Share Name Share Symbol Market Type Share ISIN Share Description
First Derivatives Plc LSE:FDP London Ordinary Share GB0031477770 ORD 0.5P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  10.00 0.39% 2,605.00 2,590.00 2,605.00 2,630.00 2,510.00 2,585.00 72,160 16:35:24
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Software & Computer Services 217.4 16.7 50.9 51.2 695

First Derivatives PLC Interim results for the six months ended 31.08.19

05/11/2019 7:00am

UK Regulatory (RNS & others)


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First Derivatives PLC

05 November 2019

5 November 2019

First Derivatives plc

("FD", the "Company" or the "Group")

Interim results for the six months ended 31 August 2019

FD (AIM: FDP.L, Euronext Growth: FDP.I) today announces its results for the six months ended 31 August 2019.

Financial Highlights

 
  Six months to 31 August         2019        2018      Change 
  Revenue                       GBP116.7m   GBP105.6m    +11% 
                               ----------  ----------  ------- 
  Gross profit                  GBP48.0m    GBP43.9m     +9% 
                               ----------  ----------  ------- 
  Adjusted EBITDA*              GBP22.0m    GBP18.1m     +22% 
                               ----------  ----------  ------- 
  Profit before tax              GBP8.4m     GBP7.6m     +12% 
                               ----------  ----------  ------- 
  Reported diluted EPS            24.2p       21.7p      +11% 
                               ----------  ----------  ------- 
  Interim dividend per share      8.5p        7.7p       +10% 
                               ----------  ----------  ------- 
  Net debt**                    GBP60.2m    GBP24.2m 
                               ----------  ----------  ------- 
 

*Adjusted for share-based payments and acquisition costs; H1 2020 adjusted EBITDA (excluding impact of IFRS 16): GBP20.2m (+12%)

**Excluding lease obligations under IFRS 16

Business Highlights

-- Software revenue up 13% to GBP71.4m (H1 2019: GBP63.1m), driven by 19% growth in recurring software license revenue

-- Multiple contract wins across both software and managed services and consulting providing confidence in our outlook, including notable deals signed with a major Japanese bank for the global roll-out of a next generation e-FX platform built on Kx and multi-year assignments across our managed services and consulting business

-- Software revenue from Industry increased by 45% to GBP4.4m (H1 2019: GBP3.1m); while at an early stage we have achieved substantial progress across a number of strategic enterprise and partnership opportunities, some of which we expect to close and announce during H2

-- Managed services and consulting revenue up 7% to GBP45.2m (H1 2019: GBP42.5m) with our long-term, strategic client relationships and market-leading services enabling continued growth

-- Completion of the acquisition of the minority shareholdings in Kx Systems, taking 100% ownership, funded by new financing facilities which provide flexibility to support the Group's growth plans

-- Strong pipeline and momentum going into the second half provide us with confidence in the Group's full year performance.

Seamus Keating, Executive Chairman of FD, commented: "We successfully executed on our strategy during the period, signing a number of key contracts across our business, and making strong progress towards securing landmark contracts in the markets we are targeting across Industry. We continue to progress our search for a new CEO following the passing in July of our founder, Brian Conlon, and we will provide an update when the process is complete.

Our financial performance was solid, and we are encouraged by the growing momentum through the period that provides confidence in achieving another year of strong growth, in line with consensus forecasts*."

*The Group believes consensus revenue and adjusted EBITDA (excluding the impact of IFRS 16) forecasts for the year to 29 February 2020 to be GBP242.9m and GBP43.8m respectively.

For further information, please contact:

 
First Derivatives plc                       +44(0)28 3025 2242 
 Seamus Keating, Executive Chairman          www.firstderivatives.com 
 Graham Ferguson, Chief Financial Officer 
 Ian Mitchell, Head of Investor Relations 
 
Investec Bank plc 
 (Nominated Adviser and Broker) 
 Andrew Pinder 
 Carlton Nelson 
 Sebastian Lawrence                         +44 (0)20 7597 5970 
 
Goodbody (Euronext Growth Adviser and 
 Broker) 
 David Kearney 
 Don Harrington 
 Finbarr Griffin                            +353 1 667 0420 
 
FTI Consulting 
 Matt Dixon 
 Dwight Burden 
 Darius Alexander 
 Niamh Fogarty                              +44 (0)20 3727 1000 
 

About FD

FD is a global technology provider with more than 20 years of experience working with some of the world's largest finance, technology, automotive, utility, manufacturing and energy institutions. The Group's Kx technology, incorporating the kdb+ time-series database, is a leader in high-performance, in-memory computing, streaming analytics and operational intelligence. Kx delivers the best possible performance and flexibility for high-volume, data-intensive analytics and applications across multiple industries. FD operates from 15 offices across Europe, North America and Asia Pacific, including its headquarters in Newry, and employs more than 2,400 people worldwide.

For further information, please visit www.firstderivatives.com and www.kx.com

Business Review

The Group has delivered a solid financial performance for the period, in which revenue increased by 11% to GBP116.7m with adjusted EBITDA increasing by 22% to GBP22.0m, as we continue to invest in our long-term growth strategy. The period was notable for the strategic progress achieved across our markets but overshadowed by the loss of our founder, Brian Conlon.

In our Kx business, we continued to build on our leading position in FinTech, with 18% growth in recurring revenue and the signing of notable contracts that will further contribute to revenue growth in future periods; we posted strong underlying growth in our MarTech business; and in Industry we saw initial revenue from a number of contracts and partnership agreements won in prior periods, while making progress with others that we expect to close and announce during the second half of the financial year.

In our managed services and consulting business we recorded 7% growth as we transitioned some staff from the successful completion of multi-year implementation projects onto new assignments, while investing in public cloud training. We have achieved a number of notable contract wins during the year to date, and we continue to be well placed to assist our clients with both their 'run the bank' and 'change the bank' programmes.

We employ more than 2,400 people, whose combined talents are directed at serving our existing and potential clients. With the combination of a proven strategy, world-class technology targeting a vast addressable market and a talented and committed workforce, we continue to face the future with confidence.

Kx platform

Kx is a technology platform that enables the analysis of vast quantities of data, both real-time and historic, at cost and performance levels unmatched by competing solutions. Kx offers a flexible solution - at its core the platform comprises the kdb+ database, with its highly efficient 600kb footprint, and an enterprise layer designed to maximise analytic performance while providing vital functions such as security, control and visualisation. The platform provides all the integration and development tools required to enable a third party, such as an OEM partner or a direct customer, to build their own customised applications. This approach enables these third parties to deliver a solution that meets their specific business needs while benefitting from Kx's performance (Kx is typically orders of magnitude faster than competing solutions), efficiency (including lower hardware and power costs), and flexibility (with deployment options ranging from the edge, to on-premise, cloud and hybrid architectures). The stability of our platform, which is tried and tested across some of the most demanding industries in the world, is also a differentiator, providing competitive advantage against emerging technologies that cannot demonstrate the resilience achieved by Kx.

