NCC Group PLC Final Results (3422L)

TIDMNCC

RNS Number : 3422L

NCC Group PLC

18 July 2017

18 July 2017

NCC Group plc

NCC Group plc (LSE: NCC, "NCC" or "the Group"), the independent global cyber security and risk mitigation expert, has reported its full year results for the 12 months to 31 May 2017 and provides an update on the Strategic Review.

Year end results

-- Group revenue up 17% to GBP244.5m (2016: GBP209.1m), organic growth 3% excluding impact of FX and acquisitions

   --      Operating loss GBP53.4m (2016: profit GBP11.4m) 
   --      Adjusted* EBIT GBP27.5m (2016: GBP39.7m) 

-- Individually significant charges of GBP71.0m, including intangible asset write downs of GBP62.0m

   --      Adjusted* EBITDA GBP36.2m (2016: GBP45.0m), in line with revised expectations 
   --      Adjusted* basic earnings per share 6.7p (2016: 11.8p) 
   --      Basic loss per share 20.4p (2016: earnings 2.5p) 
   --      Net debt reduced to GBP43.7m from half year level of GBP48.8m 
   --      Total dividend maintained at 4.65p per share with final dividend of 3.15p per share 
   --      Completed two small US based bolt-ons 
   --      Significant changes to the Board 

Strategic Review

   --      Markets and customer views of NCC services continue to be positive 
   --      NCC scores highly against the most important key customer purchasing criteria 
   --      Escrow remains an attractive business and stabilises the Group 
   --      Assurance focus on cyber security 
   o   Web Performance and Software Testing businesses to be sold 
   --      Business needs better internal organisation - changes to operating model underway 

Chris Stone, Executive Chairman, comments:

"Our strategic review has identified the business's unique opportunity - leading positions in growing global markets, customers who value us and our exceptionally skilled workforce. But, we need to change how we organise ourselves and improve our internal business processes.

"The last financial year was very challenging, with the business performance falling well short of original expectations, as well as outgrowing some of our business processes and controls.

"However, and more importantly, it is clear that the business has a number of notable strengths. We still enjoy significant organic growth in our core segments and have a strong balance sheet. Furthermore, in a constantly evolving and complex market, our unique skills and capabilities are recognised by our customers as putting us at the forefront of the market.

"When we have successfully managed our way through this transitional period, improved our organisation and how we go to market, we see significant upside opportunities and material value creation.

"Overall, the Board's expectations for adjusted EBIT in 2018 are unchanged with its confidence in our prospects reflected in the recommendation to maintain the dividend at the current level."

* This is a non-GAAP or Alternative Performance Measure (APM). Adjusted figures exclude the amortisation of acquired intangibles, individually significant items, share-based charges, the unwinding of discount on deferred and contingent consideration, the results of the exited Domain Services business and any associated tax thereon.

Enquiries:

 
NCC Group (www.nccgroup.trust)    [phone] 
Chris Stone, Executive Chairman 
Brian Tenner, Interim CEO 
 
Instinctif Partners 
Adrian Duffield/Chris Birt        [phone] 
 

Executive chairman's statement

Overview

NCC has a unique opportunity: we hold leading positions in growing markets around the world, our customer's value us, and our workforce is exceptionally skilled. However, we need to change how we organise ourselves and improve our internal business processes. This will enable us to capture significant additional value.

My first statement to shareholders as Executive Chairman reflects on two strong but contradictory themes. Firstly, the past year has been very challenging, both operationally and financially. Business performance has fallen short of expectations, we have outgrown some of our business processes and controls, and we have experienced significant changes to our Board.

Equally, and more importantly, it is already clear that the years ahead present significant upside opportunities. Strong value creation will result if we effectively implement our new strategy and successfully manage NCC through the transitional period in which we now find ourselves.

Our business is not broken - indeed it has some notable strengths, both financial and operational. We still enjoy significant organic growth in our core markets and have a strong balance sheet. Furthermore, in a constantly evolving and complex market, our unique market leading skills and capabilities are keeping us at the forefront of thought leadership. This is recognised by customers, who reward us with high levels of repeat business. If we improve our organisation and how we go to market, we will also see material value creation.

Business Performance

The financial performance for the year was clearly disappointing though in line with revised expectations. Despite delivering revenue growth of almost GBP35.4m (up17%), Adjusted* EBIT went backwards to GBP27.5m from GBP39.7m in the prior year. Operating profit fell from GBP11.4m in the prior year to a loss of GBP53.4m. This outcome reflected a number of historical weaknesses in our operating model.

Strategic Review and Strategic Plan

Following the trading update on 21 February 2017, the Board commissioned a Strategic Review. The Review focused on three key areas. Firstly, to develop a better understanding of our market place, our competitors and our customers. Secondly, to assess the relative strengths and weaknesses of NCC in the market. Thirdly, to assess the value created by the current portfolio of businesses.

The review confirmed that our markets remain attractive, and more importantly, that customers regard NCC as a strong competitor in these markets with a clearly differentiated proposition.

The cyber security theme (or 'golden thread') that runs through the Assurance Division represents a unique set of competencies and capabilities that we can leverage to deliver greater customer value in a highly complex and fragmented market. Our sector and application specific product offerings are leading edge and our solutions capabilities are valued and sought after.

The Review also confirmed the current financial logic of the relationship between Assurance and Escrow. Escrow itself is an attractive business and provides a stabilising influence on the Group.

Finally, the Review identified two of the smaller Assurance businesses that sit outside the cyber golden thread whose future would be better served under alternative ownership. These businesses, Web Performance and Software Testing, will be disposed of in due course.

Subsequently we initiated the development of a new Strategic Plan and revised Target Operating Model in order to underpin our 'go to market' and delivery strategies. In the next 12 to 24 months, we intend to focus more of our efforts on internal self-help measures than has historically been the case.

This should ensure that we reverse the margin compression seen in both trading divisions and most territories in the last two years. The Group will then benefit from further organic growth with foundations built on scalable products and business processes. These new foundations will also enhance our ability to leverage acquisition related growth when the Group returns to being acquisitive. Acquisition activity is therefore likely to be limited during this period to smaller 'bolt-ons'.

Dividends

The Board has reviewed business performance in the current year alongside our historical progressive dividend policy. While mindful of the need for investment over the next few years, the Board is confident in our prospects and hence recommends that the dividend is maintained at the current level.

A final dividend of 3.15p is therefore being recommended by the Board, making a total for the year of 4.65p, equal to the prior year. If approved, the final dividend in respect of the year ended 31 May 2017 will be paid on 29 September 2017 to shareholders on the register as at 1 September 2017 with an ex-dividend date of 31 August 2017.

As a matter of note, an administrative non-compliance issue has been identified with respect to distributable reserves and the payment of historical dividends. At all times the Group had adequate reserves in subsidiary companies to meet these dividends. We expect to remedy the position by means of a shareholder circular and appropriate resolutions at the AGM in September.

Current trading and outlook

All businesses go through transitional phases as they grow and mature. NCC is no exception. Where we are different, and at a significant advantage to many, is that change has not been forced upon us by mounting losses, a stretched balance sheet, technological obsolescence or a sudden shrinkage in our markets.

We are operating in a rapidly growing international market in which our core skills and competencies allow us to lead rather than follow. Our challenge is to manage the transition from one business model to another, as the growth in scale and complexity has made our early stage model ineffective. We now need to create structures and products that allow us to benefit from our scale and deliver additional value for our customers whilst never losing sight of our core competencies and strengths, most notably represented in our staff, their energy and their commitment.

So while there is a lot of work to do to implement new processes, systems and structures, the outlook for NCC remains very positive. In fast growing international markets, with a range of innovative products and services, the challenge is to execute effectively the planned changes in strategy and operating model.

The Board is confident that the Group can deliver sustainable earnings growth and enhanced shareholder value once it has more robust foundations in place. We are not only 'securing tomorrow, today,' for our customers, but for all of our long term stakeholders.

In terms of trading for the current financial year, the Board expects Escrow to return to low single digit revenue growth and see some margin improvement. The Assurance business is expected to see high single digit revenue growth as we build from the low point of the second half of last year. Assurance gross margins will improve as we implement our new operating model over the course of the new financial year. Set against these gains in gross profit are some cost headwinds arising from higher overheads linked to property costs and the amortisation and depreciation increases that result from capital spend in 2017. Finally, the disposal of the Web and Software Testing businesses will reduce EBIT on a pro rata basis by GBP2.7m based on 2017 results.

Overall the Group's expectations for adjusted EBIT in 2018 are unchanged.

Governance

During the year, the Board has undertaken a major review of some of the Group's governance structures. In part, this was prompted by a combination of shareholder and employee feedback. In addition, there was also the realisation that rapid growth in recent years had taken the Group beyond the design limits of the previous operating model.

The Board remains committed to high standards of corporate governance. We are working actively to enhance governance as well as our business processes and internal controls to match our ambitions for the Group's future. The results of the Governance Review will are set out in the Annual Report and Accounts

Board composition

There have been a number of changes to the Board during the year. I joined the Board on 6 April 2017 as a Non-Executive Director, becoming Executive Chairman in April when Paul Mitchell stood down as Chairman.

Last year we noted our intention to strengthen the team further with an additional independent Non-Executive Director. As a result, Jonathan Brooks joined the Board as a Non-Executive Director on 13 March 2017. Jonathan brings significant valuable experience of the technology sector.

Brian Tenner was appointed as Chief Financial Officer on 1 February 2017 following a search process prompted by the resignation of, Atul Patel, on 10 August 2016. He became Interim CEO on 1 March 2017, following the decision of Rob Cotton to step down as CEO.

The current model of an Executive Chairman working closely with Brian as Interim CEO and CFO has been a necessary and effective bridge to deliver the Strategic Review and also maintain stability in the management of the business. Recognising that this is not a sustainable long term solution, the Board has commenced a process to identify a permanent CEO using a firm of independent executive search consultants.

Board effectiveness

As Executive Chairman, I am responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its performance. During the year, the Board has reviewed its performance and effectiveness in accordance with the requirements of the Code. We note that the recent and significant changes in membership and new strategic direction represent a transition period for the Board as well as the Group.

The Board will work to enhance oversight of the Group's strategic development, monitoring the delivery of its business objectives and the development of the new Target Operating Model. We will also work hard to ensure that we maintain an effective corporate governance framework that keeps pace with the rate of growth and change inside and outside NCC.

Employees

Our staff are the foundation for the value inherent in NCC. In developing and implementing our new Strategic Plan and Target Operating Model we will work to ensure that we create a working environment that values the individual and allows each one of us to contribute to our full potential. This will include creating organisational values and clearer structures, roles and responsibilities. The coming financial year will also see a greater focus on personal development and training.

I would like to record my own and the Board's sincere thanks to all of the Group's employees who have maintained their focus on delivering excellent service to our customers. This has been achieved against a backdrop of uncertainty caused by the Group's volatile financial and share price performance, particularly in the latter quarters of the year. Our business is entirely reliant on the skills and experience of our staff. We are fortunate to have them choose to build their careers with NCC, and I look forward to working with all of them as we take our business forward.

Strategic Review

The Group began a Strategic Review in February 2017. The objectives of the review fell into three broad categories:

   --      Assessing our market place and customers buying preferences and criteria 
   --      Customer and market views of NCC and our capabilities, strengths and weaknesses 
   --      Assessing the commercial and portfolio logic of the current business lines within the Group 

As findings emerged from the initial scope of work in the Strategic Review, we began a parallel work stream to consider:

-- How we currently organise ourselves to address and capture the opportunities presented in our markets by best leveraging our strengths and unique selling propositions

Key Findings from the Strategic Review

The key findings from the Strategic Review are set out in more detail below but can be summarised as follows:

Market place: our markets continue to grow at or around a double digit rate. Companies buying decisions are more about technical expertise and value for money than a simple price basis.

Our customers: NCC scores well on the issues that matter to customers. Technical expertise, value for money and speed of delivery. The quality of customer service does appear to be an issue for the industry generally and NCC is similar in this regard. Our customers want to buy more from us and value our brand and reputation for excellence.

Our portfolio: The two divisions of Escrow and Assurance see little cross over in customer purchasing. However, Escrow is a robust stabilising influence on the Group. Within Assurance, we have identified two service lines that would have a better opportunity to flourish under alternative ownership and these will be sold in due course.

As we digested the emerging outputs from the Strategic Review it became clear that to reach our full potential we would need to re-organise how we go to market and how we do business (in terms of our internal processes and structures). We have therefore started work on developing and implementing a new Target Operating Model (TOM).

The market opportunity

Introduction

Fundamentally, NCC is operating in a dynamic and fast growing market. Or rather, a series of related but separate fast growing markets. These statements apply whether one considers the market place from a product and service perspective, from a geographical perspective, or from an industry vertical perspective. Change is literally the one constant in almost all aspects of the market.

Today, cybercrime is one of the single biggest threats to businesses and individuals around the world. We estimate that the average cost to recover from a DDoS attack is GBP275,000 and more than 90% of businesses have experienced some form of cyber security threat. On average, it takes almost 120 days for an organisation to find out that it has been compromised.

Furthermore, from our own research into the safety of the Internet, almost two-thirds of consumers believe an online data breach will compromise their financial information within the next year. The fact that some 60% of consumers are more worried than ever before about protecting their personal and financial information online reinforces the threat as the greatest to face business today.

Online security still seems to be behind the curve in failing to keep pace with the numerous types of organisations and individuals that seek to disrupt the internet and organisations use of systems and data.

The threat of being hacked or having valuable data stolen continues to evolve at a seemingly unstoppable pace. Attacks using phishing, fake payment requests and ransomware are now every day events. These attacks often cause significant operational disruption whose economic consequences can vastly outweigh any cost of remediation or prevention.

Our challenge is to ensure that customers understand that a relatively modest upfront investment in advice or other cyber services can ultimately save significant sums in remediation costs and arising from reputational damage.

The world in which we live cannot be made completely safe from cybercrime. As the number and range of threats proliferate, being innovative and using our experience and skills to protect against attacks becomes more important than ever. NCC is doing this by providing the best security consultants to our clients as well as conducting world-renowned security research.

Market dynamics

The relevant sub-segments that NCC's core cyber offering competes in are shown below:

 
Size $bn*       Market Segment              NCC offering 
   7.0        Fully outsourced IT       NCC provides limited        Threat 
                    Security           services in this segment   Intelligence 
  11.0     Managed Security Services         MONITORING 
   6.0       Advisory, Governance       Process & Governance 
                  & Assessment 
   4.0     Forensic & Legal Response      Security testing 
  10.0            Operational             Security testing 
 

*OC&C estimates

The addressable market is clearly large at $38.0 bn in total but very fragmented. Management estimate that NCC is one of the largest 'pure play' cyber security companies focussing on services as opposed to products but that we currently have relatively low market shares in most segments and geographies. Once we have developed robust and scalable internal structures and processes, this will represent a significant opportunity to grow the business profitably though bolt-on acquisitions.

Market research as part of the Strategic Review also confirmed that market growth is likely to continue and that customers' propensity to pay more for high quality advice and solutions is growing.

Customers buying behaviours and key purchasing criteria (KPC's)

Customers made clear that their key buying criteria focus more on quality of technical expertise and advice as opposed to price. While value for money (effectively a ratio or a comparison of quality and cost) is very important, that reflects more on the demand for quality than low cost.

Interestingly, customers did not place as high a value on the ability to source internationally. Even in those customers who did buy in multiple territories.

   --      Technical Expertise 

Consistently noted as having top-tier technical talent, Fox-IT seen as most technically advanced player in NL

   --      Customer Service 

UK and US customers often feel NCC too transactional, Fox-IT customers value their trusted partnership

   --      Value for Money 

NCC and Fox-IT generally perceived as good value, customers very willing to pay more for quality

   --      Speed of Delivery 

Seen as "mid-sized" competing with boutique pure-plays, NCC advantages include wider capabilities and flexibility

   --      Brand / Reputation 

Well known by security professionals in the UK and US, Fox-IT highly regarded in NL (Dutch government work)

   --      Low Price 

Seen to be expensive but price rarely the deciding factor, NCC rated highly as good 'value for money'

In summary, on the items that matter most to customers in their buying decisions, NCC score well or very well with the exception of customer service which appears to be an industry wide issue.

