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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Alfa Financial Software Holdings Plc | LSE:ALFA | London | Ordinary Share | GB00BDHXPG30 | ORD 0.1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.60 | 0.93% | 173.40 | 173.40 | 174.20 | 175.00 | 171.40 | 175.00 | 47,330 | 16:35:27 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Prepackaged Software | 102M | 23.5M | 0.0796 | 21.86 | 513.69M |
From May 2019 to May 2024
TIDMALFA
RNS Number : 1032S
Alfa Financial Software Hldgs PLC
07 March 2019
7 March 2019
Alfa Financial Software Holdings PLC
2018 Preliminary Results Announcement
Alfa Financial Software Holdings PLC ("Alfa" or the "Company"), a leading developer of mission critical software for the asset finance industry, today publishes its audited results for the year ended 31 December 2018.
Business Highlights:
-- Improved revenue and profit performance in H2 2018, with top line increasing by 16% on H1 2018
-- Sales pipeline conversion progressing well with:
o one new customer implementation engagement underway; and
o planning underway for the rollout of the second phase of an existing multi-national engagement
-- Number of late-stage pipeline opportunities increased in comparison to June 2018 -- Discussions ongoing with the paused software implementation customer
-- Organisational changes made, including in our sales and commercial departments and progress with partner relationships
Financial Highlights:
Hot Features
Premium
2018 2017
GBPmillion GBPmillion
unless unless otherwise
otherwise stated Movement
Statutory Highlights stated %
---------------------------- ----------- ------------------ ---------
Revenue 71.0 87.8 (19%)
Operating profit 22.4 33.8 (34%)
Profit for the period 18.2 25.9 (30%)
Earnings per share - basic 6.3 pence 9.1 pence (31%)
Net cash 44.9 31.3 43%
2018 2017
GBPmillion GBPmillion
unless otherwise unless otherwise Movement
Financial Highlights (1) stated stated %
------------------------------------- ------------------ ------------------ ---------
Revenue - constant currency 71.2 84.4 (16%)
Adjusted EBIT 22.4 41.2 (46%)
Adjusted EBIT - constant currency 22.5 38.3 (41%)
Adjusted earnings per share -
diluted 6.1 pence 11.0 pence (45%)
Operating Free Cash Flow Conversion 86% 69% n/a
(1) See Definitions section for further information of the calculation of measures not specifically defined by IFRS
Andrew Denton, CEO of Alfa, commented:
"While 2018 was a challenging year for Alfa, with the delay of one of our significant software implementations and a slower than expected conversion of our sales pipeline, we continue to focus on converting sales opportunities into successful customer implementation projects.
We are currently progressing contractual discussions with a new European customer and planning a second phase implementation for an existing multi-national customer. We have also seen an increase in the overall size of the late-stage pipeline across geographies and verticals since we last reported at our half year results. Following an assessment of a number of different areas across the business - including our sales and commercial processes - we have made a number of organisational changes which we believe will strengthen the business going forward.
We remain confident in the long-term opportunities for Alfa and are comfortable that the company will perform in line with the Board's expectations in the year to come. Notwithstanding the challenges of driving growth, Alfa remains a strongly profitable, cash generative and well capitalised business with outstanding staff and intellectual property."
Presentation
Alfa management will be hosting an analyst presentation at Numis Securities, 10 Paternoster Square, EC4M 7LS at 9.00am GMT on 7(th) March 2019.
Following the presentation on 7 March 2019, results information will be available on the Alfa investor site: investors.alfasystems.com.
Enquiries
Alfa Financial Software Holdings PLC Andrew Denton, Chief Executive Officer Viv Maclachlan, Chief Financial Officer +44 (0)20 7588 1800 Tulchan Communications LLP James Macey White Matt Low Deborah Roney +44 (0)20 7353 4200 Barclays Robert Mayhew Edward Hill +44 (0)20 7623 2323 Numis Simon Willis Jonathan Abbott Tom Ballard +44 (0)20 7260 1000
Notes to Editors
Alfa has been delivering systems and consultancy services to the global asset and automotive finance industry since 1990. Our best practice methodologies and specialised knowledge of asset finance mean that we deliver the largest software implementations and most complex business change projects. With an excellent delivery history over nearly three decades in the industry, Alfa's track record is unrivalled.
Alfa Systems, our class-leading technology platform, is at the heart of some of the world's largest asset finance companies. Key to the business case for each implementation is Alfa Systems' ability to replace multiple client systems on a single platform. Alfa Systems supports both retail and corporate business for automotive, equipment, wholesale and dealer finance on a multijurisdictional basis, including leases/loans, originations and servicing. An end-to-end solution with integrated workflow and automated processing using business rules, the opportunities that Alfa Systems presents to asset finance companies are clear and compelling.
Alfa Systems is used by customers in more than 25 countries and Alfa has offices in Europe, Asia-Pacific and North America. For more information, visit www.alfasystems.com.
Forward-looking statements
This report contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Alfa. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Alfa has no obligation to update the forward-looking statements or to correct any inaccuracies therein.
Definitions
Adjusted Earnings - Adjusted Earnings is defined as profit for the period from continuing operations attributable to equity holders of the Company, before IPO-related expenses and pre-IPO share-based compensation, less the tax effect of these adjustments. Adjusted Earnings is used in measuring profitability because it represents a Group measure of performance which excludes the impact of certain non-cash charges and other charges not associated with the underlying operating performance of the business, while including the effect of items that management believes affect shareholder value and in-year return, such as income tax expense and net finance income.
Adjusted EBIT - Adjusted EBIT is defined as profit from continuing operations before income taxes, finance income, IPO-related expenses and pre-IPO share-based payments. Management utilises this measure to monitor performance as it illustrates the underlying performance of the business by excluding items considered by management not to be reflective of the underlying trading operations of the Group or adding items which are reflective of the overall trading operations.
Billings - Billings are amounts invoiced in the year.
Constant Currency - Management provide percentage increases or decreases in revenue or Adjusted EBIT to eliminate the effect of changes in currency values as we believe it is helpful to the understanding of underlying trends in the business. When trend information is expressed herein "in constant currencies", the comparative results are derived by re-calculating non British pounds denominated revenue and/or expenses using the average monthly exchange rates of this year and applying it to the comparative periods results, excluding gains or losses on derivative financial instruments. The average rates are as follows:
Average exchange rates for the period 2018 2017 USD 1.3355 1.2887 Euro 1.1303 1.1414 Swedish Krona 11.5953 11.0001 New Zealand Dollar 1.9311 1.8140 Australian Dollar 1.7862 1.6811
Diluted Adjusted Earnings per share - Adjusted Earnings is used for the purposes of calculating Diluted Adjusted Earnings per share. Management uses diluted Adjusted Earnings per share to assess total Company performance on a consistent basis at a per share level.
ODS - Ongoing development and services, which is one of the Alfa revenue segments.
Operating Free Cash Flow Conversion - Operating Free Cash Flow Conversion is calculated as cash from operations less gains and losses on settlement of derivative instruments and margin calls and capital expenditures and adding back IPO-related expenses and Pre-IPO share-based compensation, as a percentage of Adjusted EBIT.
CHIEF EXECUTIVE'S REVIEW
CEO's review of the year - 2018
2018 has been a challenging year for Alfa following both the pause of one of our significant software implementations and the slower than expected conversion of the sales pipeline.
In June 2018 we announced that one of our major customers had taken the decision to delay their implementation project. This decision related to the customer's existing internal systems and we are currently actively involved in discussions regarding the planning of the restart of this implementation, which is expected to be in the second half of 2019. This resulted in a decrease in 2018 revenue of GBP5.3 million in comparison to the prior year.
We also saw a potential new customer significantly increase the geographical and functional scope of its proposed project. While this delayed the date at which the project may have started, it also materially increased the scale and size of the possible opportunity. We remain in positive discussions with this potential new customer, and it remains a prospect in our pipeline.
We highlighted that one of our larger existing customers looked likely to extend its decision point regarding the expansion of its multi-country implementation. As of today, the first phase of this customer's implementation is going well, with completion expected in the first half of 2019 and we are now engaged to design the second phase of the roll out which will start this year.
We continue to assess whether our sales processes are relevant in the current market, whether our product offering is aligned with the needs of prospective customers and whether we have the right people in the right place to serve the business we have now and for the coming year. Moving into 2019, certain operational and management changes have been made which we believe will ensure that we are best placed to win new customers.
Sales execution
We have combined the sales and commercial teams to simplify reporting lines and to increase communication speed, with the objective of improving contract execution and increasing the pace and rate of our sales conversion. We have also assessed whether there were common themes or factors that were slowing the customer decision-making process which we could impact by adapting our go-to-market strategy. Following this review, we found no reason to make significant changes to pricing and proposition, although we continue to see more focus on hosted solutions, a requirement for systems to be digital ready and customers looking for global solutions.
We have seen a number of single country implementations expand into potential multi-country implementations over the last 24 months. In the long-term, this expansion leads to operational benefits for the customer. For Alfa, while this multi-country expansion increases the value and size of the opportunity, it often also impacts and complicates the decision making process.
We believe these changes have contributed to positive momentum, evidenced by the start of delivering implementation services to a new European customer in the fourth quarter of 2018, whilst continuing to agree concurrently the license and maintenance agreements. This new project will represent a significant opportunity and strengthens our European footprint.
There are always improvements which can be made in sales execution and this remains a key focus for myself, the rest of the executive and the Board going forward.
Product offering and strategy
During 2018, we progressed a number of key projects which will continue to position Alfa Systems as a platform solution. We are continuing to see demand for multi-country and highly integrated implementations and therefore we have further developed our Digital^Gateway technology and API strategy. We are encouraged by the early-stage, anecdotal customer feedback to date. This work will continue into 2019, when we will test the relevance and priorities of our product roadmap with our customers at the user group forums we run in Europe and North America.
To complement our sales efforts in relation to enterprise customers, Alfa has been developing its volume market strategy (previously "Business-in-a-Box"). This part of our growth strategy is focused on winning business from companies in the asset finance market which are smaller than our current enterprise customers. To be successful in this, we need to offer a product that is ready to go, pre-built and pre-configured with best practice
processes. During 2018 and into 2019, we have introduced our Alfa Start methodology at one of our implementation projects with significant success to a leading US automotive retailer. This is an important first step in simplifying implementations which will extend our market opportunity, and results in a methodology which has been developed using our years of experience working with such companies. The second step is our Modularisation project, the aim of which is to separate key components of Alfa Systems which will decrease the cost of future development and facilitate faster implementations. This remains a key priority on our product roadmap for 2019 and into 2020.
A key trend in 2018 was an increase in our customers using digital initiatives and artificial intelligence methods to help them deliver efficiencies and improve their customers' satisfaction levels. In 2018 we contributed to this by enabling a number of our customers' digitalisation strategies, primarily through our Point of Sale and customer self-service offering. Moving forward into 2019, the priority will be on building on this to demonstrate the business possibilities that Alfa Systems' broad and flexible open API gives. We seek to leverage our API and establish technology partnerships and build a platform ecosystem around Alfa Systems which will be available to all customers.
Partners and people
Historically our people have delivered 100% of our software implementations and ongoing support efforts to our customer base. As of now, we have three agreed partnership framework agreements in place which provides us with the ability to decouple our future growth from headcount. It will also provide us with a more flexible cost base and extend our geographic reach in areas where we do not have a presence. We are negotiating framework agreements with two additional partners, have submitted two co-bids for prospective customers and hope to extend the partner network further during 2019.
In addition to aligning our sales and commercial teams, we have set up an Investment Committee to review and monitor product strategy and investment going forward. We also welcome a new Global Director of People, Campbell Fitch, who brings with him a wealth of experience in relation to talent and succession planning and remuneration.
2018 results
Following the announcement of a paused software implementation and slower than expected conversion of our sales pipeline, our revenue decreased by 19% to GBP71.0 million (2017: GBP87.8 million), with operating profit margin decreasing to 32% (2017: 39%). The impact of our paused software implementation contract was sizeable and completing implementation work on five customers in 2017 led to a greater dependence on ODS revenue in the year.
During 2018 we upgraded six of our customers around the world which contributed to growth in ODS revenue and we launched a new web point of sale system to support one of our Asia Pacific customers with their broker-introduced business. In the US, our Alfa Start implementation methodology is being successfully utilised on the implementation of one of the largest used car retailers, assisting with acceleration of implementation times. This provides solid evidence that our progress on our volume market strategy is producing benefits both for us and our customers.
Looking forward
Moving into 2019, our focus remains on converting sales opportunities to contracted customers. We are currently progressing contractual discussions with a new European customer and planning a second phase implementation for an existing multi-national customer. We have also seen an increase in the overall size of the pipeline across geographies and verticals since we last reported at our half year results. Following an assessment of a number of different areas across the business - including our sales and commercial processes - we have made a number of organisational changes which we believe will strengthen the business going forward.
We remain confident in the long-term opportunities for Alfa, and expect the company to perform in line with the Board's expectations in the year ahead.
Andrew Denton
CEO
7 March 2019
FINANCIAL REVIEW
Group results 2018 2017 Movement
GBP'000s GBP'000s %
------------------------------------- ---------- ---------- ---------
Revenue 71,038 87,777 (19%)
Implementation and support expenses (18,924) (20,971) (10%)
Research and product development
expenses (16,341) (13,963) 17%
Sales, general and administrative
expenses (13,457) (19,076) (29%)
Other operating income 66 62 6%
------------------------------------- ---------- ---------- ---------
Operating profit 22,382 33,829 (34%)
Finance income 74 33 124%
Profit before taxation 22,456 33,862 (34%)
Taxation (4,306) (7,996) (46%)
------------------------------------- ---------- ---------- ---------
Profit for the financial year 18,150 25,866 (30%)
------------------------------------- ---------- ---------- ---------
2018 was a challenging year, where revenue decreased by GBP16.7 million year on year, although we saw an increase in activity in the second half of the year, where revenue increased by 16% on the first half of 2018.
Excluding the impacts of gains and losses on derivative financial instruments, this represented an annual decrease of GBP14.9 million in revenue from customers, which was directly related to the pausing of a significant software implementation contract which contributed GBP5.3 million to the decrease, GBP9.2 million of decreases in other software implementation revenues and a GBP4.8 million decrease in maintenance revenue. This was offset by increases in ODS revenue of GBP3.1 million as we delivered a number of upgrades to existing customers.
The decline in revenue ultimately led to operating profit margin decreasing to 32% in 2018 from 39% in 2017.
Group results 2018 2017 Movement
GBP'000s GBP'000s %
------------------------------------- ---------- ---------- ---------
Software implementation 30,391 43,654 (30%)
ODS 23,920 20,831 15%
Maintenance 16,846 21,617 (22%)
------------------------------------- ---------- ---------- ---------
Revenue from customers 71,157 86,102 (17%)
(Loss)/gain on derivative financial
instruments (119) 1,675 (107%)
------------------------------------- ---------- ---------- ---------
Group revenue from customers
* 71,038 87,777 (19%)
------------------------------------- ---------- ---------- ---------
*Revenue from customers is presented net of any losses or gains on derivative financial instruments. During 2018 we settled the final portion of our USD forward programme, with GBP0.1 million of losses recorded against revenue in the period (2017: GBP1.7 million gain).
Excluding the impact of these gains or losses on financial instruments and restating our 2017 revenue using 2018 exchange rates, our 2018 constant currency revenue decline was 16%, in comparison to an actual decline of 19%. Excluding the impact of gains and losses on financial instruments and using 2018 exchange rates, our 2017 revenue would have been GBP84.4 million.
Software implementation revenue 2018 2017
GBP'000s GBP'000s
-------------------------------------- ---------- ----------
New 3,301 198
Ongoing 25,986 22,097
Paused 1,104 5,194
Completed - 16,165
-------------------------------------- ---------- ----------
Software implementation revenue from
customers* 30,391 43,654
-------------------------------------- ---------- ----------
*Revenue from customers is presented net of any losses or gains on derivative financial instruments. During 2018 we settled the final portion of our USD forward programme, with GBP0.1 million of losses recorded against revenue in the period (2017: GBP1.7 million gain).
Software implementation revenue decreased by GBP13.3 million, or by 30%, to GBP30.4 million for the year ended 31 December 2018 (2017: GBP43.7 million). This was primarily due to GBP16.2 million of revenue in 2017 from completed implementations and the pausing of an ongoing software implementation by the midpoint of 2018.
