Results   

The financial performance of the business, as compared to the restated 2016 results, is summarised as follows:

Revenue of £27.7 million (2016 restated: £21.2 million, growth 31%, 17% in constant currency terms) with divisional operating profit of £5.1 million (2016 restated: £6.1 million). Adjusted operating profit after corporate costs was £3.4 million (2016 restated: £4.6 million). Operating loss was £2.5 million (2016 restated: £1.9 million).

Organic revenue, excluding the acquired revenues from customers of Xcaliber at January 2016 was £24.3 million (growth 19%). Organic revenue grew to £21.8 million when expressed in constant currency terms (growth 6%).

The organic and acquired revenues are shown in the table below:

Included within the operating profit are provision releases totalling £1.2 million (2016: £nil) arising from the release of acquisition provisions on contingent liabilities for which the business has made steps to eliminate the risk and which are therefore no longer required.

The increase in statutory operating loss is largely a result of the reduction in divisional adjusted operating profit which has been partially offset by a lower share-based payment charge and the non-recurrence of the Xcaliber investment disposal accounting in the prior year. The Group's continuing M&A activity was greater in 2017 versus the prior year, yielding a higher charge.

Adjusted operating cash flow was £2.8 million (2016: £6.0 million), with a cash conversion of 80% (2016 restated: 130%) relative to AOP. Operating cash outflow from continuing operations was £0.7 million (2016: £4.0 million inflow) which includes payments associated with M&A activity and exceptional one-off payments totalling £2.4 million (2016: £1.1 million) and interest and tax payments which were similar to the previous year.

Significant other cash outflows include capital expenditure (£3.4 million), capital cost of acquisitions (£1.1 million) and dividends (£1.4 million). A share placing in May which raised £9.3 million of net proceeds resulted in net cash at the end of the period of £1.7 million (2016: £1.0 million).

Tax payments were comparable year on year, however cash tax payments due of £0.8 million were paid in July 2017.

A reconciliation between adjusted operating profit and operating loss is given on the face of the income statement.

Segmental results

Group review

The Erasure division enables customers to erase and repurpose IT devices with certified software. The Diagnostics division provides consistent, accurate and measurable diagnostics of smartphones and tablets, as well as a new diagnostics tool developed internally following the acquisition of the SmartChk product in the Xcaliber transaction. The Group has seen a significant increase in the number of customers contracting both erasure and diagnostics technology. The revenues have been allocated to the appropriate segments according to the respective portion of licences sold.

The revenues and adjusted operating profit of these divisions comprise the Group's continuing operations as presented in the financial statements, while discontinued revenues are comprised of the Digital Care insurance business which was disposed of in September 2016 and, additionally in the prior year, revenues associated with the Depot Repair business prior to the disposal of that business in April 2016.

The total result for the year, including the impact of the required accounting for discontinued operations was a loss of £4.3 million (2016 restated: £25.7 million).

The full results of the discontinued business are presented in note 7.

Erasure division

The Erasure division revenue increased to £23.5 million (2016 restated: £20.5 million), with the business acquiring a number of new customers in the year.

Adjusted operating profit was £4.6 million, at an adjusted operating profit margin of 19%, compared to an adjusted operating profit margin of 30% in 2016. The margin reduction is primarily due to the large investment in the sales force in the year which is expected to generate a benefit to revenue in subsequent financial years.

Diagnostics division

The Diagnostics division generated revenues of £4.2 million, comprising the multi-year contract with our large US mobile carrier (won in May 2016 and representing £3.2 million of revenue) as well as significant contract wins with additional carriers in Asia and Europe during 2017. This represents growth from the prior year revenues of £0.7 million (consolidated from January 2016, £1.3 million on a pro forma full year 2016 basis).

The division recorded adjusted operating profit for the first time in 2017, of £0.5 million (2016: £nil) owing to growth in new contracts, net of investment in the development and sales teams of the product in the first full year under Group control.

Revenue recognition

The Group monitors its sales performance by tracking invoiced revenue, which is a measure of the level of business won in the year. This differs from the reported revenue figures because IFRS revenue recognition requires the business to defer the revenue earned on software subscriptions - which have a defined term - over the term of the contract.

This generally has an adverse impact on revenue in the period in which the invoiced sale was made, because the revenue is held on the balance sheet and released in future periods as the contract is fulfilled. The impact is shown below:

An accounting adjustment for discounts has been recorded against revenue with the corresponding entry being recorded through reserves until the discount is claimed by the customer.