The Kx platform also provides the Group with the ability to develop applications where the business case is compelling. Our domain expertise in FinTech, garnered over more than twenty years, has enabled us to build applications that target areas such as market surveillance, regulatory reporting, algorithmic trading and liquidity management. We continue to seek opportunities to develop new applications; in those markets where we lack sufficient reach or domain expertise we will continue to target partnership agreements with systems integrators and OEMs who will be responsible for sales and delivery, supported by us. This approach reduces risk and enables deeper engagement across a wider range of potential customers than the Group could achieve under a solely direct sales model.

Research and development

Our R&D continues to focus around three key themes - improving the performance of our technology, growing its addressable market and making it easier to adopt.

Improving performance. We released a new version of our platform with more than 100 new features, which included improved security capabilities, increased support for Kafka and Python and improvements to ease the deployment of the platform. The new version also included increased functionality for our visualisation solution, Kx Dashboards. Our commitment to making Kx the leading platform for AI was reinforced by new features and performance improvements including enhanced integration with Python's Pandas library.

Growing addressable market. During the period, to encourage greater use of our technology within organisations, we made our developer tools available to all our enterprise customers as part of their existing license agreements. This move has been particularly well received, leading to multiple training requests and adding expansion opportunities with existing customers to our sales pipeline. We also released a number of our software tools as free and open source versions, including tools that make it easier to integrate Kx with other enterprise technology platforms as well as tools aimed at the developer community at large. Our aim is to increase adoption of our Kx technology and enable as wide a community as possible to understand the potential of Kx to meet their big data challenges.

Ease of adoption. We delivered a series of initiatives to expand the use of Kx on the public cloud, which aims to simplify Kx deployment. We launched 'Kx on demand' on both the Amazon Web Services Marketplace and Google Cloud Launcher and we also achieved 'advanced partner' status with Amazon Web Services, following investment in staff training. We are committed to enabling our clients to adopt Kx wherever it is needed - from chip to edge to cloud.

We have also partnered with Intel in the period to support the release of Optane DC Persistent Memory, a technology that delivers improved memory and storage performance and which promises significant performance gains for enterprise analytics. Following our work with Intel, Kx supports Optane DC natively and we are working with Intel on joint marketing initiatives to communicate the advantages that Kx and Optane DC can deliver when combined.

Taken together, these initiatives are boosting our technology's performance, enabling us to increase our total addressable market and ease the adoption and integration of Kx within our clients' technology infrastructure, thereby driving revenue and profit growth.

Business development

FinTech

FinTech software continued to deliver strong growth, with total revenue up by 11% to GBP44.6m and recurring license revenue up by 18% to GBP15.8m, representing 35% of total FinTech software revenue (H1 2019: 33%). Growth came from continued demand for solutions such as regulatory and risk reporting, market surveillance and trading analytics. Using Kx as a platform for these solutions enables our clients to improve the quality and integrity of their data, allowing them to generate more revenue, increase their operational efficiency and to meet regulatory scrutiny in a timely and cost-effective manner.

We continue to see our clients evaluate and prepare to move their data operations to the public cloud, attracted by opportunities for development agility and innovation combined with the ability to cope with peaks in compute resource demands. FD is well placed to assist with this transformation, which we expect to be a multi-year strategic shift in technology delivery and which offers the potential to drive significant growth in our revenue from both FinTech software and managed services and consulting.

During the period we signed a number of significant new multi-year contracts, which will underpin growth in future periods. These included one of our largest ever deals, developing a next generation FX trading platform for a major Japanese bank, where Kx will become an integral component of the bank's global FX trading; a contract for Kx to power an AI-based pricing engine and trading platform, using our data refinery product for rapid deployment; the displacement of a competitor at a European bank for the capture of fixed income and FX data; and the sale of a range of our products to a bank based in the Middle East.

We have a strong pipeline across a range of products and geographies, including areas such as surveillance / financial crime and our data refinery platform.

MarTech

Revenue from MarTech increased by 13% to GBP22.4m with 52% of this revenue derived from subscription contracts (H1 2019: 49%). Our solution, powered by Kx and branded as MRP Prelytix, is the only enterprise-class B2B predictive Account-Based Marketing (ABM) platform. It delivers predictive analytics derived from billions of data points, ingested in real-time, enabling clients to dynamically activate a wide range of sales and marketing tactics informed by real-time insights.

The unique insights provided by MRP Prelytix and our constant technical innovation of the platform resulted in MRP Prelytix being recognised within its industry through the award of 'Best Overall ABM Solution' at the 2019 MarTech Breakthrough Awards. In addition, industry analysts Ovum published a report in which MRP Prelytix was named as a 'Leader' in ABM, noting that MRP's "thoughtful integrated use of artificial intelligence within ABM is going to create many opportunities for sales and marketing organizations to better engage with their target account portfolio."

This technical and market leadership translated into additional direct sales during the period as well as the emergence of new sources of revenue through global media agency and channel partners, which represent potentially significant revenue streams for our platform.

We continue to sign new clients on a subscription basis while a number of existing clients increased their use of the platform based on the strong return on investment they had achieved in prior periods. Technology companies continue to form the core of our client base in MarTech, as exemplified through a significant new client win with a large semi-conductor manufacturer. However, our platform is applicable to a wide range of industries and we were pleased to sign new clients across a range of industries, including several additions in financial services and a sizable deal for a global management consultancy business.

During the period we also broadened and deepened the capabilities of our MRP platform. We introduced new functionality, including content syndication driven by MRP Prelytix, which extend our reach deeper into clients by working with their agency partners to capture more of their total sales and marketing spend. These initiatives are expected to generate additional revenue in future periods while increasing the appeal of our platform as a comprehensive lead generation solution.

These additional direct and agency deals began to contribute to our revenue during H1 and were more than sufficient to offset the loss of a significant customer which was the subject of a corporate restructuring in early 2019 and which significantly cut its marketing expenditure as a result. We saw revenue build through the period and are pleased with our momentum into H2 and beyond.

Industry

Kx technology's performance and total cost of ownership advantages have enabled us to generate considerable interest across a number of high value markets where data volumes and velocity present significant challenges. Our strategy is to seek predictable, long-term revenue streams, such as OEM and revenue share agreements, while securing direct sales that establish our position within our target industry markets. This means revenues are tempered in the current investment phase, but in the longer term should deliver strong, predictable growth across a range of markets.