Our competitive position

We must continue to drive innovation and thought leadership in our key market segments. The key is to ensure that our thought leadership also leads to practical new solutions to apply to the challenges and issues that our customers face. Finding the right balance of 'blue sky' thinking and ideas that can be rapidly commercialised.

Innovation and creativity are two key foundations for the Group's continued development and growth. Our new Target Operating Model is designed to ensure that these remain a core feature of the business.

The recent well publicised cyber-attacks on a wide range of public and private enterprises around the world are a reminder of the need to constantly innovate.

Our aim is to shift the current range and scale of the services and products offered by NCC in the cyber security market to more repeat business of a highly differentiated nature.

During the Strategic Review we assessed the Group's 'Net Promotor Score' (NPS). This metric is widely used across a range of industries where customer satisfaction is a critical performance indicator. What NPS measures, quite simply, is whether or not a customer, on the basis of its experiences with a service provider, would recommend that service provider to another organisation.

The measurement scale in NPS is itself a challenge - a positive score is counted if it rates a nine or ten out of ten. Conversely, a negative score is recorded for any outcome ranging from zero to six. What this means is that if a company received 100 scores of its service, with 10 ratings in each category, its NPS score would be negative 40.

The results of the NPS survey confirmed NCC with a score of "positive 26". As noted above in the explanation of the methodology, achieving any sort of positive score is difficult and a positive score of plus 26 means the significant majority of ratings by customers had to be above six out of ten and with a high proportion of those scoring the top two marks.

What the survey did show was that NCC scored better than many of its direct competitors in the Big Four or in the pure play cyber services companies. It is clear, when combined with direct feedback from customers that NCC is well regarded for our technical expertise and our ability to help our customers overcome their cyber security challenges.

Target Operating Model

Our current organisational structures and operating model have reached the limits of their design tolerances. In many cases the overlay of our business processes on those organisational design features creates a 'spaghetti wiring diagram' that is complex, creates unclear accountabilities and is inefficient at delivering business processes and services to customers.

The recent addition of some relatively large acquisitions has emphasised further the need for a clear and transparent operating model that delivers a number of key objectives, the principle ones being as set out below.

TOM Objective 1: Align the business to how our customers want to buy

The Strategic Review revealed that even our global customers tend to want to buy local services for delivery in country. This is true even for customers who have a central technology input to sourcing decisions.

This finding drives the conclusion of a TOM that has a primary dimension of geographical business units and P&L accountability.

TOM Objective 2: Leverage NCC's value between business units

The business has historically operated within silos. This has been the case even inside individual business units where our structures have not encouraged service or product line leaders to cross sell or provide fully integrated solutions to our customers.

Our historical Go-To-Market model was identified by customers as being too transactional in many cases. While initiatives to address this issue began during the year, the old operating model barriers to collaboration were not removed.

Our customers value our technical expertise and the wide range of services that we offer. Therefore, in order to leverage value across the geographies and service lines, we concluded that a matrix structure would be appropriate for the TOM.

Therefore, the secondary dimension of the TOM is based around key service and product lines with key leadership and accountability roles identified within each to ensure sharing of best practice. To avoid unnecessary cost increases or duplication of roles, there will be some 'double-hatting' in smaller businesses as they grow.

TOM Objective 3: Deliver an integrated Go-To-Market proposition

Our customers value our expertise and range of services. They would like to buy more from us. But our current Go-To-Market approach can make this difficult. The challenges flow from disparate accountabilities and targets for different teams within the business units.

We are therefore creating aligned sales and delivery teams with single leaders within each geography. Critically, sales leadership for strategic accounts, transactional sales activities, inside sales, bid preparation and management, and supporting marketing activities will report to one person in each territory. This will allow us to join up our offerings at a more strategic purchasing level within customers while also ensuring that our current successful transactional sales generation machine continues to perform.

TOM Objective 4: Create scalable structures that facilitate profitable growth

Our historical ways of working and focus on certain services and products prevent benefits of scale from being realised. Selling more of a particular service would lead to an equal and proportionate increase in our costs and hence no positive operational leverage to drive improving margins.

Our staff management and work allocation processes have been less efficient than we would like. This has led to under-selling of key technical skills in that they are used on activities that attract a lower day rate than they should.

As well as a more accurate matching our staff skills to the value of the work being performed for customers, we also intend to increase our focus on platform based sales such as monitoring services and after sales value added services. In particular, these will be driven from our Security Operations Centres in Delft (Fox) and Leeds (MSS) and will include services such as Threat Intelligence, DetACT, Managed Security Services, and our CTMp platform.

TOM Objective 5: Design and implement effective and efficient business processes that support operating leverage

Over the last few years our support costs have been rising steadily, creating a further erosion of operating leverage or in some cases even leading to negative operating leverage. This reflects the fact that in many cases our business processes and systems have not been upgraded to keep pace with the size and complexity of the group.

The Group has been slow in rolling out its preferred core systems and this has caused undue delays, cost increases and inefficiency in how we work. These issues extend from finance and reporting systems to CRM systems to work and staff planning and management processes and beyond.

A key part of implementing the TOM is to embed effective and efficient business processes and systems within it. Over the next two years, we will therefore be focussing on designing and implementing standardised business processes and making sure they and the underpinning systems are rolled out across all of our business units. These systems and processes will often be designed and monitored centrally to ensure shared disciplines and effective control of the business.

Underpinning all of the objectives for the TOM will be a series of direct and specific key performance indicators and other metrics that drive the desired behaviours and outcomes. For example, we will be focussing on realisation for our consultants' time as opposed to the more simple but less informative utilisation measure.

Realisation will focus on a combination of hours worked but also, critically, on the amount of work that is actually billed and the rate at which it is billed. These are currently areas where we believe there is value leakage from the Group and plugging these leaks will help to generate improved margins in future.

Our strategy

Our new Strategic Plan is designed to deliver more sustainable revenue growth at improved margins, increases in shareholder value, and an improved service and product offering to customers.

We are developing a new set of KPIs that align more closely to our strategic priorities. Some of these are still under development as noted below. We will report on each one as we implement our strategy.

 
Strategic               Rationale and current             KPIs and our performance          Focus and goals 
 Priorities              status                            in 2017                           for 2018 
--------------------  --------------------------------  --------------------------------  ---------------------------- 
1 Grow                  In attractive and growing         Underlying* organic* revenue    Implement new 
 At a managed           markets where NCC enjoy            growth                          Go-To-Market strategy 
 pace and in            strong competitive                 2017: 4% (2016: 19%)            and team structures 
 areas of core          differentiators,                   Stripping out the impact        Growth may therefore 
 strength               we aim to deliver medium           of acquisitions and changes     lag behind the 
                        term growth in excess              in foreign currency exchange    market during 
                        of market rates. By focusing       rates, we aim to deliver        the year Develop 
                        on higher value added              growth in the short term        a clearer understanding 
                        services we will avoid             broadly in line with market     of our pipeline 
                        growth for its own sake            rates.                          and ordering processes 
                        while simultaneously 
                        protecting 
                        our margins. 
--------------------  --------------------------------  --------------------------------  ---------------------------- 
2 Implement             The Strategic Review              Adjusted* gross margin          Implement the 
 Our new Target         identified                         to improve                      organisation design 
 Operating              that we do not organise            2017: 34.7% (2016:38.5%)        concepts in the 
 Model                  ourselves in a way that            Measured as a percentage        TOM Develop role 
                        brings simplicity and              of gross margin to annual       descriptions for 
                        efficiency to our service          revenue.                        named management 
                        delivery.                          Gross margin being revenue      posts Implement 
                        We will implement a new            less direct costs of sales      a staff appraisal 
                        and clear operating model          and service delivery.           system 
                        that delivers better customer      This will be one measure 
                        service at an improving            that shows the effectiveness 
                        gross margin.                      and efficiency of our new 
                                                           TOM 
--------------------  --------------------------------  --------------------------------  ---------------------------- 
3 Improve               Our existing business             SG&A* ratio to improve          Focus on implementing 
 Business processes     processes are inefficient         2017: 23.4% (2016: 19.0%)        new processes 
 and systems            and in many cases difficult       General Administration           and systems roll 
                        to scale. They often rely         costs as a percentage of         out Expect benefits 
                        on manual activity and            annual revenue.                  to flow in the 
                        disparate information                                              following year 
                        systems that can lead             This KPI reflects the            Operational leverage 
                        to a lack of clarity in           efficiency                       gains driven by 
                        decision making.                  of our business processes        more basic cost 
                        We will design and implement      and our 'cost to serve'.         control 
                        improved business processes 
                        with reduced manual 
                        interventions 
                        to lower in our costs 
                        to serve. 
--------------------  --------------------------------  --------------------------------  ---------------------------- 
4 Lead                  The market is evolving            Engagement with thought         Continued demonstration 
 Technical               so quickly that we need           leadership content across       that NCC has a 
 thinking and            to be at the forefront            all mediums and resulting       holistic view 
 product development     of developing new services        inbound activity.               of cyber security 
 In a rapidly            and responses to address                                          Understanding 
 evolving and            emerging threats. Our                                             of opportunities 
 dynamic market          customers' needs are also                                         and risk associated 
 sector                  changing: not just in                                             with emerging 
                         response to new threats                                           technologies Brand 
                         but also in respect of                                            growth with non-traditional 
                         how and where they carry                                          audiences 
                         out their businesses. 
                         We need to respond to 
                         those changes in how we 
                         position ourselves and 
                         our services. 
--------------------  --------------------------------  --------------------------------  ---------------------------- 
5 Develop               All of our key strategic          Employee turnover 21.8%               We will develop 
 our people              goals will rely fundamentally     Employee engagement survey            and implement 
 to allow them           on our people and their           data from June 2017 will              employee performance 
 to reach their          skills. So we need to             be used to develop some               appraisal and 
 full potential          ensure that we attract            additional appropriate                development systems 
 and contribute          and retain high quality           KPIs here. 
 fully to NCC            staff. We need to ensure 
                         they are properly trained, 
                         gain the right experiences 
                         and are also properly 
                         incentivised - by recognition 
                         and the working environment 
                         as much as by reward. 
--------------------  --------------------------------  --------------------------------  ---------------------------- 
 

Interim chief executive's review

Group revenue

For the financial year ended 31 May 2017, the Group increased reported revenue by 17% to GBP244.5m (2016: GBP209.1m). Excluding Domain Services business that was exited during the year, the growth was GBP37.7m or 18%.

The table below shows the elements of growth that were organic (net sales growth in businesses that were owned for equivalent periods in the current and prior year), acquisitions growth (includes the full year impact of prior year acquisitions), and growth resulting from the impact of FX rates. Growth from changes in FX rates is calculated by re-stating the prior year revenue figures at current year weighted average rates.

 
                            2017       2017 
Growth driver (excluding 
 Domain)                    GBPm   % growth 
 
Organic                      6.8         3% 
Acquisition                 21.1        10% 
FX                           9.8         5% 
-------------------------  -----  --------- 
Total growth                37.7        18% 
-------------------------  -----  --------- 
 

The Group's current information systems do not report the impact of foreign exchange movements as a matter of course. The figures above are therefore calculated at year end using assumed weighted average exchange rates for each relevant currency for each year in question. This is being addressed in the Group's new consolidation system which is being implemented in the first quarter of the new financial year.

The FX growth above is driven by increases in the weighted average exchange rates of both the US$ and EURuro against GBPGBP, both of which strengthened by around 15%.

The geographical breakdown of revenue by the location of the delivering business for the current and past year is as follows (Domain excluded):

 
                    2017         2016 
                 -----------  ----------- 
                 GBPm    %    GBPm    % 
UK               147.1  61%   144.4  71% 
US               58.4   24%   39.2   19% 
Europe and RoW   36.4   15%   20.6   10% 
---------------  -----  ----  -----  ---- 
Total revenue    241.9  100%  204.2  100% 
---------------  -----  ----  -----  ---- 
 

Note: some businesses sell a modest amount of services in other countries and report that revenue as being within their own geography.

The amount of Group revenue earned outside the UK increased by GBP35.0m and reflects the impact of the Fox-IT acquisition in the Netherlands half way through the last financial year and also strong growth in our US Assurance business.

Both of these factors occurred within the Assurance division where the share of Group revenue has now risen to 85% (2016: 83%).

Underlying organic revenue growth in the first half of the financial year was 19% but in the second half fell by 5% compared to the prior year periods. The second half of the current year actually saw revenue fall compared to the first half, contrary to the historical trends the business has delivered.

Weakness in the second half compared to the prior year and the first half of the current year was particularly focussed in MSS third party product sales which were GBP6.5m down in the second half compared to the first half.

Fox High Assurance product sales were also down GBP1.2m in the second half. Between them these reductions accounted for 85% of the fall in sales between the first and second halves.

A more detailed breakdown of the revenue performance in each of the Operating Segments is shown in the Assurance and Escrow divisional reports.

The Group is currently reviewing the basis on which revenue analysis is further reported. This review will include concepts such as recurring revenues, contracted revenues and repeat business. The Group may need to implement systems changes to accurately capture this analysis across all business units. Some further analysis is set out in the Divisional reviews.

The Group continued to have minimal reliance on any one customer or sector. Within Assurance the largest customer represents approximately 4% of Assurance revenue. The largest customer in Escrow is just over 1% of total Escrow revenue.

Group profitability and margins

The Board and Executive management use a number of non-GAAP measures in their day to day management of the business. The Group's primary financial profitability measure will be Adjusted EBIT. Last year the Group used Adjusted EBITDA for this purpose. It is management's view that Adjusted EBIT is more closely aligned to the underlying performance of the business. The majority of our peers and stakeholders use this metric, and hence it is therefore a more appropriate KPI for use in the business and in our external communications.

The table below sets out the reconciliation between reported statutory measures and the non-GAAP measures of Adjusted EBIT and Adjusted EBITDA.

 
                                               2017   2016 
                                               GBPm   GBPm 
Reported operating (loss) / profit           (53.4)   11.4 
Results of Domain Services (exited)           (1.0)    1.4 
Individually significant items (details 
 below)                                        71.0   18.9 
Amortisation of acquired intangible assets     10.3    6.8 
Share based payments                            0.6    1.2 
-------------------------------------------  ------  ----- 
Adjusted EBIT                                  27.5   39.7 
Depreciation                                    5.2    3.7 
Amortisation of software and capitalised 
 development costs                              3.5    1.6 
-------------------------------------------  ------  ----- 
Adjusted EBITDA                                36.2   45.0 
-------------------------------------------  ------  ----- 
 

During the year, despite delivering growth in most of our business units, each business unit and the Group as a whole has seen a contraction in our margins. The main cause relates to cost increasing both before and at a faster rate than the growth in our revenues in each business unit.

Margins contracted due to increases in both direct and indirect costs. Salary related costs represent approximately 70% of the Group's cost base. Cost increases were largely driven by a significant increase in headcount (16%) combined with average salary increases of 6-7% to give total salary based cost increases of approximately 23% or around 16% of sales.

This compares with total organic and acquisition based revenue growth of 15% and led to consequent reduction in utilisation and realisation from our professional service delivery staff.

We also made investments in new sales structures that have not yet born fruit in proportionately increased revenues. Other indirect cost increases reflect GBP3.4m of additional depreciation and amortization of tangible and intangible assets linked to a number of systems having entered service and hence have started amortizing. In addition there was a GBP1.3m of acquisition impact on these costs.

Premises costs increased by GBP1.4m partly to accommodate extra staff and also in upgrading facilities. Marketing spend rose GBP1.3m as the Group sought to raise its profile in a number of areas.

As a result, Adjusted EBIT in the year fell from GBP39.7m to GBP27.5m despite the benefit of a positive foreign exchange impact of GBP0.6m. At the same time, our Adjusted EBIT margin fell from 19.4% to 11.4%.