The total deferred revenue for the continuing Group at 30 June 2017 was £5.9 million (2016 restated: £4.2 million) which comprises revenue to be recognised in future periods. Of the balance at 30 June 2017, £4.5 million of deferred revenue is due to be recognised during 2018.

Of the £5.9 million deferred revenue balance, £3.2 million represents cash already collected from customers and £2.7 million is within trade receivables at the year end.

Corporate costs

Corporate costs of £1.7 million (2016: £1.5 million) have increased slightly. This cost comprises the costs associated with running the Plc function. The cost of Directors has increased in 2017 in comparison to 2016, as well as some small inflationary increases for services procured by the Plc such as listing and broker fees.

Currency hedging activities and constant currency 

One of the risks that the Group faces by carrying out business in overseas markets is currency fluctuations. In order to manage the Group's exposure to this, the CFO conducts a quarterly review of the Group's currency hedging activities and makes a formal recommendation for any changes to the Board as required.

The Group is well diversified across ten main currencies with Sterling representing only around 10% of revenues. The Group has a policy of hedging cash balances across countries to minimise individual exposures in any one currency, however with the majority of revenues and costs in non-Sterling, there is exposure in translating of overseas results back into Sterling when that currency strengthens or weakens.

Following the UK's decision to leave the European Union in June 2016, Sterling weakened against all overseas currencies in which the Group trades. This has resulted in an overall foreign exchange benefit for the Group as the translation of revenues generated in foreign currencies is now worth more in Sterling terms.

The average exchange rates applied are as follows:

The sales percentage represents amounts billed in that currency and is not directly comparable to the sales generated in any one jurisdiction.

A comparison of actual results, to results restated at constant currency is presented below:

At a revenue level, the impact of the weakening of Sterling has been £3.0 million, representing 15 percentage points of the Group's year-on-year growth. The impact is less severe at profit level since the Group matches its revenues and costs generated in overseas currencies, creating a natural hedge.

The Group implements forward contracts for payments and receipts, where the amounts are large, are not denominated in the local country's functional currency, where the timing is known in advance, and where the amount can be predicted with certainty.  In addition, the Group undertakes natural hedges by structuring and paying future earn-outs on acquisitions in the acquired Company's local currency.

The Group does not undertake any cash flow or profit hedging activities to insulate from currency movements in respect of overseas earnings, specifically the conversion of its largely non-Sterling generated income into the Group's reporting currency, Sterling.

No other hedging activities are undertaken in respect of tangible and intangible fixed assets, working capital (such as stock, debtors, or creditors), or other balance sheet items, as these are generally small in nature in any one individual country. 

Acquisition of non-controlling interests

In the period, the Group has continued to invest further in its minority offices and has increased stakes in the following offices:

On 18 August 2016, the Group acquired the remaining 49% it did not already own of the issued share capital of Blancco Australasia Pty. The consideration of AUD$0.1 million (£0.1 million) was funded through the Group's cash reserves.

On 30 September 2016, the Group acquired an additional 19% stake in Blancco SEA Bhd Sdn, bringing its ownership to 70%. The consideration of USD$0.3 million (£0.3 million) was funded through the Group's cash reserves.

On 11 October 2016, the Group acquired the remaining 49% it did not already own of the issued share capital of Blancco France SAS for an initial consideration of €0.1 million (£0.1 million) and a contingent consideration of €0.1 million (£0.1 million). The deferred consideration is payable in or around December 2017. At 30 June 2017, the business had achieved the required sales target in order to earn a full pay out, and therefore the full contingent consideration will be settled.

On 9 February 2017, the Group increased its stake in the issued share capital of Software Blancco S.A. de CV (in Mexico) from 51% to 70% for a deferred consideration of USD$1.2 million (£1.0 million). The terms of the share purchase agreement were for the first 50% payment to be made six months after completion and the remaining 50%, twelve months after completion. However, in light of the matters associated with the Mexican contract from the year ended June 2016, the cash phasing has been renegotiated such that USD$0.4 million (£0.3 million) was settled in August 2017 and the remaining USD$0.8 million (£0.6 million) will be settled on a pro rata basis only in line with any cash collections.

On 13 February 2017, the Group acquired the remaining 50% it did not already own of the issued share capital of Blancco Canada Inc. The consideration of CAD$0.2 million (£0.2 million), was funded through the Group's cash reserves.