Our industry revenue grew by 45% to GBP4.4m in the period (H1 2019: GBP3.1m), with recurring revenue up by 12%. Growth came from the progression of the OEM and partnership agreements closed in prior periods as successful implementation of our software was achieved in these new markets. We are pleased with the high level of interest we are seeing across industries in the adoption of our software, resulting from a continued focus on marketing, development and sales expansion efforts. Importantly, during the period we progressed a number of high-value opportunities relating to both potential partnership and OEM agreements as well as direct sales. Notable progress during the period included:

-- Automotive - Following our appointment last year as Innovation Partner to Aston Martin Red Bull Racing (AMRBR), we have continued to make progress, signing a contract during the period with a further high-profile F1 team for the use of Kx to support in-race telematics. We continue to see opportunities for other F1 teams to adopt Kx, with these engagements offering the potential to push Kx deeper into the automotive ecosystem generally. We are generating significant interest across the automotive industry and continue to progress opportunities across engineering, design, telemetry and connected cars.

-- Utilities - We have made progress on a number of large-scale, long-term contract bids to deliver Kx as a platform within utilities, working alongside our partner CGI, which counts many of the world's leading utilities as customers. We continue to work to deliver a next-generation electricity information exchange for Fingrid, the transmission system operator for Finland, through which we are building intellectual property that we will be able to re-use in future Kx deployments. We expect numerous utility market participants to upgrade their systems in the coming years and, while the bid process for such deals is lengthy, we believe we are well placed to generate significant long-term revenues from this market.

-- Smart manufacturing - Our previously announced OEM agreements with a Fortune 500 provider of precision manufacturing equipment and with BISTel, a leading South Korean provider of smart manufacturing solutions, continue to develop in line with our expectations. Both OEMs are using Kx for Sensors and kdb+ to enable more rapid decision making based on vast quantities of sensor data, ultimately to assist their customers improve production yields. This is a use case that resonates through smart manufacturing and is enabling us to progress a pipeline of direct and OEM sales opportunities.

After the period end, we have made further progress towards securing a number of high-profile partnership and OEM agreements across multiple use cases, some of which we expect to be able to close and announce during H2. We are also in late stage discussion with several significant direct prospects which, if signed, could contribute to current year revenue. We see this anticipated growth in commercial agreements as a natural evolution of our sales process, with lengthy initial sales cycles as we penetrate new markets, which allows Kx to establish itself and generate a pipeline of opportunities with other participants in the market.

Managed services and consulting

Revenue from managed services and consulting was GBP45.2m, an increase of 7% on the prior period (H1 2019: GBP42.5m). FD has more than 20 years of experience providing services to leading capital markets firms, training and developing our consultants in-house through industry-recognised programmes to equip them with data science skill sets and an understanding of how capital markets firms use technology to underpin their business. We provide support for mission-critical systems, assist clients with regulatory change initiatives and assist in the delivery of both "run-the-bank" and "change-the-bank" projects across our client base.

While the long-term and strategic nature of our client relationships provides high levels of visibility in our managed services and consulting activities, growth during the period was below that experienced in recent years. This was expected and was due to a combination of two multi-year third party vendor implementations completing successfully at the start of our financial year, with the staff involved moving onto other projects through the period and weaker economic conditions impacting client decision making, with demand in London soft but balanced by increased demand in Europe and UK regional centres and our near shore activities

Notwithstanding economic uncertainty, we secured a number of contract wins during the period, particularly around regulatory compliance and reporting in Europe. We have also expanded the range of third-party vendor technologies we support and developed some additional propositions that we believe will be attractive to our clients and increase our addressable market.

As a result, irrespective of any improvement in economic conditions, we expect growth to accelerate in our traditionally stronger H2. Our confidence is underlined by a number of multi-year contracts signed in recent months which include:

-- The implementation of an application rationalisation and migration programme for a regional division of a major investment bank, representing a new customer win in a competitive bid process.

-- Delivering a multi-year programme of regulatory-driven projects and an application upgrade for a North American bank.

-- Providing implementation and delivery services under a new agreement with a third-party independent software vendor, provided by FD on a near-shore basis with considerable growth potential.

Given our high levels of ongoing visibility and recent contract wins we are confident that our multi-year track record of growth in our managed services and consulting business will continue, led by our commitment to quality and excellence in our financial services, vendor services, regulatory and managed services practices. Furthermore, we believe there are a number of large-scale projects ready to be initiated when economic conditions and macro uncertainty improve, which provides confidence in the longer-term growth capabilities in managed services and consulting.

CEO Succession

As announced on 29 July, FD's founder and CEO Brian Conlon passed away during the period. Under our succession planning, a process to appoint a successor was initiated and Non-Executive Chairman Seamus Keating was appointed Executive Chairman to guide the business through that process and oversee the Executive Committee in the interim period. The CEO recruitment process is a priority for the Group and a further update will be provided in due course.

People

The Group employs more than 2,400 people, unchanged from the same time last year as we have focused on consolidating our position following record levels of recruitment in recent years. Our graduate recruitment and training programme attracts a vibrant team and equips them with high levels of in-demand skills. During the period FD was awarded a Charter Mark by Diversity Mark NI for our work on diversity and inclusion, while more than 500 of our staff commenced cloud certification training to enhance our capabilities across the business as our interactions with public cloud providers such as AWS, Google and Azure continue to deepen.

We have also extended our recruitment and development efforts with programmes aimed at providing apprenticeships for school leavers as they work towards their chosen degree. Retention rates remain in line with prior periods and are significantly higher than the industry average, driven by our commitment to continued training and development programmes, a rewarding career path and a fair remuneration and reward system.

Current trading and outlook

We move into the second half of our financial year with good momentum across the business. The investment programme in recent years has generated a strong pipeline of opportunities across our business, and we remain confident of securing contracts across the markets we are targeting within industry. Combined with a solid performance in H1 this provides confidence in the achievement of full year results in line with consensus forecasts.

Financial Review

The table below highlights the components of revenue growth across the Group along with an analysis of gross profit. The analysis also shows our revenue and growth by vertical market.