This decline was offset partly by GBP3.3 million of new implementation customer revenue from our win of a multi-national customer in March 2018 and ongoing implementation revenue increasing by GBP3.9 million. With an average number of implementation customers of four during 2018 (2017: six), revenue per customer increased by 4% reflecting the maturity of our implementation portfolio. Average number of customers is calculated based on the number of months of implementation activities in each year.
During 2018 we recorded a GBP1.7 million reversal of deferred license revenue recognised in previous periods due to an increase in the expected days to complete the relevant implementation project. Although this decreased software implementation revenue in 2018, it is expected that the overall project value will increase due to the increased work effort in future periods.
In 2018, 88% of implementation revenue is denominated in US dollars (2017: 62%) and as such, were impacted by the strong USD in the first half of the year.
Moving into 2019 we have one software implementation customer due to complete its initial phase in mid-2019, two implementations which are due to complete in 2020 and one implementation customer which is expected to have a second portfolio go-live in 2019 with the final portfolio go-live scheduled for 2021.
ODS revenue 2018 2017
GBP'000s GBP'000s
----------------------------- ---------- ----------
New 9,069 2,163
Ongoing 11,661 12,833
Completed or non-recurring 3,190 5,835
ODS revenue from customers* 23,920 20,831
----------------------------- ---------- ----------
*Revenue from customers is presented net of any losses or gains on derivative financial instruments. During 2018 we settled the final portion of our USD forward programme, with GBP0.1 million of losses recorded against revenue in the period (2017: GBP1.7 million gain).
For a third year in a row, ODS increased with 2018 growth of 15% to GBP23.9 million in 2018, with the number of ODS customers increasing. This increase in customer numbers was due to one implementation customer which went live in late 2017 moving into ODS and a new customer where we are engaged to carry out implementation work pre agreement on contracts for license and maintenance.
New ODS customers contributed GBP9.1 million of revenue in 2018, an increase of GBP6.9 million. Our ongoing customer services included five upgrades at existing ODS customers.
Non-recurring revenue in 2018 included GBP2.5 million of settlement amounts on termination of right-of-use and maintenance contracts. As of the fourth quarter of 2018, one of our significant maintenance customers confirmed that they were terminating their agreement for maintenance and the right to use Alfa Systems. This timing was in line with expectations and resulted in a GBP2.5 million recognition of non-recurring revenue as there is no right of clawback within the contractual amounts payable until termination of the agreement in October 2019.
In 2017 non-recurring revenue reflected increased license amounts following increases in portfolio sizes of GBP3.2 million. 2017 completed revenue of GBP2.7 million related to upgrade work at two customers who exited the asset finance market or stopped their system upgrade work due to other business priorities.
Maintenance
Maintenance revenue decreased by GBP4.8 million, or 22%, to GBP16.8 million (2017: GBP21.6 million), primarily due to non-recurring catch up maintenance of GBP3.3 million paid in 2017 and a reduction of GBP2.6 million in maintenance due to contracts which will not renew in 2019. These movements were offset by an increase in ongoing maintenance contracts of GBP1.1 million. Annual rate rises on the underlying existing customer base were offset by the weakening of the US dollar on US dollar denominated maintenance contracts.
Geographical overview
On a regional basis, 47% of the Group's revenue is generated from US-based customers (2017: 47%), 32% from UK customers (2017: 36%), and 21% from the Rest of World (2017: 17%).
Geographical split of revenue 2018 2017
GBP'000s GBP'000s
------------------------------------- ---------- ----------
UK 22,847 30,686
US 33,124 40,492
Rest of World 15,186 14,924
Revenue 71,157 86,102
(Loss)/gain on derivative financial
instruments (119) 1,675
------------------------------------- ---------- ----------
Group revenue 71,038 87,777
------------------------------------- ---------- ----------
UK
UK revenue decreased by GBP7.8 million, or by 26%, to GBP22.8 million for the year ended 31 December 2018 (2017: GBP30.7 million) primarily due to the anticipated slowing in activity as recently upgraded or implemented customers move more than 12 months from go-live date. This contributed GBP3.4 million to the decrease.
There was a further decrease of GBP0.7 million due to a decline in non-recurring revenue from customers' year on year.
Non-recurring revenue in 2018 included GBP2.5 million of settlement amounts on termination of right-of-use and maintenance contracts. As of the fourth quarter of 2018, one of our significant maintenance customers confirmed that they were terminating their agreement for maintenance and the right to use Alfa Systems. This timing was in line with expectations and resulted in a GBP2.5 million recognition of non-recurring revenue as there is no right of clawback within the contractual amounts payable until termination of the agreement in October 2019. This customer contributed GBP2.5 million of maintenance revenue annually and GBP0.4 million of ODS revenue in 2018. No revenue is expected to be recognised from this customer in 2019. Offsetting this was non-recurring revenue in 2017 of GBP3.3 million which related to catch up amounts due to increases due to portfolio sizes or termination or settlement payments.
The remaining decreases of approximately GBP3.7 million were primarily due to decreased activity at a number of customers who continue to pay maintenance but are in mid-upgrade cycle.
US
US revenue decreased by GBP7.4 million, or by 18%, to GBP33.0 million for the year ended 31 December 2018 (2017: GBP40.5 million) reflecting a pausing at one of our most significant implementation customers, coupled with the termination in late 2017 of a smaller portfolio customer who had chosen to exit the market. The paused contract contributed GBP5.3 million to the decline with the termination contributing GBP3.0 million in the year. Other implementation revenue, excluding the paused project, increased by GBP1.8 million was offset by ODS decreases of GBP0.9 million.
US revenues are derived from automotive customers (2017: 100%) with banking customers contributing 45% of segment revenue (2017: 38%), OEMs contributing 27% (2017: 38%) and independent customers 28% (2017: 14%) following the win of Carmax in 2017.
Rest of World
Rest of World ("RoW") revenue is generated principally from Europe accounting for GBP12.4 million or 82% of revenue in 2018 (2017: GBP12.5 million) with the remainder generated in Australia and New Zealand. RoW revenue grew marginally to GBP15.2 million (2017: GBP14.9 million) as new implementation projects offset declines in projects completed in 2017. In 2018, RoW revenue is derived wholly from the equipment vertical (2017: 89%).
Operating profit
The Group's operating profit decreased by GBP11.3 million, or 34%, to GBP22.4 million in the year ended 31 December 2018, from GBP33.8 million in 2017, with the margin decreasing to 32% (2017: 39%). This decline predominantly reflecting the decrease in revenue in 2018 coupled with an increase in personnel costs, primarily in the first half of the year. This has been offset by lower IPO related share-based payment expense and professional fees of GBP7.2 million in aggregate.
Expenses by activity 2018 2017 Movement
GBP'000s GBP'000s %
---------------------------------------- ---------- ---------- ---------
Implementation and support
expenses 18,924 20,971 (10%)
Research and product development
expenses 16,341 13,963 17%
Sales, general and administrative
expenses 13,457 19,076 (29%)
Other operating income (66) (62) 7%
---------------------------------------- ---------- ---------- ---------
Total operating expenses 48,656 53,948 (10%)
---------------------------------------- ---------- ---------- ---------
Operating expenses excluding
2017 Pre-IPO share-based compensation
and IPO related expenses 48,656 46,548 5%
Implementation and Support ("I&S") expenses decreased by GBP2.0 million, or by 10%, to GBP18.9 million (2017: GBP21.0 million). I&S expenses are predominantly personnel costs, accounting for 66% of total activity costs. In the year, average I&S headcount remained stable with average headcount of 110, with personnel related costs decreasing by GBP2.1 million. This decrease was as a result of the geographical mix of personnel changing. In addition to the decrease in personnel related costs, travel costs decreased by GBP0.2 million following the pausing of one of our significant software implementations while there has been a GBP0.3 million increase in overhead recharges predominantly due to increased property costs.
Research and product development ("R&PD") expenses have increased by GBP2.4 million to GBP16.3 million (2017: GBP14.0 million). 91% of R&PD expenses are personnel related costs and during 2018, our development efforts centred primarily on internal investment projects to assess feasibility of modularisation or progressing our digital gateway programme. In 2018 we capitalised GBP0.4 million in relation to our digital developments. In 2018, engineers increased to 152 from 142 in 2017 with average costs per engineer increasing by 12% as a result of wage inflation and benchmarking of salaries to the market.
Sales, general and administrative ("SG&A") expenses decreased by GBP5.6 million, or by 29%, to GBP13.5 million (2017: GBP19.1 million) which reflected a decrease in 2017 IPO related share-based payment expense and professional fees of GBP7.4 million. Excluding these exceptional items, SG&A expense increased by GBP1.7 million, or by 15%, from GBP11.7 million in 2017.
This increase reflects an increase in personnel costs of GBP2.4 million as average personnel numbers increased to 65 from 49 in 2017 as we bolstered our back office capability and grew our sales and marketing team, offset by a decrease in foreign exchange losses of GBP1.6 million. Additionally we incurred GBP0.3 million of increased depreciation and amortisation charges and GBP0.3 million of additional share-based payment expense in relation to our 2018 LTIP awards to 90 employees.
Adjusted operating expenses, excluding 2017 non-recurring items
Although costs decreased year on year, excluding 2017 non-recurring pre-IPO share-based compensation and IPO related expenses, operating expenses increased by GBP1.8 million. This increase was partly due to GBP2.7 million increase in personnel related expenses as our average headcount increased in the second and third quarters, with average headcount of 327 for the year in comparison to 301 in 2017. In addition to this property expenses increased by GBP0.9 million due to an expansion of our London base from January 2018. These increases were offset by foreign exchange differences of GBP1.6 million.
Profit after taxation
Profit after taxation decreased by GBP7.7 million, or by 30%, to GBP18.2 million (2017: GBP25.9 million). The effective rate of taxation in 2018 decreased to 19%, (2017: 24%) due to non-deductible expenses such as share-based payment expenses decreasing in 2018. Excluding exceptional items, the adjusted effective rate of taxation in 2018 was 19% (2018: 19%).
Tax policy
The Group accounts for tax matters in accordance with the Group's code of conduct and ethical guidelines. It is the Group's obligation to pay the amount of tax legally due and to observe all relevant and applicable rules and regulations in the jurisdictions in which it operates. While meeting this obligation, the Group also has an obligation to its shareholders to plan, manage and control tax costs. The Group seeks to achieve this by conducting business affairs in the way that is efficient from a tax perspective, such as implementing a robust transfer pricing policy and claiming available tax credits and incentives. The Group is committed to building a constructive working relationship with the tax authorities of the countries in which it operates.
Key financial metrics
The Group uses a number of key financial metrics which are not specifically defined by IFRS but which management use as key measures to assess financial performance. Adjusted EBIT and Adjusted Earnings are utilised by management to monitor performance as it illustrates the underlying performance of the business by excluding items considered by management not to be reflective of the underlying trading operations of the business. Adjusted Earnings also includes income tax and interest received, which affect shareholder value and in-year return.
The most directly comparable measure of Adjusted EBIT and Adjusted Earnings is our profit from continuing operations. Billings and Operating Cash Flow Conversion are monitored by management as liquidity measures. The most directly comparable measure of Operating Cash Flow Conversion is cash generated from operations as a percentage of operating profit.
These measures are not directly comparable to similarly referenced measures used by other companies and, as a result, investors should not consider these performance measures in isolation from, or as a substitute analysis for, our results of operations as determined in accordance with IFRS.
New customer revenue
New customer revenue comprises revenue generated by customers who have not previously generated revenues in the applicable segment in the prior period.
Constant currency
We provide percentage increases or decreases in revenue or Adjusted EBIT to eliminate the effect of changes in currency values as we believe it is helpful to the understanding of underlying trends in the business. When trend information is expressed herein "in constant currencies", the comparative results are derived by re-calculating non British pounds denominated revenue and/or expenses using the average monthly exchange rates of this year and applying them to the comparative period's results, excluding gains or losses on derivative financial instruments. The average rates are as follows:
2018 2017
USD 1.3355 1.3554
Euro 1.1303 1.2163
Swedish Krona 11.5953 11.5210
New Zealand Dollar 1.9311 1.9497
Australian Dollar 1.7862 1.6811
2018 2018 Movement
GBP'000s GBP'000s %
----------------------------------- ---------- ---------- ---------
Revenue - as reported 71,038 87,777 (19%)
Revenue - constant currency 71,157 84,436 (16%)
Adjusted EBIT - as reported 22,382 41,229 (46%)
Adjusted EBIT - constant currency 22,501 38,333 (41%)
Adjusted EBIT 2018 2017
GBP'000s GBP'000s
-------------------------- ---------- ----------
Profit for the period 18,150 25,866
Adjusted for:
Taxation 4,306 7,996
Finance income (74) (33)
Share-based compensation - 4,400
IPO-related expenses - 3,000
-------------------------- ---------- ----------
Adjusted EBIT 22,382 41,229 -------------------------- ---------- ----------
Adjusted EBIT, defined as operating profit excluding pre-IPO share-based payments and IPO-related costs, decreased by GBP18.8 million, or 46%, to GBP22.4 million in 2018 (2017: GBP41.2 million). Adjusted EBIT margin in 2018 decreased to 32% (2017: 47%), reflecting a decline in revenue of GBP16.7 million and an increase in personnel related costs of GBP2.2 million. Excluding the impacts of currency, Adjusted EBIT on a constant currency basis decreased 27%.
Billings
These are amounts invoiced in year. This differs from revenue as defined by IFRS due to the release of deferred income in relation to license payments and maintenance agreements and accrued income in relation to work in progress. Billings decreased by GBP10.3 million, or 13%, to GBP66.5 million (2017: GBP76.8 million), which was GBP4.5 million less than revenue recognised. Deferred license recognised in 2018 was GBP4.3 million.
Operating Free Cash Flow Conversion
Operating Free Cash Flow conversion increased to 86% (2017: 69%) due to collection of a license payment offset by increases to accrued income for amounts not invoiced until 2019 as per contractual agreements.
Operating Cash Flow generation 2018 2017
GBP'000s GBP'000s
------------------------------------------- ---------- ----------
Cash generated from operations 20,954 28,853
Adjusted for:
Settlement of derivative financial
instruments and margin calls (108) (2,683)
Capital expenditure (1,638) (663)
IPO-related expenses excluded from
Adjusted EBIT - 3,000
------------------------------------------- ---------- ----------
Operating Free Cash Flow 19,208 28,507
------------------------------------------- ---------- ----------
Adjusted EBIT, including pre-IPO expenses 22,382 41,229
------------------------------------------- ---------- ----------
Operating Free Cash Flow Conversion 86% 69%
------------------------------------------- ---------- ----------
Funding and liquidity
At 31 December 2018 the Group had cash reserves of GBP44.9 million (2017: GBP31.3 million). Cash balances were denominated predominantly in GBP and US dollars, being 46% and 38% of the total cash and cash equivalents balance respectively.
Cash flow 2018 2017
GBP'000s GBP'000s
---------------------------------------------- ---------- ----------
Cash generated from operations 20,954 28,853
Settlement of derivative financial
instruments and margin calls (108) (2,683)
Income taxes paid (5,846) (6,888)
---------------------------------------------- ---------- ----------
Net cash generated from operating activities 15,000 19,282
---------------------------------------------- ---------- ----------
Net cash (used in)/generated by investing
activities (1,564) 26,413
---------------------------------------------- ---------- ----------
Cash used in financing activities - (60,743)
---------------------------------------------- ---------- ----------
Effect of exchange rate changes 219 49
---------------------------------------------- ---------- ----------
Movement in year 13,655 (14,999)
Cash and cash equivalents at the beginning
of the year 31,267 46,266
---------------------------------------------- ---------- ----------
Cash and cash equivalents at the end
of the year 44,922 31,267
---------------------------------------------- ---------- ----------
Net cash generated from operating activities
Net cash generated from operating activities decreased by GBP4.3 million to GBP15.0 million during year ended 31 December 2018 (2017: GBP19.3 million) primarily due to the decrease in cash generated from operations of GBP7.9 million to GBP21.0 million, offset by a reduction in settlement of derivative financial instruments of GBP2.6 million and a decrease in tax paid of GBP1.0 million.
The decrease of GBP7.9 million in cash generated from operations was primarily due to the decrease of GBP13.4 million in operating profit, after non-cash items of share-based payment expense, depreciation and unrealised gains and losses on derivative instruments, offset by a positive movement in working capital of GBP5.5 million. Movements in working capital decreased during 2018 to a cash outflow of GBP2.7 million (2017: GBP8.2 million outflow), as shown in the table below.
