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Electronic Data Processing PLC (EDP)

Preliminary results for the year ended 30 September 2017

EDP is an IT solution provider to the UK wholesale distribution industry and a supplier of CRM and Business Intelligence software more widely.

Highlights:

Sir Michael Heller, Chairman of EDP, said:

"With a strong, cash-generative business model and a debt-free balance sheet I remain confident that the business is well positioned for the future".

For further information please contact:

www.edp.co.uk

Chairman's Statement

Turnover for the year to 30 September 2017 was £5.11 million compared with £4.96 million the previous year, an increase of 3%.  At the half-year stage, we reported that sales activity had improved modestly compared to the previous year and that continued into the second half in spite of a challenging market.

Adjusted operating profit was £540,000, compared with £430,000 last year, an increase of 26%.  This profit measure, which excludes non-cash IFRS items and exceptional non-trading costs, is reconciled to statutory operating profit in note 4 to the consolidated financial statements. As management exercised tight control to maintain overheads at similar levels to the previous year, the increase in sales had a significant impact on operating profit.

Statutory pre-tax profit for the year also increased to £417,000 compared with £244,000 the prior year, an increase of 71%.  Last year's result included one-off property costs of £104,000 relating to a property that we have now sold.  Adjusting for that item would result in an increase in statutory pre-tax profit of 20%.

Contracted recurring revenues, which comprise annual software licence fees and periodic hosting charges, remained strong at 80% of total revenues (2016: 82%).  Revenues delivered through our hosting centre continued to increase and in the year under review represented 61% of total revenues (2016: 59%).

R&D cash expenditure for the year was £901,000 (2016: £982,000) and was principally focussed on continued enhancements to our key products, Quantum VS and Vecta.

As previously reported, we sold our remaining surplus freehold property for £1.2 million in December 2016.  The property's carrying value had previously been adjusted to reflect the expected net sale proceeds which, after disposal costs, amounted to £1.17 million.  The process that we started some years ago, to dispose of six freehold properties which had become surplus to operating requirements, has generated more than £7 million of cash which has supported distributions to shareholders in excess of £11 million over the same period.

At the year-end our cash balances were £6.4 million compared with £5.4 million last year.  The increase reflects the proceeds from the sale of property referred to above.  Operating cash flows were £580,000 (2016: £818,000) and dividends paid amounted to £635,000 (2016: £631,000).

Net assets at 30 September 2017 were £6.4 million compared to £3.2 million at 30 September 2016.  This significant increase is principally due to the elimination of the deficit on the defined benefit pension scheme under IAS19.  Net of deferred tax, the position on the scheme has improved by £3.4 million during the year due largely to improved surrender terms for the scheme's principal asset.  This matter is explained further in the Chief Executive's Statement.

The Directors are proposing to pay a final dividend of 3p per share (2016: 3p) giving a total dividend for the year of 5.0p, the same as last year.  Total cash dividends paid to shareholders will therefore amount to £635,000.  If approved by shareholders, the final dividend will be paid on 6 April 2018 to those shareholders on the register at 9 March 2018.  The shares will be ex-dividend on 8 March 2018.

We announced last year that we are carrying out a strategic review of the business.  As previously reported, uncertainty over the pension scheme valuation since March 2017 has impacted on the strategic review process and caused it to take longer than originally expected.  However, the process is continuing now that the actuarial valuation of the scheme has been completed.  Should the strategic review process not result in an acceptable offer being made for the Company, the Board confirms that it intends to consider returning an amount of cash to shareholders subject to any constraints on distributable reserves and the rules of the Takeover Code.  However, it should be noted that the improvement in the Group's net asset position referred to above positively impacts our distributable reserves.  The Company will update shareholders further when it is in a position to do so.

I would like to thank all our members of staff and my colleagues on the Board for their contribution during the year.

With a strong, cash-generative business model and a debt-free balance sheet I remain confident that the business is well positioned for the future.

Sir Michael Heller

Chairman

12 December 2017

Chief Executive's Statement

Revenue for the year was up 3% at £5.11 million compared with £4.96 million the year before.  We saw slightly higher sales activity throughout the year in relation to both of our key products, Quantum VS and Vecta, and also increased levels of professional services activity, for which credit should go to our professional services team.