Revenue and Gross Margin Analysis (GBPm)

 
    H1      H1               H1      H1               H1      H1                                H1       H1 
  2020    2019   Change    2020    2019   Change    2020    2019   Change                     2020     2019     Change 
 Software by sector                                                         Total Software 
 FinTech Revenue          MarTech Revenue          Industry 
   1.9     6.3    (69%)       -       -        -     1.2     0.3     253%   Perpetual          3.2      6.6    (52%) 
  15.8    13.3      18%    11.7     9.8      20%     0.8     0.7      12%   Recurring         28.3     23.8     19% 
------  ------           ------  ------           ------  ------                         ---------  ------- 
  17.7    19.6    (10%)    11.7     9.8      20%     2.0     1.1      92%   Licenses          31.5     30.4      3% 
                                                                            Cost of 
                                                                             sales           (6.0)    (5.0)      20% 
                                                                                         ---------  ------- 
                                                                            Gross 
                                                                             profit           25.4     25.4      - 
                                                                            Gross 
                                                                             margin            81%      84%     (3%) 
 
  26.9    20.7      30%    10.7    10.0       7%     2.4     2.0      20%   Services          40.0     32.7     22% 
                                                                            Cost of 
                                                                             sales          (28.3)   (23.4)     21% 
                                                                                         ---------  ------- 
                                                                            Gross 
                                                                             profit           11.7      9.3     26% 
                                                                            Gross 
                                                                             margin            29%      28%      1% 
 
  44.6    40.3      11%    22.4    19.8      13%     4.4     3.1      45%   Revenue           71.4     63.1     13% 
                                                                            Cost of 
                                                                             sales          (34.3)   (28.4)     21% 
                                                                                         ---------  ------- 
                                                                            Gross 
                                                                             profit           37.2     34.7      7% 
                                                                            Gross 
                                                                             margin            52%      55%     (3%) 
 
                                                                            Total Managed services 
 Managed services and consulting by sector                                   and consulting 
 FinTech Revenue          MarTech Revenue          Industry 
  45.2    42.5       7%       -       -        -       -       -        -   Revenue           45.2     42.5      7% 
                                                                            Cost of 
                                                                             sales          (34.4)   (33.3)      3% 
                                                                                         ---------  ------- 
                                                                            Gross 
                                                                             profit           10.8      9.2     18% 
                                                                            Gross 
                                                                             margin            24%      22%      2% 
 Sector Totals 
 FinTech Revenue          MarTech Revenue          Industry 
  89.8    82.7       9%    22.4    19.8      13%     4.4     3.1      45%   Revenue          116.7    105.6     11% 
                                                                            Cost of 
                                                                             sales          (68.7)   (61.7)     11% 
                                                                                         ---------  ------- 
                                                                            Gross 
                                                                             profit           48.0     43.9      9% 
                                                                            Gross 
                                                                             margin            41%      42%      - 
 EBITDA and net margin profit analysis 
                                                                            R&D              (5.6)    (4.9)     15% 
 
                                                                            Sales 
                                                                             expense        (17.2)   (15.8)      9% 
 
                                                                            Adjusted 
                                                                             operating 
                                                                             expense         (7.6)    (9.0)    (16%) 
 
                                                                            Adj. EBITDA 
                                                                             ex cap           17.6     14.2     23% 
 
                                                                            Capitalised 
                                                                             R&D               4.4      3.8     15% 
 
                                                                            Adj. EBITDA       22.0     18.1     22% 
                                                                            Adj. EBITDA 
                                                                             margin            19%      17%      2% 
 
 

Revenue and Margins

Group revenue increased organically by 11% to GBP116.7m (H1 2019: GBP105.6m) driven by continued strong growth in recurring software revenue, balanced by a reduction in perpetual software license revenue and lower growth in managed services and consulting. As a result of this mix, gross margin reduced slightly to 41% (H1 2019: 42%).

Our continued investment in the Group's operations resulted in an increase in sales and marketing cost of 9%, building on the 21% increase seen in FY 2019, as we added new sales and pre-sales staff to expand our market reach. Research and development costs increased by 15%, in line with recent periods, as we continued to deliver improvements in our software's performance and interoperability for the benefit of our growing client base. Other operating expenses increased by 2% reflecting the Group's fiscal discipline.

Software

Total software revenue increased by 13% to GBP71.4m and represented 61% of total Group revenue (H1 2019: 60%). While total software license revenue increased by 3%, this included a 52% fall in perpetual license revenue and a 19% gain in recurring license revenue as we focused on growing our high-quality recurring revenue. Perpetual license revenue is lumpy and difficult to predict and the prior year represented a strong comparator period. We expect H2 to deliver an increased level of perpetual license revenue over H1, given the status of our advanced pipeline.

Software revenue from FinTech increased by 11% to GBP44.6m, reflecting a 10% decline in license revenue (18% increase in recurring license revenue offset by a 69% decrease in perpetual licenses) and 30% growth in services revenue. Our software services, comprising implementation, managed services and development work for our Kx clients, have been in high demand during the period as the use cases for our technology continue to expand as further reliance is placed on our technology stack.

Total revenue from MarTech was up by 13% to GBP22.4m, driven by continued growth in subscription revenue, which was up by 20% to GBP11.7m, and a 7% increase in services revenue. For the first time, revenue from software subscriptions formed the majority of MarTech revenue and we continue to expect the subscription component of the mix to trend upwards. Momentum increased through the period, driven by new client wins and additional revenue streams, and we are confident of ongoing good growth in MarTech.

Software revenue from Industry increased by 45% to GBP4.4m. Our short-term performance in this is driven by the level of perpetual license revenue which, from a low base, was up 253% in the period as some of our previous OEM and partner wins moved into production. We have maintained our focus on obtaining revenue share agreements, particularly through OEM agreements, accepting perpetual deals only where necessary. While slower to generate revenue in early periods, we are confident this approach will result in larger ongoing royalty-style payments to the Group in future periods as products and solutions with "Kx Inside" are brought to market by our clients and partners. Recurring revenue grew by 12% in the period and we expect H2 to show growth on H1 in both recurring and perpetual license revenue.

Software gross margin decreased slightly from 55% to 52%, driven by the reduction of high margin perpetual license revenue in the mix. Software license gross margin fell to 81% (H1 2019: 84%) and license revenue was 44% of total software revenue (H1 2019: 48%). Software services gross margin grew marginally to 29% (H1 2019: 28%) as utilisation increased in the period. We invested to grow the Kx services team in H1 and will continue to invest in H2 to support the expansion of our technology across our markets.

Managed services and consulting

Managed services and consulting revenue increased by 7% to GBP45.2m while delivering gross margins of 24%, up from 22% in the prior period. While revenue growth was lower than in recent periods due to the reasons discussed in the Business Review, our high level of visibility in this business enabled us to match our recruitment requirements to growth levels and therefore increase margins. Based on current activity levels we anticipate another year of double-digit revenue growth and have increased our recruitment in recent months in line with future growth expectations.

Profit before tax

Reported profit before tax increased by 12% to GBP8.4m (H1 2019: GBP7.6m). Adjusted profit before tax increased by 6% to GBP13.3m (H1 2019: GBP12.6m) held back by increased interest costs following the completion of the acquisition of the minority interest in Kx Systems Inc. The calculation of adjusted profit before tax is detailed below.

 
                                                    H1 2020   H1 2019 
                                                       GBPm      GBPm 
 
 Reported profit before tax                             8.4       7.6 
 
 Adjustments for: 
 Amortisation of acquired intangibles                   1.9       1.8 
 Share-based payment and related costs                  1.6       1.5 
 Acquisition costs, associate disposal costs and 
  changes in deferred consideration                     0.9       1.6 
 Loss on foreign currency translation                   0.5         - 
 Share of loss of associate                               -         - 
 
 
 Adjusted profit before tax                            13.3      12.6 
 
 

Other income, which relates mostly to employment and training incentive grants, was GBP0.1m for the period, down from GBP0.4m in the prior year period.