The Group's overall EBIT result included GBP0.2m of losses from the now closed Domain Services operating segment (2016: operating losses GBP1.4m). The current year charge was then offset by a GBP1.2m profit on disposal of Open Registry (also treated as an adjusting item).

The Group's reported pre-tax loss was GBP55.3m (2016: profit GBP9.4m).

Assurance Division - Business Performance Review

Assurance revenue

Assurance now accounts for 85% of Group revenue and the impact of foreign exchange rate changes contributed GBP8.0m to the growth in the division.

In addition, Assurance benefitted from the full year effect of the prior year acquisition of Fox-IT (impact in 2017: GBP14.0m) and acquisitions in the year just completed (PSC GBP5.9m and VSR GBP1.1m).

Net organic growth was GBP6.8m which represented year on year growth of 5.0% with the balance due to changes in foreign exchange rates (GBP8.0m impact).

The table below shows the revenue split between Security Consulting and a combined Web Performance and Software Testing.

 
                                       31 May  31 May 
                                         2017    2016    Change 
Assurance revenue                        GBPm    GBPm         % 
Security Consulting                     178.1   138.9       28% 
Software Testing and Web Performance     26.6    30.0     (11%) 
-------------------------------------  ------  ------  -------- 
Total                                   204.7   168.9       21% 
-------------------------------------  ------  ------  -------- 
 

Revenues in our Web Performance and Software Testing businesses fell by GBP0.5m (5%) and GBP2.9m (14%) respectively. In Web Performance, we felt the impact of a slower take up than expected for a new service line an have taken an impairment charge on this business.

In Software Testing the loss of a project that was already underway at the start of the year, following a strategic decision to cancel a divestment by the customer, had a negative impact on both revenue and costs as utilisation rates for permanent staff fell.

Towards the end of the financial year, both Web Performance and Software Testing businesses saw a pick up in sales pipeline opportunities and also in some longer term contract wins.

The table above can act as a guide to the impact on revenue of the proposed disposals of the Web Performance and Software Testing businesses during the course of the new financial year ending 31 May 2018. Neither business is particularly seasonal and therefore any reduction to the Group total turnover following the disposals is likely to be pro rated to the point in the new year when the businesses are sold.

The Assurance division saw very mixed revenue results during the year. While the headline growth rate for the Security Consulting activities is very attractive, some business lines saw better performance than others.

The underlying performance of the Security Consulting business lines is much easier to understand using constant currency and also by splitting performance between organic and acquisition based growth.

Assurance revenue is broken down into more detail in the table below in terms of the impact of changes in foreign exchange rate, the impact of acquisitions in both the prior year and the year under review, and the organic performance of a number of operating units within Security Consulting:

 
                                              Growth          Growth 
Assurance revenue bridge                        GBPm    GBPm       % 
Revenue for the year ended 31 May 
 2016                                                  168.9 
Impact of FX changes                             8.0 
Full year of owning Fox-IT                      14.0 
PSC acquisition this year                        5.9 
VSR acquisition this year                        1.1 
--------------------------------------------  ------  ------  ------ 
Net revenue growth from FX and acquisitions             29.0     17% 
UK Consulting organic growth                    11.0             19% 
US Consulting organic growth                     5.3             24% 
Fox-IT - excluding High Assurance                1.6             17% 
Fox-IT - High Assurance                        (3.6)           (53%) 
MSS - excluding product sales                    2.8             17% 

MSS - product sales                            (7.4)           (48%) 
Other including Web and Software Testing       (2.9) 
--------------------------------------------  ------  ------  ------ 
Net organic growth                                       6.8      5% 
 
Total Assurance revenue growth                          35.8     21% 
--------------------------------------------  ------  ------  ------ 
Revenue for the year ended 31 May 
 2017                                                  204.7 
--------------------------------------------  ------  ------  ------ 
 

The table above highlights the number and variety of moving parts in explaining this year's revenue performance. The impact of changes in FX rates and acquisitions is shown in the top half of the table.

For the purposes of this analysis, given that Fox-IT was acquired at the end of November 2015, the whole of the first half of the current financial year's revenue has been attributed to the impact of the acquisition.

Growth in UK and US consulting revenues were very healthy, representing growth of 19% and 24% respectively on a constant currency basis. This was driven by a combination of market growth and our ability to capture share due to our scale. In addition, we have been bringing new products to market and continuing to expand our focus areas beyond transactional activity.

Within Fox-IT we saw two strong opposing forces. As previously announced, a key customer for Fox High Assurance products (Fox-HA) significantly slowed down its purchases from the business following the change in ownership of the company.

It is clear that we should have engaged with this customer in a transparent way ahead of the acquisition to allay some of their concerns. However, we have since been working hard and collaboratively to allay the concerns of the customer and we are starting to see some new orders coming in for Fox-HA products from this critical customer.

If momentum is maintained we should see some growth in this service line in the new financial year compared to the year ending 31 May 2017.

In sharp contrast, to Fox-HA, the other Fox service lines saw organic growth of 17% in the second half of the year compared to the same period of ownership in the prior year. In particular, our CTMp platform and Threat Intelligence made promising progress.

This is particularly pleasing in that both of these are key service lines that we aim to expand within the Netherlands and then to leverage in other NCC locations.

The scalability of the CTMp platform will also support margin recovery. It is for this reason and the emerging recovery in Fox-HA, that while the execution challenges for the business are reflected in the impairment of around 30% of the goodwill associated with the acquisition, we remain confident about the prospects for the Fox-IT business and its capability to support a broader platform of scalable high value add services across the NCC.

In MSS we also saw two conflicting but slightly different themes from those in Fox IT. The negative force there has been in the re-sale of third party products which fell by GBP7.4m compared to the prior year, equating to a fall of 48% and a fall in 2017 second half sales of products of almost 90% to GBP0.7m.

The fall partly reflects the end of an earn-out period that had been put in place when the business was acquired by the previous owners and subsequently extended by NCC. In addition, we are trying to change our focus to higher value add activities and the building of long term relationships with our customers.

We have not pursued these sorts of sales as strongly as in previous years. Instead, where we continue to sell third party products, we will aim to link those purchases to implementation consulting advice and after sales services such as monitoring in our Leeds based Security Operations Centre (SOC).

While the revenue would have helped the year's results, we are not overly concerned as we seek to deliberately re-balance the business away from single transaction re-selling of third party products.

Similarly to Fox-IT, the areas of the business where we do see longer term value and growth potential, the service lines grew by 17% year on year.

The summary of the Assurance revenue is:

-- good growth was delivered in those areas where we want to place our future focus as this is where scalable margin recovery can be created

   --      Fox-HA will start to recover in the coming year 

-- Re-selling third party products in MSS in the medium term will be continued if we can create linkages to our own value added after sales services

   --      Acquisitions and FX also played strong supporting roles in the revenue growth story. 

The table below is an estimated split of our Assurance revenue streams based on currently available information. We will be improving the quality and granularity as well as the relevance of our internal management information systems over the coming years. The data therefore gives a broad indication of the split of our revenue streams.

 
                            2017               2016 
                      -----------------  ----------------- 
Assurance revenue     GBPm   % of total  GBPm   % of total 
 type 
Consulting services   156.1     76%      122.4     73% 
Managed Services      24.9      12%      11.8       7% 
Product sales         23.8      12%      34.7      20% 
--------------------  -----  ----------  -----  ---------- 
Total                 204.7     100%     168.9     100% 
--------------------  -----  ----------  -----  ---------- 
 

Product sales are a mix of third party products and our own. Currently we are not able to perform the same analysis at a gross margin or profitability level.

Assurance profitability analysis

While revenue grew in total by GBP35.8m (21%), the absolute level of adjusted operating profit fell year on year by GBP9.2m (35%). The fall in operating profit is all the more stark because it is after the positive impact of foreign exchange gains of GBP0.4m and the benefit of acquisitions. The acquisition benefits were from a full year of ownership of the Fox-IT (GBP0.5m) and part year ownership of PSC and VSR (GBP1.7m).

Adjusted EBIT margins fell to 8.2% (2016: 15.3%). The more significant driver for this was the increase in overall salary costs.

Our consulting businesses in the UK and US both saw a fall in absolute profitability as a lack of control over the cost base meant that it grew faster than our revenue streams. In particular this reflected a strategy to build sales and delivery teams ahead of equivalent revenue growth and that led to margins being compressed in both businesses at a Gross Margin and EBIT margin level.

At the same time, the Group was starting to develop its strategic sales capability to allow us to move further up our customers internal purchasing decision chains to become less transactional and more strategic in approach. That investment has been slower than anticipated to bear fruit.

The Assurance business will typically see one or two major unplanned contract wins in any particular year. These can be related to the reaction to a major event at a customer or a specific proactive project such as corporate activity.

In the year to May 2017, the division did not have a material benefit from any such contracts and actually suffered from the loss of some. In one specific case, a large scale Software Testing project (reference above) was already underway with staff deployed on the ground. When the customer discontinued the contract the revenue stream stopped very quickly in the first half whereas it had been expected to run for most of the year.

A second large scale project was cancelled before it began. In the third, which had not become a contracted order but had been a firm prospect as NCC were the preferred supplier for that type of work, the customer decided not to proceed with the work.

The estimated potential revenue from the three contracts was around GBP14-17m and GBP6-7m of gross margin (based on a gross margin assumption of 40%). Approximately GBP7-10m of this revenue had been included in the Group's operating plan at the start of the year.

The most challenged part of the Assurance division was MSS which saw a fall in revenue of GBP4.6m (14%). As noted earlier, while much of the revenue fall related to less attractive sales of third party products, the gross margin delivered would still have been a helpful contribution towards the overhead base.

Similarly to the consulting businesses, in MSS the Group set about re-balancing the sales efforts and teams towards strategic and higher value added sales of customer solutions comprising product, professional services and managed services. While we are confident that this is the correct approach in the medium term, the short term impact was to increase our cost base at a time when revenues were falling.

There was also the impact of ongoing integration challenges for the MSS service lines (acquired under the Accumuli plc transaction).

Escrow Division Business Performance Review

Revenue performance

The Escrow division now accounts for 15% of Group revenues (2016: 17%). Escrow revenue for the year grew by GBP1.8m (5%) to GBP37.1m (2016: GBP35.3m). Excluding the impact of FX, at constant currency rates underlying growth was GBP0.1m (0.3%).

 
                       31 May  31 May 
                         2017    2016 
Revenue                  GBPm    GBPm  % Change 
UK                       25.4    25.7      (1%) 
USA                       7.9     6.2       27% 
Europe                    3.9     3.4       13% 
---------------------  ------  ------  -------- 
Total Escrow revenue     37.2    35.3        5% 
---------------------  ------  ------  -------- 
 

Escrow UK

Escrow UK revenue was GBP25.4m (2016: GBP25.7m).

During the second half of the year we identified that some invoices had been recognised as revenue ahead of the related service delivery. The correction of this issue reduced reported revenue in the year by GBP1.0m with an almost equivalent EBIT impact.

The issue had built up over three years and no individual year required a material adjustment and hence the full impact was recognised as a one off, non-recurring, non-cash item in the current year. While there was never any question of not delivering the service and in many cases payment was received in advance, this revised approach is deemed to be a more appropriate application of the Group's unchanged policy on revenue recognition.

The reported 1% reduction in revenue (2016: 8% growth) would have been growth of 3% if not for the one-off adjustment.

Escrow UK recurring revenues increased to GBP14.1m (2016: GBP13.7m) and terminations remain around 11% with nearly 90% of all contracts renewed (2016: 90%).

We expect UK growth to remain modest given the relative market maturity and our market share.

Escrow USA

Escrow US revenues grew by 27% to GBP7.9m (2016: GBP6.2m) with recurring revenues of GBP4.5m. Approximately half of this related to the impact of changes in FX rates with the balance all being organic growth.

In the fourth quarter we re-structured our senior management and sales team in Escrow USA to build further on the significant opportunity we have in that country.

Escrow Europe

Escrow Europe revenues grew by 13% to GBP3.9m (2016: GBP3.4m) with recurring revenues of GBP2.1m. However, all of this and more was the result of changes in FX rates. On an underlying organic basis the business actually shrank by 3%.

This reflects significant management change in our European Escrow team that are being addressed in the first half of the new financial year.

Escrow Rest of the World

The division has recently established an office in Dubai to take advantage of the Group's reputation and expertise in a region that has good demand potential for Escrow services and in which we have a number of existing clients, allowing us to build a larger footprint in anticipation of Expo 2020.

Our short term goals for the Escrow division as a whole are:

   --      to maintain our market leading position in the UK, delivering modest annual organic growth 
   --      to continue to develop evolving solutions for customers in a SaaS and Cloud based world 
   --      to build on our scalable capability in the US 

-- to stabilise our relatively small footholds in a number of European territories (the Netherlands, Germany, and Switzerland).

-- to begin to build out from our new positions in our 'Rest of the World' offices in Dubai and Singapore.

Escrow UK now has 111 employees (2016: 107), Escrow Europe has12 employees (2016: 15) and the North American Escrow businesses have 41 employees (2016: 59).

Escrow revenues and growth can be further analysed as follows:

 
                        2017   2016  Change 
Reported revenue        GBPm   GBPm       % 
Escrow contracts        26.3   24.6      7% 
Verification testing     9.6    9.7    (1%) 
Other services           1.3    1.0     30% 
---------------------  -----  -----  ------ 
Total Escrow revenue    37.2   35.3      5% 
---------------------  -----  -----  ------ 
 

Escrow profitability analysis

The table below shows the split of EBIT by Escrow region. For reporting purposes, RoW EBIT is included within the UK.

 
                         31 May  31 May 
                           2017    2016    Change 
EBIT                       GBPm    GBPm         % 
UK                         17.4    18.3      (5%) 
USA                         3.7     3.0       23% 
Europe                      1.9     2.0      (5%) 
Shared central costs      (3.9)   (3.2)     (22%) 
-----------------------  ------  ------  -------- 
Total Escrow adjusted* 
 EBIT                      19.1    20.1    (5.0%) 
-----------------------  ------  ------  -------- 
 

The GBP1.0m impact on profitability of the revenue recognition issue has been noted above. Because the revised approach was adopted in the second half of the financial year but applied to the year as a whole, it has had a disproportionate impact on the reported results in the second half. Excluding this adjustment, EBIT for Escrow would have been flat year on year.

The division experienced some of the same increases in the cost base as seen in the Assurance division but to a lesser degree. As a result, EBIT margins in the division fell by 5.6% to 51.3% (2016: 56.9%) with revenue recognition being a one off 2.6% reduction.

The revised operating model that is already in place for the Escrow teams around the world mean that the division should deliver an improvement in margins in the new financial year ending May 2018.

Individually significant items

The carrying value of all of our goodwill and intangible assets were assessed as part of our normal year end process. As a result, there have been a number of impairments recognised in respect of good will and other intangible assets.

The Fox and former Accumuli businesses (the latter now known as MSS) have underperformed in the year compared to our original acquisition forecasts. They have also encountered integration challenges that have slowed the pace of commercial leverage of the different new service and product lines across the rest of the Group.

In MSS we are also shifting focus away from one part of the business that previously concentrated on simply re-selling third party products often without value added after sales services.

The net result of these factors is to recognise an impairment of the goodwill that arose on the acquisition of Accumuli plc by GBP24.3m. This equates to around 50% of the goodwill attributable to what is now known as MSS. It is worth noting that one part of the Accumuli business has been successfully and fully integrated with our UK Security Consulting business and its share of goodwill (GBP14.3m) is now considered as part of that Cash Generating Unit (CGU).

In Fox we have recognised an impairment of GBP24.3m of goodwill, representing around 30% of the goodwill that arose on acquisition.

While we are confident that the Fox IT business and service lines and the MSS business re-focused on value added managed services and advisory services are attractive business in the medium to long term, there is much to be done to realise this potential. The length of time needed to realise this potential and the execution risks involved over that period mean that it is appropriate to recognise the impairment of these assets.