Because of the high margin nature of the business (our gross margin is typically over 90%), this increase in turnover had a significant impact on our underlying operating profitability, which increased 26% to £540,000 from £430,000 a year earlier.  Continued careful management of the cost base meant that overheads (as used in the calculation of adjusted operating profit) were maintained at near identical levels to the previous year.  Whilst an increase in sales of 3% can result in a 26% increase in operating profit, we are always mindful that the converse is also true and remain vigilant in controlling the cost base.

In common with many businesses, we are conscious that the UK economy faces considerable uncertainty over the coming years.  Most of our customers are directly impacted by Brexit one way or another.  The majority of them import and are affected by the significant exchange rate movements that we have experienced over the last 18 months or so.  Different sectors have varying views of the future, with some of those in the Builders Merchants sector, for example, currently feeling more positive than some of those who are not directly involved in construction.  The fact that we offer our products into a variety of industry verticals within the distribution sector, provides our business with a good degree of resilience as we are not overly reliant on any one sector.  However, economic uncertainty typically can mean that significant capital expenditure decisions can be delayed or even cancelled as businesses take a "wait and see" approach.

Our consistent strategy for many years has been to strengthen the relationship we have with our customers by growing the proportion of our revenues delivered through our hosting centre in Milton Keynes.  Last year hit yet another record as 61% of our revenues were delivered using the hosting model.  This was up from 59% last year, and, in fact, we have seen this figure grow for 17 out of the last 18 years.

We continue to manage the migration process from our legacy applications to Quantum VS carefully.  At 30 September 2017, we had signed 48 customers for Quantum VS compared to 40 a year earlier.  The decision to change ERP solution is a major decision for any business, and, whilst we believe that Quantum VS provides an excellent solution for the majority of the users of our older, legacy products, the migration process itself inevitably leads to higher levels of customer churn than we have historically seen. This will continue to be the case.

Some of the users of our legacy products are keen to remain on their current system for the foreseeable future and we are geared to offer a flexible approach to work with them.  This often leads to a new long term (5 year) contract, which provides them with comfort and us with excellent visibility of revenues and the ability to plan our resources going forwards.  Of course, we will seek to promote Quantum VS to them at an appropriate time in the future.

Our combined CRM and Business Intelligence (BI) product Vecta generated 28% of total revenues during the period under review, up from 25% a year earlier.  We have stated previously that in the medium term, we would expect to see the proportion of our total revenues represented by Vecta to increase due to the fact that its sales cycle is much shorter than that for an ERP solution, such as Quantum VS, and this remains the case.

Strategy

Our principal software products, Quantum VS and Vecta, offer clear business benefits to our customers helping them to generate sales growth or to create efficiencies and reduce costs.  Quantum VS and Vecta are complementary, with many of our customers using both.

Quantum VS is a comprehensive ERP application, which addresses a focussed number of verticals within the distribution sector, including builders and timber merchants, suppliers of fixings and fastenings, industrial and security products and electrical wholesalers.  As noted above, our long-term strategy is to manage the migration of customers from our four legacy applications (Merchant, Charisma, Esprit and The Business Programme) to Quantum VS, whilst identifying and exploiting new business opportunities in our target vertical markets.

Vecta is an extremely powerful combined CRM and BI product which drives sales growth for businesses in a range of verticals much wider than those addressed by Quantum VS. 

Our strategy remains to exploit the space between the major CRM products, which typically do not deliver sales analysis as standard, and pure BI tools. 

We continue to invest in the long-term future of our key products through significant levels of R&D.  During the year to 30 September 2017 our R&D expenditure was £901,000 (2016: £982,000).  This represented 18% of total revenues (2016: 20%).

Business Model

All of our software products are supplied under long-term contracts.  In the case of Quantum VS and our legacy products these are typically of five years initial duration; in the case of Vecta it is typically three years.  Contracts for ERP applications can be either in the form of traditional on-site licencing arrangements or hosted service level agreements. In the case of Vecta, which is only offered as a cloud-based service, new contracts are exclusively hosted service level agreements.  These contracted recurring revenues represented 80% of total revenues during the year, compared with 82% last year.  Typically, our customer relationships extend well beyond the initial contract period.

The recurring revenue model gives us good visibility of revenues and strong cashflows as charges are mainly invoiced annually in advance.

The remainder of our revenues arise from initial software licence fees, initial hosting service charges and the provision of professional services.  We also supply a small amount of low-margin computer hardware.