The Group continued to invest in research and development to maintain its technology lead, with total R&D up 15% to GBP5.6m. Net capitalisation of R&D decreased by 23% in the period, as detailed below:

 
                                          H1 2020   H1 2019   Movement 
                                             GBPm      GBPm 
 Research and development costs: 
 Expensed during the period                   1.2       1.1        12% 
 Capitalisation of product development 
  costs                                       4.4       3.8        15% 
 
 
 Total research and development               5.6       4.9        15% 
 
 
 Amortisation of R&D                        (4.0)     (3.3)        22% 
 
 Net capitalisation of R&D                    0.4       0.6      (23%) 
 

IFRS 16

The Group has implemented IFRS 16, the new accounting standard dealing with leases, using the modified retrospective method applied from 1 March 2019. The impact of the new standard is to move the charge on the income statement for operating leases from operating costs to depreciation and interest, while on the balance sheet there is an asset recognising the right of use and a future lease liability within both current and non-current liabilities.

These impacts are detailed in note 1 to the statement.

Earnings per share

Reported profit after tax increased by 12% to GBP6.6m (H1 2019: GBP5.9m) and reported diluted earnings per share increased by 11% to 24.2p per share (H1 2019: 21.7p).

The adjusted profit after tax for the period of GBP10.9m (H1 2019: GBP10.6m) represented growth of 3%. The major factors impacting earnings per share growth were a higher interest charge and an increase in the Group's adjusted tax rate to 18.0% (H1 2019: 16.0%).

The calculation of adjusted profit after tax is detailed below:

 
                                                         H1 2020   H1 2019 
                                                            GBPm      GBPm 
 
 Reported profit after tax                                   6.6       5.9 
 
 Adjustments from profit before tax                          4.9       5.0 
 Tax effect of adjustments and US tax reform               (0.6)     (0.4) 
 
 
 Adjusted profit after tax                                  10.9      10.6 
 
 
 Weighted average number of ordinary shares (diluted)      27.5m     27.3m 
 
 Adjusted EPS (fully diluted)                              39.6p     38.7p 
 

The fully diluted average number of shares in issue increased to 27.5m (H1 2019: 27.3m) as additional existing share options were exercised. This resulted in adjusted fully diluted earnings per share of 39.6p, representing growth of 2% for the period (H1 2019: 38.7p).

Balance sheet

Total assets increased by 17% to GBP317.7m (H1 2019: GBP272.3m). The purchase of the minority interest in Kx Systems for $53.8m in cash in June 2019 impacted the balance sheet by eliminating the liability due to the minority interest shareholders. The result of this transaction saw interest costs increase in the period as new loans were drawn in U.S. dollars. This transaction, along with the implementation of IFRS 16, saw non-current loans and borrowings increase by GBP61.4m.

In February 2019 the Group announced it had secured new financing facilities comprising a term loan of GBP65m and a revolving loan facility of a further GBP65m, replacing the existing facilities on improved terms. While the Group is comfortable operating at this level of indebtedness, it is expected that the current level of net debt represents the peak and should reduce in future periods, driven by operating cash flow, subject to other strategic activities that may be undertaken in future periods.

Other financial assets, which includes equity investments, increased to GBP15.4m (FY 2019: GBP13.7m) reflecting the lower increase in funding provided for venture companies during the period.

Deferred revenue at the period end was up 9% at GBP17.5m (H1 2019: GBP16.1m), arising from the continued growth in recurring license revenue in the period.

Cash generation and net debt

The Group generated GBP16.4m of cash from operating activities before taxes paid (H1 2019: GBP13.5m) representing 74% conversion of adjusted EBITDA (H1 2019: 74%). The Group typically has a stronger H2 cash generation profile as it benefits from the billing and collection of the majority of the Group's recurring revenue, while H1 sees larger payments out in the form of taxation and dividend payments in addition to staff bonuses.

At the period end, net debt was GBP60.2m (H1 2019: GBP24.2m). The factors impacting the movement in net debt are summarised in the table below:

 
                                                       H1 2020   H1 2019 
                                                          GBPm      GBPm 
 
 Opening net debt (excluding lease liabilities)         (16.1)    (16.2) 
 
 Operating cash flow                                      16.4      13.5 
 Taxes paid                                              (3.0)     (3.7) 
 Dividends paid                                          (5.1)     (4.3) 
 Capital expenditure: property, plant and equipment      (1.2)     (2.5) 
 Capital expenditure: intangible assets                  (4.4)     (3.8) 
 Deferred consideration paid                                 -     (4.1) 
 Acquisition of subsidiaries                            (43.0)         - 
 Investments                                             (1.0)     (3.3) 
 Issue of new shares                                       3.6       2.6 
 Finance leases                                          (1.6)         - 
 Interest, foreign exchange and other                    (4.8)     (2.3) 
 
 Closing net debt                                       (60.2)    (24.2) 
 
 

The Group assists innovative start-up and scale-up businesses seeking to use the power of Kx, in return for a revenue share. In some cases we inject seed capital to help launch the business and bring solutions to market quickly. The table below summarises the investments made in such companies to date as well as the maximum future commitment and the revenue generated for the Group. Future commitments to these businesses are typically payable only if certain pre-determined challenging performance milestones are achieved. In H1 2020 the Group advanced GBP1.0m in equity and loans to its new and existing venture agreement companies with a maximum further commitment of up to GBP1.9m across all 21 venture agreements.

 
                                                                 Total to 
                                             H1 2020   H1 2019       date 
 
 Number of venture agreements in period            3         4         21 
 Equity and loans advanced (GBPm)                1.0       3.3       17.7 
 Outstanding commitment (GBPm)                   1.9       2.7 
 
 Revenue share agreements                          4         4         20 
 Revenue recognised for software services 
  (GBPm)                                         0.4       0.9        5.6 
 Licenses recognised under revenue share 
  agreements (GBPm)                              0.1       0.0        0.8 
 

Dividend

The Board has declared an interim dividend of 8.50p per share (H1 2019: 7.70p per share) which will be paid on 5 December 2019 to those shareholders on the register on 15 November 2019.