In our Web Performance business we have reviewed the carrying value of both internally generated intangible assets and the goodwill associated with the acquisition of that business. While we do see longer term value in this business, some of the revenue generating intangible assets have been slower than originally anticipated to generate revenues and a retained customer base.

The slower ramp up in revenue has therefore led to the recognition of impairments over two assets amounting to GBP3.2m and over goodwill of GBP5.7m.

In the prior year it was announced that the Group was withdrawing from the Domain Services operating segment. At that time two assets were retained with carrying values of GBP2.5m and GBP2.0m in respect of the .trust TLD and a software application for use in Domain and potentially in other retained parts of the Group.

Given the inherent uncertainties in realising any value from the .trust TLD, it has been decided to write that asset off in full. The Group will seek to maximise any value from the asset. It has now been identified that the retained Domain software system does not have a role in the business going forward and it too has been fully impaired.

Other individually significant items in the year are set out in the notes below. They include:

   --      Adjustments to deferred and contingent consideration due to changes in FX rates GBP2.9m; 
   --      Holiday pay accrual relating to previous financial periods of GBP1.8m; 

-- Restructuring costs of GBP1.3m relate to professional fees for the Strategic Review, the Target Operating Model project, exit payments to the former CEO, and retention bonuses paid to former employees of Accumuli plc;

   --      Double running and exit costs of GBP1.3m for empty properties; 

-- Impairment of property plant and equipment (GBP0.9m) on the planned re-location of the Group's Manchester Head Office in September 2017; and

   --      Acquisition costs GBP0.8m. 

Prior year individually significant items are set out in Note 3

Taxation

The Group's adjusted effective tax rate is 29.3% (2016: 22%), which is above the average standard UK rate of 20% (2016: 21%). The higher effective rate reflects the higher tax rates incurred in the overseas businesses. It had been reported in January 2017 that the tax rate for the year would rise to around 31%.

This was based on an estimated position at the time of the Interim Results in January 2017 and included certain assumptions about the level and geographical origin of pre-tax profits.

The actual results were lower than those estimates and a significant part of the reduction was the level of profit arising in higher tax territories. The Group expects to maintain the effective P&L tax rate at around 30% for the next few years, assuming a similar geographic split of profitability compared to the current year.

The Group has recently hired a tax and treasury manager whose role will include developing a longer term strategy for tax and treasury matters. In both of these areas the Board has a low risk appetite to purse aggressive tax strategies and the new strategies will operate inside that.

Earnings per share

The adjusted basic earnings per share from operations was 6.7p (2016: 11.8p).

The table below reconciles basic EPS to Adjusted EPS on the Group's definitions of adjusting items including their tax impact.

 
                                                2017    2016 
                                                Pence   Pence 
Basic EPS as per the income statement          (20.4)   2.5 
Domain exit                                    (0.6)    0.4 
Amortisation of acquired intangibles            2.7     2.1 
Individually significant items                  24.8    6.2 
Share based payments                            0.1     0.4 
Unwinding discount on deferred consideration    0.1     0.2 
---------------------------------------------  ------  ------ 
Adjusted basic EPS                              6.7     11.8 
---------------------------------------------  ------  ------ 
 

The adjusted fully diluted earnings per share from continuing operations was 6.7p (2016: 11.2p) whilst reported fully diluted loss per share was 20.4p (2016: earnings 2.4p).

Dividends

The Board is recommending a final dividend of 3.15p per ordinary share, making a total for the year of 4.65p. This represents a dividend equal to that paid in the prior year.

While dividend cover is negative (2016: 2.4 times based on basic adjusted earnings per share from continuing operations), the Board is confident that the Group's new Strategic Plan will be a source of long term sustainable growth in earnings, cash flow and shareholder value.

An administrative non-compliance issue has been identified with respect to distributable reserves and the payment of previous dividends. We expect to remedy the position by means of a shareholder circular and appropriate resolutions at the AGM in September 2017.

Cash

We will transparently disclose the key moving parts in our cash flows. As part of this, we are adopting a new definition and calculation of Free Cash Flow and Cash Conversion ratio that is more closely aligned to market practice.

The table below summarises the Group's cash flow for the year.

 
                                         2017    2016 
                                         GBPm    GBPm 
Cash inflow before changes in working 
 capital                                 33.8    37.3 
Changes in working capital              (2.1)   (14.2) 
Interest paid                           (1.9)   (2.0) 
Income taxes paid                       (1.8)   (7.3) 
--------------------------------------  ------  ------ 
Net cash from operating activities       28.0    13.8 
Net capital expenditure                 (10.6)  (11.6) 
Capitalised development costs           (3.7)   (1.9) 
--------------------------------------  ------  ------ 
Free cash flow                           13.7    0.3 
Acquisitions                            (26.6)  (76.7) 
Disposals                                0.1      - 
Dividends                               (12.8)  (10.3) 
Share issues                             0.7    123.7 
--------------------------------------  ------  ------ 
Net cash flow before financing          (24.9)   37.0 
--------------------------------------  ------  ------ 
 
Opening net debt                        (12.7)  (50.6) 
Foreign exchange impacts                (6.1)    0.9 
--------------------------------------  ------  ------ 
Closing net debt                        (43.7)  (12.7) 
--------------------------------------  ------  ------ 
 

The Group generated a net GBP28.0m of cash from operating activities. This is before deducting GBP3.7m of internally capitalised development costs.

Working capital saw a reduction in accrued income as our billing processes became more effective and timely in the fourth quarter. While the natural consequence of this is then an increase in trade debtors, the net impact is to shorten the working capital lifecycle and accelerate cash conversion. The net working capital cash outflow was the result of deliberate management action to improve supplier relations by improving the profile of creditor payments compared to prior years.

Significant opportunities to improve working capital remain. For example, unbilled accrued income over 60 days old amounts to GBP2.7m and GBP9.7m of similarly aged trade debtors represent an opportunity to improve.

Interest and tax cash costs remained modest and the latter reflects in part the lower profitability of our overseas higher tax rate territories.

Net capital expenditure of GBP11.0m was a mix of discretionary and maintenance capex. No breakdown of discretionary versus maintenance capex is available as yet. However, maintenance spend includes costs of new hardware and software for use in the business. Discretionary spend includes a number of new office locations that have either been acquired or moved into in the year ending 31 May 2017.

The largest one off 'discretionary' capex spend in 2017 was the GBP3.8m cost of Category A and B fit out costs of the Group's new headquarters building in Manchester that will be occupied in the summer of 2017.

The move was occasioned by the end of the existing lease and the need for more space to accommodate business growth. The fit out costs in the year were almost fully funded by a landlord contribution of GBP3.7m. The estimate to complete the project is GBP4.4m and the final cash costs will be paid in the 2018 financial year.

We expect property, plant and equipment capex to be at a similar level in the 2018 financial year. The expected reduction from one-off property costs incurred in 2017 will be compensated by the remaining costs of the Manchester head office capex. In 2019, after the property projects have been completed, we expect capex to reduce by GBP3-4m.

Conversely, we expect our annual premises costs which include depreciation, rent, and rates to increase in the new financial year by GBP1.9m which will be an annualised GBP2.2m in the following year.

The calculation of the cash conversion ratio for the last two years is set out below and referenced to the various notes in the Annual Report.

 
                                               2017   2016 
                                                GBPm   GBPm 
Net cash generated from operating activities   28.0   13.8 
Adjusted EBITDA                                36.2   45.0 
---------------------------------------------  -----  ----- 
Cash conversion ratio (A) / (B)                 77%    31% 
---------------------------------------------  -----  ----- 
 

One of the main drivers for the difference between operating cash flow and EBITDA are the capitalised development cash costs in the year of GBP3.7m which if charged against EBITDA will give a cash conversion ratio of 86% in 2017.

Financing facilities

In November 2016, the Group increased its banking facilities to GBP110m (May 2016: GBP78m) with a new five year multi bank facility, comprising a GBP80m (May 2016: GBP78m) revolving credit facility and a GBP30m (May 2016: nil) five-year term loan. The term loan amortises at GBP2.5m every six months until maturity and at the end of the year the term facility stood at GBP25.0m.

The Group's primary banking covenants are:

-- Leverage limit of 2.5 times and this is calculated as Adjusted EBITDA / Net Debt. For the purposes of the covenant test, net debt includes deferred consideration on acquisitions (but not contingent consideration)

-- As at 31 May 2017 leverage for banking purposes stood at 1.50 times, comfortably below the Group's maximum 2.5x covenant limit.

-- Net Interest cover which is calculated as Adjusted EBITDA / net interest payments and has a limit of 3.5 times.

-- As at 31 May 2017 net interest cover was 25.9 times, again comfortably above the minimum level.

At the year end outstanding contingent payments relate to PSC of GBP2.8m and VSR of GBP1.3m. The payments to the former owners of PSC and VSR are due in two equal instalments and are measured in December 2017 and December 2018 by reference to profit targets set at the time of the acquisitions.

Also outstanding is non-contingent deferred consideration in respect of the acquisition of Fox IT comprising of EUR10m in cash and EUR2.5m shares due to be paid in November 2017. The Group has the option to make the share based payment in cash instead.

Principal risks and uncertainties

The Group operates in a dynamic and evolving market place. As new events occur or the business transitions into new activities or phases of its development, the risk register is updated accordingly.

For example, reflecting the changing nature of the business, during 2016-17, we had to complete the integration of two new and sizable acquisitions into our risk management processes. As a result of these acquisitions, the Group now has a larger proportion of its revenue coming from hardware or other product sales and also from key strategic customers, with the consequence of there being less predictable sales cycles and in some cases larger but less frequent and less predictable sales.

During the year, we saw a slowing in purchase activity by a key strategic customer in the Netherlands. We also incurred customer losses, while professionalising the contracts management activities in one of the businesses we recently acquired, as well as having to bear increased costs.

Furthermore, as a result of these recent large acquisitions, the scale and complexity of the Group increased and enhanced controls and processes needed to be put in place. In order to address this, the Board approved the appointment of a Director of Risk and Assurance, and a Group Tax and Treasury Manager.

Detailed descriptions of the current principal risks and uncertainties faced by the Group, their potential impact and mitigating processes and controls are set out below. The tables also highlight whether the risk is assessed as increasing or decreasing with a similar assessment for the position last year. This includes identifying new principal risks and uncertainties.

 
Risk Areas                          Potential Impact                     Mitigation 
----------------------------------  -----------------------------------  ------------------------------------ 
1 Strategy                          A poor strategy or ineffective       Members of the Board have 
 As the Group and its operating      execution of a strategy              significant experience 
 environment change, so              would have a material negative       in evolving business strategies. 
 too must its strategy               impact on the Group's financial      This experience has been 
 if it is to continue to             performance and value.               complemented by the use 
 succeed and generate increasing     It would potentially weaken          of external consultants 
 shareholder value.                  the Group compared to its            who have participated in 
 The Group is in the process         competitors and risk the             the recent Strategic Review. 
 of changing and developing          Group's established position 
 a new strategy that will            in the market place. 
 need to take root. 
----------------------------------  -----------------------------------  ------------------------------------ 
2 Management of change              Poor change management               The Board has been enhanced 
 As the Group adapts and             could lead to ineffective            during the last six months 
 changes its strategy there          implementation of projects           by the appointment of an 
 are a number of complex             that then cost more to               executive Chairman and 
 projects and initiatives            deliver, take longer to              Interim CEO, both of whom 
 that not only need to               deliver, result in fewer             have extensive experience 
 be delivered but also               benefits being realised              of implementing change 
 require understanding               (or all three).                      on organisations. 
 and support from all staff                                               Through regular engagement 
                                                                          with all levels of staff 
                                                                          the Group will ensure that 
                                                                          the Group's Vision and 
                                                                          strategy is shared with 
                                                                          and understood by all staff. 
----------------------------------  -----------------------------------  ------------------------------------ 
3 Information Technology            If the Group's systems               The Group has made significant 
 The Group is heavily reliant        failed, this could affect            investment in its IT infrastructure 
 on continued and uninterrupted      the Group's ability to               to ensure it continues 
 access to its IT systems.           provide services to our              to support the growth of 
 The Group is a natural              customers. If a system               the organisation. 
 target for individuals              failure was the result               The Group has appropriate 
 who may seek to disrupt             of a successful external             controls in place in order 
 the Group's commercial              cyber attack, this could             to mitigate the risk of 
 activities.                         result in the loss of sensitive      systems failure and data 
                                     data and compromise the              loss, including systems 
                                     Group's reputation as a              back-up procedures and 
                                     leader in the field of               disaster recovery plans. 
                                     cyber security.                      The Group also deploys 
                                     Failing to successfully              appropriate malware protection, 
                                     implement new IT systems             network security controls 
                                     could similarly cause business       and encryption of mobile 
                                     disruption.                          devices. 
                                                                          The Group is currently 
                                                                          reviewing high priority 
                                                                          systems changes to ensure 
                                                                          that projects are well 
                                                                          managed and deliver the 
                                                                          required targeted benefits 
                                                                          in an appropriate timeframe. 
----------------------------------  -----------------------------------  ------------------------------------ 
4 Recruitment & retention           Loss of key managers could           Key personnel are tied 
 of key personnel                    result in a lack of necessary        in through rewarding career 
 The Group would be adversely        expertise or continuity              structures and attractive 
 impacted if it were unable          to execute the Group's               salary packages, which 
 to attract and retain               strategy.                            can include participation 
 the right calibre of skilled        An inability to attract              in share schemes. 
 staff.                              and retain sufficient high-calibre   Succession plans are being 
 Some roles within the               employees could become               finalised for key members 
 Group operate in highly             a barrier to the continued           of the management team 
 technical and extremely             success and growth of NCC            where they are not already 
 specialised areas in which                                               in place. 
 there are shortages of                                                   The Group is reviewing 
 skilled people.                                                          our assessment and development 
                                                                          processes to ensure that 
                                                                          our employees can enjoy 
                                                                          opportunities for further 
                                                                          career training and development. 
----------------------------------  -----------------------------------  ------------------------------------ 
5 Conduct and                       Conduct risk can arise               NCC operates a system of 
 reputational risk                   from a number of areas               policies and procedures 
 Damage can result to our            such as failing to meet              which are regularly audited 
 reputation or business              customer expectations on             as part of the Quality 
 by a combination of unanticipated   project delivery, testing            System. 
 events or by the acts               assignments or source code           These, combined with management 
 of a single employee                handling or from employees           oversight, the risk management 
                                     who could maliciously disrupt        process, project reviews 
                                     the business and steal               and customer feedback, 
                                     customer information.                mitigate the risk to successful 
                                     All such instances could             service and project delivery. 
                                     result in damage to reputation,      All staff are trained regularly 
                                     loss of repeat business              and backups are taken wherever 
                                     and potentially lead to              possible before testing 
                                     litigation and/or claims             assignments begin. 
                                     against NCC.                         Employees are vetted before 
                                                                          joining and robust controls 
                                                                          and processes are in place 
                                                                          to manage employees such 
                                                                          as accounting controls, 
                                                                          IT monitoring large downloads 
                                                                          of data and controls on 
                                                                          client site operations. 
----------------------------------  -----------------------------------  ------------------------------------ 
 6 Cyber risk                       As a provider of security            The Board has constituted 
  This is the risk that              services, the Group is               a Cyber Security Committee 