Movements in working capital 2018 2017
GBP'000s GBP'000s
----------------------------------------- ---------- ----------
Movement in trade and other receivables (1,237) 252
Movement in trade and other payables
and provisions (excluding derivative
financial instruments and contract
liabilities) (114) (1,148)
Movement in contract liabilities (1,379) (7,300)
----------------------------------------- ---------- ----------
Movement in working capital (2,730) (8,196)
----------------------------------------- ---------- ----------
Trade and other receivables in 2018 represented an outflow of GBP1.2 million. This movement is made up of a GBP2.2 million decrease due to earlier invoicing of fourth quarter fees for some customers, while accrued income increased by GBP3.7 million. Accrued income represents unbilled work in progress in relation to our ODS customers and certain settlement amounts where there is contractual agreement to invoice in 2019. In relation to customers which had accrued income balances at 31 December 2018, , GBP10.8 million had been invoiced and GBP3.8 million collected at 28 February 2019.
Movement in contract liabilities relates to deferred license fees and maintenance amounts. The outflow in 2018 decreased to GBP1.4 million due to a decrease in deferred maintenance amounts due to our paused contract and a change in maintenance year of one of our ongoing implementation customers. Liabilities in relation to software implementations remained at GBP1.6 million due to license revenue recognised in the year being offset by license fees collected in the year of GBP4.1 million.
Net cash flows used in investing activities of GBP1.6 million in year ended 31 December 2018 related to investment in internal systems and other computer equipment. We capitalised GBP0.4 million of internally generated intangible assets in relation to the development of our digital offering. Net cash flows generated from investing activities of GBP26.4 million in year ended 31 December 2017 related to the receipt of a related party loan receivable from the ultimate parent company of GBP27.0 million, offset by GBP0.7 million of capital expenditure.
Net cash flows used in financing activities were nil in the year ended 31 December 2018. In 2017, net cash flows used in financing activities of GBP60.7 million related to pre-IPO dividends paid to the ultimate parent company.
Currency hedging
The Group had entered into US dollar forwards in 2016 which have been fully settled by 31 December 2018. In 2018, overall currency movements were such that the impact of these arrangements was a loss of GBP0.1 million (2017: gain to revenue of GBP1.7 million).
Capital expenditure and contractual obligations
The Group's capital expenditure is primarily invested in the UK and invested GBP0.4 million in equipment (2017: GBP0.7 million) and GBP0.6 million on a new HR and finance system and capitalised GBP0.4 million of internally generated digital capability assets.
At 31 December 2018, the Group had GBP19.6 million of operating leases contractually agreed, of which GBP2.5 million is payable within 12 months of the year end, GBP9.3 million in 1-5 years and GBP7.9 million after 5 years.
Distributions to shareholders
In 2018 there were no distributions to shareholders. In February and May 2017, dividends of GBP60.7 million were declared and paid to the ultimate parent company prior to the IPO. No final dividend has been declared.
Related party transactions
The ultimate parent undertaking is CHP Software and Consulting Limited (the "Parent"), which is the parent undertaking. There was no trading between the Group and the Parent. There are no balances outstanding from the Parent at 31 December 2018 and 31 December 2017.
Subsequent events
There have been no reportable subsequent events since the balance sheet date.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARED 31 DECEMBER 2018
The disclosed figures are not statutory accounts in terms of section 434 of the Companies Act 2006. The statutory accounts give full disclosure of the Group accounting policies and are scheduled to be posted to shareholders on or around 19 March 2019 and will be filed with the Registrar of Companies in due course. On the statutory accounts for the year ended 31 December 2018, the auditor gave an unqualified opinion that did not contain an emphasis of matter and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
Condensed consolidated statement of profit or loss and comprehensive income for the year ended 31 December 2018
GBP'000s Note 2018 2017 --------------------------------------------- ------ -------------------------- ------------ Continuing operations Revenue 2/3 71,038 87,777 Implementation and support expenses 4/5 (18,924) (20,971) Research and product development expenses 4/5 (16,341) (13,963) Sales, general and administrative expenses 4/5 (13,457) (19,076) Other operating income 66 62 --------------------------------------------- ------ -------------------------- ------------ Operating profit 22,382 33,829 Finance income 7 74 33 Profit before taxation 22,456 33,862 Taxation 8 (4,306) (7,996) --------------------------------------------- ------ -------------------------- ------------ Profit for the financial year 18,150 25,866 --------------------------------------------- ------ -------------------------- ------------ Other comprehensive income: Items that may be subsequently reclassified to profit and loss Exchange differences on translation of foreign operations 11(b) 376 - Total comprehensive income, net of tax 376 - --------------------------------------------- ------ -------------------------- ------------ Total comprehensive income for the period 18,526 25,866 --------------------------------------------- ------ -------------------------- ------------ Earnings per share (in pence) for profit attributable to the ordinary equity holders of the company Basic 17 6.3 9.1 Diluted 17 6.1 8.6 Weighted average no. of shares - basic 17 285,962,898 283,134,180 Weighted average no. of shares - diluted 17 300,000,000 300,000,000
The above consolidated statement of profit or loss and comprehensive income should be read in conjunction with the accompanying notes.
Condensed consolidated statement of financial position as of 31 December 2018
GBP'000s Note 2018 2017 ------------------------------------------------ -------- -------------------- ------- Assets Non-current assets Goodwill 10(b) 24,737 24,737 Other intangible assets 10(c) 1,203 - Deferred tax assets 10(d) 8 - Property, plant and equipment 10(a) 1,455 1,463 Total non-current assets 27,403 26,200 ------------------------------------------------ -------- -------------------- ------- Current assets Trade and other receivables 9(a) 4,651 6,887 Accrued income 9(b)/16 9,162 5,505 Prepayments 9(b) 1,452 1,731 Other receivables 9(b) 947 619 Derivative financial assets 9(e) - 108 Cash and cash equivalents 9(c) 44,922 31,267 ------------------------------------------------ -------- -------------------- ------- Total current assets 61,134 46,117 ------------------------------------------------ -------- -------------------- ------- Total assets 88,537 72,317 ------------------------------------------------ -------- -------------------- ------- Liabilities and equity Current liabilities Trade and other payables 9(d) 7,588 7,417 Corporation tax 9(d) 2,448 3,956 Contract liabilities - software implementation 3/16 1,662 1,673 Contract liabilities - deferred maintenance 3 3,772 5,046 Total current liabilities 15,470 18,092 ------------------------------------------------ -------- -------------------- ------- Non-current liabilities Deferred tax liabilities 10(d) - 17 Provisions for other liabilities 9(d) 152 87 Total non-current liabilities 152 104 ------------------------------------------------ -------- -------------------- ------- Total liabilities 15,622 18,196 ------------------------------------------------ -------- -------------------- ------- Capital and reserves Ordinary shares 11(a) 300 300 Translation reserve 11(b) 376 - Retained earnings 72,239 53,821 ------------------------------------------------ -------- -------------------- ------- Total equity 72,915 54,121 ------------------------------------------------ -------- -------------------- ------- Total liabilities and equity 88,537 72,317 ------------------------------------------------ -------- -------------------- -------
The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
The consolidated financial statements were approved and authorised for issue by the Board of Directors on 7 March 2019.
Condensed consolidated statement of changes in equity for the year ended 31 December 2018
Equity
attributable
to owners
Share Share Translation Retained of the
GBP'000s Note capital premium reserve earnings parent
--------------------------- ----- --------- --------- ------------ ---------- --------------
Balance as at 1 January
2017 27 11,123 - 73,448 84,598
--------------------------- ----- --------- --------- ------------ ---------- --------------
Profit for the financial
year - - - 25,866 25,866
Total comprehensive
income for the year - - - 25,866 25,866
Capital reduction (27) (11,123) - 11,150 -
Reorganisation of share
capital 300 - - (300) -
Dividends paid to parent - - - (60,743) (60,743)
Employee share schemes
- value of employee
services 6 - - - 4,400 4,400
Balance as at 31 December
2017 300 - - 53,821 54,121
--------------------------- ----- --------- --------- ------------ ---------- --------------
Profit for the financial
year - - - 18,150 18,150
Other comprehensive
income - - 376 - 376
--------------------------- ----- --------- --------- ------------ ---------- --------------
Total comprehensive
income for the year - - 376 18,150 18,526
--------------------------- ----- --------- --------- ------------ ---------- --------------
Employee share schemes
- value of employee
services 6 - - - 268 268
Balance as at 31 December
2018 300 - 376 72,239 72,915
--------------------------- ----- --------- --------- ------------ ---------- --------------
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
Condensed consolidated statement of cash flows for the year ended 31 December 2018
GBP'000s Note 2018 2017 ---------------------------------------------- --------- -------- --------- Cash flows from operations Operating profit 22,382 33,829 Adjustments: Depreciation and amortisation 10(a)(c) 876 495 Employee share scheme charge 6 305 4,400 Loss on disposal of property, plant 2 - and equipment Unrealised loss/(gain) on derivative financial instruments 2/9(e) 119 (1,675) Movement in working capital: Movement in trade and other receivables (1,237) 252 Movement in trade and other payables and provisions (excluding derivative financial instruments and contract liabilities) (114) (1,148) Movement in contract liabilities (1,379) (7,300) Cash generated from operations 20,954 28,853 Settlement of derivative financial instruments and margin calls (108) (2,683) Income taxes paid (5,846) (6,888) Net cash generated from operating activities 15,000 19,282 ---------------------------------------------- --------- -------- --------- Cash flows from investing activities Payments for property, plant and equipment 10(a) (622) (663) Payments for software intangible assets 10(c) (609) - Payments for software development costs 10(c) (407) - Repayment of loan by parent company - 27,043 Interest received 74 33 ---------------------------------------------- --------- -------- --------- Net cash (used in)/generated by investing activities (1,564) 26,413 ---------------------------------------------- --------- -------- --------- Cash flows from financing activities Dividends paid to parent 15(c) - (60,743) Cash used in financing activities - (60,743) ---------------------------------------------- --------- -------- --------- Effect of exchange rate changes 219 49 Net increase/(decrease) in cash 13,655 (14,999) Cash and cash equivalents at the beginning of the year 31,267 46,266 Cash and cash equivalents at the end of the year 9(c) 44,922 31,267 ---------------------------------------------- --------- -------- ---------
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
Notes to the condensed consolidated financial statements for the year ended 31 December 2018
1. Significant changes in the current reporting period and going-concern
The financial position and performance of the Group was particularly affected by the following events and transactions during the reporting period:
i. The adoption of the new accounting standards ii. Delay in software implementation projects iii. Loss of a significant maintenance customer as of the fourth quarter of 2018
(i) Adoption of new accounting standards - The Group has updated its accounting policies as a result of adopting IFRS 15 "Revenue from Contracts with Customers". The Group has applied IFRS 15 using the modified retrospective method of adoption and there have been no resultant changes to the quantum of revenue recognised on application of IFRS 15.
Alfa has also voluntarily changed the presentation of certain amounts in the statement of financial position to reflect the terminology of IFRS 15. Contract liabilities such as license amounts collected ahead of implementation completions were previously presented as deferred license amounts.
The other standards, including the application of IFRS 9 "Financial Instruments" on 1 January 2018, did not have any impact on the Group's accounting policies and did not impact the six months to 30 June 2018 or require retrospective adjustment to prior periods presented.
(ii) Delay in software implementation projects - On 1 June 2018, we announced that one of our major customers had decided to delay its software implementation project for internal reasons with our understanding from the customer being that a restart is expected in 2019. This pause has impacted our results for the year ended 2018 in that software implementation revenue has decreased by GBP4.1 million and maintenance revenue by GBP1.2 million.
(iii) Loss of a significant maintenance customer as of the fourth quarter of 2018 - As at 31 October 2018, one of our significant maintenance customers confirmed that they were terminating their agreement for maintenance and right-of-use of Alfa Systems. This customer contributed GBP2.5 million of maintenance revenue annually and GBP0.4 million of ODS revenue in 2018. As there is no right of clawback on the contractual amounts, GBP2.5 million of non-recurring maintenance revenue was recognised in 2018 with no revenue expected to be recognised in 2019.
Assessing the impact of these events - In assessing the application of a going-concern basis in the preparation of these financial statements, the Directors reassessed that the Group meets its day-to-day working capital requirements through its cash reserves, which were GBP44.9 million at 31 December 2018 (see note 9(c)). The Group's forecasts and projections take into account reasonably possible changes in trading performance due to the impact of operational, legal, macro-economic risks or reputational risks.
Having assessed the principal risks, and other matters discussed in the viability statement, the Directors have a reasonable expectation that Alfa has adequate resources to continue in operational existence for the foreseeable future, being a period of not less than 12 months from the date of signing of this report, and therefore they continue to adopt the going-concern basis of accounting in preparing these consolidated financial statements.
Following the recent decision by the UK population to exit, in due course, from the European Union ("Brexit"), the Directors have considered whether or not this will manifest itself as an additional risk to the Group. While it is difficult to predict the impact of an exit, there may be an impact on the way Alfa does business. The Directors do not consider this to constitute a principal risk to the business however they will continue to monitor and assess it.
How the numbers are calculated
2. Segments and principal activities
2.1 Segments Operating segment and reporting segments are reported
in a manner consistent with the internal reporting provided
to the Chief Operating Decision Maker ("CODM"). The Group's
Chief Executive Officer ("CEO"), who is responsible for allocating
resources and assessing performance, has been identified as
the CODM.
The CODM regularly reviews the Group's operating results in
order to assess performance and to allocate resources. The
CODM considers the business from a product perspective and,
therefore, recognises one operating and reporting segment,
being the sale of software and related services. The Group
is choosing to present revenue segmentation by type of project
and a consolidated adjusted Earnings Before Interest and Taxation
("Adjusted EBIT") measure, as presented to the CODM, as additional
information in this note, along with the required entity-wide
disclosure.
The Group discloses revenue split by type of project; Software
implementation, Ongoing development and services ("ODS") and
Maintenance.
a) Software implementation projects - An implementation process
contains three types of billing stream; the recognition of
a license, fees in relation to implementation tasks and fees
for additional development. Software implementation projects
can take from nine months to five-years depending on the complexity
of the implementation or size of customer.
The license element is generally invoiced and collected at
the beginning of the project and the license amount is banded
by the number of geographies, modules taken by the customer
and the number of contracts or agreements to be written and
managed on Alfa Systems.
Implementation and development fees are invoiced based on a
daily-rate basis.
b) ODS revenue - represents the ongoing development and services
efforts which are either ad hoc projects with existing customers
or relate to development or services delivered after a new
implementation. The services can be support immediately after
an implementation, further development for customer specific
functionality or change management assistance. Such services
are generally provided on a shorter contractual term.
c) Maintenance revenue is invoiced periodically in advance.
Maintenance amounts are linked to the volumes of contracts
or agreements being written through Alfa Systems and therefore
increase if the customer's portfolio increases.
See note 3 for details of our revenue recognition accounting
policy and related critical accounting judgements and key sources
of estimation uncertainty in relation to revenue recognition.
2.2 Adjusted EBIT and Adjusted Earnings The CODM analyses
the financial performance of the business on two adjusted
profit measures, being adjusted earnings before interest and
tax ("Adjusted EBIT") and adjusted earnings ("Adjusted Earnings").
Adjusted EBIT and Adjusted Earnings are not measures defined
by IFRS. The most directly comparable IFRS measure to both
Adjusted EBIT and Adjusted Earnings is operating profit for
the relevant period.
Adjusted EBIT - Adjusted EBIT is defined as profit from continuing
operations before income taxes, finance income, pre-IPO share-based
compensation and IPO-related expenses. Management utilises
this measure to monitor performance as it illustrates the
underlying performance of the business by excluding items
considered by management not to be reflective of the underlying
trading operations of the Group or adding items which are
reflective of the overall trading operations, as applicable.
Adjusted Earnings - Adjusted Earnings is defined as profit
for the period from continuing operations attributable to
equity holders of the Company, before IPO-related expenses
and pre-IPO share-based compensation, less the tax effect
of these adjustments. Adjusted Earnings is used by the CODM
in measuring profitability because it represents a Group measure
of performance which excludes the impact of certain non-cash
charges and other charges not associated with the underlying
operating performance of the business, while including the
effect of items that management believe affect shareholder
value and in-year return, such as income tax expense and net
finance costs.