Consolidated income statement (unaudited)

Six months ended 31 August 2019

 
                                                            2019       2018 
                                                Note     GBP'000    GBP'000 
 Revenue                                        2 & 3 
 Software licenses and services                           71,441     63,111 
 Managed services and consulting                          45,235     42,463 
                                                       ---------  --------- 
 Total revenue                                           116,676    105,574 
 
 Cost of sales                                    2 
 Software licenses and services                         (34,286)   (28,399) 
 Managed services and consulting                        (34,411)   (33,293) 
                                                       ---------  --------- 
 Total cost of sales                                    (68,697)   (61,692) 
 
 Gross profit                                             47,979     43,882 
 
 Operating costs 
 Research and development costs                          (5,605)    (4,883) 
 Of which capitalised                                      4,425      3,833 
 Sales and marketing costs                              (17,244)   (15,785) 
 Administrative expenses                                (18,874)   (19,337) 
 Impairment (loss)/gain on trade and other 
  receivables                                              (200)        249 
 Other income                                                121        364 
                                                       ---------  --------- 
 Total operating costs                                  (37,377)   (35,559) 
 
 Operating profit                                         10,602      8,323 
 
 Acquisition costs and changes in contingent 
  deferred consideration                                     871      1,582 
 Share-based payment and related costs                     1,578      1,543 
 Depreciation and amortisation                             7,083      4,774 
 Amortisation of acquired intangible assets                1,850      1,846 
                                                       ---------  --------- 
 Adjusted EBITDA                                          21,984     18,068 
---------------------------------------------  ------  ---------  --------- 
 
 Finance income                                               14          1 
 Finance expense                                         (1,628)      (714) 
 Loss on foreign currency translation                      (548)       (46) 
                                                       ---------  --------- 
 Net finance costs                                       (2,162)      (759) 
 
 Share of loss of associate, net of tax                      (8)        (6) 
                                                       ---------  --------- 
 Profit before taxation                                    8,432      7,558 
 
 Income tax expense                                      (1,791)    (1,626) 
 
 Profit for the period                                     6,641      5,932 
                                                       =========  ========= 
 
 
                           Pence   Pence 
 Earnings per share    5 
 Basic                      25.2    23.0 
 Diluted                    24.2    21.7 
 

The Group has initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

Consolidated statement of changes in equity (unaudited)

Six months ended 31 August 2019

 
                                     Share     Share    Merger     Share  Fair value      Currency   Retained    Total 
                                   capital   premium   reserve    option     reserve   translation   earnings   equity 
                                                                 reserve                adjustment 
                                   GBP'000   GBP'000   GBP'000   GBP'000     GBP'000       GBP'000    GBP'000  GBP'000 
 
Balance at 1 March 2019                131    79,726     8,118    10,744       3,587         3,944     36,560  142,810 
Impact of changes in accounting 
 policy - see note 1                     -         -         -         -           -             -        399      399 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Restated balance at 1 March 
 2019                                  131    79,726     8,118    10,744       3,587         3,944     36,959  143,209 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Total comprehensive income 
 for the period 
Profit for the period                    -         -         -         -           -             -      6,641    6,641 
Other comprehensive income 
Net exchange gain on net 
 investment 
 in foreign subsidiaries                 -         -         -         -           -        10,563          -   10,563 
Net exchange loss on hedge 
 of net investment in foreign 
 subsidiaries                            -         -         -         -           -       (4,840)          -  (4,840) 
Net change in fair value of              -         -         -         -           -             -          -        - 
 equity investments at FVOCI 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Total comprehensive income 
 for the period                          -         -         -         -           -         5,723      6,641   12,364 
Transactions with owners of 
 the Company 
Tax relating to share options            -         -         -     1,026           -             -          -    1,026 
Exercise of share options                2     4,579         -     (976)           -             -          -    3,605 
Issue of shares as contingent 
 deferred consideration                  -     1,096         -         -           -             -          -    1,096 
Share-based payment charge               -         -         -       737           -             -          -      737 
Dividends to owners of the 
 Company                                 -         -         -         -           -             -    (5,084)  (5,084) 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Balance at 31 August 2019              133    85,401     8,118    11,531       3,587         9,667     38,516  156,953 
                                  ========  ========  ========  ========  ==========  ============  =========  ======= 
 

The Group has initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

Consolidated statement of changes in equity (unaudited)

Six months ended 31 August 2018

 
                                     Share     Share    Merger     Share  Fair value      Currency   Retained    Total 
                                   capital   premium   reserve    option     reserve   translation   earnings   equity 
                                                                 reserve                adjustment 
                                   GBP'000   GBP'000   GBP'000   GBP'000     GBP'000       GBP'000    GBP'000  GBP'000 
 
Balance at 1 March 2018                128    81,286         -    14,341           -       (6,874)     49,218  138,099 
Impact of correction of reserves 
 classification(1)                       -   (8,118)     8,118         -           -         8,588    (8,588)        - 
Impact of changes in accounting 
 policy(2)                               -         -         -         -           -             -    (1,002)  (1,002) 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Restated balance at 1 March 
 2018                                  128    73,168     8,118    14,341           -         1,714     39,628  137,097 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Total comprehensive income 
 for the period 
Profit for the period                    -         -         -         -           -             -      5,932    5,932 
Other comprehensive income 
Net exchange gain on net 
 investment 
 in foreign subsidiaries                 -         -         -         -           -         6,076          -    6,076 
Net exchange loss on hedge 
 of net investment in foreign 
 subsidiaries                            -         -         -         -           -       (1,588)          -  (1,588) 
Net change in fair value of              -         -         -         -           -             -          -        - 
 equity investments at FVOCI 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Total comprehensive income 
 for the period                          -         -         -         -           -         4,488      5,932   10,420 
Transactions with owners of 
 the Company 
Tax relating to share options            -         -         -     1,307           -             -          -    1,307 
Exercise of share options                2     2,565         -         -           -             -          -    2,567 
Change in measurement of NCI 
 put                                     -         -         -         -           -             -    (9,346)  (9,346) 
Share-based payment charge               -         -         -       645           -             -          -      645 
Dividends to owners of the 
 Company                                 -         -         -         -           -             -    (4,383)  (4,383) 
                                  --------  --------  --------  --------  ----------  ------------  ---------  ------- 
Balance at 31 August 2018              130    75,733     8,118    16,293           -         6,202     31,831  138,307 
                                  ========  ========  ========  ========  ==========  ============  =========  ======= 
 

(1) See note 33 in the Group's financial statements for the period ended 28 February 2019 for details of restatement relating to reserves classification.