  is faced by many of our            a high profile target and            chaired by the Senior Non-Executive 
  customers, that external           could therefore be targeted          Director. 
  agents will successfully           by attacks specifically              Security testing is regularly 
  access and harm NCC data           designed to disrupt the              carried out on the Group's 
  and operating systems,             Group's business and harm            infrastructure and there 
  inspired by either the             the Group's reputation.              are extensive measures 
  pursuit of financial gain          If such an attack was successful,    in place to assist in identifying 
  or malice.                         it could adversely affect            and dealing with security 
                                     the market's perception              incidents. 
                                     of the Group as well as              The Group has a dedicated 
                                     causing business disruption.         Information Security Management 
                                                                          Forum which meets regularly 
                                                                          to discuss security risks 
                                                                          to the Group. Employees 
                                                                          also receive regular security 
                                                                          training and updates. 
----------------------------------  -----------------------------------  ------------------------------------ 
7 Acquisitions and disposals        Well-executed acquisitions           As part of its medium term 
 Acquisitions and disposals          and disposals with an appropriate    strategy, the Board remains 
 can be costly to complete           purchase price can create            committed to making value-enhancing 
 and complex to deliver              significant value. Poorly            acquisitions. 
 the targeted benefits.              executed acquisitions and            The need to establish a 
 Risks range from deal               disposals or those with              robust and scalable 'Target 
 execution (including price          excessive purchase prices            Operating Model' for the 
 negotiations, due diligence,        can destroy shareholder              Group, including integrated 
 and contracting) to transition      value.                               ways of working, processes 
 and integration into (or                                                 and systems, means that 
 separation from) NCC                                                     the Group is less likely 
                                                                          to make any material acquisitions 
                                                                          for the next 1 to 2 years 
                                                                          while that TOM is put in 
                                                                          place. 
                                                                          Furthermore, the significant 
                                                                          write down in the carrying 
                                                                          values of goodwill following 
                                                                          the acquisition of Accumuli 
                                                                          and Fox-IT has led the 
                                                                          Board to commence a review 
                                                                          of our acquisition process 
                                                                          and disciplines to identify 
                                                                          areas for improvement and 
                                                                          ways in which to reduce 
                                                                          the risk of future impairments 
                                                                          on any new acquisitions. 
                                                                          This includes developing 
                                                                          a more robust post-acquisition 
                                                                          integration process to 
                                                                          deliver targeted benefits. 
----------------------------------  -----------------------------------  ------------------------------------ 
8 Competition and failure           A major change in the technology     The Group employs a number 
 to respond to market trends         landscape could lead to              of industry leading experts 
 Barriers to market entry            a decline in an individual           and thought leaders in 
 are relatively low in               service line's revenue               our market place. This 
 some of our lower value             stream. One example of               puts us at the forefront 
 service offerings. Equally,         a recent change that needs           of change and allows us 
 in such a dynamic and               a response is the move               early insight into emerging 
 fast evolving technology            to more cloud based applications     trends. This in turn allows 
 space, products or services         and data storage.                    us to anticipate or pre-empt 
 can be rendered obsolete                                                 a number of potential risks. 
 by new technologies or                                                   Group wide technology and 
 platforms                                                                technical forums are used 
                                                                          to disseminate and share 
                                                                          market intelligence and 
                                                                          trends, as well as to formulate 
                                                                          responses, on a regular 
                                                                          basis. 
----------------------------------  -----------------------------------  ------------------------------------ 
9 Failure to protect intellectual   If such rights are not               Patents are applied for 
 property                            sufficiently protected,              where appropriate and intellectual 
 A number of the Group's             the Group could potentially          property is only disclosed 
 service offerings depend            no longer be able to offer           under a licence agreement 
 on intellectual property            a particular service in              or confidentiality agreement. 
 rights that need to be              some or all countries.               The Group also takes steps 
 registered, maintained                                                   to differentiate its IP 
 and protected in various                                                 as far as possible to lower 
 jurisdictions. Examples                                                  the risk of any potential 
 include trademarks, patents                                              infringement claims. 
 and valuable know-how. 
----------------------------------  -----------------------------------  ------------------------------------ 
 10 Liquidity, foreign              Inability to re-finance              The Group's current banking 
  exchange and banking facilities    the Group's core banking             facilities cover all of 
  The Group requires access          facilities could call into           its expected needs of the 
  to adequate banking facilities     doubt the Group's longer-term        Group for the period of 
  to fund its daily operations,      viability. Equally, if               such facilities and are 
  capital investments and            those facilities lacked              sufficiently flexible to 
  potential acquisitions.            the appropriate flexibility          allow the Group to function 
  Furthermore, as the Group's        and structure, this could            effectively. 
  international footprint            inhibit delivery of the              The Group has recently 
  expands, there is an inherent      Group's strategy.                    appointed a Tax and Treasury 
  risk of adverse foreign            The absence of any currency          Manager for the first time. 
  exchange movements affecting       hedging in 2016-17 resulted          Part of their role is to 
  profitability.                     in an exchange loss of               support the CFO in developing 
                                     GBP3.7m                              a Treasury strategy and 
                                                                          overseeing its implementation. 
                                                                          The Board is currently 
                                                                          reviewing a new Foreign 
                                                                          Exchange hedging strategy 
                                                                          that is primarily based 
                                                                          on net cash flow hedging. 
----------------------------------  -----------------------------------  ------------------------------------ 
 

On behalf of the Board

Brian Tenner

Interim Chief Executive

18 July 2017

 
 
 
   Consolidated Income Statement 
   for the year ended 31 May 2017 
                              Note      2017          2017       2017      2016          2016       2016 
                                       Total   Adjustments   Adjusted     Total   Adjustments   Adjusted 
                                                     (Note                           (Note 3) 
                                                        3) 
                                        GBPm          GBPm       GBPm      GBPm          GBPm       GBPm 
 Revenue                       2,      244.5         (2.6)      241.9     209.1         (4.9)      204.2 
 Cost of Sales                       (160.2)           2.3    (157.9)   (150.6)           3.8    (146.8) 
 Reclassification 
  of costs                     4           -             -          -      21.2             -       21.2 
---------------------------  -----  --------  ------------  ---------  --------  ------------  --------- 
 Gross profit                           84.3         (0.3)       84.0      79.7         (1.1)       78.6 
 Administration 
  expenses                           (137.7)          81.2     (56.5)    (68.3)          29.4     (38.9) 
---------------------------  -----  --------  ------------  ---------  --------  ------------  --------- 
 Administration 
  expenses comprises: 
 General & administrative 
  expenses                            (57.0)           0.5     (56.5)    (41.4)           2.5     (38.9) 
 Profit on sale 
  of subsidiary 
  companies                    5         1.2         (1.2)          - 
 Amortisation 
  of acquired intangible 
  assets                       9      (10.3)          10.3          -     (6.8)           6.8          - 
 Individually 
  significant items            3      (71.0)          71.0               (18.9)          18.9          - 
 Share based payments                  (0.6)           0.6          -     (1.2)           1.2          - 
---------------------------  -----  --------  ------------  ---------  --------  ------------  --------- 
 
 Operating (loss)/profit      2,4     (53.4)          80.9       27.5      11.4          28.3       39.7 
 
 Net Interest 
  expense                              (1.4)             -      (1.4)     (1.4)             -      (1.4) 
 Discount on acquisition 
  consideration                        (0.5)           0.5          -     (0.6)           0.6          - 
---------------------------  -----  --------  ------------  ---------  --------  ------------  --------- 
 Net financing 
  costs                                (1.9)           0.5      (1.4)     (2.0)           0.6      (1.4) 
---------------------------  -----  --------  ------------  ---------  --------  ------------  --------- 
 
 (Loss)/profit 
  before taxation                     (55.3)          81.4       26.1       9.4          28.9       38.3 
 Taxation                      6       (1.3)         (6.3)      (7.6)     (3.1)         (5.2)      (8.3) 
---------------------------  -----  --------  ------------  ---------  --------  ------------  --------- 
 Attributable 
  to equity holders 
  of the parent 
  company                             (56.6)          75.1       18.5       6.3          23.7       30.0 
 Earnings per 
  share from continuing 
  operations                   8 
 Basic earnings 
  per share                          (20.4p)                               2.5p 
 Diluted earnings 
  per share                          (20.4)p                               2.4p 
---------------------------  -----  --------  ------------  ---------  --------  ------------  --------- 
 
 
 
 
 
 Consolidated Statement of comprehensive 
  income 
  for the year ended 31 May 2017 
                                                      2017    2016 
                                                      GBPm   GBP'm 
 (Loss)/profit for the 
  year                                              (56.6)     6.3 
-------------------------------------------  ----  -------  ------ 
 
 Items that may be reclassified 
  subsequently to profit 
  or loss (net of tax) 
 Foreign exchange translation 
  differences                                         17.9     9.7 
-------------------------------------------  ----           ------ 
 Total comprehensive (loss)/income 
 for the year, net of tax                           (38.7)    16.0 
-------------------------------------------  ----  -------  ------ 
 Attributable to: 
-------------------------------------------  ----           ------ 
 Equity holders of the 
  parent                                            (38.7)    16.0 
-------------------------------------------  ----  -------  ------ 
 
 

Consolidated statement of financial position

at 31 May 2017

 
                                   Notes      2017             2016 
                                           GBPm   GBPm   GBPm         GBPm 
Non-current assets 
Intangible assets                    9    267.6         297.3 
Plant and equipment                 10     18.3          12.7 
Investments                                 0.4           0.6 
Deferred tax assets                 13      4.2           5.3 
---------------------------------  -----  -----  -----  -----  ----------- 
Total non-current assets                         290.5               315.9 
---------------------------------  -----  -----  -----  -----  ----------- 
 
Current assets 
Trade and other receivables         11     66.7          66.4 
Inventories                                 1.1           0.3 
Cash and cash equivalents                  12.3          20.7 
---------------------------------  -----  -----  -----  -----  ----------- 
Total current assets                              80.1                87.4 
Total assets                                     370.6               403.3 
---------------------------------  -----  -----  -----  -----  ----------- 
 
Current Liabilities 
Trade and other payables            14     29.7          31.6 
Provisions                          14      1.5             - 
Consideration on acquisitions       14     12.9           3.5 
Deferred revenue                    15     35.6          36.3 
Current tax payable                         3.0           1.2 
---------------------------------  -----  -----  -----  -----  ----------- 
Total current liabilities                         82.7                72.6 
---------------------------------  -----  -----  -----  -----  ----------- 
 
Non-current liabilities 
Deferred tax liability              13     14.2          15.5 
Provisions                          16      3.5           0.4 
Consideration on acquisitions       16      2.1          18.5 
Interest bearing loans                     56.0          33.4 
---------------------------------  -----  -----  -----  -----  ----------- 
Total non-current liabilities                     75.8                67.8 
---------------------------------  -----  -----  -----  -----  ----------- 
Net Assets                                       212.1               262.9 
---------------------------------  -----  -----  -----  -----  ----------- 
 
Equity 
Issued capital                              2.8           2.8 
Share premium                             148.0         147.3 
Merger reserve                             42.3          42.3 
Retained earnings                         (7.1)          62.5 
Reserve for own shares                        -         (0.2) 
Currency translation reserve               26.1           8.2 
---------------------------------  -----  -----  -----  -----  ----------- 
Total equity attributable 
 to equity holders of the parent                 212.1               262.9 
---------------------------------  -----  -----  -----  -----  ----------- 
 

These financial statements were approved by the Board of Directors on 18 July 2017 and were signed on its behalf by:

Brian Tenner

Interim Chief Executive

NCC Group plc

4627044

Consolidated statement of cash flows

for the year ended 31 May 2017

 
                                                       Notes    2017    2016 
                                                                GBPm    GBPm 
Cash inflow for the year before changes in 
 working capital                                        17      33.8    37.3 
Increase in trade and other receivables                        (2.3)  (15.1) 
Decrease in trade and other payables                             0.2     0.9 
Cash generated from operating activities before 
 interest and tax                                               31.7    23.1 
Interest paid                                                  (1.9)   (2.0) 
Income taxes paid                                              (1.8)   (7.3) 
-----------------------------------------------------  -----  ------  ------ 
Net cash generated from operating activities                    28.0    13.8 
 
Cash flows from investing activities 
Purchase of plant and equipment                         10    (11.0)   (4.6) 
Capital contribution for property, plant and 
 equipment                                              16       3.7       - 
Proceeds from disposal of property                               0.4       - 
Software and development expenditure                     9     (7.4)   (8.9) 
Acquisition of businesses                                     (28.4)  (78.5) 
Cash acquired with subsidiaries                         12       1.9     1.8 
Cash disposed of from sale of subsidiaries               5     (1.7)       - 
Proceeds from sale of subsidiaries                               1.7       - 
Net cash generated in investing activities                    (40.8)  (90.2) 
 
Cash flows from financing activities 
Pu 
 rchase of own shares                                              -   (0.1) 
Proceeds from the issue of ordinary share 
 capital                                                         0.7   123.8 
Draw down / (repayment) of borrowings                           18.9  (33.5) 
Equity dividends paid                                         (12.8)  (10.3) 

-----------------------------------------------------  -----  ------  ------ 
Net cash used in financing activities                            6.8    79.9 
-----------------------------------------------------  ----- 
 
Net (decrease)/increase in cash and cash equivalents    17     (6.0)     3.5 
-----------------------------------------------------  -----  ------  ------ 
 
Cash and cash equivalents at beginning of 
 year                                                           20.7    16.4 
Effect of foreign currency exchange rate changes               (2.4)     0.8 
-----------------------------------------------------  -----  ------  ------ 
Cash and cash equivalents at end of year                        12.3    20.7 
-----------------------------------------------------  -----  ------  ------ 
 
 
 
Reconciliation of net change in cash and cash 
 equivalents to movement in net debt 
                                                      2017    2016 
                                                      GBPm    GBPm 
(Decrease)/increase in cash and cash equivalents     (6.0)     3.5 
Change in net debt resulting from cashflows         (18.9)    33.5 
Foreign currency translation differences on 
 cash and cash equivalents                           (2.4)     0.8 
Foreign currency translation differences on 
 borrowings                                          (3.7)     0.1 
Change in net debt during the year                  (31.0)    37.9 
--------------------------------------------------  ------  ------ 
Net debt at start of year                           (12.7)  (50.6) 
--------------------------------------------------  ------  ------ 
Net debt at end of year                             (43.7)  (12.7) 
--------------------------------------------------  ------  ------ 
 
 
  Net debt comprises                                  2017    2016 
                                                      GBPm    GBPm 
Cash and cash equivalents                             12.3    20.7 
Total borrowings (Note 21)                          (56.0)  (33.4) 
Net debt                                            (43.7)  (12.7) 
--------------------------------------------------  ------  ------ 
 

Statements of changes of equity

for the year ended 31 May 2017

Group

 
                                   Issued                               Currency   Reserve 
                                    Share       Share      Merger    Translation       for     Retained 
                                  capital     Premium     Reserve        reserve       own     Earnings     Total 
                                                                                    shares 
                                     GBPm        GBPm        GBPm           GBPm      GBPm         GBPm      GBPm 
 
 Balance at 1 June 
  2015                                2.3        24.0        42.3          (1.5)     (0.5)         65.1     131.7 
 
 Profit for the year                    -           -           -              -         -          6.3       6.3 
 Adjustment to currency 
  translation reserve 
  from sale of subsidiary 
  companies                             -           -           -            0.1         -            -       0.1 
 Foreign currency 
  translation differences               -           -           -            9.6         -            -       9.6 
                                ---------  ----------  ----------  -------------  --------  -----------  -------- 
 Total comprehensive 
  income for the year                   -           -           -            9.7         -          6.3      16.0 
                                ---------  ----------  ----------  -------------  --------  -----------  -------- 
 
 Transactions with 
  owners recorded 
  directly in equity 
 Dividends to equity 
  shareholders                          -           -           -              -         -       (10.3)    (10.3) 
 Share based payment 
  transactions                          -           -           -              -         -          1.1       1.1 
 Current and deferred 
  tax on share based 
  payments                              -           -           -              -         -          0.6       0.6 
 Shares issued                        0.5       123.3           -              -         -            -     123.8 
 Purchase of own 
  shares                                -           -           -              -       0.3        (0.3)         - 
 Total contributions 
  by and distributions 
  to owners                           0.5       123.3           -              -       0.3        (8.9)     115.2 
                                ---------  ----------  ----------  -------------  --------  -----------  -------- 
 
 Balance at 31 May 
  2016                                2.8       147.3        42.3            8.2     (0.2)         62.5     262.9 
                                ---------  ----------  ----------  -------------  --------  -----------  -------- 
 
                                   Issued                               Currency   Reserve 
                                    Share       Share      Merger    Translation       for     Retained 
                                  capital     Premium     Reserve        reserve       own     Earnings     Total 
                                                                                    shares 
                                     GBPm        GBPm        GBPm           GBPm      GBPm         GBPm      GBPm 
 
 Balance at 1 June 
  2016                                2.8       147.3        42.3            8.2     (0.2)         62.5     262.9 
 
 Profit for the year                    -           -           -              -         -       (56.6)    (56.6) 
 Foreign currency translation 
  differences                           -           -           -           17.9         -            -      17.9 
 
 Total comprehensive 
  income for the year                   -           -           -           17.9         -       (56.6)    (38.7) 
                                ---------  ----------  ----------  -------------  --------  -----------  -------- 
 
 Transactions with 
  owners recorded directly 
  in equity 
 Dividends to equity 
  shareholders                          -           -           -              -         -       (12.8)    (12.8) 
 Share based payment 
  transactions                          -           -           -              -         -          0.2       0.2 
 Current and deferred 
  tax on share based 
  payments                              -           -           -              -         -        (0.4)     (0.4) 
 Shares issued                          -         0.7           -              -         -            -       0.7 
 Purchase of own shares                 -           -           -              -       0.2            -       0.2 
 Total contributions 
  by and distributions 
  to owners                             -         0.7           -              -       0.2       (13.0)    (12.1) 
                                ---------  ----------  ----------  -------------  --------  -----------  -------- 
 
 Balance at 31 May 
  2017                                2.8       148.0        42.3           26.1         -        (7.1)     212.1 
                                ---------  ----------  ----------  -------------  --------  -----------  -------- 
 
 

Notes

(forming part of the financial statements)

   1          Accounting policies 

Basis of preparation

NCC Group plc ("the Company") is a company incorporated in the UK. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group"). The parent company financial statements present information about the Company as a separate entity and not about the Group.