Management use Adjusted EBIT and Adjusted Earnings to (i)
provide senior management with a monthly report of operating
results that is prepared on an adjusted earnings basis and
(ii) prepare strategic plans and annual budgets on an adjusted-earnings
basis. Senior management's annual compensation may also be
reviewed, in part, using adjusted performance measures.
In addition, Adjusted Earnings is used for the purposes of
calculating diluted Adjusted Earnings per share. Management
uses diluted Adjusted Earnings per share to assess performance
on a consistent basis at a per share level. See note 17.
2(a) Revenue by type
The Group assesses revenue by type of project, being Software implementations, ODS and Maintenance, as summarised below:
GBP'000s 2018 2017 ------------------------------------------------- --------------------- -------------- Software implementation 30,391 43,654 ODS 23,920 20,831 Maintenance 16,846 21,617 ------------------------------------------------- --------------------- -------------- Operating revenue 71,157 86,102 (Loss)/gain on derivative financial instruments (119) 1,675 ------------------------------------------------- --------------------- -------------- Total revenue 71,038 87,777 ------------------------------------------------- --------------------- --------------
2(b) Adjusted EBIT and Adjusted Earnings
The following tables reconcile profit for the period to Adjusted EBIT and profit for the period attributable to equity holders of the Company to Adjusted Earnings for the periods presented:
GBP'000s 2018 2017 ------------------------------------ ---------------------- ------- Profit for the year 18,150 25,866 Adjusted for: Taxation 4,306 7,996 Finance income (74) (33) Pre-IPO employee share schemes (1) - 4,400 IPO-related expenses (2) - 3,000 Adjusted EBIT 22,382 41,229 ------------------------------------ ---------------------- ------- GBP'000s 2018 2017 ---------------------------------------------- ------- ------- Profit for the period attributable to equity holders of the Company 18,150 25,866 Adjusted for: Pre-IPO employee share schemes (1) - 4,400 IPO-related expenses (2) - 3,000 Tax effect adjustments (3) - (290) ---------------------------------------------- ------- ------- Adjusted Earnings 18,150 32,976 ---------------------------------------------- ------- ------- 1) Relates to pre-IPO employee share schemes expense as detailed in note 6. 2) Relates to costs related to the IPO.
3) IPO-related professional fees, where applicable, were tax-effected based on the applicable rate in the UK in the period in which incurred. Pre-IPO employee share schemes were not deductible for tax purposes and therefore have not been tax-effected.
2(c) Non-current assets geographical information
Non-current assets (other than financial instruments and deferred tax assets) attributable to each geographical market:
GBP'000s 2018 2017 ------------------------------------------------ ------------------------- ------- UK 27,096 25,855 US 269 310 Rest of world 30 35 ------------------------------------------------ ------------------------- ------- Total non-current assets (other than financial instruments and deferred tax assets) 27,395 26,200 ------------------------------------------------ ------------------------- -------
Revenue by geographical market is contained within note 3.
3. Revenue from contracts with customers
3.1 Revenue
The Group derives revenue from the following sources:
(1) software implementation revenue which includes software
licenses, software development and other software implementation
services;
(2) software maintenance (help desk and other support services);
and
(3) ongoing development and support services.
The Group provides the right to use, software development services,
core implementation services and ongoing support of its product,
Alfa Systems. The Group's contractual arrangements contain
multiple deliverables or services, such as the development
or customisation of the software to the customer's requirements,
implementation services such as migration of data and testing
and certain project management services.
Alfa assesses whether there are distinct performance obligations
at the start of each contract and throughout the performance
of the implementation, development and services projects and
maintenance period. These performance obligations are laid
out below.
3.2 Accounting policy, performance obligations and critical
accounting judgements and key sources of estimation uncertainty
The Group has identified the following separate performance
obligations:
(i) Software implementation services - Where implementation
services are considered to be distinct, i.e. when relatively
straightforward, do not require additional development services
and could be performed by an external third party, the implementation
services are accounted for as a separate performance obligation
from any development services. The transaction price is allocated
to each performance obligation based on the stand-alone selling
prices, derived from day rates and is recognised monthly based
on the effort incurred, limited to the amount to which Alfa
has a right to payment.
(ii) Development services - The second performance obligation
is the granting of a right to use Alfa Systems, which includes
the delivery of the related software license and any development
efforts which change the underlying code. The total revenue
attributable to this performance obligation is estimated at
the outset of the relevant software implementation project
and recognised as the effort is expended, on a percentage
of completion basis, limited to the amount to which Alfa has
the right to payment. A percentage-of-completion basis has
been used as customers obtain the ability to benefit from
the product from the start of the implementation project,
the development or customisation of the asset has no alternative
use to the Group and the customer is entitled to the benefits
of the efforts as at the date the efforts are delivered, so
recognition over time is appropriate.
Development services are valued using the residual-value method
as there are no stand-alone selling prices which are observable
as each project is customised.
(iii) Option over the right to use Alfa Systems - In the event
that customers have to pay periodic maintenance fees in order
to keep using Alfa Systems, a component of these future maintenance
fees is attributable to the right to use the software. In
these circumstances the license granted by Alfa is considered
to renew in future periods. There may be a material right
in respect of discounts in future periods. In order to ascribe
a value to this option, management initially determine the
periodic value of the development services during the software
implementation period and estimate the remaining expected
customer life.
(iv) Periodic right to use Alfa Systems - This represents
the stand-alone selling price of the periodic option to renew
the right to use Alfa Systems. If there is the right of clawback
of the annual right to use, such amounts are recognised throughout
the annual period. If there is no right of clawback, then
the annual right to use amount is recognised in full when
there is a right of collection.
(v) Periodic maintenance amounts - This represents the stand-alone
selling price of the ongoing support or maintenance of Alfa
Systems, which is recognised throughout the period as the
services are delivered.
Critical judgements in applying the Group's accounting policies
Revenue recognition - Assessing performance obligations - The
Group is required to make an assessment as to whether the implementation
process, which includes license, implementation and development
revenue streams as well as any maintenance fees during this
phase, forms one or a number of performance obligations. In
doing so, the Group assesses each software implementation contract
as to whether the underlying software requires significant modification
or customisation by the Group in order to meet the customer's
requirements before Alfa Systems can be utilised by the customer.
Therefore there is a judgement required in determining what
efforts relate to the implementation process, by assessing whether
these efforts can be delivered by a third party and what efforts
could be determined to be development and services which change
or enhance the underlying code. In making this judgement, the
Group assesses the contractual terms and the original project
plan for the implementation but also uses historical evidence
of what is core implementation work.
==========================================================================
Key sources of estimation uncertainty
Revenue recognition - percentage of completion estimate -
The Group estimates the number of days required to complete
the relevant software-customisation effort at the outset of
the project and at each balance sheet date implementation.
Estimates of total project days required for a relevant project
are based on historical evidence of past implementations,
knowledge of the customer's systems being replaced and scope
of customisation being requested. The Group applies the percentage-of-completion
method when calculating development services revenue and updates
estimates at each quarter end accordingly. At 31 December
2018, if the Group's estimates of project days to complete
increased by 5% in relation to ongoing software implementation
projects, this would result in development services revenue
decreasing by GBP0.3 million in 2018.
==================================================================================
Key sources of estimation uncertainty
Revenue recognition - Assigning a stand-alone selling price
for implementation services day rates - The Group assesses
the value of the implementation services delivered by assessing
the effective day rate for an implementation contract, taking
into account all revenue streams from implementation contracts
against day rates of similar projects in the same geographies.
If the stand-alone selling price in relation to implementation
day rate decreased by 5%, this would result in operating profit
decreasing by GBP0.4 million.
=================================================================
3.3 Unrealised gains or losses on derivative financial instruments.
The Group has made an accounting policy election to recognise
unrealised gains or losses on derivative financial instruments
within revenue, therefore such gains or losses are shown net
of revenue where instruments have been entered into match the
US dollar denominated projected cash flows. GBP0.1 million
of unrealised losses on derivative financial instruments were
recognised in the year ended 31 December 2018 (2017: GBP1.7
million of unrealised gains).
Disaggregation of revenue from contracts with customers
3(a) Customer concentration - Customers with revenue accounting for more than 10% of total revenue are as follows:
GBP'000s 2018 2017 ------------ ----- ----- Customer A 21% 23% Customer B 13% 3% Customer C 10% 10% Customer D 9% 10%
See note 9(a) for outstanding trade receivables from those customers with revenue accounting for more than 10% of total revenue.
3(b) Timing of revenue - The Group derives revenue from the transfer of goods and services over time and at a point in time in the following revenue segments:
2018 - GBP'000s Software ODS Maintenance Total
implementation revenue
---------------------------------- ---------------- ------- ------------ ---------
At a point in time - fixed price - 2,461 - 2,461
Over time - time and materials 30,391 21,459 - 51,850
Over time - fixed price - - 16,846 16,846
Total revenue from customers
* 30,391 23,920 16,846 71,157
---------------------------------- ---------------- ------- ------------ ---------
*Revenue from customers is presented net of any losses or gains on derivative financial instruments. During 2018 we settled the final portion of our USD forward programme, with GBP0.1 million of losses recorded against revenue in the period (2017: GBP1.7 million gain).
2017 - GBP'000s Software ODS Maintenance Total revenue
implementation
-------------------------------- ---------------- ------------ ------------ --------------
Over time - time and materials 43,654 20,831 - 64,485
Over time - fixed price - - 21,617 21,617
Total revenue from customers
* 43,654 20,831 21,617 86,102
-------------------------------- ---------------- ------------ ------------ --------------
*Revenue from customers is presented net of any losses or gains on derivative financial instruments. During 2018 we settled the final portion of our USD forward programme, with GBP0.1 million of losses recorded against revenue in the period (2017: GBP1.7 million gain).
All goods and services are sold directly to the customer.
3(c) Revenue geographical information - Revenue attributable to each geographical market based on where the license is sold or the service is as follows:
GBP'000s 2018 2017 ------------------------------- ------------------ ------- UK 22,847 30,686 US 33,124 40,492 Rest of world 15,186 14,924 ------------------------------- ------------------ ------- Total revenue from customers* 71,157 86,102 ------------------------------- ------------------ -------
*Revenue from customers is presented net of any losses or gains on derivative financial instruments. During 2018 we settled the final portion of our USD forward programme, with GBP0.1 million of losses recorded against revenue in the period (2017: GBP1.7 million gain).
3(d) Revenue by currency - Revenue by contractual currency is as follows:
GBP'000s 2018 2017 ------------------------------- ------------------- ------------------- GBP 23,608 34,349 USD 36,532 40,695 Euro 5,830 2,481 Other 5,187 8,577 ------------------------------- ------------------- ------------------- Total revenue from customers* 71,157 86,102 ------------------------------- ------------------- -------------------
*Revenue from customers is presented net of any losses or gains on derivative financial instruments. During 2018 we settled the final portion of our USD forward programme, with GBP0.1 million of losses recorded against revenue in the period (2017: GBP1.7 million gain).
3(e) Assets and liabilities from contracts with customers
GBP'000s 2018 2017
--------------------------------------------- ------------------- ------
Contract liabilities - deferred license 1,662 1,673
Contract liabilities - deferred maintenance 3,772 5,046
--------------------------------------------- ------------------- ------
5,434 6,719
--------------------------------------------- ------------------- ------
Significant changes in contract liabilities - Contract liabilities have remained relatively constant as the Group has collected $5.4 million (GBP4.1 million) in relation to license fees from software implementation customers and adjusted GBP1.7 million in relation to reassessment of total time to complete the implementation, offset by GBP4.3 million recognised in the year.
4. Operating profit 4.1 Operating profit is calculated after items such as personnel costs (including training and recruitment), cost of hardware not capitalised, research and development costs and other infrastructure expenses. Implementation and Services expenses - Such expenses relate to the remuneration of personnel assigned to software implementation services, in addition to project-related travel and accommodation expenses and an appropriate portion of relevant overheads. Research and product development expenses - The Group invests a substantial part of its time in research and product development work in relation to the enhancement of its product platform and capabilities. Research and product development work is charged to the client where it is linked to specific client projects such as initial software implementations. The Group's research and product development costs include remuneration costs and an appropriate portion of relevant overheads. Internally generated research and product development costs only qualify for capitalisation if the Group can demonstrate all of the criteria explained in note 10(c), which presents capitalised development costs, disclosed as internally generated intangible assets. If the criteria are not met, such expenditure is recognised as an expense in the period in which it is incurred. The Group continues to assess the eligibility of development costs for capitalisation on a project-by-project basis. All other operating costs are recorded through "Sales, general and administrative expenses."
The following items have been included in arriving at operating profit:
GBP'000s 2018 2017 ------------------------------------------------- ---------------------- ------------------------- Personnel costs 33,361 31,197 Training and recruitment 516 1,036 Other personnel related expenses 2,726 2,320 Advertising, sponsorship and marketing expenses 822 855 Depreciation and amortisation (note 10(a) and 10(c)) 876 495 Property costs 2,750 1,857 Travel costs 3,862 4,057 IT expenses 1,498 1,241 Professional advisor costs 1,670 4,579 Insurance 216 193 Foreign currency differences (523) 1,100 Employee share schemes (note 6) 268 4,400 Other 680 680 ------------------------------------------------- ---------------------- -------------------------
A further split by function is set out below:
GBP'000s 2018 2017 ------------------------------------------------- ---------------------- --------------------- Personnel costs 12,522 14,620 Travel costs 3,862 4,057 IT expenses 1,213 1,241 Overhead allocation 1,327 1,053 ------------------------------------------------- ---------------------- --------------------- Implementation and support expenses 18,924 20,971 Personnel costs 14,723 12,445 Overhead allocation 1,618 1,518 ------------------------------------------------- ---------------------- --------------------- Research and product development expenses 16,341 13,963 Personnel costs 8,842 6,452 Advertising, sponsorship and marketing expenses 822 855 Professional advisor costs 2,128 4,579 Depreciation and amortisation (note 10(a) and 10(c)) 876 495 Foreign currency differences (523) 1,100 Employee share schemes (note 6) 268 4,400 Overhead allocation 1,044 1,195 ------------------------------------------------- ---------------------- --------------------- Sales, general and administrative expenses 13,457 19,076 ------------------------------------------------- ---------------------- --------------------- 5. Personnel costs Employee benefits - The Group provides a range of benefits to employees, including paid holiday arrangements and defined contribution pension plans. Short-term benefits - Short-term benefits, including health cover and other similar non-monetary benefits, are recognised as an expense in the period in which the service is received. Post-employment benefits - The Group operates various defined contribution plans for its employees. A defined contribution plan is a pension plan where the Company pays fixed contributions into a separate independent entity. The Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to the employee's service in the current and prior periods. Employee share schemes -Expense in relation to employee share schemes is recognised in line with the accounting policy in note 6. Personnel costs GBP'000s 2018 2017 ----------------------------------------- ------------------------- ------- Wages, salaries and short-term benefits 28,366 24,524 Social security 4,322 5,050 Post-employment benefits 2,094 1,624 Employee share schemes 268 4,400 ----------------------------------------- ------------------------- ------- Total personnel costs 35,050 35,598 ----------------------------------------- ------------------------- ------- Average monthly number of people employed 2018 2017 (including Directors) ------------------------------------------------- ----- ----- UK 235 218 US 72 67 Rest of World 20 16 ------------------------------------------------- ----- ----- Total average monthly number of people employed 327 301 ------------------------------------------------- ----- ----- Average monthly number of people employed 2018 2017 (including Directors) ------------------------------------------------- ----- ----- Software implementation 110 110 Research and product development 152 142 Sales, general and administrative 65 49 ------------------------------------------------- ----- ----- Total average monthly number of people employed 327 301 ------------------------------------------------- ----- ----- 6. Employee share schemes Employee share schemes are schemes in which the Group receives goods or services as consideration for its own equity instruments. These are accounted for as equity-settled share-based payments. The grant date fair value of the employee share scheme is recognised as a personnel cost, with a corresponding increase in equity, over the period that the employee becomes unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model where required, taking into account the terms and conditions upon which the options were granted and is charged to the income statement on a straight-line basis over the vesting period of the award. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. The Group has two schemes in existence, being the 2018 LTIP plan granted in May 2018 and the 2014/2015 pre-IPO plan.