(2) See note 1a in the Group's financial statements for the period ended 28 February 2019 for impact of changes in accounting policy relating to the adoption of IFRS 9 at 1 March 2018. The Group has also initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

Consolidated balance sheet (unaudited)

As at 31 August 2019

 
                                                    As at         As at          As at 
                                                31 August     31 August    28 February 
                                                     2019          2018           2019 
                                                            Restated(1) 
                                        Note      GBP'000       GBP'000        GBP'000 
 
 Assets 
 Property, plant and equipment             6       32,597         8,691         10,162 
 Intangible assets and goodwill                   160,559       156,996        151,965 
 Equity accounted investee                          2,710         2,631          2,711 
 Other financial assets                            15,374         3,870         13,706 
 Trade and other receivables                        4,809         9,810          5,720 
 Deferred tax assets                               17,367        20,223         15,352 
                                              -----------  ------------  ------------- 
 Non-current assets                               233,416       202,221        199,616 
 
 Trade and other receivables                       61,516        57,065         57,915 
 Current tax receivable                             2,655             -          1,461 
 Cash and cash equivalents                         20,128        12,984         18,798 
                                              -----------  ------------  ------------- 
 Current assets                                    84,299        70,049         78,174 
 
 Total assets                                     317,715       272,270        277,790 
                                              ===========  ============  ============= 
 
 Equity 
 Share capital                                        133           130            131 
 Share premium                                     85,401        75,733         79,726 
 Merger reserve                                     8,118         8,118          8,118 
 Shares option reserve                             11,531        16,293         10,744 
 Fair value reserve                                 3,587             -          3,587 
 Currency translation adjustment 
  reserve                                           9,667         6,202          3,944 
 Retained earnings                                 38,516        31,831         36,560 
                                              -----------  ------------  ------------- 
 Equity attributable to shareholders              156,953       138,307        142,810 
                                              -----------  ------------  ------------- 
 
 Liabilities 
 Loans and borrowings                      7       95,188        33,805            289 
 Trade and other payables                           3,773         1,360          3,300 
 Deferred tax liabilities                          11,153        10,382         10,827 
                                              -----------  ------------  ------------- 
 Non-current liabilities                          110,114        45,547         14,416 
 
 Loans and borrowings                      7        8,094         3,339         34,998 
 Trade and other payables                  8       37,392        75,689         77,546 
 Current tax payable                                  537           639          1,004 
 Employee benefits                                  4,625         5,966          5,945 
 Contingent deferred consideration                      -         2,783          1,071 
                                              -----------  ------------  ------------- 
 Current liabilities                               50,648        88,416        120,564 
 
 Total liabilities                                160,762       133,963        134,980 
                                              -----------  ------------  ------------- 
 
 Total equity and liabilities                     317,715       272,270        277,790 
                                              ===========  ============  ============= 
 

(1) See note 33 and note 1a in the Group's financial statements for the period ended 28 February 2019 for details of restatement relating to reserves classification and impact of changes in accounting policy relating to the adoption of IFRS 9 at 1 March 2018 respectively. The Group has also initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

Consolidated cash flow statement (unaudited)

Six months ended 31 August 2019

 
                                                                    2019       2018 
                                                                 GBP'000    GBP'000 
 
 Cash flows from operating activities 
 Profit for the period                                             6,641      5,932 
 Adjustments for: 
 Net finance costs                                                 2,162        759 
 Depreciation of property, plant and equipment                     3,086      1,495 
 Amortisation of intangible assets                                 5,847      5,125 
 Associate income                                                      8          6 
 Increase in deferred consideration                                    -        842 
 Equity settled share-based payment transactions                   1,578      1,543 
 Grant income                                                      (121)      (364) 
 Tax expense                                                       1,791      1,626 
                                                               ---------  --------- 
                                                                  20,992     16,964 
 
 Changes in: 
 Trade and other receivables                                     (2,067)    (3,110) 
 Trade and other payables                                        (2,560)      (396) 
                                                               ---------  --------- 
 Cash generated from operating activities                         16,365     13,458 
 
 Taxes paid                                                     (2,986)     (3,695) 
                                                               ---------  --------- 
 Net cash from operating activities                               13,379      9,763 
 
 Cash flows from investing activities 
 Interest received                                                    14          1 
 Acquisition of subsidiary                                      (42,874)          - 
 Acquisition of other investments and associates                   (668)      (437) 
 Increase in loans to other investments                            (345)    (2,883) 
 Acquisition of property, plant and equipment                    (1,239)    (2,465) 
 Acquisition of intangible assets                                (4,425)    (3,833) 
 Deferred consideration paid (IFRS 3 purchase consideration)           -    (4,111) 
                                                               ---------  --------- 
 Net cash used in investing activities                          (49,537)   (13,728) 
 
 Cash flows from financing activities 
 Proceeds from issue of share capital                              3,605      2,567 
 Drawdown of loans and borrowings                                 76,933      8,900 
 Repayment of borrowings                                        (35,210)    (1,766) 
 Payment of finance lease liabilities                            (1,547)        (7) 
 Interest paid                                                   (1,386)      (679) 
 Dividends paid                                                  (5,107)    (4,316) 
                                                               ---------  --------- 
 Net cash generated from financing activities                     37,288      4,699 
 
 Net increase in cash and cash equivalents                         1,130        734 
 Cash and cash equivalents at 1 March                             18,798     12,365 
 Effects of exchange rate changes on cash held                       200      (115) 
                                                               ---------  --------- 
 Cash and cash equivalents at 31 August                           20,128     12,984 
                                                               =========  ========= 
 

The Group has initially applied IFRS 16 at 1 March 2019. Under the transition method chosen comparative information has not been restated; see note 1.

Notes to the Interim Results

   1    Accounting policies 

Basis of Preparation

The results for the six months ended 31 August 2019 are unaudited and have not been reviewed by the Company's Auditors. Except as described below they have been prepared on accounting bases and policies that are consistent with those used in the preparation of the financial statements of the Company for the year ended 28 February 2019.

The financial statements contained in this report do not constitute statutory accounts within the meaning of Section 477 of the Companies Act 2006. They have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union. The results for the period ended 28 February 2019 were prepared under International Financial Reporting Standards (IFRSs) as adopted by the EU ("adopted IFRSs") and reported on by the auditors and received an unqualified audit report. Full accounts for the period ended 28 February 2019 have been delivered to the Registrar of Companies.

Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Changes in accounting policies

The following standards, amendments and interpretations were effective for accounting periods beginning on or after 1 March 2019 and these have been adopted in the Group financial statements where relevant:

   --   IFRS 16 Leases; 
   --   Amendments to IAS 28 Long-term interests in Associates and Joint Ventures; 
   --   Annual Improvements to IFRS Standards 2015-2017 Cycle; 
   --   IFRIC 23 Uncertainty over income tax treatment. 

The effects of applying IFRS 16 is described in further detail below. The other changes listed above did not result in material changes to the Group financial statements.

IFRS 16 Leases

The Group adopted IFRS 16 from 1 March 2019 using the modified retrospective method with the cumulative effect of initially applying the standard reflected as an adjustment to the opening balance of retained earnings as of 1 March 2019; as such, comparative information has not been restated to reflect the new requirements.