These financial statements have been approved for issue by the Board of Directors on 18 July 2017.

The financial information set out herein does not constitute the Company's statutory financial statements for the year ended 31 May 2017 or the year ended 31 May 2016 but is derived from those financial statements. Statutory financial statements for 2016 have been delivered to the Registrar of Companies, and those for 2017 will be delivered in due course. The auditors have reported on those statutory financial statements; their report was (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain statements under sections 498(2) or 498(3) of the Companies Act 2006.

In accordance with EU law (IAS Regulation EC 1606/2002), the group financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') adopted for use in the EU as at 31 May 2017 ('adopted IFRS'), International Financial Reporting Interpretations Committee ('IFRIC') interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The preliminary results consolidate those of the Company and its subsidiaries.

The Group financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use within the European Union and in accordance with the accounting policies included in the Annual Report for the year ended 31 May 2016. A number of new standards and amendments to existing standards were effective for the financial year ended 31 May 2017. None of these have had a material impact. A number of standards, amendments and interpretations have been issued and endorsed by the EU, but which are not yet effective and accordingly the Group has not yet adopted. The cumulative impact of the adoption of these standards is not expected to significant.

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for consideration payable on acquisitions that is measured at fair value.

Functional and presentation currency

The Group and Company financial statements are presented in millions of Pounds Sterling (GBPm) and all values are rounded to one decimal place except when otherwise indicated.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Business and Financial.

The Group funds its strategic acquisitions and meets its day to day working capital requirements via a multi-currency revolving credit facility of GBP80.0m, a GBP25.0m multi-currency term loan that amortises by GBP2.5m every six months and an overdraft of GBP5m. At 31 May 2017, the amount drawn down under the facilities was GBP56.0m. This facility was agreed in November 2015 and is due for renewal in November 2020.

The Directors have reviewed the trading and cash flow forecasts of the Group as part of their going concern assessment and have taken into account reasonable downside sensitivities which reflect uncertainties in the current operating environment. The possible changes in trading performance show that the Group is able to operate within the level of the banking facilities and as a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for a period of at least twelve months. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

   2          Segmental information 

The Group is organised into the following two reporting segments (2016: three) Escrow and Assurance each of which is separately reported. While revenue and profitability are monitored by individual business units within these operational segments it is only at the operating segment level that resource allocation decisions are made. Performance is measured based on segment profit, which comprises segment operating profit excluding amortisation of intangible assets, share based payment charges and exceptional items. Interest and tax are not allocated to business segments and there are no intra-segment sales.

Segmental analysis 2017

 
                                             Escrow   Assurance   Domain      Head     Group 
                                                                            Office 
                                               GBPm        GBPm     GBPm      GBPm      GBPm 
 Revenue                                       37.2       204.7      2.6         -     244.5 
 Cost of sales                                (2.0)     (155.9)    (2.3)         -   (160.2) 
 Gross profit                                  35.2        48.8      0.3         -      84.3 
 G&A before Adjustments                      (17.1)     (104.4)    (4.5)    (11.7)   (137.7) 
------------------------------------------  -------  ----------  -------  --------  -------- 
 Operating profit                              18.1      (55.6)    (4.2)    (11.7)    (53.4) 
 
 Adjustments*                                   1.0        72.2      4.2       3.5      80.9 
------------------------------------------  -------  ----------  -------  --------  -------- 
 Adjusted operating profit                     19.1        16.6        -     (8.2)      27.5 
------------------------------------------  -------  ----------  -------  --------  -------- 
 
 Depreciation of PP&E                           0.2         2.9        -       2.1       5.2 
 Amortisation of software and capitalised 
  development costs                               -         1.7        -       1.8       3.5 
------------------------------------------  -------  ----------  -------  --------  -------- 
 Adjusted EBITDA                               19.3        21.2        -     (4.3)      36.2 
------------------------------------------  -------  ----------  -------  --------  -------- 
 

*Adjustments includes the results of Domain Services, individually significant items and other adjustments (Note 3).

Segmental analysis 2016

 
                                             Escrow   Assurance   Domain      Head     Group 
                                                                            Office 
                                               GBPm        GBPm     GBPm      GBPm      GBPm 
 Revenue                                       35.3       168.9      4.9         -     209.1 
 Cost of sales                                (1.7)     (123.9)    (3.8)         -   (129.4) 
 Gross profit                                  33.6        45.0      1.1         -      79.7 
 G&A before Adjustments                      (14.4)      (30.7)   (17.2)     (6.0)    (68.3) 
------------------------------------------  -------  ----------  -------  --------  -------- 
 Operating profit                              19.2        14.3   (16.1)     (6.0)      11.4 
 
 Adjustments*                                   0.9        11.5     15.6       0.3      28.3 
------------------------------------------  -------  ----------  -------  --------  -------- 
 Adjusted operating profit                     20.1        25.8    (0.5)     (5.7)      39.7 
 
 Depreciation of PP&E                           0.2         2.0        -       1.5       3.7 
 Amortisation of software and capitalised 
  development costs                               -         0.7        -       0.9       1.6 
------------------------------------------  -------  ----------  -------  --------  -------- 
 Adjusted EBITDA                               20.3        28.5    (0.5)     (3.3)      45.0 
------------------------------------------  -------  ----------  -------  --------  -------- 
 
 

The revenue classified as adjustments relates to Domain services (Note 6).

There are no customer contracts which account for more than 10% of segment revenue.

 
                                       2017   2016 
                                       GBPm   GBPm 
Revenue by geographical destination 
UK                                    140.1  122.2 
Rest of Europe                         37.5   34.1 
Rest of the World                      66.9   52.8 
------------------------------------  -----  ----- 
Total revenue                         244.5  209.1 
------------------------------------  -----  ----- 
 
   3          Individually significant items 

Individually significant items and other adjustments have been presented in a separate column in the consolidated income statement to provide users of the accounts with a reconciliation to the Group's separately reported non-GAAP results.

The Group separately identifies items as "individually significant items". As permitted by IAS1 'Presentation of financial statements', an item is disclosed separately if it is considered unusual by its nature or scale, and is of such significance that separate disclosure is required to fairly present the financial performance of the Group.

 
Adjustments                                   2017    2016 
                                              GBPm    GBPm 
 
Domain results (Note 5)                        0.2     1.4 
Profit on sale of subsidiary companies 
 (Note 5)                                    (1.2)       - 
Amortisation of acquired intangible assets 
 (Note 9)                                     10.3     6.8 
Individually significant items (see below)    71.0    18.9 
Share based payments                           0.6     1.2 
Discount on acquisition consideration          0.5     0.6 
-------------------------------------------  -----  ------ 
Adjustment to loss before taxation            81.4    28.9 
-------------------------------------------  -----  ------ 
 

The revenue, cost of sales and general and administrative expenses in the current and prior year relate to Domain services. The prior year treatment of the Domain trading loss has been amended to be consistent with the current year treatment as an adjusting item in calculating non-GAAP measures. The profit on sale of subsidiary companies relates to the disposal of the Open Registry Group in January 2017 for a net profit GBP1.2m (Note 5).

 
Individually significant items                 2017    2016 
                                               GBPm    GBPm 
Goodwill impairment: 
 
        *    Fox-IT                          (24.3)       - 
 
        *    Accumuli                        (24.3)       - 
 
        *    Web Performance                  (5.7)       - 
 
        *    Open Registry                        -  (11.9) 
Intangible asset impairment: 
 
        *    Capitalised development costs    (5.7)   (6.8) 
 
        *    Software costs                   (2.0)       - 
-------------------------------------------  ------  ------ 
Impairment of intangible assets              (62.0)  (18.7) 
-------------------------------------------  ------  ------ 
Acquisition related costs                     (0.8)   (2.3) 
Adjustments to consideration                  (2.9)     4.7 
Restructuring costs                           (1.3)   (2.6) 
Onerous property leases                       (1.3)       - 
Vacation pay                                  (1.8)       - 
Impairment of fixtures and fittings           (0.9)       - 
Other                                         (9.0)   (0.2) 
-------------------------------------------  ------  ------ 
Total - individually significant items       (71.0)  (18.9) 
-------------------------------------------  ------  ------ 
 

Acquisition related costs of GBP0.8m (2016: GBP2.3m) consist of fees incurred in relation to the acquisitions of Payment Software Company Inc on 28 September 2016 and Virtual Security Research LLC on 11 November 2016 (note 12). In the prior period, the costs relate to fees incurred in relation to the acquisition of Fox-IT Holdings BV.

The adjustment to consideration of a GBP2.9m charge relates to foreign exchange revaluation differences on the carrying value of consideration in the prior year of GBP4.7m income relate to the net gains related to the re-assessment of the Open Registry contingent consideration and an adjustment to the consideration payable for a previous Accumuli plc acquisition.

A goodwill impairment of GBP54.3m (2016: GBP11.9m) has been recognised in respect of the CGU's for Fox-IT Holdings BV, Accumuli plc and Web Performance (Note 9). The underlying drivers for these impairments are discussed in more detail in the performance review sections of the Strategic Report.

The directors have assessed the carrying value of intangible assets and concluded that the carrying values of certain capitalised development and software costs are impaired (Note 11). Accordingly, a write down of GBP5.7m (2016: GBP6.8m) has been recognised in respect of capitalised development costs (GBP3.2m) and in respect of the .trust domain name (GBP2.5m). In addition, residual Domain Services software with a book value of GBP2.0m has been written off in full. In the prior year, the intangible asset write down of GBP6.8m relates to the impairment of capitalised costs for redundant technology.

The group has incurred restructuring costs of GBP1.3m (2016: GBP2.6m) relating to the exit payments to the former Chief Executive (as shown in the Remuneration Report) and other members of senior management. In addition, professional fees in relation to the Strategic Review and retention bonuses paid to former employees of Accumuli plc were also incurred. As previously reported NCC became responsible for paying these bonuses on acquisition of the Accumuli group. In the year to 31 May 2016, restructuring costs included Accumuli plc retention bonuses, severance costs and other costs associated with the wind down of the Domain Services division.

The onerous property lease charge of GBP1.3m (2016: GBPnil) is in respect of double running costs of empty properties. The GBP1.8m charge for vacation pay relates to previous financial periods and this is described in more detail in the Audit Committee Report. Of the total charge, GBP0.5m relates to the prior year with the balance relating to prior years up to 31 May 2015 with no significant charge in any one year. The GBP0.9m (2016: GBPnil) impairment of fixtures and fittings relates to items in the current head office which will be obsolete after the relocation later this year.

The tax effect in the income statement relating to the individually significant items recognised is:

 
                                              2017    2016 
                                              GBPm    GBPm 
Goodwill impairment (breakdown shown 
 below): 
                                                 -       - 
        *    Fox-IT 
                                                 -       - 
        *    Accumuli 
                                                 -       - 
        *    Web Performance 
                                                 -       - 
        *    Open Registry 
Intangible asset impairment (breakdown 
 shown below): 
 
        *    Capitalised development costs   (1.4)   (2.3) 
                                                 -       - 
        *    Domain name 
-------------------------------------------  -----  ------ 
Impairment of intangible assets              (1.4)   (2.3) 
-------------------------------------------  -----  ------ 
Acquisition related costs                    (0.3)   (0.2) 
Adjustments to deferred and contingent 
 consideration                                 0.1 
Restructuring costs                          (0.3)   (0.6) 
Onerous property leases                      (0.2)       - 
Vacation pay                                 (0.5)       - 
Impairment of fixtures and fittings              -       - 
Other individually significant items         (1.2)   (0.8) 
-------------------------------------------  -----  ------ 
Total                                        (2.6)   (3.1) 
-------------------------------------------  -----  ------ 
 
   4          Expenses and auditors' remuneration 
 
                                                         2017   2016 
                                                         GBPm   GBPm 
(Loss)/profit before taxation is stated after 
 charging/ (crediting): 
 
Amounts receivable by auditors and their associates 
 in respect of: 
Audit of these financial statements                         -      - 
Audit of financial statements of subsidiaries 
 pursuant to legislation                                  0.2    0.1 
------------------------------------------------------  -----  ----- 
Total audit                                               0.2    0.1 
------------------------------------------------------  -----  ----- 
Review of interim financial statements                      -      - 
Total fees                                                0.2    0.1 
 
 
Depreciation of property, plant and equipment 
 (Note 10)                                                5.2    3.7 
Impairment of fixtures and fittings* (Note 10)            0.9      - 
Amortisation and other amounts written off intangible 
 fixed assets: 
Amortisation of software (Note 9)                         2.0    1.6 
Amortisation of development costs (Note 9)                1.5      - 
Amortisation of acquired intangibles (Note 9)            10.3    6.8 
Impairment of goodwill*                                  54.3   11.9 
Impairment of capitalised development costs*              5.7    6.9 
Impairment of software costs*                             2.0      - 
Operating lease rentals charged: 
 
        *    Hire of property, plant and equipment        3.2    3.9 
 
        *    Other operating leases                       1.6    1.4 
Research and development expenditure                      1.7    2.2 
Profit on sale of discontinued operation*                 1.2      - 
Profit on disposal of plant and equipment               (0.1)  (0.1) 
------------------------------------------------------  -----  ----- 
 

*Included within individually significant items, Note 3.

The reclassification of costs relates to administrative salaries and travel costs that were reported within cost of sales in the prior year but have been reclassified to general and administrative expenses in this years' consolidated income statement.

   5          Domain services 

In June 2016, the Board took the decision to close down the activities of the Domain Services operating segment. During the prior year, the development activities of Domain Services were severely curtailed and the assets and business activities were either shut down or sold in the current financial year. This included the sale of the Open Registry group of companies comprising Open Registry SA, ClearingHouse for Intellectual Property SA, Nexperteam CVBA and Sensirius CVBA to external buyers for a combined total consideration of EUR3.75m in January 2017, EUR2.0m receivable in immediate cash and EUR1.75m as deferred consideration, receivable in July 2018 at a fixed interest rate of 4%. A profit on disposal of GBP1.2m is recognised in the consolidated income statement within individually significant items (note 3).

The tables below provide an analysis of Domain Services activities for revenue, EBITDA and profit before tax as these are considered to be the most relevant to understanding underlying business performance.