GBP'000s 2018 2017
----------------------------------------------- ----- ------
Employee share schemes - value of services 268 4,400
Expense in relation to fair value of social 37 -
security liability on employee share schemes
Total cost of employee share schemes 305 4,400
----------------------------------------------- ----- ------
Year Vesting date 2018 Number 2017 Number
of grant of shares of shares
------------------------ ----------- ------------------- ---------------- --------------
2018 LTIP plan 2018 1 June 2021 1,733,375 -
4 equal tranches
2014/2015 pre-IPO plan 2014/2015 from 1 June 2018 11,627,878 16,744,191
2018 LTIP 2014/2015 pre-IPO
plan
------------------------------- -------------------- --------------------------
Number of shares 2018 2017 2018 2017
------------------------------- ------------- ----- ------------ ------------
Issued and outstanding at the
beginning of the year - - 16,744,191 16,854,351
Granted during the year 1,745,250 - - -
Vested during the year - - (4,867,716) (110,160)
Forfeited during the year (11,875) - (248,597) -
Issued and outstanding at the
end of the year 1,733,375 - 11,627,878 16,744,191
------------------------------- ------------- ----- ------------ ------------
2018 LTIP plan- Under the 2018 LTIP plan, awards in the form of nil cost options over ordinary shares in Alfa were granted on 31 May 2018 to selected employees in accordance with the Group's Long-Term Incentive Plan approved by shareholders at the annual general meeting on 24 April 2018. Shares in the company are transferred to participants at the end of the three-year service period if they continue to be employed by the Group throughout the period.
Calculation of the fair value of the 2018 LTIP plan - None of the outstanding options have an exercise price. The weighted average contractual life is 3 years (2017: 3.5 years).
The 2018 LTIP plan is valued using the grant date share price as a proxy for fair value of the option adjusted for any dividends over the period. There are no market or non-market performance conditions attached to the option scheme and as such no performance conditions are included in the fair value calculations. The market price of the shares at the grant date which was GBP1.43, which is the weighted average fair value of those share options at the measurement date. Assumptions used in relation to fair value include no dividends expected to be
paid on the shares in the next three-years. Employee attrition has been assumed at 45%.
The Group's shares have only been quoted since June 2017, therefore the amount of historical share price data was considered insufficient to determine the expected volatility parameter at the time of valuation. This was therefore assessed based on the volatilities of certain quoted companies that were considered to offer some degree of comparability to the Company. These volatilities were assessed based on a measurement period of the past 10 years. The fair value of the Company's shares was the intrinsic value at the date of grant as the exercise price was nil.
The appraisal value at the date of grant (being 4 October 2018), with a three-year vesting period, was determined to be the intrinsic value at that date.
2014/2015 pre-IPO plan- The Group granted 91,020 Ordinary A shares and 75,689 Ordinary A1 shares to employees in 2014 and 2015, which were subsequently re-measured to fair value when a listing event became probable in the fourth quarter of 2016. The share-based compensation charge in relation to these grants has been recognised in full in the year ended 31 December 2017.
7. Finance income
Finance income is recognised on related party loans using the
effective interest method. See note 9.2 for further details
on effective interest method.
GBP'000s 2018 2017
-------------------------------------------- ----- -----
Interest income on cash or short-term bank
deposits 74 33
-------------------------------------------- ----- -----
8. Income tax expense
Taxation expense for the period comprises current and deferred
tax recognised in the reporting period. Tax is recognised in
the consolidated statement of comprehensive income, except
to the extent that it relates to items recognised in other
comprehensive income or directly in equity. In this case tax
is also recognised in other comprehensive income or directly
in equity respectively. Current or deferred taxation assets
and liabilities are not discounted.
i) Current tax - The current income tax charge is calculated
on the basis of the tax laws enacted or substantively enacted
at the reporting date in the countries where the Group's subsidiaries
and associates operate and generate taxable income. Management
periodically evaluates positions taken in tax returns with
respect to situations in which applicable tax regulation is
subject to interpretation. It establishes provisions where
appropriate on the basis of amounts expected to be paid to
the tax authorities.
ii) Deferred tax - Deferred income tax is recognised, using
the liability method, on temporary differences arising between
the tax bases of assets and liabilities and their carrying
amounts in the Group's consolidated financial statements. However,
the deferred income tax is not accounted for if it arises from
initial recognition of an asset or liability in a transaction
other than a business combination that at the time of the transaction
affects neither accounting nor taxable profit or loss. Deferred
income tax is determined using tax rates (and laws) that have
been enacted or substantively enacted by the reporting date
and are expected to apply when the related deferred income
tax asset is realised or the deferred income tax liability
is settled.
Deferred income tax assets are recognised to the extent that
it is probable that future taxable profit will be available
against which the temporary differences can be utilised. Deferred
income tax assets and liabilities are offset when there is
a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income taxes
assets and liabilities relate to income taxes levied by the
same taxation authority on either the taxable entity or different
taxable entities where there is an intention to settle the
balances on a net basis.
Analysis of charge in the year
GBP'000s 2018 2017
--------------------------------------------------- ------ ------
Current tax
Current tax on profit for the year 3,800 7,326
Adjustment in respect of prior years (73) (63)
Foreign tax on profit of subsidiaries for
the current year 605 728
--------------------------------------------------- ------ ------
Current tax 4,332 7,991
Deferred tax
Origination and reversal of temporary differences (29) 5
Adjustment in respect of prior years 3 -
--------------------------------------------------- ------ ------
Deferred tax (26) 5
Total tax charge in the year 4,306 7,996
--------------------------------------------------- ------ ------
The effective tax rate for the year is higher (2017: higher) than the standard rate of corporation tax in the UK for the year ended 31 December 2018 of 19% (2017: 19.25%). The differences are explained below:
Analysis of charge in the year GBP'000s 2018 2017 ----------------------------------------------- ------- ------- Profit on ordinary activities before taxation 22,456 33,862 ----------------------------------------------- ------- ------- Profit on ordinary activities at the standard rate of corporation tax Tax effects of: 4,267 6,518 Effect of different tax rates of subsidiaries operating in other jurisdictions 84 353 Expenses not deductible for tax purposes 51 383 Income not taxable for tax purposes (26) (26) Share-based payment - 847 Adjustment in respect of prior years (70) (63) Group relief - (16) Total tax charge for the year 4,306 7,996 ----------------------------------------------- ------- -------
Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2017 on 6 September 2016. These include reductions to the main rate of corporation tax to reduce the rate to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using these enacted tax rates and reflected in these consolidated financial statements.
9. Financial assets and liabilities
This note provides information about the Group's financial instruments, including:
-- an overview of all financial instruments held by the Group;
o Trade receivables (note 9(a));
o Other financial assets at amortised cost (note 9(b));
o Cash and cash equivalents (note 9(c));
o Trade and other payables (note 9(d)); and
o Derivative financial instruments (note 9(e))
-- specific information about each type of financial instrument; -- accounting policies; and
-- information about determining the fair value of the instruments, including judgements and estimation uncertainty involved.
The Group holds the following financial assets and liabilities:
GBP'000s Notes 2018 2017
---------------------------------------- ------ ----------------- ------------
Financial assets at amortised cost
Trade receivables 9(a) 4,651 6,887
Other financial assets at amortised
cost 9(b) 11,561 7,855
Cash and cash equivalents 9(c) 44,922 31,267
Derivative financial assets - used
for hedging 9(e) - 108
---------------------------------------- ------ ----------------- ------------
Total financial assets 61,134 46,117
---------------------------------------- ------ ----------------- ------------
Financial liabilities at amortised
cost
Trade and other payables 9(d) 7,588 7,417
Contract liabilities 5,434 6,719
---------------------------------------- ------ ----------------- ------------
Total financial liabilities 13,022 14,136
---------------------------------------- ------ ----------------- ------------
9.1 Financial assets and liabilities are recognised in the
statement of financial position when the Group becomes party
to the contractual provision of the instrument.
9.2 Financial assets are classified as either financial assets
at fair value through profit or loss, loans and receivables
or as available-for-sale financial assets. The classification
depends on the purpose for which the financial assets were
acquired. Management determines the classification at initial
recognition.
Regular purchases and sales of financial assets are recognised
on the trade-date, being the date on which the Group commits
to purchase or sell the asset. Financial assets are derecognised
when the rights to receive cash flows from the investments
have expired or have been transferred and the Group has transferred
substantially all risks and rewards of ownership.
All financial assets are initially recognised at fair value
plus, in the case of financial assets not subsequently reported
at fair value through profit or loss, transactions costs that
are attributable to the acquisition of the financial asset.
Subsequent measurement - Financial assets at fair value through
profit or loss (FVTPL).
Financial assets at fair value through profit or loss are financial
assets held for trading. A financial asset is classified in
this category if it is:
* Acquired or incurred principally for the purpose of
selling or repurchasing it in the near-term;
* A derivative not designated and effective as a
hedging instrument.
They are subsequently measured at fair value and the resulting
gains or losses are presented in profit or loss within 'Revenue.'
FVTPL financial assets are classified as current assets.
Loans and receivables - Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are
not quoted in an active market. They are included in current
assets, except for maturities greater than 12 months after
the reporting date. The Group's loans and receivables comprise
trade and other receivables and cash and cash equivalents (notes
9(a) and 9(c)).
Loans and receivables are initially recognised at fair value
plus transaction costs and subsequently measured at amortised
cost using the effective interest method, except for the current
portion where the recognition of interest would be immaterial.
The effective interest income is recognised in profit or loss
within 'Finance income.'
The effective interest method is a method of calculating the
amortised cost of a financial asset or financial liability
and allocating the interest income or expense over the relevant
periods. The effective interest rate is the rate that exactly
discounts estimated future cash flows (including all fees on
points paid or received that form an integral part of the effective
interest rate, transaction costs and other premiums or discounts)
through the expected life of the financial asset or financial
liability, or, where appropriate, a shorter period.
Impairment of financial assets - Financial assets, other than
those measured at fair value through profit or loss, are assessed
for indicators of impairment at each reporting date. Financial
assets are impaired where there is objective evidence that,
as a result of one or more events that occurred after the initial
recognition of the financial asset, the estimated future cash
flows of the financial asset has been impacted. The carrying
amount of the financial asset is directly reduced by the impairment
loss for all financial assets carried at amortised costs with
the exception of trade receivables, where the carrying amount
may be reduced through the use of an allowance account (note
9(a)).
9.3 Financial liabilities are classified as either financial
liabilities at fair value through profit or loss or financial
liabilities measured at amortised cost. All financial liabilities
are recognised initially at fair value and, in the case of
financial liabilities measured at amortised costs, net of directly
attributable costs.
Subsequent measurement - Financial liabilities at fair value
through profit or loss (FVTPL) - Financial liabilities at fair
value through profit or loss are financial liabilities held
for trading. A financial liability is classified as held for
trading if it is:
* Acquired or incurred principally for the purpose of
selling or repurchasing it in the near-term;
* A derivative not designated and effective as a
hedging instrument.
Financial liabilities measured at amortised cost - Financial
liabilities measured at amortised cost are initially recognised
at fair value, net of transaction costs and subsequently measured
at amortised cost using the effective interest method. The
resulting discounted interest charge is recognised in profit
or loss within 'Finance costs'.
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or
expired.
9.4 Fair value measurement - The Group measures certain financial
instruments at fair value. Fair value is the price that would
be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. The fair value is based on the presumption
that the transaction to sell the asset or transfer the liability
takes place either in the principal market for the asset or
liability; or in the absence of a principal market, in the
most advantageous market for the asset or liability.
The principal market or the most advantageous market must be
accessible to or by the Group. The fair value of an asset or
a liability is measured using the assumptions that market participants
would use when pricing the asset or liability, assuming that
market participants act in their economic best interest.
The Group uses valuation techniques that are appropriate in
the circumstances and for which sufficient data is available
to measure fair value, maximising the use of relevant observable
inputs and minimising the use of unobservable inputs. All assets
and liabilities for which fair value is measured or disclosed
in the Group's consolidated financial statements are categorised
within the fair value hierarchy, as follows:
* Level 1 inputs: Quoted prices (unadjusted) in active
markets for identical assets or liabilities;
* Level 2 inputs: Inputs other than quoted prices
included within Level 1 that are observable for the
asset or liability, either directly or indirectly;
* Level 3 inputs: Inputs for the asset or liability
that are not based on observable market data.
The Group's policy is to recognise transfers into and out of
fair value hierarchy levels at the end of the reporting period
when the event or change in circumstances occurred.
9 (a) Trade receivables
9.5 Trade receivables are amounts due from customers for licenses
sold or services performed in the ordinary course of business.
They are generally due for settlement within 30 days and are
therefore all classified as current. Trade receivables are recognised
initially at fair value and subsequently measured at amortised
cost using the effective interest method, less provision for
impairment. An impairment loss is recognised when there is objective
evidence that the Group will not be able to collect all amounts
due according to the original terms of the receivable. The amount
of the impairment charge is the difference between the asset's
carrying amount and the present value of estimated future cash
flows, discounted at the original effective interest rate. The
impairment loss is recognised in the income statement within
'Sales, general and administrative expenses' and subsequent
recoveries are credited in the same account previously used
to recognise the impairment charge.
The maximum exposure to credit risk at the reporting date is
the carrying value of each class of receivable mentioned above.
The credit qualities of these receivables are periodically assessed
by reference to external credit ratings (if available) or to
historical information about their default rates. The Group
does not hold any collateral as security.
As the total carrying amount of the current portion of the trade
and other receivables is due within the next 12 months after
the reporting date, the impact of applying the effective interest
method is not significant and, therefore, the carrying amount
equals the contractual amount or the fair value initially recognised.
GBP'000s 2018 2017
-------------------------- ------ ------
Trade receivables 4,651 6,887
Provision for impairment - -
-------------------------- ------ ------
Trade receivables - net 4,651 6,887
Ageing of trade receivables
Ageing of net trade receivables GBP'000s 2018 2017 ------------------------------------------ ----------------- ------ Less than 30 days 3,976 5,596 Past due 31-90 days 643 1,291 Past due 91+ days 32 - ------------------------------------------ ----------------- ------ Trade receivables - net 4,651 6,887 ------------------------------------------ ----------------- ------
The Group believes that the unimpaired amounts that are past due are fully recoverable as there are no indicators of future delinquency or potential litigation.
Currency of trade receivables GBP'000s 2018 2017 ------------------------------- ---------------- ------ GBP 1,109 2,833 USD 2,993 3,109 Other 549 945 ------------------------------- ---------------- ------ Trade receivables - net 4,651 6,887 ------------------------------- ---------------- ------
Trade receivables due from significant customers - Customers with revenue accounting for more than 10% of total revenue have outstanding trade receivables as follows:
GBP'000s 2018 2017 ------------ ----------------- ------ Customer A 2,228 1,541 Customer B - - Customer C 542 658 Customer D 475 372
As at issuance of these financial statements, 86% of amounts relating to customers accounting for more than 10% of total revenue had been collected.
Impairment and risk exposure - Information about the impairment of trade receivables and the Group's exposure to market risk (specifically foreign currency risk) and credit risk can be found in note 13(a) and (b).
9 (b) Other receivables held at amortised cost
GBP'000s 2018 2017 ------------------------------------------- ------------------ ------ Accrued income 9,162 5,505 Prepayments 1,452 1,731 Other receivables 947 619 Total other receivables held at amortised cost 11,561 7,855 ------------------------------------------- ------------------ ------ 9.6 Accrued income represents fees earned but not yet invoiced at the reporting date which has no right of offset with contract liabilities - deferred license amounts.
Accrued income increased by GBP3.7 million representing an increase due to termination settlements of GBP1.8 million to be invoiced in 2019 and an increase in ODS customer activity. In relation to customers which had accrued income balances at 31 December 2018, , GBP10.8 million had been invoiced and GBP3.8 million collected at 28 February 2019.
9(c) Cash and cash equivalents
9.7 Cash and cash equivalents include cash at bank and in hand as well as short-term deposits with original maturities of three months or less. GBP'000s 2018 2017 --------------------------- ------- ------- Cash at bank and in hand 44,922 30,283 Short-term deposits - 984 --------------------------- ------- ------- Cash and cash equivalents 44,922 31,267 --------------------------- ------- -------
Short-term deposits relate to deposit accounts held in relation to financial instruments.
