new Ad Ratings product, of which £232,000 was capitalised during the period. Costs relating to the research phase of the product, amounting to £943,000, have been expensed during the period. Development costs are amortised over their useful economic life of three years.
10. Share capital
At 30 September 2019, the Company had 13,226,773 shares in issue (31 March 2019: 13,226,773) of which 650,156 were held in treasury (31 March 2019: 650,156), and the Company had 1,857,671 stock options outstanding of which 355,823 were fully vested.
On 17 April 2019 the Company granted an advisor to the Board, Stefan Barden, an equity award comprising of 300,000 zero cost options. These options vest in three tranches of 100,000 each subject to Gross Profit and the Company's share price exceeding certain targets. The three tranches lapse on 30 July 2024, 30 July 2029 and 30 July 2032 respectively. Full details of the grant can be found in the Company's Annual Report for the year ended 31 March 2019.
On 4 September 2019 the Company granted 1,058,135 zero cost options to certain members of the senior management team. Of these, 462,934 options were granted as replacements to equity awards made under the 2017 LTIP scheme. The options vest between 12 August 2020 and 12 August 2024, subject to Gross Profit, Profit After Tax and the Company's share price exceeding certain targets. These targets are the same as those set under the 2017 LTIP scheme, full details of which are given in the Company's Annual Report for the year ended 31 March 2019. The options lapse on 21 March 2027.
11. Related party transactions
During the period the Company paid the following dividends to directors:
Six months ended 30 Sep
2019
2018
£
£
John Kearon
189,519
212,493
James Geddes
16,843
15,929
Ken Ford (resigned from the Board on 24 July 2018)
-
1,280
Robert Brand
1,920
1,920
Graham Blashill
640
640
208,922
232,262
A family member of James Geddes will receive commission from WeWorks equal to 10% of the first year of rental payments to be made by the Company on its new WeWorks office space in London. This commission will amount to £40,000, and was reviewed by, and received the prior approval of, the Company's Audit Committee.
12. Changes in accounting policies
The adoption of IFRS 16, 'Leases' has resulted in the following changes to the previously reported figures:
Balance sheet (extract)
Audited 12 months to 31 Mar 2019
Impact of IFRS 16
Unaudited 12 months to 31 Mar 2019 Restated
£000
£000
£000
ASSETS
Non-current assets
Property, plant and equipment
227
2,620
2,847
Intangible assets
814
-
814
Deferred tax asset
275
24
299
1,316
2,644
3,960
Current assets
Contract costs
208
-
208
Trade and other receivables
6,915
(8)
6,907
Current income tax asset
431
-
431
Cash and cash equivalents
4,315
-
4,315
11,869
(8)
11,861
Total assets
13,185
2,636
15,821
EQUITY
Capital and reserves attributable to equity holders of the Company
Share capital
132
-
132
Share premium account
1,601
-
1,601
Merger reserve
477
-
477
Foreign currency translation reserve
223
11
234
Retained earnings
4,721
(141)
4,580
Total equity
7,154
(130)
7,024
LIABILITIES
Non-current liabilities
Provisions
610
-
610
Lease liabilities
23
2,389
2,412
633
2,389
3,022
Current liabilities
Provisions
225
-
225
Lease liabilities
48
462
510
Trade and other payables
4,591
(85)
4,506
Contract liabilities
534
-
534
5,398
377
5,775
Total liabilities
6,031
2,766
8,797
Total equity and liabilities
13,185
2,636
15,821
12. Changes in accounting policies (continued)
Income statement (extract)
Audited 12 months to 31 Mar 2019
Impact of IFRS 16
Unaudited 12 months to 31 Mar 2019 Restated
£000
£000
£000
Operating profit
1,932
68
2,000
Finance income/(expense)
2
(137)
(135)
Income tax expense
(677)
24
(653)
Profit after taxation
1,257
(45)
1,212
Cash flow statement (extract)
Audited 12 months to 31 Mar 2019
Impact of IFRS 16
Unaudited 12 months to 31 Mar 2019 Restated
£000
£000
£000
Net cash generated from operating activities
609
925
1,534
Net cash used by investing activities
(1,030)
(1,030)
Net cash used by financing activities
(982)
(925)
(1,907)
Net decrease in cash and cash equivalents
(1,403)
-
(1,403)
Cash and cash equivalents at 31 Mar
4,315
-
4,315
12. Changes in accounting policies (continued)
The adoption of IFRS 16, 'Leases' has resulted in the following changes to the previously reported figures:
Balance sheet (extract)
Unaudited 6 months to 30 Sep 2019
Impact of IFRS 16
Unaudited 6 months to 30 Sep 2019 Restated
£000
£000
£000
ASSETS
Non-current assets
Property, plant and equipment
217
3,019
3,236
Intangible assets
510
510
Deferred tax asset
282
9
291
1,009
3,028
4,037
Current assets
Contract costs
148
-
148
Trade and other receivables
7,115
(7)
7,108
Current income tax asset
335
-
335
Cash and cash equivalents
3,552
-
3,552
11,150
(7)
11,143
Total assets
12,159
3,021
15,180
EQUITY
Capital and reserves attributable to equity holders of the Company
Share capital
132
-
132
Share premium account
1,601
-
1,601
Merger reserve
477
-
477
Foreign currency translation reserve
270
14
284
Retained earnings
4,417
(112)
4,305
Total equity
6,897
(98)
6,799
LIABILITIES
Non-current liabilities
Provisions
456
-
456
Lease liabilities
46
2,340
2,386
502
2,340
2,842
Current liabilities
Provisions
407
-
407
Lease liabilities
47
881
928
Trade and other payables
3,950
(102)
3,848
Contract liabilities
356
-
356
4,760
779
5,539
Total liabilities
5,262
3,119
8,381
Total equity and liabilities
12,159
3,021
15,180
12. Changes in accounting policies (continued)
Income statement (extract)
Unaudited 6 months to 30 Sep 2019
Impact of IFRS 16
Unaudited 6 months to 30 Sep 2019 Restated
£000
£000
£000
Operating profit
1,081
47
1,128
Finance income/(expense)
1
(72)
(71)
Income tax expense
(400)
9
(391)
Profit after taxation
682
(16)
666
Cash flow statement (extract)
Unaudited 6 months to 30 Sep 2019
Impact of IFRS 16
Unaudited 6 months to 30 Sep 2019 Restated
£000
£000
£000
Net cash used by from operating activities
(1,088)
540
(548)
Net cash used by investing activities
(268)
-
(268)
Net cash used by financing activities
(824)
(540)
(1,364)
Net decrease in cash and cash equivalents
(2,180)
-
(2,180)
Cash and cash equivalents at 30 Sep
3,552
-
3,552
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