 
Results of Domain services         2017    2016 
                                   GBPm    GBPm 
Revenue                             2.6     4.9 
Expenses                          (2.7)   (6.3) 
EBITDA                            (0.1)   (1.0) 
Individually significant items        -  (18.7) 
Depreciation and amortisation     (0.1)   (0.4) 
--------------------------------  -----  ------ 
Profit before tax                 (0.2)  (20.1) 
--------------------------------  -----  ------ 
 
Gain recognised on sale             1.2       - 
 
Profit/(loss) for the year          1.0  (20.1) 
--------------------------------  -----  ------ 
 
 
Effect of the Open Registry Group sale on         2017   2016 
 assets and liabilities 
                                                  GBPm   GBPm 
Intangible assets                                  0.1    0.1 
Plant & Equipment                                  0.1    0.1 
Trade and receivables                              3.2    2.5 
Cash and cash equivalents                          1.6    1.3 
Trade payables                                   (5.2)  (4.1) 
Net liabilities                                  (0.2)  (0.1) 
-------------------------------------------      -----  ----- 
Consideration received, satisfied in cash          1.7      - 
Cash disposed of                                 (1.7)      - 
-------------------------------------------      -----  ----- 
Net cash inflow                                      -      - 
-----------------------------------------------  -----  ----- 
 
 
   6          Taxation 

Recognised in the income statement

 
                                                  2017   2016 
                                                  GBPm   GBPm 
Current tax expense 
Current year                                       3.1    4.4 
Adjustment to tax expense in respect of prior 
 periods                                             -  (0.5) 
Foreign tax                                        0.9    0.8 
-----------------------------------------------  -----  ----- 
Total current tax                                  4.0    4.7 
Deferred tax (note 13)                           (2.7)  (1.6) 
-----------------------------------------------  -----  ----- 
 
Tax in income statement                            1.3    3.1 
-----------------------------------------------  -----  ----- 
 

Reconciliation of effective tax rate

 
                                                             2017     2016 
                                                             GBPm     GBPm 
 
Profit before taxation                                     (55.3)      9.4 
----------------------------------------------------      -------  ------- 
 Current tax using the UK corporation tax 
  rate of 19% (2016: 20%)                                  (11.0)      1.9 
 
Effects of: 
 Items not taxable for tax purposes                          12.3      2.0 
 Adjustment to tax charge in respect of prior 
  periods                                                   (0.4)    (0.2) 
 Differences between overseas tax rates                       0.2    (0.5) 
 Movements in temporary differences not recognised            0.6 
 Effect of rate change                                      (0.4)    (0.1) 
----------------------------------------------------  -----------  ------- 
Total tax expense                                             1.3      3.1 
--------------------------------------------------------  -------  ------- 
 
 

Current and deferred tax recognised directly in equity was a debit of GBP0.2m (2016: charge of GBP0.6m). The UK Government has announced that it intends to reduce the rate of corporation tax to 17% with effect from 1 April 2020. This was substantively enacted in September 2016. As at the year end the impact of the anticipated rate change is reflected in the tax provisions reported in these accounts. Finance Act 2015 (No.2), which was substantively enacted in October 2015, included provisions to reduce the rate of corporation tax to 19% with effect from 1 April 2017. Accordingly, the UK deferred tax balances which were valued at the rate of 19% in the 31 May 2016 accounts have been revalued at the 17% rate in these accounts where relevant.

   7          Dividends 
 
                                                     2017    2016 
                                                     GBPm    GBPm 
 Dividends paid and recognised in the year           12.8    10.3 
 Dividends proposed but not recognised in the 
  year                                                8.7     8.7 
-------------------------------------------------  ------  ------ 
 
 Dividends per share paid and recognised in 
  the year                                          4.65p   4.18p 
 Dividends per share proposed but not recognised 
  in the year                                       3.15p   3.15p 
-------------------------------------------------  ------  ------ 
 
   8          Earnings per share 

The calculation of adjusted earnings per share is based on the following:

 
                                            2017         2017    2016         2016 
                                            GBPm         GBPm    GBPm         GBPm 
 (Loss)/profit for the year from 
  continuing operations used for 
  basic and diluted earnings per 
  share                                                (56.6)                  6.3 
----------------------------------------  ------  -----------  ------  ----------- 
 Amortisation of acquired intangible 
  assets (Note 9)                           10.3                  6.8 
 Domain Services net result                (1.0)                  1.4 
 Individually Significant Items 
  (Note 3)                                  71.0                 18.9 
 Unwinding of discount                       0.5                  0.6 
 Share based payments                        0.6                  1.2 
 Tax arising on the above items            (6.3)                (5.2) 
                                                         75.1                 23.7 
----------------------------------------  ------  -----------  ------  ----------- 
 Adjusted profit from continuing 
  operations used for adjusted earnings 
  per share                                              18.5                 30.0 
----------------------------------------  ------  -----------  ------  ----------- 
 
                                                       Number               Number 
                                                    of shares            of shares 
                                                            m                    m 
 Basic weighted average number 
  of shares in issue                                    276.3                254.6 
 Dilutive effect of share options                           -                  3.5 
----------------------------------------  ------  -----------  ------  ----------- 
 Diluted weighted average shares 
  in issue                                              276.3                258.1 
----------------------------------------  ------  -----------  ------  ----------- 
 Adjusted basic EPS                                      6.7p                11.8p 
----------------------------------------  ------  -----------  ------  ----------- 
 

In the prior year, the average market value of the Company's shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.

The prior year did not treat Domain Services as an adjusting item as the decision to exit the business was taken after the end of the financial year. To be consistent with the current year, the prior year adjusting items have been amended to include the results of Domain Services. The net impact was to increase the prior year Adjusted EPS by 0.4p.

   9          Intangible assets 
 
 
                                       Development  Customer contracts 
                           Software          costs   and relationships  Goodwill  Total 
                               GBPm           GBPm                GBPm      GBPm   GBPm 
Cost: 
At 1 June 2015                 18.4            8.7                47.8     155.7  230.6 
Acquisitions through 
 business combinations          1.7              -                25.4      72.9  100.0 
Additions - internally 
 developed                      6.9            1.9                   -         -    8.8 
Costs write down                  -          (6.8)                   -         -  (6.8) 
Effects of movements 
 in exchange rates                -            0.4                 3.0       7.6   11.0 
At 31 May 2016                 27.0            4.2                76.2     236.2  343.6 
-------------------------  --------  -------------  ------------------  --------  ----- 
Acquisitions through 
 business combinations            -              -                 7.7      12.1   19.8 
Additions - internally 
 developed                      3.7            3.7                   -         -    7.4 
Reclassification             (11.1)           11.1                   -         -      - 
Disposal of subsidiaries                     (0.1)               (3.4)         -  (3.5) 
Effects of movements 
 in exchange rates              0.6            0.4                 6.5      16.6   24.1 
At 31 May 2017                 20.2           19.3                87.0     264.9  391.4 
-------------------------  --------  -------------  ------------------  --------  ----- 
 
Accumulated amortisation and impairment losses: 
At 1 June 2015                  7.7              -                17.8         -   25.5 
Charge for year                 1.6              -                 6.8         -    8.4 
Impairment charge                 -              -                   -      11.9   11.9 
Effects of movements 
 in exchange rates                -              -                 0.5         -    0.5 
-------------------------  --------  -------------  ------------------  --------  ----- 
At 31 May 2016                  9.3              -                25.1      11.9   46.3 
-------------------------  --------  -------------  ------------------  --------  ----- 
Charge for year                 2.0            1.5                10.3         -   13.8 
Impairment charge               2.0            5.7                   -      54.3   62.0 
Reclassification              (2.1)            2.1                             -      - 
Effects of movements 
 in exchange rates                -          (0.2)                 1.9         -    1.7 
At 31 May 2017                 11.2            9.1                37.3      66.2  123.8 
 
Net book value: 
At 31 May 2017                  9.0           10.2                49.7     198.7  267.6 
-------------------------  --------  -------------  ------------------  --------  ----- 
At 31 May 2016                 17.7            4.2                51.1     224.3  297.3 
-------------------------  --------  -------------  ------------------  --------  ----- 
 

Cash generating units (CGU's): Goodwill and intangible assets are allocated to CGUs in order to be assessed for potential impairment. CGUs are defined by accounting standards as the lowest level of asset groupings that generate separately identifiable cash inflows that are not dependent on other CGUs. Following the Strategic Review, the Directors have reconsidered the CGUs within the Group. The CGUs and the allocation of goodwill to those CGUs is shown in the table below. The table also includes the discount rate used to assess the NPV of the future cash flows of each CGU:

 
                                         2017       2017 
 Cash generating units                   GBPm   Discount 
                                                    rate 
 Escrow UK                               22.9      11.4% 
 Escrow Europe                            8.3      11.8% 
 Escrow USA                               7.3      14.9% 
 Total Escrow                            38.5          - 
 Assurance USA                           28.1      14.6% 
 PSC                                      9.8      14.5% 
 VSR                                      2.3      14.5% 
 UK Security Consulting                  18.5      12.6% 
 Fox-IT                                  62.7      17.0% 
 Software Testing                         8.0      12.5% 
 Web Performance                          2.2      15.2% 

 Accumuli (known internally as MSS)      28.6      15.4% 
-------------------------------------  ------  --------- 
 Total Assurance                        160.2          - 
-------------------------------------  ------  --------- 
 Total Group                            198.7          - 
-------------------------------------  ------  --------- 
 
 
 

In the prior year, the goodwill allocation and WACC rates for each CGU (in brackets) were: Escrow UK GBP21.2m (10.1%), Escrow Europe GBP6.4m (10.7%), Escrow USA GBP7.3m (12.9%), Assurance USA GBP24.6m (15.0%) and European Security Services GBP164.8m (11.2%).

The composition of the MSS business noted above (formerly known as Accumuli) is slightly different from the Accumuli Group at acquisition. One part of the Accumuli business, known as RandomStorm, carried on identical activities to some parts of UK Security Consulting. Those activities and their cash flows were transferred to UK Security Consulting during the year and are no longer separately managed or independent cash flows associated with MSS. Those cash flows and their associated share of goodwill is therefore included in the UK Security Consulting CGU.

During the year, the Group acquired Payment Software Company Inc, a global payment and security consulting company and Virtual Security Research LLC, (VSR) an information network and application security consulting company.

When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market discount rate. Cash flow projections are based on the Group's detailed annual operating plan for the forthcoming financial year with assumptions applied for expected revenue growth and costs to forecast years two to five which are forecasts which have been approved by the Board. The judgement on these assumptions is based on management's past experience of growth and knowledge of the industry sectors and markets. The projections beyond five years are forecast using an estimated long-term growth rate of 2.5% (2015: 2.5%) which represents management's best estimate of a long term annual growth rate in EBITDA. A different set of assumptions may be more appropriate in future years dependent on changes in the macro-economic environment.

The discount rates used are based on management's calculation of the WACC using the capital asset pricing model to calculate the cost of equity. Specific rates are used for each CGU in the value in use calculation and the rates reflect management's assessment on the level of relative risk in each respective CGU. The pre-tax discount rates used in the value in use calculations are shown above.

The Directors have considered a range of sensitivities. If the discount rates used in each CGU were decreased or increased by 1%, the total Net Present Value of future cash flows would increase by GBP105m and decrease by GBP81m respectively. In the case of the CGUs where goodwill has been impaired in the current year, or where an impairment would potentially arise, the impairment amounts would increase/ (decrease) as follows:

 
 
                                                            Discount            Discount 
                                                    rate 1% increase    rate 1% decrease 
                                                                2017                2017 
 Cash generating units                                          GBPm                GBPm 
 Fox-IT                                                          9.1              (11.2) 
 MSS                                                             2.6               (3.1) 
 Web Performance                                                 0.8               (1.1) 
 Total for units with impairments                               12.5              (15.4) 
------------------------------------------------  ------------------  ------------------ 
 Software Testing                                                0.2               (1.9) 
------------------------------------------------  ------------------  ------------------ 
 Total for units with impairments and Software 
 Testing                                                        12.7              (17.3) 
------------------------------------------------  ------------------  ------------------ 
 
 
   10         Plant and equipment 
 
                             Computer   Plant and       Fixtures 
                            equipment   equipment   and fittings  Motor vehicles    Total 
                                 GBPm        GBPm           GBPm            GBPm     GBPm 
Cost: 
At 1 June 2015                   14.6         0.4            9.7             0.4     25.1 
Additions                         3.2           -            1.3             0.1      4.6 
Acquired as part 
 of business combination          0.9           -            1.0               -      1.9 
Disposals                       (0.3)           -              -               -    (0.3) 
Movement in foreign 
 exchange rates                   0.2           -            0.2               -      0.4 
-------------------------  ----------  ----------  -------------  --------------  ------- 
At 31 May 2016                   18.6         0.4           12.2             0.5     31.7 
-------------------------  ----------  ----------  -------------  --------------  ------- 
Additions                         4.2         0.1            6.6             0.1     11.0 
Acquired as part 
 of business combination          0.5           -              -               -      0.5 
Disposals                       (0.3)       (0.4)          (0.2)           (0.2)    (1.1) 
Movement in foreign 
 exchange rates                   0.8           -            1.0               -      1.8 
-------------------------  ----------  ----------  -------------  --------------  ------- 
At 31 May 2017                   23.8         0.1           19.6             0.4     43.9 
-------------------------  ----------  ----------  -------------  --------------  ------- 
 
Depreciation: 
At 1 June 2015                   11.3         0.4            3.9             0.1     15.7 
Charge for year                   1.9           -            1.7             0.1      3.7 
Disposals                       (0.2)           -              -               -    (0.2) 
Movement in foreign 
 exchange rates                 (0.1)           -          (0.1)               -    (0.2) 
-------------------------  ----------  ----------  -------------  --------------  ------- 
At 31 May 2016                   12.9         0.4            5.5             0.2     19.0 
Charge for year                   3.3           -            1.9                      5.2 
Impairment                          -           -            0.9               -      0.9 
Acquired as part 
 of business combination          0.4           -              -               -      0.4 
 
Disposals                       (0.3)       (0.4)          (0.2)           (0.1)    (1.0) 
Movement in foreign 
 exchange rates                   0.6           -            0.4               -      1.0 
-------------------------  ----------  ----------  -------------  --------------  ------- 
At 31 May 2017                   16.9           -            8.5             0.1     25.5 
-------------------------  ----------  ----------  -------------  --------------  ------- 
 
Net book value: 
At 31 May 2017                    6.9         0.1           11.1             0.2     18.3 
-------------------------  ----------  ----------  -------------  --------------  ------- 
At 31 May 2016                    5.7           -            6.7             0.3     12.7 
-------------------------  ----------  ----------  -------------  --------------  ------- 
 

The GBP0.9m impairment of fixtures and fittings in the current head office property which is due for relocation later in the year is recognised as an "other individually significant item" in the consolidated income statement.

   11         Trade and other receivables 
 
                                     Group  Group  Company  Company 
                                      2017   2016     2017     2016 
                                      GBPm   GBPm     GBPm     GBPm 
 
Trade receivables                     40.9   39.4        -        - 
Prepayments                            6.6    7.2        -        - 
Other receivables                      1.5      -        -        - 
Accrued income                        17.7   19.8 
Amounts owed by group undertakings       -      -    149.6    130.2 
-----------------------------------  -----  -----  -------  ------- 
                                      66.7   66.4    149.6    130.2 
-----------------------------------  -----  -----  -------  ------- 
 

The ageing of trade receivables at the end of the reporting period was:

Group

 
                               Gross   Impairment   Gross   Impairment 
                                2017         2017    2016         2016 
                                GBPm         GBPm    GBPm         GBPm 
 Not past due                   19.8            -    25.0            - 
 Past due 0-30 days             12.1            -     9.0            - 
 Past due 31-90 days             7.7            -     4.7            - 
 Past due more than 90 days      2.0        (0.7)     1.4        (0.7) 
----------------------------  ------  -----------  ------  ----------- 
                                41.6        (0.7)    40.1        (0.7) 
----------------------------  ------  -----------  ------  ----------- 
 

The Company had no trade receivables (2016: GBPNil).