Currency of cash and cash equivalents
GBP'000s 2018 2017 --------------------------- ------------------ ------- GBP 20,882 19,341 USD 16,877 9,955 Euro 4,751 591 SEK 206 334 AUD 1,813 472 Other 393 574 --------------------------- ------------------ ------- Cash and cash equivalents 44,922 31,267 --------------------------- ------------------ -------
9(d) Trade and other payables
9.8 Trade payables are obligations to pay for goods or services which have been acquired in the ordinary course of business from suppliers. Trade payables are recognised initially at fair value and subsequently measured at amortised costs using the effective interest rate method. Trade and other payables are initially recorded at fair value and subsequently measured at amortised cost. As the total carrying amount is due within the next 12 months from the balance sheet date, the impact of applying the effective interest method is not significant and, therefore, the carrying amount equals the contractual amount or the fair value initially recognised. Trade and other payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. 9.9 Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. When the effect of the time value is material, provisions are measured at the present value of the expenditures expected to be required to settle the obligation. GBP'000s 2018 2017 ------------------------------------------------ ------------------- ------- Trade payables 7,588 7,417 Corporation tax 2,448 3,956 Deferred tax liabilities - 17 Contract liabilities - software implementation 1,662 1,673 Contract liabilities - deferred maintenance 3,772 5,046 Provisions for other liabilities 152 87 Total trade and other payables 15,622 18,196 Less non-current portion (152) (87) ------------------------------------------------ ------------------- ------- Total current trade and other payables 15,470 18,109 ------------------------------------------------ ------------------- -------
See note 8 for further information on corporate tax liabilities
See note 3 and 16 for further information on contract liabilities
Provision
for wear
GBP'000s and tear
------------------------ ----------
At 1 January 2017 58
Provided in the period 29
At 31 December 2017 87
Provided in the period 65
At 31 December 2018 152
------------------------ ----------
Provisions for general wear and tear are made for expected future expenditure of the Alfa headquarters at Moor Place in London in accordance with lease obligations and are based on the Group's best estimate of the likely committed cash outflow. These costs are expected to be incurred at the end of the lease and therefore have been classified as non-current.
9(e) Derivative financial instruments
9.9 Derivative financial instruments are initially recognised at fair value on the date the contract is entered into and are subsequently re-measured at fair value at each reporting date. The method of recognising the gains and losses depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the hedged item. The Group designates derivatives as held for trading. While providing effective economic hedges under the Group's risk management policies, certain derivatives are not designated as hedging instruments according to IFRS 9 'Financial Instruments'. They are classified as held for trading and the changes in the fair value are immediately recognised within 'Revenue'. See note 3 for further information. Related cash flows are reported as cash flows from investing activities. Derivatives not designated for hedge accounting are classified as a current asset or liability.
The Group has nil foreign currency financial instruments assets outstanding at 31 December 2018 (2017: GBP0.1 million assets). The Group has used Level 2 inputs for determining and disclosing the fair value of financial instruments.
10. Non-financial assets and liabilities
This note provides information about the Group's non-financial assets and liabilities, including:
-- specific information about each type of non-financial asset and non-financial liability: -- Property, plant and equipment (note 10(a)); -- Goodwill (note 10(b)); -- Other intangible assets (note 10(c)); and -- Deferred income tax (note 10(d)) -- accounting policies; and
-- information about determining the fair value of the assets and liabilities, including judgements and estimation uncertainty involved.
10(a) Property, plant and equipment
10.1 Property, plant and equipment is stated at historical
cost less accumulated depreciation. Historical cost includes
expenditure that is directly attributable to the acquisition
of the item. Depreciation on assets is calculated using the
straight-line method to allocate their cost over their estimated
useful lives, as follows:
Furniture and 3 -10 years
fittings
IT equipment 3-5 years
Motor vehicles 10 years, or over life of
the lease
The assets' residual values and useful lives are reviewed and
adjusted if necessary at each reporting date. An asset's carrying
amount is written down immediately to its recoverable amount
if the asset's carrying amount is greater than its estimated
recoverable amount. Repairs and maintenance are charged to
the income statement as incurred. Any gains or losses on disposals
are recognised within 'Sales, general and administrative expenses'
in the income statement unless otherwise specified.
10.2 Impairment of finite lived non-financial assets - Finite
lived non-financial assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised
for the amount by which the asset's carrying amount exceeds
its recoverable amount, which is the higher of an asset's fair
value less costs to sell and value in use. For the purpose
of assessing impairment, assets are grouped at the lowest levels
for which there are separately identifiable cash flows.
Fixtures
GBP'000s and fittings IT equipment Motor vehicles Total
--------------------- --------------- --------------- ---------------- ---------------
Cost
At 1 January 2017 1,245 3,162 40 4,447
Additions 43 610 - 653
Disposals (247) (1,261) - (1,508)
--------------------- --------------- --------------- ---------------- ---------------
At 31 December 2017 1,041 2,511 40 3,592
Depreciation
At 1 January 2017 533 2,586 23 3,142
Charge for the year 103 384 8 495
Disposals (247) (1,261) - (1,508)
--------------------- --------------- --------------- ---------------- ---------------
At 31 December 2017 389 1,709 31 2,129
Net book value
--------------------- --------------- --------------- ---------------- ---------------
At 31 December 2017 652 802 9 1,463
--------------------- --------------- --------------- ---------------- ---------------
Cost
At 1 January 2018 1,041 2,511 40 3,592
Additions 95 527 - 622
Foreign exchange 12 75 - 87
Disposals (1) (254) - (255)
--------------------- --------------- --------------- ---------------- ---------------
At 31 December 2018 1,147 2,859 40 4,046
Depreciation
At 1 January 2018 389 1,709 31 2,129
Charge for the year 121 494 8 623
Foreign exchange 13 79 92
Disposals (1) (252) - (253)
--------------------- --------------- --------------- ---------------- ---------------
At 31 December 2018 522 2,030 39 2,591
Net book value
--------------------- --------------- --------------- ---------------- ---------------
At 31 December 2018 625 829 1 1,455
--------------------- --------------- --------------- ---------------- ---------------
Sub-lease rentals
One of the leased properties is sub-leased to tenants under long-term operating leases, with rentals payable monthly. Minimum lease payments receivable on these sub leases of property are as follows:
GBP'000s 2018 2017 ----------------------------------------- ------ ----- Within one year 427 - Later than one year but not later than 5 900 - years Total sub-lease payments receivable 1,327 -
10(b) Goodwill
10.3 Goodwill arose on the acquisition of subsidiaries in 2012
as part of a group reorganisation and represents the excess
of the consideration transferred and the amount of any non-controlling
interest in the investment over the fair value of the identifiable
assets acquired and liabilities and contingent liabilities
assumed.
Goodwill is tested annually for impairment. The carrying amount
is allocated to the cash-generating unit ("CGU") that is expected
to benefit from investment and which represents the lowest
level at which the goodwill is monitored for internal management
purposes. The carrying value of the CGU is then compared to
the higher of its fair value less costs of disposal and its
value in use. Any impairment attributed to the goodwill is
recognised immediately as an expense and is not subsequently
reversed.
GBP'000s 2018 2017
---------------- ------- -------
Cost
At 1 January 24,737 24,737
At 31 December 24,737 24,737
---------------- ------- -------
Impairment of goodwill -The Group tests annually whether goodwill has suffered any impairment on an annual basis in accordance with the accounting policy stated above. There is one CGU, being the Group, as its geographical operations do not have separate or distinct cash inflows. The recoverable amount of goodwill has been determined based on value-in-use calculations using cash flow projections based on financial budgets for a five-year period using a discount rate of 12%. Cash flows beyond these periods have been extrapolated using a steady 2% average growth rate. This growth rate does not exceed the long-term average growth rate for the markets in which the Group operates.
Budgeted cash flow projections are based on the expectation of signing new customers in the Group's sales pipeline as well as ongoing projects or ODS projects with existing customers. Budgeted gross margin is based on historical evidence and the expectations of market development and efficiency leverage. Management believes that any reasonable change in any of the key assumptions on which the recoverable amount is based would not cause the reported carrying amount to exceed the recoverable amount of the CGU. The pre-tax discount rate reflects the current market assessment of the time value of money and the risks specific to the Group for which the estimates of future cash flows have not been adjusted, as required by IFRS.
Management believes that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed the recoverable amount.
10(c) Other intangible assets
Internally generated research and product development costs
only qualify for capitalisation if the Group can demonstrate
all of the following:
* The technical feasibility of completing the
intangible asset so that it will be available for use
or sale, its intention to complete the intangible
asset and use or sell it;
* Its ability to use or sell the intangible asset; how
the intangible asset will generate probable future
economic benefits;
* The existence of a market or, if it is to be used
internally, the usefulness of the intangible asset;
* The availability of adequate technical, financial and
other resources to complete the development and to
use or sell the intangible asset;
* Its ability to measure reliably the expenditure
attributable to the intangible asset during
development.
Generally, commercial viability of new products, modules or
capabilities is not proven until all high risk development issues
have been resolved through testing in the marketplace. Development
expenditure incurred on minor or major upgrades, or other changes
in software functionality, does not satisfy the criteria, where
it is considered that the product is not substantially new in
its design or functional characteristics. Such expenditure is
therefore recognised as an expense.
The Group continues to assess the eligibility of development
costs for capitalisation on a project-by-project basis.
The Group amortises intangible assets with a limited useful
life, using the straight-line method over the following periods:
Computer software - license period or up to 10 years as applicable
Internally generated software - 3-5 years
Total
Internally other
Computer generated intangible
GBP'000s software software assets
--------------------- --------------- --------------- ------------
Net book value
--------------------- --------------- --------------- ------------
At 31 December 2017 - - -
--------------------- --------------- --------------- ------------
Cost
At 1 January 2018 - - -
Additions 1,049 407 1,456
--------------------- --------------- --------------- ------------
At 31 December 2018 1,049 407 1,456
Amortisation
At 1 January 2018 - - -
Charge for the year 253 - 253
At 31 December 2018 253 - 253
Net book value
--------------------- --------------- --------------- ------------
At 31 December 2018 796 407 1,203
--------------------- --------------- --------------- ------------
Significant movement in other intangible assets - During 2018, Alfa implemented a new HR and finance system at a cost of GBP1.1 million, including GBP0.6m of subscription costs. The externally acquired computer software will be amortised over either the license period or 10 years, as applicable.
Critical judgements in applying the Group's accounting policies Internally generated software development - Assessing whether project meets criteria of IAS 38 - Group is required to make an assessment of each ongoing project in order to determine at what stage a project meets the criteria outlined in the Group's accounting policies. Such assessment may, in certain circumstances, require significant judgement. In making this judgement, the Group evaluates, amongst other factors, the stage at which technical feasibility has been achieved, management's intention to complete and use or sell the product, the likelihood of success, availability of technical and financial resources to complete the development phase and management's ability to measure reliably the expenditure attributable to the project. Research and product development expenditure incurred on minor or major upgrades, or other changes in software functionality, does not satisfy the criteria where it is considered that the product is not substantially new in its design or functional characteristics. Such expenditure is therefore recognised as an expense. The total research and product development expense for the period was GBP16.3 million (2017: GBP14.0 million) and there was GBP0.2 million capitalised personnel costs in the year and GBP0.2 million of capitalised external agency costs (2017: nil). ======================================================================
10(d) Deferred income tax
The provision for deferred tax consists of the following deferred tax assets/(liabilities) relating to accelerated capital allowances and short-term timing differences in relation to unpaid pensions accruals and share-based payments.
GBP'000s 2018 2017 ----------------------------------------------- ----- ----- Deferred tax assets due within 12 months 30 21 Deferred tax liabilities due within 12 months (22) (38) ----------------------------------------------- ----- ----- Total 8 (17) ----------------------------------------------- ----- -----
There are no balances due after 12 months.
GBP'000s 2018 2017 ---------------------------------------------- ----- ----- Balance as at 1 January (17) (22) Adjustments in respect of prior period (1) - Deferred income taxes recognised in the income statement 26 5 Balance as at 31 December 8 (17) ---------------------------------------------- ----- ----- Consisting of: Depreciation in excess of capital allowances 22 38 ---------------------------------------------- ----- ----- Other timing differences (30) (21) ---------------------------------------------- ----- -----
Deferred income tax liabilities have not been recognised for the withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries as the Group is able to control the timing of these temporary differences and it is probable that they will not reverse in the foreseeable future. Unremitted earnings totalled GBP7.6 million at 31 December 2018 (2017: GBP4.0 million).
11. Equity
11(a) Ordinary shares
Ordinary shares are classified as equity. There are no restrictions
on the distribution of capital and the repayment of capital.
Issued and fully paid 2018 2017
----------------------------- ----------------------- -----------------------
Shares GBP'000s Shares GBP'000s
----------------------------- ------------ --------- ------------ ---------
Ordinary shares - 0.1 pence 300,000,000 300 300,000,000 300
Balance as at 31 December 300,000,000 300 300,000,000 300
----------------------------- ------------ --------- ------------ ---------
No additional shares have been issued or cancelled in the year ended 31 December 2018.
11(b) Other reserves
Cumulative translation reserve GBP'000s ---------------------------------------- --------- At 1 January 2017 and 31 December 2017 - Currency translation of subsidiary 376 At 31 December 2018 376 ---------------------------------------- --------- Exchange differences arising on translation of the foreign controlled entity are recognised in OCI and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of.
At the end of 2017, the functional currency of one of our subsidiaries changed to the local currency in which it operated due to a change in the underlying contracting method with customers.
12. Critical judgements and key sources of estimation uncertainty
The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group's accounting policies.
This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Detailed information about each of these estimates and judgements is included in other notes, together with information about the basis of calculation for each affected line item in the financial statements. In addition, this note explains where there have been actual adjustments this year as a result of changes to previous estimates.
The Group's areas involving significant judgements or estimates are as follows:
-- Critical judgement - Revenue recognition - Assessing performance obligations (note 3)
-- Key sources of estimation uncertainty - Revenue recognition - percentage of completion estimate (note 3)
-- Key sources of estimation uncertainty - Revenue recognition - Assigning the transaction value to performance obligations (note 3)
-- Critical judgement - Internally generated software development - assessing whether the project meets the criteria of IAS 38 (note 10(c))
13. Financial risk management
This note explains the Group's exposure to financial risks and how these risks could affect the Group's future financial performance. Current year profit and loss information has been included where relevant to add further context.
Area Exposure arising Measurement Management
from
Market risk - Contracted revenue Cash flow forecasting Natural hedging
foreign exchange and costs denominated from localised
in a currency cost base
other than the
entity's functional
currency; and
Monetary assets
and liabilities
denominated in
a currency other
than the entity's
functional currency.
----------------------- ---------------------- -------------------------
Credit risk - Cash and cash Credit ratings Diversification
cash balances equivalents of bank
deposits
----------------------- ---------------------- -------------------------
Credit risk - Trade receivables Ageing analysis Diversification
customer receivables and Credit ratings of
contract assets credit limits
and
letters of credit
----------------------- ---------------------- -------------------------
Liquidity Cash and cash Cash flow forecasting Collection of
equivalents up-front license
fees, ageing analysis
of customer receivables
----------------------- ---------------------- -------------------------
The Group's overall risk management policy focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group has used financial instruments to hedge certain risk exposures in the past. Risk management is carried out by the finance function under policies approved by the Chief Financial Officer. The finance function identifies, evaluates and mitigates financial risks when deemed necessary.
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going-concern, so that they can provide returns for shareholders and benefits for other stakeholders and maintain an optimal capital structure.
13(a) Market risk
(i) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currencies, primarily with respect to those described below. Revenue is predominantly denominated in pounds sterling and US dollar. Operating costs are influenced by the currencies of the countries where the Group's subsidiaries are based and the pounds sterling and the US dollar are the currencies most significantly influencing operating costs.
The split by currency in relation to trade receivables is set out in note 10(b).
The Group's exposure to foreign currency risk in relation to revenue is set out in note 4.
All instruments have been settled as of 31 December 2018. The notional principal amounts of the outstanding commercial foreign exchange contracts at 31 December 2017 were $9.0 million or GBP6.7 million.