Dividends paid to non-controlling interests

On 27 September 2016, a dividend was declared and paid by Blancco Japan Inc. The total dividend of ¥57.0 million (£0.4 million) was paid, of which ¥27.9 million (£0.2 million) was paid to the minority shareholder. This resulted in a cash outflow for the Group of £0.2 million and a corresponding reduction in the non-controlling interest reserve held on the balance sheet. A similar transaction occurred with Blancco Australia at a cash cost of £0.1 million prior to the buyout of the 49% minority interest.

Disposal of Mobile Insurance business

The discontinued operations generated a profit for the period of £nil on a total revenue of £1.7 million (2016: £151.9 million revenue and £7.7 million loss). The result for the period represents the Mobile Insurance business only, compared to the combined Repair Services business (to March 2016) and Mobile Insurance business in the prior year.

The result includes £1.5 million of disposal provision released for which no claim was paid out, covering working capital adjustments and warranties. Further provisions remain in the June 2017 balance sheet, predominantly covering tax liabilities that could realise a cash outflow for up to seven years following the disposal dates.

Disposal costs, over and above those incurred in the disposal of the Repair Services business in April 2016, are presented within deal fees in the income statement and total £0.6 million, plus some small reorganisation costs incurred totalling £0.2 million.

On 30 September 2016, the Group sold the Mobile Insurance business to Mazovia Capital for contingent consideration payable over two to three years. The consideration is contingent on meeting certain performance measures with the first payment not falling due until 2018. Latest forecasts estimate that no consideration will be receivable and accordingly no contingent asset has been recorded.

Exceptional acquisition and restructuring costs

The Group has undertaken acquisitions of non-controlling interests in the period which have incurred acquisition expenses amounting to £1.7 million (2016: £1.3 million), and are inclusive of Hanover corporate advisory fees of £0.4 million (2016: £0.7 million relating to continuing operations).

Exceptional costs in the continuing business amounted to £1.0 million (2016: £nil) which predominantly relate to redundancy costs and legal fees associated with the Group's patent defence.

Amortisation of internally generated R&D expenditure

Amortisation of internally generated intangible assets which have been generated by the Group is presented within adjusted operating profit. The activity of the R&D team is split between research and administration activity which is not eligible for capitalisation, and development time which is required to be capitalised under IFRS. During 2017, the Group has capitalised R&D costs amounting to £2.6 million (2016: £2.3 million), and amortised previously capitalised R&D costs of £1.2 million (2016: £0.5 million).

The charge is increasing over time due to the accumulation of capital expenditure since the acquisition of Blancco in April 2014. The Group is continuing to invest greater amounts each year in its development activities and amortises the expenditure over the period the product is expected to last, generally four years from the point of release of the product. The amortisation is therefore currently lagging behind the development expenditure capitalised.

Amortisation of acquired intangibles

Amortisation of intangible assets acquired as part of the Group's previous M&A activity was £2.5 million (2016: £2.5 million) and is in line with the prior year since no acquisitions which have resulted in a change in control (nor recognition of newly acquired assets) have taken place during 2017.

Share-based payments

The share-based payments charge was £0.7 million (2016: £1.2 million) and represents the charge for the options granted under the software long term incentive plan.

The charge is lower than the previous year due to the decline in the share price over the last 12 months, and therefore a reduction in the accrued value of the awards currently vested.

During the year, two exercises took place under the plan, with values totalling £0.4 million. These were settled by transferring shares from the Company's Employee Benefit Trust (EBT) to the beneficiaries. Accordingly, a credit to reserves has been recorded representing the value generated from disposing of the EBT shares, with a corresponding reduction in the liabilities carried for the plan.

Net financing income

Net financing income was £0.8 million (2016: £0.9 million expense). Included within the financing income are:

·     The unwind of the time value of money on the deferred consideration payable in future periods for the Group's acquisitions, which represents a non-cash charge of £0.5 million (2016: £0.3 million).

·     The impact of revaluation of deferred consideration, due to both foreign exchange movements and future forecasts on which the contingent consideration is earned. A non-cash net credit of £1.6 million (2016: non-cash charge of £0.3 million) is principally due to a reduction in value of the Xcaliber earn-out due to a reduction in forecast qualifying revenues and to a reduction in value of the Blancco Sweden earn out due to matters associated with collection of debt from the active erasure sales which comprise part of the earn out value.

·     The cost associated with the Group's banking facility of £0.3 million (2016: £0.4 million), reduced slightly due to the lower facility available for the continuing Group.