Financial Review

Revenue for the year was £5.11 million compared with £4.96 million last year, an increase of 3%.  Second half revenues were £2.57 million (2016: £2.45 million) compared with £2.54 million in the first half of the year (2016: £2.51 million). 

As noted above adjusted operating profit increased 26% to £540,000 (2016: £430,000) representing an operating margin of 10.6% (2016: 8.7%).  Statutory pre-tax profit was £417,000 (2016: £244,000).

Adjusted operating profit is used by the Board and management to monitor the performance of the business on a day-to-day basis and it is the headline profit figure in the management accounts.  It excludes interest receivable, any gains and losses on property transactions, one-off exceptional items and a number of non-cash items which arise under IFRS (including defined benefit pension scheme charges and the capitalisation and amortisation of development costs). A full reconciliation of adjusted operating profit to statutory operating profit is provided in note 4 to the consolidated financial statements.  Furthermore, as noted in the Remuneration Report, adjusted operating profit is the measure on which the Directors' bonus is based.

Cash balances amounted to £6.4 million at 30 September 2017, up from £5.4 million the previous year.  This includes operating cash flows of £580,000 and £1.2 million cash received from the sale of property.  Other significant cash items were dividends paid of £635,000 and capital expenditure of £118,000.

R&D expenditure was £901,000 (2016: £982,000). Of this £89,000 (2016: £127,000) was capitalised as required by IAS 38.  Amortisation of previously capitalised R&D expenditure amounted to £110,000 (2016: £96,000).  Accordingly, the R&D charge in the income statement is £922,000 (2016: £951,000).

The tax charge for the year was £23,000 (2016: £86,000) which represents an effective tax rate of 5.5%.  The main reason for the low effective tax rate this year is a prior year corporation tax adjustment of £71,000.  Of this, £61,000 relates to tax refunds received in respect of R&D tax relief claimed for the 2015 and 2016 accounting periods.

Earnings per share was 3.11p compared to 1.25p last year, an increase of 149%.  On a fully diluted basis this amounted to 3.09p (2016: 1.24p).

Pension

As a result of the significant increase in the discontinuance surrender value of the defined benefit scheme's Grouped Funding policy, the value of the pension scheme's assets under IAS 19 has increased by approximately £3 million this year. This factor, coupled with actuarial gains of approximately £900,000 resulting from updated financial and mortality assumptions, has eliminated the deficit of £3.88 million (£3.22 million net of deferred tax) that was shown in the 2016 balance sheet. In 2017, the balance sheet shows a small pension surplus under IAS 19 of £240,000 (£156,000 net of deferred tax), a movement of £4.12 million (£3.38 million after deferred tax). Of this movement, net of deferred tax, £70,000 has been charged in the income statement and £3.45 million has been credited directly to reserves.

As previously announced, the triennial valuation of the scheme as at 31 July 2016 was completed and signed off by the actuary, trustees and employer in October 2017. On a scheme funding basis, the deficit at 31 July 2016 was finalised at £70,000, representing a funding level of 99%.

The deficit is expected to have been cleared by the 2018/19 scheme year as a result of the payment of terminal bonuses by the scheme insurer in respect of member retirements that will take place over the next two years. The formal deficit recovery plan does not therefore require the immediate payment of cash contributions by the Company. However, the Company has agreed with the trustees to make a one-off contribution of up to a maximum of £118,000, payable on or before 31 July 2020, in the event that the terminal bonus payments do not cover the deficit in full.

Net assets

Net assets per share increased to 50.7p (2016: 25.3p).  The increase is primarily due to the improvement in the position on the defined benefit pension scheme.

Property

As previously reported we sold our last remaining surplus freehold property in December 2016 for £1.2 million. We had previously written the property down in the balance sheet to reflect the expected net sale proceeds which amounted to £1.17 million after costs.  Following the sale, we have achieved expected cash cost savings of around £20,000 a year.

Outlook

Balancing the migration of customers from our legacy ERP products to Quantum VS, whilst identifying and converting new business opportunities for Quantum VS and Vecta remains our principal focus.  Wider economic factors and uncertainty over Brexit, in particular, continue to affect business confidence generally and may impact discretionary capital expenditure decisions including replacement of IT systems.  However, the strength of our business model built around an 80% recurring revenue base, together with continued investment in our sales team and product development, should mean we are well placed to deal with the challenges we face over the coming year.

Finally, I would like to thank all of my colleagues throughout the business for their hard work and commitment during the year.

Julian Wassell

Chief Executive

12 December 2017