In 2019, the Group intends to naturally hedge exposure to foreign currency risk by entering into customer contracts in local currency, with a matching cost base. Previously the policy of the Group had been to hedge committed and highly probable forecasted foreign currency operational transactions. The Group had used uses foreign exchange forwards for this purpose. Hedge accounting had not been applied and therefore the mark-to-market impact is recorded net of revenue. For the year ended 31 December 2018, the impact of these derivatives was an unrealised loss of GBP0.1 million (2017: gain of GBP1.7 million) as the US dollar depreciated against pounds sterling in 2018 compared to 31 December 2017. The offsetting loss related to the forecasted revenue is not visible due to the sales not yet being recorded in the books of the Group as a significant amount of US dollar denominated revenue is in relation to license and maintenance which are recognised rateably in the income statement.
As the US dollar appreciates against pounds sterling, the derivative contracts entered into with financial institutions have a negative mark-to-market. The Group's financial derivative counterparties require margin call should its mark-to-market exceed a pre-agreed contractual limit. In order to protect from the potential margin calls for significant market movements, the Group holds a liquidity buffer in cash and monitors margin requirements on a daily basis for adverse movements in the US dollar versus pounds sterling.
At 31 December 2018 and 2017, the margin requirement related to foreign exchange hedges was nil and nil respectively.
A 10% movement in the USD GBP exchange rate in the year ended 31 December 2018 would impact revenue and operating profit (excluding share-based payments) by 6% and 15% respectively.
13(b) Credit risk
(i) Credit risk related to transactions with financial institutions
Credit risk with financial institutions is managed by the Group's finance function in accordance with a Board approved policy. Management is not aware of any significant risks associated with financial institutions as a result of cash and cash equivalents deposits (including short-term investments) and financial derivative transactions.
All financial counterparties where assets held are over GBP250,000 are AA rated or above (as per ratings from Moody's Investor Services).
(ii) Credit risks related to customer trade receivables
Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, change of strategy and default or delinquency in payments are considered indicators that the trade receivable could be impaired. Given the complexity, the size and the length of certain software implementation of service-related projects, a delay in the settlement of an open trade receivable does not constitute objective evidence that the trade receivable is impaired.
The Group has a relatively diverse customer base geographically and by industry. The responsibility for customer credit risk management rests with management of the Group. Payment terms are set in accordance with practices in the different geographies and end-markets served, typically being 30 days from the date of the invoice. Trade receivables are actively monitored and managed. Collection risk is mitigated through the use of upfront payments of licenses and maintenance. Historically, there has been a de minimis level of customer default as a result of the long history of dealing with the Group's customer base and an active credit monitoring function. Where applicable, credit limits may be established based on internal or external rating criteria, which take into account such factors as the financial condition of the customers, their credit history and the risk associated with their industry segment.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts, other than where the Group has collected upfront payments in the form of license fees at the start of a software implementation contract. The Group has therefore concluded that the expected loss rates for trade receivables are less than the loss rates for the contract assets.
The expected loss rates of trade receivables are based on the payment profiles of customer invoices over a period of 36 months before 31 December 2018 or 1 January 2018 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates would then be adjusted to reflect current or forward-looking information in relation to any macroeconomic factors affecting the ability of the customers to settle the receivables.
The Group has not identified any current factors or forward-looking information which would be relevant to the historical loss rates as all trade receivables have been collected in the past 24 months. Therefore, on this basis, the loss allowance as at 31 December 2018 and 1 January 2018 (on adoption of IFRS 9) was nil, for both trade receivables and contract assets.
See note 9(a) - Trade and other receivables for the ageing of trade receivables and significant customer credit risk exposure.
13(c) Liquidity risk
The Group's principal objective when managing capital is to safeguard the Group's ability to continue as a going-concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders.
The capital structure of the Group consists of cash and cash equivalents (note 9(c)) and equity attributable to equity holders of the parent.
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.
The Group manages its exposure to liquidity risk through short and long-term forecasts and by seeking to align the maturity profiles of its financial assets with its financial liabilities. The Group's policy is to maintain an adequate level of liquidity to meet its liabilities expected to be settled in the short or near term, under both normal and stressed conditions.
The following table details the remaining contractual maturity of the Group's derivative and non-derivative financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows.
31 December 2018
----------------- -------------------------------------------------------------------
Less than Between Between Between More than
GBP'000s 6 months 6-12 months 1-2 years 2-5 years 5 years
----------------- ----------- -------------- ------------ ------------ ----------
Trade and other 7,588 - - - -
payables
Provisions - - - - 152
31 December 2017
----------------- -------------------------------------------------------------------
Less than Between Between Between More than
GBP'000s 6 months 6-12 months 1-2 years 2-5 years 5 years
----------------- ----------- -------------- ------------ ------------ ----------
Trade and other 7,417 - - - -
payables
Provisions - - - - 87
14. Unrecognised items
14 (a) Contingencies and commitments
The Group has no capital commitments, no material contingent liabilities and no contingent assets.
14(b) Non-cancellable operating leases
14.1 Operating leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Various buildings, machinery and equipment from third parties are leased under operating lease agreements. Under such operating lease agreements, the total lease payments are recognised as rent expense on a straight-line basis over the term of the lease agreement, and are included in "Sales, general and administrative expenses," reflecting the nature of the leased assets. Lease incentives received to enter into an operating lease are credited to the consolidated income statement, to reduce the lease expense, on a straight-line basis, over the period of the lease. The Group's property lease in respect of its London headquarters has a lease term of ten years, with a five-year extension.
Operating lease commitments relate to property and motor vehicle leases. Operating lease payments in the year amounted to GBP2.3 million (2017: GBP1.3 million). Future operating lease payments, in respect of non-cancellable leases, are set out below at the applicable dates:
GBP'000s 2018 2017 ------------------------------------------ ------ ------ Within one year 2,465 1,302 Later than one year but not later than 5 years 9,306 4,535 Later than 5 years 7,856 3,566
14 (c) Events occurring after the reporting period
There have been no reportable subsequent events.
Other information
15. Related parties
15 (a) Controlling shareholder
The ultimate parent undertaking is CHP Software and Consulting Limited (the "Parent"), which is the parent undertaking of the smallest and largest group in relation to these consolidated financial statements. The ultimate controlling party is Andrew Page.
15 (b) Subsidiaries
Subsidiaries - Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Unless otherwise stated, they have share capital consisting solely of ordinary shares, and the proportion of ownership interests held equals the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. Inter-company transactions and balances between Group companies are eliminated.
All intra-Group transactions, balances, income and expenses are eliminated on consolidation. All subsidiaries have a 31 December year end and all trading subsidiaries act as sales offices for the Company's principal activity. The below percentages held by company and Group refer to ordinary shares held.
Held Held Held Held
by Company by Group by Company by Group
Registered address Principal 2018 2018 2017 2017
and country of activity
incorporation
---------------- ------------------------- --------------- ------------ ---------- ------------ ----------
Moor Place, 1
Alfa Financial Fore Street Avenue,
Software London, EC2Y Holding
Group Limited 9DT, UK company 100% 100% 100% 100%
Moor Place, 1
Alfa Financial Fore Street Avenue,
Software London, EC2Y Software
Limited 9DT, UK and services - 100% - 100%
Alfa Financial 350N Old Woodward
Software Avenue, Birmingham, Software
Inc MI 48009, USA and services - 100% - 100%
Level 57 MLC
Alfa Financial Centre, 19-29
Software Martin Place,
Australia Sydney, NSW 2000, Software
Pty Limited Australia and services - 100% - 100%
Level 1 Building
Alfa Financial B, 600 Great
Software South Road, Greenlane, Software
NZ Limited Auckland 1051,NZ and services - 100% - 100%
Alfa Financial Bockenkheimer Software - 100% - -
Software Landstraße and services
GmbH 20,
60323 Frankfurt
am Main
Alfa Financial Software GmbH was established in 2018 and has not traded in the period.
15(c) Transactions with related parties
There was no trading between the Group and the Parent.
The balances outstanding from the Parent at 31 December 2018 and 2017 were nil and nil respectively.
During the period, the Group made arms-length transactions with Classic Technology Limited, a company in which the founder holds an interest. These transactions amounted to GBP0.04 million (2017: GBP0.04 million) in relation to fees paid for rental of property. There were no outstanding receivables balances at the end of the reporting period.
15(d) Key management compensation
Key management compensation (including Directors) GBP'000s 2018 2017 --------------------------------------------------- -------------------------- ------ Wages, salaries and short-term benefits 1,651 2,236 Social security 229 286 Post-employment benefits 63 31 Share-based payments - 1,201 Total key management compensation 1,943 3,754 --------------------------------------------------- -------------------------- ------
15(e) Directors' compensation
Aggregate Directors' compensation GBP'000s 2018 2017 --------------------------------------- -------------------- ------ Aggregate emoluments 1,366 1,132 Post-employment benefits 22 15 --------------------------------------- -------------------- ------ Total aggregate director compensation 1,388 1,147 --------------------------------------- -------------------- ------
For further details on Directors' remuneration, see the Report on Directors' Remuneration in the Governance section of the Annual Report. Key management members of the Executive Committee (including any relevant Directors).
16. Offsetting assets and liabilities
Financial assets and liabilities are offset and the net amount is reported in the balance sheet where Alfa currently has a legally enforceable right to offset the recognised amounts, and there is an intention to realise the asset and settle the liability simultaneously.
The following table presents the recognised financial instruments that are offset as at 31 December 2018 and 31 December 2017.
2018 Gross amounts Gross amounts Net amounts
GBP000's offset presented
in the in the
balance balance
sheet sheet
Financial assets
Accrued income 12,301 (3,139) 9,162
--------------------------------- -------------- -------------- ------------
Financial liabilities
Contract liabilities - software
implementation (4,801) 3,139 (1,662)
--------------------------------- -------------- -------------- ------------
2017 Gross amounts Gross amounts Net amounts
GBP000's offset presented
in the in the
balance balance
sheet sheet
Financial assets
Accrued income 8,612 (3,107) 5,505
--------------------------------- -------------- -------------- ------------
Financial liabilities
Contract liabilities - software
implementation (4,780) 3,107 (1,673)
--------------------------------- -------------- -------------- ------------
17. Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to equity holders of Alfa by the weighted average
number of ordinary shares outstanding during the year.
Diluted earnings per share for the periods presented are the
ordinary shares which are held in an employee trust on behalf
of employees are treated as having a potentially dilutive effect
as these shares have service conditions attaching to them.
Should the service conditions not be met, the shares will be
forfeited. The shares have no right to voting or to dividends
while held in trust.
Diluted Adjusted Earnings per share is defined as Adjusted
Earnings, as reconciled below, divided by the weighted average
number of shares issued and outstanding, diluted.
As a result of the Group reorganisation in 2017, the basic
and diluted earnings per share metrics, actual and adjusted,
are calculated with reference to the share structure of the
new parent company, as if it has been the parent for all periods
presented.
2018 2017
----------------------------------------------- -------------------------- ------------
Profit attributable to equity holders of
Alfa (GBP'000s) 18,150 25,866
Weighted average number of shares outstanding
during the year 285,962,898 283,134,180
Basic earnings per share (pence per share) 6.3 9.1
Weighted average number of shares outstanding
including potentially dilutive shares 300,000,000 300,000,000
Diluted earnings per share (pence per share) 6.1 8.6
----------------------------------------------- -------------------------- ------------
2018 2017
----------------------------------------------- -------------------------- ------------
Adjusted Earnings attributable to equity
holders of the Company (GBP'000s) (note
2) 18,150 32,976
Weighted average number of shares outstanding
including potentially dilutive shares 300,000,000 300,000,000
Diluted adjusted earnings per share (pence
per share) 6.1 11.0
----------------------------------------------- -------------------------- ------------
18. Auditor's remuneration
The Group obtained the following services from the Group's auditor as detailed below:
GBP'000s 2018 2017 ------------------------------------------------ ----- ------ Audit of the consolidated financial statements 117 100 Audit of subsidiaries 108 63 ------------------------------------------------ ----- ------ Total audit fees 225 163 Audit related assurance fees 77 61 ------------------------------------------------ ----- ------ Total assurance fees 302 224 Non-audit services - 779 ------------------------------------------------ ----- ------ Total audit and non-audit related services 302 1,003 ------------------------------------------------ ----- ------ 19. Summary of significant accounting policies
This note provides a list of the significant accounting policies adopted in the preparation of these consolidated financial statements to the extent they have not already been disclosed in the other notes above. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the Group, consisting of Alfa Financial Software Holdings PLC and its subsidiaries.
A list of subsidiaries is contained in note 15(b). Alfa is a public company limited by shares and is incorporated and domiciled in England. Its shares are listed on the London Stock Exchange.
The registered office is Moor Place, 1 Fore Street Avenue, London, EC2Y 9DT, United Kingdom. Alfa's registration no. is 10713517.
These financial statements were authorised for issue by the Directors on 7 March 2019. All press releases, financial reports and other information are available on our website in the Investor Relations section at www.afasystems.com.investors
The principal activity of the Group is to provide software solutions and consultancy services to the asset finance industry in the United Kingdom, United States of America, Europe and Asia Pacific.
19 (a) Basis of preparation
Compliance with IFRS- The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS") and interpretations issued by the IFRS Interpretations Committee ("IFRS IC") as adopted by the European Union and with the Companies Act 2006 as applicable to companies reporting under IFRS.
Prior to the admission of Alfa's shares on the main market of the London Stock Exchange on 1 June 2017 (the "Admission"), the Company obtained control of the entire share capital of Alfa Financial Software Group Limited ("AFSGL") via a share-for-share exchange. In substance, these consolidated financial statements reflect the continuation of the pre-existing Group previously headed by AFSGL, and the consolidated financial statements have been prepared applying the principles of predecessor accounting as this was a common control transaction and therefore outside the scope of IFRS 3 "Business Combinations".
Historical cost convention- The consolidated financial statements have been prepared under the historical cost convention, other than the revaluation of financial assets and financial liabilities (including derivative instruments) recorded at fair value through profit or loss.
Going-concern - The ability of the company to continue as a going-concern is contingent on the ongoing viability of the Group. The Group meets its day-to-day working capital requirements through its cash reserves generated from operating activities. There may be uncertainty in relation to operations, particularly over (a) the level of demand for the Group's software, and (b) the ability to retain existing customers. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group has sufficient cash reserves to operate for a period of not less than 12 months.
Having assessed the principal risks and the other matters discussed in connection with the viability statement, the Directors considered it appropriate to adopt the going-concern basis of accounting in preparing its consolidated financial statements. Further information on cash and cash equivalents is given in note 9(c) to the consolidated financial statements.
New and amended standards adopted by the Group - The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2018:
-- IFRS 9, 'Financial Instruments'; -- IFRS 15, 'Revenue from Contracts with Customers'; -- Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS 2; -- Annual Improvements 2014-2016 cycle; and -- Interpretation 22, 'Foreign Currency Transactions and Advance Consideration'.
Alfa has changed its accounting policies and made certain retrospective adjustments to the presentation of contract assets and liabilities following the adoption of IFRS 15. This is disclosed in note 3. The adoption of IFRS 15 has not had any impact on the amounts recognised in the prior period and is not expected to affect the current or future periods.
The other amendments listed above did not have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods.
New standards, amendments and interpretations not yet adopted - The following standards and amendments have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2019 or later periods, but the Group has not early adopted them. Unless otherwise indicated in note 20, these publications are not expected to have a significant impact on the Group's consolidated financial statements:
-- IFRS 16 'Leases', effective for annual periods beginning on or after 1 January 2019. This new standard supersedes IAS 17 'Leases', IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC-15 'Operating Leases-Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'.
There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.
19(b) Principles of consolidation
The accounting policy and list of subsidiaries consolidated are contained in note 15(b).
19(c) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the CODM, as disclosed in note 2.
19(d) foreign currency translation
(i) Functional currency - Items included in the consolidated financial statements of each of the Group's subsidiaries are measured using the currency deemed to be their functional currency. Significant subsidiaries are deemed to have a functional currency similar to the currency in which they operate. Certain smaller subsidiaries are deemed to be operating as an extension of the UK trading subsidiary, and therefore have a functional currency of pounds sterling.
(ii) Presentation currency - The consolidated financial statements are presented in pounds sterling. Alfa's functional and presentation currency is pounds sterling,
(iii) Foreign currency transactions - Transactions in foreign currencies are translated into the respective functional currencies using the exchange rates prevailing at the dates of the transactions. Foreign exchange differences arising from the settlement of such transactions and from the translation at the reporting date of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. The average annual rate for the US dollar used was 1.3355 in 2018 (2017: 1.2887). The closing rate for the US dollar used was 1.2736 in 2018 (2017: 1.3493).