·     Interest received from cash held on deposit of £nil (2016: £0.1 million)

Taxation

The total tax charge was £0.7 million (2016: £0.6 million). This comprises a corporation tax charge of £0.1 million and a deferred tax charge of £0.6 million. The Group is seeing a higher proportion of revenues generated in overseas territories, particularly in Japan where the tax rate is higher than the historic Group average.

Additionally, the deferred tax charge has increased year-on-year due to the deferred tax charge associated with provision releases.

Earnings per share

Adjusted earnings per share for the continuing business were 3.02p (2016 restated: 4.16p).

Basic loss per share for the continuing business was 5.20p (2016 restated: 5.17p), also driven by the change in share base.

Cash and working capital

The cash flows of the discontinued operations have been removed from the individual captions in the cash flow statement and are presented separately.

We closed the year with net cash of £1.7 million (2016: £1.0 million). The overall cash position has improved since 30 June 2016 due to a share placing which raised £9.5 million (fees totalling £0.2 million were paid subsequent to the year end).

Cash reserves have been utilised as follows:

·     The continued investment in our operating locations of £2.8 million, representing:

o  Costs of acquisition of non-controlling interests in Australia, France, South East Asia, Canada and Mexico

o  Expansion into new territories: China, Singapore and Latin America.

·     Exceptional costs including redundancies and engagement in patent defence to protect the market- leading position of the business, totalling £0.9 million.

·     Cash flows associated with the discontinued business and disposal of the Mobile Insurance business of £2.2 million, representing:

o  The budgeted final deal fees associated with the Repair Services business of £0.8 million

o  Lower than expected sales activity in the Mobile Insurance business in the period as customers deferred spend during the disposal process, resulting in an adverse result of £0.7 million

o  Deal costs associated with the disposal of £0.7 million.

Operating cash conversion is 80% and the absolute cash flow has reduced year-on-year by 54%.  

The Group has seen a shift in the level of subscription business closed, for which cash is generally collected in advance of recognition of revenue.

Growth into new territories and associated up-front costs have also resulted in a cash outflow for which the working capital cycle should improve once the sales teams in these locations are fully ramped up.

Tax and interest paid are in line with prior periods, although a significant tax payment of £0.8 million was made in July 2017.

Capital expenditure and R&D qualifying for capitalisation was £3.4 million (2016: £2.5 million). Of this capital expenditure, £2.6 million (2016: £2.3 million) was incurred in the ongoing development of the Blancco product range. The remaining expenditure relates to purchase of property, plant and equipment and investment in the Group's operating systems.

Dividend paid of £1.4 million represents both the dividend paid to shareholders of the Group of £1.1 million and dividends paid to minority shareholders of the Group's subsidiaries of £0.3 million, which includes the dividend paid to the Japanese minority shareholder and former Australian minority shareholder, the latter as part of the purchase of the 49% share capital previously owned by the minority shareholder.

Other movements of £0.1 million outflow (2016: £1.3 million outflow) include changes in the value of overseas cash held on deposit when translated back into Sterling at the exchange rates prevailing at the end of the period.

Year end net cash comprised gross borrowings of £9.9 million denominated in Sterling (2016: £3.7 million in Sterling), cash and cash equivalents of £11.6 million (2016: £4.8 million) and deferred arrangement fees of £nil (2016: £nil).

Dividend

Given the position of the business and the need to invest for growth, the Board has decided not to pay a final dividend.

Post Year end events

In August 2017, the terms of the earn-out relating to Blancco Sweden were renegotiated (previously £1.1 million due for payment in March 2017). As a consequence of this renegotiation €0.2 million (£0.2 million) was settled in August 2017 and the remaining deferred contingent consideration will be settled following collection of cash from the Mexican contracts which comprised part of the earn-out value. At 30 June 2017, the fair value of the deferred contingent consideration that has not been settled in August 2017 has been measured at £nil.

Also, in August 2017, the terms of the contingent consideration on the acquisition of 19% of the issued share capital of Software Blancco S.A. de CV, were renegotiated. In light of the matters associated with the Mexican contract from June 2016, the cash phasing has been renegotiated such that $0.4 million (£0.3 million) was settled in August 2017 and the remaining $0.8 million (£0.6 million) will be settled on a pro rata basis only in line with collections from the associated customer. At 30 June 2017, the fair value of the deferred contingent consideration that has not been settled in August 2017 has been measured at £nil.