The Group establishes a provision for impairment that represents its estimate of incurred losses in respect of specific trade receivables. The movement in the provision for impairment was:

 
                          Group   Group 
                           2017    2016 
                           GBPm    GBPm 
 Balance at 1 June          0.7     0.3 
 (Utilised)/created in        -     0.4 
 Balance at 31 May          0.7     0.7 
-----------------------  ------  ------ 
 
   12         Acquisitions 

Payment Software Company Inc

NCC Group Inc acquired Payment Software Company Inc, (PSC) a company based in California, USA, on 28 September 2016. PSC is a global payment and security consulting company, providing services to organisations that require specialist compliance, forensics and consulting support.

The consideration paid was $16.6m initial cash consideration with contingent consideration payments of $1.9m, where the fair values are based on the estimated cash outflows discounted using a risk-adjusted discount rate, due on earn-out periods to 31 December 2017 and 31 December 2018. The two contingent payments are payable in cash on the achievement of specific profit based performance targets which we expect to be achieved based on current business forecasts. Accordingly, the full contingent consideration liability has been recognised at its fair value.

 
                                                                          Fair values 
Acquiree's identifiable net assets at the                           GBPm         GBPm 
 acquisition date: 
 
Intangible assets - acquired                                                      5.7 
Trade and other receivables                                                       1.5 
Deferred tax liability                                                          (2.0) 
Cash                                                                              1.8 
Creditors & accruals                                                            (1.2) 
Net identifiable assets                                                           5.8 
Goodwill on acquisition                                                           9.8 
-----------------------------------------------------------------  -----  ----------- 
Total consideration                                                              15.6 
-----------------------------------------------------------------  -----  ----------- 
Satisfied by: Initial cash consideration                            12.8 
-----------------------------------------------------------------  -----  ----------- 
                     Deferred cash consideration                     3.0 
-----------------------------------------------------------------  -----  ----------- 
                     Finance discount on deferred consideration    (0.2) 
-----------------------------------------------------------------  -----  ----------- 
                                                                    15.6 
 ----------------------------------------------------------------  -----  ----------- 
Net cash outflow                                                                 12.8 
-----------------------------------------------------------------  -----  ----------- 
Cash acquired                                                                   (1.8) 
-----------------------------------------------------------------  -----  ----------- 
Net cash outflow excluding cash acquired                                         11.0 
-----------------------------------------------------------------  -----  ----------- 
 

The goodwill of GBP9.8m represents the benefits expected to be generated from sales and profit growth from the wider NCC customer base in the US market. The goodwill is not expected to be deductible for tax purposes. Acquisition costs relating to professional fees totalling GBP0.4m were incurred and are recognised as individually significant items in the income statement (note 3). The Group's consolidated income statement includes eight month's post acquisition trading, with PSC Inc contributing GBP5.9m revenue and GBP1.2m operating profit.

Virtual Security Research LLC

NCC Group Inc acquired Virtual Security Research LLC, (VSR) a company based in Boston, Massachusetts, USA, on 11 November 2016. VSR is an information, network and application security consulting company providing services to corporate clients of varying sizes primarily in the US Technology and Financial Services sectors.

The consideration paid was $3.7m initial cash consideration with contingent consideration payments of $0.9m, where the fair values are based on the estimated cash outflows discounted using a risk-adjusted discount rate, due on earn out periods to 31 December 2017 and 31 December 2018. The two contingent payments are payable in cash on the achievement of specific profit based performance targets which we expect to be achieved based on current business forecasts. Accordingly, the full contingent consideration liability has been recognised at its fair value.

 
                                                             Fair values 
Acquiree's identifiable net assets at the              GBPm         GBPm 
 acquisition date: 
 
Intangible assets - acquired                                         2.0 
Trade and other receivables                                          0.5 
Cash                                                                 0.1 
Creditors & accruals                                               (0.7) 
Net identifiable assets                                              1.9 
Goodwill on acquisition                                              2.3 
-----------------------------------------------------  ----  ----------- 
Total consideration                                                  4.2 
-----------------------------------------------------  ----  ----------- 
Satisfied by: Initial cash consideration                2.9 
-----------------------------------------------------  ----  ----------- 
             Deferred cash consideration (no impact 
              from discounting)                         1.3 
-----------------------------------------------------  ----  ----------- 
                                                        4.2 
 ----------------------------------------------------  ----  ----------- 
Net cash outflow                                                     2.9 
-----------------------------------------------------  ----  ----------- 
Cash acquired                                                        0.1 
-----------------------------------------------------  ----  ----------- 
Net cash outflow excluding cash acquired                             2.8 
-----------------------------------------------------  ----  ----------- 
 

The goodwill of GBP2.3m represents the benefits expected to be generated from sales and profit growth from the wider NCC customer base in the US market. The goodwill is expected to be deductible for tax purposes. Acquisition costs relating to professional fees totalling GBP0.2m were incurred and are recognised as individually significant items in the income statement (note 3). The Group's consolidated income statement includes six full months of post-acquisition trading, with VSR contributing revenue of GBP1.1m and operating profit of GBP0.5m.

Fox-IT Holdings BV

In the prior year, NCC Group (Solutions) Limited acquired Fox-IT Holdings BV, a company based in the Netherlands. Fox-IT has a leading market position in Europe for high-end Cyber Security solutions and is a leading European provider of Advanced Incident Response Services. Fox-IT's activities of Advanced Threat Protection, Threat Intelligence and Web/Mobile Event Analytics, High Assurance and Secure Infrastructure, provide further depth to NCC's cyber and assurance services and growth opportunities from new markets.

The consideration for the acquisition of Fox-IT was EUR108,250,000 initial cash, with deferred payments due on each of the first and second anniversaries of completion comprising, EUR10,000,000 cash and EUR2,500,000 newly issued NCC Group plc shares each. The first deferred payment was paid in November 2016 and the Directors agreed to make this payment fully in cash consideration. Accordingly, a payment of EUR12,500,000 was made to the former owners.

The acquisition had the following effect on the Group's assets and liabilities:

 
                                                                               Fair values 
Acquiree's identifiable net assets at the                             GBP'000      GBP'000 
 acquisition date: 
 
Plant and equipment                                                                    1.9 
Intangible assets - development                                                        1.7 
Intangible assets - acquired                                                          25.4 
Trade and other receivables                                                            7.3 
Inventory                                                                              0.4 
Deferred tax liability                                                               (6.0) 
Cash                                                                                   1.8 
Creditors & accruals                                                                 (7.5) 
Deferred revenue                                                                     (2.1) 
Net identifiable assets                                                               22.9 
Goodwill on acquisition                                                               70.9 
--------------------------------------------------------------------  -------  ----------- 
Total consideration                                                                   93.8 
--------------------------------------------------------------------  -------  ----------- 
Satisfied by: Initial cash consideration                                 76.6 
--------------------------------------------------------------------  -------  ----------- 

                     Deferred cash consideration                         14.4 
--------------------------------------------------------------------  -------  ----------- 
                     Deferred issue of equity shares consideration        3.6 
--------------------------------------------------------------------  -------  ----------- 
                     Finance discount on deferred consideration         (0.8) 
--------------------------------------------------------------------  -------  ----------- 
                                                                         93.8 
 -------------------------------------------------------------------  -------  ----------- 
Net cash outflow                                                                      76.6 
--------------------------------------------------------------------  -------  ----------- 
Cash acquired                                                                        (1.8) 
--------------------------------------------------------------------  -------  ----------- 
Net cash outflow excluding cash acquired                                              74.8 
--------------------------------------------------------------------  -------  ----------- 
 

The fair value of trade and other receivables represents GBP7.5m of gross contractual receivables and a provision for doubtful debts of GBP0.2m.

The goodwill of GBP70.9m represents the value to be generated from cross-selling Fox-IT products and services to existing group customers, sales growth from new customers in wider geographic markets and from future product development using the knowledge and expertise of the Fox-IT technical team. The goodwill is not expected to be deductible for tax purposes. Acquisition costs relating to professional fees totalling GBP1.9m were incurred and are recognised as individually significant items in the income statement account (note 3).

The Group's prior year consolidated income statement includes six month's post acquisition trading, with Fox-IT contributing GBP14.0m revenue and GBP1.3m operating profit. The combined results of NCC and Fox-IT B.V. for the twelve month period ending 31 May 2016 were revenue of GBP218.2m and operating profit before individually significant items of GBP30.5m.

The balances presented below are valued at the fair value of amounts payable and in respect of contingent consideration on acquisitions. The contingent consideration is stated at the maximum amount payable as it is believed that on current trading performance the full contingent consideration will be due.

 
 
                                                2017    2016 
Contingent consideration                        GBPm    GBPm 
 
FortConsult A/S                                    -     1.8 
Payment Software Company                         2.8       - 
Virtual Security Research                        1.3       - 
ArmstrongAdams Limited                             -     1.7 
                                                 4.1     3.5 
-------------------------------------------   ------  ------ 
The amounts outstanding in May 2016 in 
 respect of FortConsult A/S and Armstrong 
 Adams Limited were paid in full during 
 the year 
 
                                                2017    2016 
Deferred consideration                          GBPm    GBPm 
 
Fox-IT Holdings B.V.                            10.7    18.5 
                                                10.7    18.5 
-------------------------------------------   ------  ------ 
 
   13         Deferred tax assets and liabilities 

Group

Recognised deferred tax assets and liabilities are attributable to the following:

 
                                   Assets     Liabilities         Net 
                                 2017  2016    2017    2016    2017    2016 
                                 GBPm  GBPm    GBPm    GBPm    GBPm    GBPm 
Plant and equipment                 -     -   (1.9)   (2.2)   (1.9)   (2.2) 
Short term temporary 
 differences                      1.4   1.8       -       -     1.4     1.8 
Intangible assets                   -     -  (12.3)  (13.3)  (12.3)  (13.3) 
Share based payments              0.3   0.8       -       -     0.3     0.8 
Tax losses                        2.5   2.7       -       -     2.5     2.7 
Deferred tax asset/(liability)    4.2   5.3  (14.2)  (15.5)  (10.0)  (10.2) 
-------------------------------  ----  ----  ------  ------  ------  ------ 
 

Movement in deferred tax during the year:

 
                       1 June  Recognised      Exchange  Recognised                  31 May 
                         2016   in income   differences   in equity    Acquisitions    2017 
                         GBPm        GBPm          GBPm        GBPm            GBPm    GBPm 
Plant and equipment     (2.2)         0.3             -           -               -   (1.9) 
Short term temporary 
 differences              1.8       (0.4)           0.1           -               -     1.4 
Intangible assets      (13.3)         3.1         (0.9)           -           (1.2)  (12.3) 
Share based payments      0.8       (0.1)             -       (0.4)               -     0.3 
Tax losses                2.7       (0.2)             -           -               -     2.5 
                       (10.2)         2.7         (0.9)       (0.4)           (1.2)  (10.0) 
---------------------  ------  ----------  ------------  ----------  --------------  ------ 
 
 
                       1 June  Recognised      Exchange  Recognised                  31 May 
                         2015   in income   differences   in equity    Acquisitions    2016 
                         GBPm        GBPm          GBPm        GBPm            GBPm    GBPm 
Plant and equipment     (0.4)       (1.8)             -           -               -   (2.2) 
Short term temporary 
 differences              0.5         0.8           0.1           -             0.4     1.8 
Intangible assets       (9.7)         3.3         (0.5)           -           (6.4)  (13.3) 
Share based payments      0.5       (0.1)         (0.1)         0.5               -     0.8 
Tax losses                3.3       (0.6)             -           -               -     2.7 
                        (5.8)         1.6         (0.5)         0.5           (6.0)  (10.2) 
                               ----------  ------------  ----------  -------------- 
 

The Group has recognised a deferred tax asset of GBP2.5m (2016: GBP2.7m) on tax losses as management consider it probable that future taxable profits will be available against it can be utilised. The Group has not recognised a deferred tax asset on GBP6.2m (2016: GBP5.7m) of tax losses carried forward due to uncertainties over their future recovery.

Included in recognised and unrecognised tax losses are losses of GBP2.9m that will expire in 2034 (2016: GBP3.5m). Other losses may be carried forward indefinitely.

No deferred tax liability is recognised on temporary differences of GBPnil (2016: GBP0.2m) relating to the unremitted earnings of overseas subsidiaries as the Group is able to control the timing of the reversal of these temporary differences and it is probable that they will not reverse in the foreseeable future.

   14         Trade and other payables 
 
                                Group  Group  Company  Company 
                                 2017   2016     2017     2016 
                                 GBPm   GBPm     GBPm     GBPm 
 
Trade payables                    4.3    7.9        -        - 
Consideration on acquisitions 
 (note 12)                       12.9    3.5        -        - 
Non trade payables                6.7    7.6        -        - 
Accruals                         18.7   16.1        -        - 
Property provisions (note 
 16)                              1.5      -        -        - 
Intercompany payables               -      -        -     10.6 
                                 44.1   35.1        -     10.6 
 
   15         Deferred revenue 
 
                     Group  Group 
                      2017   2016 
                      GBPm   GBPm 
 
Deferred revenue      35.6   36.3 
 

Deferred revenue consists of: Escrow agreements GBP13.5m (2016: GBP13.2m), Assurance contracts GBP19.2m (2016: GBP17.1m), Website monitoring and load testing agreements of GBP2.9m (2016: GBP3.4). There are no Domain services deferred revenue contracts as the entity was disposed of during FY17 (2016: GBP2.6m). The revenue has been deferred and is released to the income statement over the contract term in accordance with the Group's accounting policy.

   16         Non-current liabilities 
 
                                 Group  Group 
                                  2017   2016 
                                  GBPm   GBPm 
 
Secured and interest bearing 
 bank loan                        56.0   33.4 
Deferred tax (note 13)            14.2   15.5 
Consideration on acquisitions 
 (note 12)                         2.1   18.5 
Property provisions                3.5    0.4 
Total non-current liabilities     75.8   67.8 
 

Total Property provisions of GBP5.0m represents capital contributions of GBP3.7m towards fit out costs on the new Manchester Head Office building and a rent free allowance of GBP1.3m which is being amortised over the period of the lease. The capital contribution provision of GBP3.7m will be released to the Income Statement over the same period as the assets in question are being depreciated (i.e. 10 years).

   17         Cash and cash equivalents 
 
Cash flow from operating activities            Notes    2017   2016 
                                                        GBPm   GBPm 
(Loss)/profit for the year                            (56.6)    6.3 
Adjustments for: 
Depreciation                                    10       5.2    3.7 
Depreciation - individually significant item     3       0.9 
Share based charges                                      0.6    1.1 
Amortisation of intangible assets                9      13.8    8.4 
Net financing costs                                      1.9    2.0 

Profit on sale of plant and equipment            4     (0.1)  (0.1) 
Impairment of intangible assets                  3       7.7    6.9 
Impairment of goodwill                           3      54.3   11.9 
Other individually significant items                     6.0  (6.0) 
Profit on disposal of subsidiaries               5     (1.2)      - 
Income tax expense                               6       1.3    3.1 
---------------------------------------------  -----  ------  ----- 
Cash inflow for the year before changes in 
 working capital                                        33.8   37.3 
---------------------------------------------  -----  ------  ----- 
 
 
                                At beginning  Cash flow  Non cash  At end 
                                     of year                items      of 
                                                                     Year 
                                        GBPm       GBPm      GBPm    GBPm 
 
Cash and cash equivalents per 
 cash flow statement                    20.7      (6.0)     (2.4)    12.3 
 

Non-cash items principally relate to the effects of foreign currency.

   18         Related party transactions 

During the year corporate finance fees of GBP0.3m (2016: GBP0.8m) and professional fees for services of Paul Mitchell of GBPnil (2016: GBP37,500) as Non-Executive Chairman were paid to Rickitt Mitchell & Partners Ltd. Paul Mitchell held the positions of Non-Executive Chairman of NCC until 31 May 2017 and is a Non-Executive Chairman of Rickitt Mitchell & Partners Ltd.

This information is provided by RNS

The company news service from the London Stock Exchange

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July 18, 2017 02:00 ET (06:00 GMT)