(iv) Group companies - the results and financial position of foreign operation's (none of which has the currency of a hyperinflationary economy) which have a functional currency different from the presentation currency are translated into the presentation currency as follows:
- assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
- income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
- all resulting exchange differences are recognised in other comprehensive income.
On consolidation, exchange differences arising from the translation of any net investment in foreign entities are recognised in other comprehensive income. When a foreign operation is sold the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale.
19(e) Revenue recognition
The accounting policies for the Group's revenue from contracts with customers are explained in note 3.
19(f) Income tax
The accounting policies for income tax and deferred tax are explained in note 8 and 10(d).
19(g) Leases
The accounting policy for operating leases is explained in note 14(b).
19(h) Impairment of assets
The accounting policy for impairment of long-lived assets is explained in note 10(b).
Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.
19(i) Cash and cash equivalents
The accounting policy for cash and cash equivalents is explained in note 9(c).
19(j) Trade receivables
The accounting policy for operating leases is explained in note 9(a).
19(k) Investments and other financial assets
The accounting policy for financial assets is explained in note 9.1.
Impairment of financial assets is explained in note 13(b).
19(l) Derivative financial instruments
The accounting policy for derivative financial instruments is explained in note 9(e). Hedge accounting has not been applied.
19(m) Property, plant and equipment
The accounting policy for property, plant and equipment is explained in note 10(a).
19(n) Goodwill and other intangible assets
The accounting policies for goodwill and other intangibles, including the amortisation methods and periods, are explained in notes 10(b) and 10(c) respectively.
Research and development which do not meet the criteria in 10(c) are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in subsequent period.
19(o) Trade and other payables
The accounting policy for trade and other payables is explained in note 9(d).
19(p) Provisions
The accounting policy for provisions is explained in note 9(d).
19(q) Employee benefits
Short-term obligations - See accounting policy in note 5.1
Long-term benefits - See accounting policy in note 5.1
Pension obligations - See accounting policy in note 5.1
Employee share scheme expense - See accounting policy in note 6
19(r) Equity
The accounting policies for ordinary shares and other reserves are explained in note 11.
19(s) Earnings per share
The accounting policies for basic, diluted and adjusted earnings per share are explained in note 17.
20. Changes in accounting policies
The Group has applied IFRS 15 using the modified retrospective method of adoption and there have been no resultant changes to the quantum of revenue recognised on application of IFRS 15, and no changes were required to retained earnings on adoption of the new standard on 1 January 2018.
Alfa has also voluntarily changed the presentation of certain amounts in the statement of financial position to reflect the terminology of IFRS 15. Contract assets recognised in relation to software implementation contracts were previously presented as part of trade and other receivables. Contract liabilities such as license amounts collected ahead of implementation completions were previously presented as deferred license amounts.
The Group has also applied IFRS 9 "Financial Instruments" from 1 January 2019 with no material impact.
21. Future changes in accounting policies in relation to standards not yet applied
Application of IFRS 16 "Leases" on 1 January 2019 - IFRS 16 will affect primarily the accounting by lessees and will result in the recognition of almost all leases on the balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. An optional exemption exists for short-term and low-value leases. The statement of profit or loss will also be affected, because the total expense is typically higher in the earlier years of a lease and lower in later years. Additionally, an operating expense will be replaced with interest and depreciation, so key metrics like EBIT will change.
Alfa has elected to apply IFRS 16, 'Leases', in accordance with the transition provisions in IFRS 16, in that the new rules will be adopted from 1 January 2019, with the cumulative effect of initially applying the new standard recognised on that date. Comparatives for the 2018 financial year will not therefore be restated.
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
-- the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
-- the accounting for operating leases with a remaining lease term of less than 12 months as at 1January 2019 as short-term leases;
-- the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
-- the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Group has also elected not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4, 'Determining whether an Arrangement contains a Lease'.
Amended accounting policy for leases under IFRS 16
Alfa leases various properties and motor vehicles. Rental contracts are typically made for fixed periods of 2 to 10 years, but might have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by Alfa. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less any lease incentives receivable;
-- amounts expected to be payable by the lessee under residual value guarantees;
-- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Group's incremental borrowing rate. Right-of-use assets are measured at cost comprising the following:
o the amount of the initial measurement of lease liability;
o any lease payments made at or before the commencement date less any lease incentives received;
o any initial direct costs; and
o restoration costs.
Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture.
Impact at 1 January 2019 - On 1 January 2019, Alfa will recognise lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17. These liabilities will be measured at the present value of the remaining lease payments, discounted using Alfa's assumed incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 3.0%.
The lease liability to be recognised at 1 January 2019 is expected to be GBP21.9 million. If the standard had been retrospectively applied as of 1 January 2018, lease liabilities of GBP11.6 million would have been recognised, as the London headquarters expanded during 2018 and therefore an additional lease liability was entered into.
The following sets out the impact on the statement of financial position at 1 January 2019:
31 December Impact of IFRS Adjusted 1 January
2018 16 2019
--------------------------- ------------------------- ------------------------------ -------------------
Non-current assets
Property plant
and equipment 1,455 19,766 21,221
Other non-current
assets 25,948 - 25,948
--------------------------- ------------------------- ------------------------------ -------------------
Total non-current
assets 27,403 19,766 47,169
Current assets
Total current
assets 61,134 70 61,204
--------------------------- ------------------------- ------------------------------ -------------------
Total assets 88,537 19,836 108,373
Current liabilities
Total current
liabilities 15,470 (961) 14,509
Non-current liabilities
IFRS16 lease liability - 21,943 21,943
Other non-current
liabilities 152 - 152
--------------------------- ------------------------- ------------------------------ -------------------
Total non-current
liabilities 152 21,943 22,095
Total liabilities 15,622 20,982 36,604
Shareholders'
equity 72,915 (1,146) 71,769
--------------------------- ------------------------- ------------------------------ -------------------
Total liabilities
and equity 88,537 19,836 108,373
--------------------------- ------------------------- ------------------------------ -------------------
Additionally, if IFRS 16 had been applied from 1 January 2018, it would have increased operating profit by GBP0.2 million and decreased profit before taxation by GBP0.4 million. Operating cash flows would have been higher by GBP1.7 million, since cash payments for the principal portion of the lease liability are classified within financing activities. Only the part of the payments that reflects interest can continue to be presented as operating cash flows.
INDEPENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF ALFA FINANCIAL SOFTWARE HOLDINGS PLC ON THE PRELIMINARY ANNOUNCEMENT OF ALFA FINANCIAL SOFTWARE HOLDINGS PLC
As the independent auditor of Alfa Financial Software Holdings PLC we are required by UK Listing Rule LR 9.7A.1(2)R to agree to the publication of Alfa Financial Software Holdings PLC's preliminary announcement statement of annual results for the period ended 31 December 2018.
The preliminary statement of annual results for the period ended 31 December 2018 includes disclosures required by the Listing Rules and any additional content such as highlights, the Chief Executive's review, financial review, narrative disclosures, management commentary and press release. We are not required to agree to the publication of presentations to analysts, trading statement, interim management statement or half-yearly financial report.
The directors of Alfa Financial Software Holdings PLC are responsible for the preparation, presentation and publication of the preliminary statement of annual results in accordance with the UK Listing Rules.
We are responsible for agreeing to the publication of the preliminary statement of annual results, having regard to the Financial Reporting Council's Bulletin "The Auditor's Association with Preliminary Announcements made in accordance with UK Listing Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Alfa Financial Software Holdings PLC is complete and we signed our auditor's report on 7 March 2019. Our auditor's report is not modified and contains no emphasis of matter paragraph.
Our audit report on the full financial statements sets out the following key audit matters which had the greatest effect on our overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team, together with how our audit responded to those key audit matters and the key observations arising from our work:
REVENUE RECOGNITION
Total group revenue recognised for the year ended 31 December 2018 was GBP71.0 million (2017: GBP87.8 million).
We have focused our work on the inappropriate recognition of revenue where there is:
i) risk of incorrect allocation of the transaction price to the different performance obligations;
ii) risk that revenue is misstated due to estimated days remaining to complete projects used in percentage of completion calculations; and
iii) timing of recognition of out of period items, contract modifications and right to use licence revenues.
Given the level of judgement involved in the identification of distinct performance obligations, we identified this as a potential fraud risk area.
We consider the key judgements to be the estimation of the standalone selling price of a customised licence in the material right calculations, the allocation of time spent between development and implementation days and the specific judgements on items recognised as out of period adjustments.
Further details are included in the critical accounting estimates and judgements note 3.2 and revenue note 3.1 to the consolidated financial statements and the Audit Committee Report.
How the scope of our audit responded to the key audit matter
In response to this key audit matter, we performed the following procedures:
-- Evaluated the design and implementation of controls regarding revenue recognition.
-- Reviewed trends in monthly revenue recognised by customer to identify any large deviations from expectations.
-- Reviewed a sample of new and ongoing contracts to test the completeness of relevant contractual terms identified in Management's technical analysis.
-- Engaged in discussions with the project managers to check for completeness of contracts and other contractual arrangements outside the usual terms and/or any contract modifications.
-- Tested the key inputs and mathematical accuracy of the percentage of completion calculations.
-- Made enquiries of project managers by challenging their estimates of the projected costs to complete, including the allocation of effort between development and implementation performance obligations.
-- Carried out a review of the historical budgeting accuracy of the allocation of development and implementation performance obligations.
-- Considered the evidence available for standalone selling prices by reference to day rates offered to post go-live customers for consultancy services.
-- We have reviewed a sample of accrued and deferred income and evaluated the impact on the financial statements.
-- Reviewed the disclosures in the financial statements for: i) changes to revenue policies are clearly described and explained; ii) performance obligations are identified and explained, and iii) critical judgements and key sources of estimation uncertainty.
Key observations
We identified differences in judgement around estimates of standalone selling prices included within management's assessment of material rights and on the timing of recognition of items that relate to previous periods. On balance, we are satisfied that the balance is free from material misstatement.
CAPITALISATION OF DEVELOPMENT COSTS
The group expends time in research and product development work in relation to the enhancement of its product. In accordance with IAS 38: Intangible assets internally generated research and development costs can only qualify for capitalisation if the group can demonstrate all of the recognition criteria are met. The group considers the eligibility of development costs for capitalisation on a project by project basis.
There is a judgement over the point at which work moves from the research phase to the development phase and over whether development costs are creating an asset which is substantially new in functionality or design. Therefore, there is a risk that development costs are not capitalised for projects that create an enduring enhancement to the software capabilities available for sale to other customers.
Further details are included in the critical accounting estimates and judgements note 3.2 and operating profit note 4.1 to the consolidated financial statements and the Audit Committee Report.
How the scope of our audit responded to the key audit matter
In response to this key audit matter, we performed the following procedures:
-- Evaluated design and implementation testing of the controls surrounding the classification of development costs and the assessment of these costs against IAS 38.
-- Tested Management's assessment of the customisation and costs incurred on client specific costs, against the criteria set out in the accounting standard, to determine whether an asset is generated for future use with other customers and should be capitalised.
-- Made enquiries of the development team as to the activities of both the client specific and the non-client specific costs and assessed whether the criteria for capitalisation as per IAS 38 have been met.
-- Performed tests of details on the allocation and valuation of costs capitalised by testing both the associated 3rd party and employee salary costs.
-- Reviewed both the numerical and narrative disclosures in the annual report to assess whether there is a fair and balanced presentation of the development costs incurred which is consistent with the accounting judgements applied.
Key observations
From the procedures performed, whilst we consider Management's assessment of those development costs that should be capitalised to be conservative, we are satisfied that the balance is free from material misstatement and that the associated disclosures are appropriate.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we did not provide a separate opinion on these matters.
Procedures performed to agree to the preliminary announcement of annual results
In order to agree to the publication of the preliminary announcement of annual results of Alfa Financial Software Holdings PLC we carried out the following procedures:
(a) checked that the figures in the preliminary announcement covering the full year have been accurately extracted from the audited or draft financial statements and reflect the presentation to be adopted in the audited financial statements;
(b) considered whether the information (including the management commentary) is consistent with other contents of the annual report;
(c) considered whether the financial information in the preliminary announcement is misstated;
(d) considered whether the preliminary announcement includes a statement by directors as required by section 435 of CA 2006 and whether the preliminary announcement includes the minimum information required by UKLA Listing Rule 9.7A.1;
(e) where the preliminary announcement includes alternative performance measures ("APMs"), considered whether appropriate prominence is given to statutory financial information and whether:
-- the use, relevance and reliability of APMs has been explained;
-- the APMs used have been clearly defined, and have been given meaningful labels reflecting their content and basis of calculation;
-- the APMs have been reconciled to the most directly reconcilable line item, subtotal or total presented in the financial statements of the corresponding period; and
-- comparatives have been included, and where the basis of calculation has changed over time this is explained.
(f) read the management commentary, any other narrative disclosures and any interim period figures and considered whether they are fair, balanced and understandable.
Use of our report
Our liability for this report, and for our full audit report on the financial statements is to the company's members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for our audit report or this report, or for the opinions we have formed.
Richard Howe FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, UK
7 March 2019
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties which could have a material impact on the long-term performance of Alfa Financial Software Holdings PLC and its subsidiaries are set out in our 2017 Annual Report available on our website. Two additional risks have been added in 2018 which will be included in our 2018 Annual Report and are as below:
Principal risk and uncertainty How it impacts us
Failure to increase market We may fail to optimally assess our
share in relation to market, technological changes, customer
large multi-national requirements, capacity needs and competitors'
customers or to retain strategies, including launching disruptive
our existing customer technologies, and therefore not target
base market opportunities or fail to win
new contracts.
We may fail to effectively address the
significant changes going on in the
industry, e.g. price, flexibility of
product or meeting increased requirements
in relation to digital enablement.
Our product may not develop sufficiently
to meet these market opportunities or
may fail to meet customer requirements
or needs, or these developments could
have delays or cost overruns impacting
on our market position, revenue or returns
on investment.
Our response:
We continue to expand our focused sales
and marketing capability to effectively
deliver new sales and expand our customer
base. We have continued to focus on
digital offerings as an additional value-add
to both new and existing customers to
increase our sales potential.
We seek to identify new customers and
to upgrade existing customers who would
benefit from our new services.
We have professional, experienced project
teams who focus on large scale implementations
and develop close relationships within
the industries we serve. We are continuing
to focus on expanding our partner network
which will open up new sales channels
and relationships. We critically review
the commercial proposals made to new
customers before we proceed and regularly
assess our progress against the original
sales proposal.
We assess all product investment projects
thorough a thorough review of business
cases before we approve major development
programs to ensure they meet our internal
commercial targets and the requirements
of the market.
------------------------------------------------
High customer concentration We have significant customer concentration
risk due to the size of our software
implementation projects, the duration
of them and the relatively low percentage
of recurring revenues from maintenance
contracts. Three customers each account
for more than 10% of revenue, contributing
44% of our 2018 revenue, and ten customers
account for 77% of our revenue in 2018.
Our response:
We continue to aim for alignment of
key contractual terms across all new
contracts which are designed to provide
protection where possible against paused
or terminated contracts.
We ensure that the Group is financially
robust and resilient to economic downturns
or project pauses by retaining cash
reserves and collecting maintenance
and license revenues in advance.
------------------------------------------------
Following the recent decision by the UK population to exit, in due course, from the European Union ("Brexit"), the Directors have considered whether or not this will manifest itself as an additional risk to the Group. While it is difficult to predict the impact of an exit, there may be an impact on the way Alfa does business. Therefore, while this does not constitute a principal risk to the business over and above the risks mentioned above, the Directors will continue to monitor and assess it.
Directors' responsibilities statement
The responsibility statement below has been prepared in connection with the annual report and financial statements for the year ended 31 December 2018. Certain parts thereof are not included within this preliminary announcement.
The Directors confirm that to the best of their knowledge:
-- the consolidated financial statements, from which the condensed financial information within this preliminary announcement have been extracted, are prepared in accordance with International Financial Reporting Standards and give a true and fair view of the asset, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
-- the Strategic Report, from which the CEO review and Financial Review within this preliminary announcement have been extracted, includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
The Directors of Alfa Financial Software Holdings PLC and their respective responsibilities are listed in the 2017 Annual Report. This responsibility statement was approved by the Board of Directors and is signed on behalf of the Board by:
Andrew Denton Vivienne Maclachlan Chief Executive Officer Chief Financial Officer 7 March 2019 7 March 2019
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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