IFRS 16 changed lease accounting mainly for lessees and replaced the existing standard IAS 17. An asset for the right to use the leased item and a liability for future lease payments is recognised for all leases, subject to limited exemptions for short-term leases and low-value lease assets. The costs of leases are recognised in profit or loss split between depreciation of the lease asset and a finance charge on the lease liability. This is similar to the accounting for finance leases under IAS 17, but substantively different to the accounting treatment for operating leases under which no lease asset or lease liability was recognised. IFRS 16 also includes an election which permits a lessee not to separate non-lease components (e.g. maintenance) from lease components and instead capitalise both the lease cost and associated non-lease costs.

The standard primarily affected the accounting for the Group as a lessee under operating leases. The application of IFRS 16 resulted in the recognition of additional assets and liabilities in the Group balance sheet and in the consolidated income statement and it replaced the straight-line operating lease expense with a depreciation charge for the right-of-use asset and an interest expense on the lease liabilities. The Group availed of the recognition exemption for short-term and low-value leases. The Group also elected to use the following practical expedients available on transition to IFRS 16:

-- not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into or modified before 1 March 2019;

   --    use hindsight in determining the lease term; 
   --    apply a single discount rate to portfolios of leases with reasonably similar characteristics; 

-- not to separate non-lease components, instead accounting for any lease and associated non-lease components as a single arrangement.

All right-of-use assets were measured at the amount of the lease liability on adoption. The Group's weighted average incremental borrowing rate applied to lease liabilities as at 1 March 2019 is 3.75%.

Details of the Group's accounting policies under IFRS 16 are set out below:

At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A lease conveys a right to control the use of an identified asset for a period of time in exchange for consideration. At inception or upon reassessment of the arrangement, the Group allocates the consideration for lease and non-lease components on the basis of their relative fair values. However, for certain leases of properties the Group has elected not to separate non-lease components and instead accounts for the lease and non-lease components as a single arrangement. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and by reducing the carrying amount to reflect the lease payments made. It is remeasured, with a corresponding adjustment to the right-of-use asset, when there is a change in the future lease payments. The lease liability is presented within loans and borrowings in the consolidated balance sheet.

The right-of-use assets is initially measured at cost, comprising the initial measurement of the corresponding lease liability, any lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The right-of-use asset is tested for impairment if there are any indicators of impairment. The right-of-use assets are presented within the same line item as that within which the corresponding underlying assets would be presented if they were owned - for the Group this is property, plant and equipment.

For short-term leases and leases of low-value assets lease payments are recognised in profit or loss on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. This expense is presented within other operating expenses in the consolidated income statement.

Prior to 1 March 2019 the policy was as follows:

   i)    Operating lease payments 

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense, over the terms of the lease.

   ii)   Finance lease payments 

Minimum lease payments made under finance leases are apportioned between the finance charge and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

iii) Determining whether an arrangement contains a lease

At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset.

At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group's incremental borrowing rate.

Impact of conversion

The following table summarises the impact of transition to IFRS 16 on retained earnings at 1 March 2019.

 
 Retained earnings                                                      Impact of 
                                                                         adopting 
                                                                          IFRS 16 
                                                                       at 1 March 
                                                                             2019 
                                                                          GBP'000 
 a Property, plant and equipment: Recognition of property, plant 
  and equipment                                                            23,159 
 b Trade and other receivables: Rent prepayment adjustment                    399 
 c Loan and borrowings non-current: Recognition of long-term lease 
  liability                                                              (19,988) 
 c Loan and borrowings current: Recognition of short-term lease 
  liability                                                               (3,171) 
                                                                     ------------ 
 Impact at 1 March 2019                                                       399 
                                                                     ============ 
 

The following tables summarise the impacts of adopting IFRS 16 on the Group's interim income statement for the six months ended 31 August 2019 and the Group's interim balance sheet for each of the line items affected.

Impact on the consolidated income statement

 
                                                                                Six months 
                                                                                  ended 31 
                                                 Six months ended 31 August    August 2018 
                                                           2019 (unaudited)    (unaudited) 
                                                                    Amounts        Amounts 
                                                                    without        without 
                                                                   adoption       adoption 
                                    As reported     Adjustments     of IFRS        of IFRS 
                                      (IFRS 16)                          16             16 
                                        GBP'000         GBP'000     GBP'000        GBP'000 
 
 Total revenue                          116,676               -     116,676        105,574 
 Total cost of sales                   (68,697)               -    (68,697)       (61,692) 
                                   ------------  --------------  ----------  ------------- 
 Gross profit                            47,979               -      47,979         43,882 
 
 Administrative expenses               (18,874)           (272)    (19,146)       (19,337) 
 Other operating costs                 (18,503)               -    (18,503)       (16,222) 
                                   ------------  --------------  ----------  ------------- 
 Total operating costs                 (37,377)           (272)    (37,649)       (35,559) 
 
 Operating profit                        10,602           (272)      10,330          8,323 
 
 Depreciation and amortisation            7,083         (1,557)       5,526          4,774 
 Other EBITDA adjustments                 4,299               -       4,299          4,971 
                                   ------------  --------------  ----------  ------------- 
 Adjusted EBITDA                         21,984         (1,829)      20,155         18,068 
---------------------------------  ------------  --------------  ----------  ------------- 
 
 Finance expense                        (1,628)             272     (1,356)          (714) 
 Other finance costs                      (534)               -       (534)           (45) 
                                   ------------  --------------  ----------  ------------- 
 Net finance costs                      (2,162)             272     (1,890)          (759) 
 
 Share of loss of associate, net 
  of tax                                    (8)               -         (8)            (6) 
                                   ------------  --------------  ----------  ------------- 
 Profit before taxation                   8,432               -       8,432          7,558 
 
 Income tax expense                     (1,791)               -     (1,791)        (1,626) 
                                   ------------  --------------  ----------  ------------- 
 
 Profit for the period                    6,641               -       6,641          5,932 
                                   ============  ==============  ==========  ============= 
 

Impact on the consolidated balance sheet

 
                                                                                    As at 31    As at 28 
                                                         As at 31 August 2019    August 2018    February 
                                                                                                    2019 
                                                                  (unaudited)    (unaudited)   (audited) 
                                                                      Amounts        Amounts     Amounts 
                                                                      without        without     without 
                                                                     adoption       adoption    adoption 
                                      As reported     Adjustments     of IFRS        of IFRS     of IFRS 
                                        (IFRS 16)                          16             16          16 
                               Note       GBP'000         GBP'000     GBP'000        GBP'000     GBP'000 
 
 Property, plant 
  and equipment                   a        32,597        (22,332)      10,265          8,691      10,162 
 Other non-current 
  assets                                  200,819               -     200,819        193,530     189,454 
                                     ------------  --------------  ----------  -------------  ---------- 
 Non-current assets                       233,416        (22,332)     211,084        202,221     199,616 
 
 Trade and other 
  receivables                     b        61,516           (697)      60,819         57,065      57,915 
 Other current assets                      22,783               -      22,783         12,984      20,259 
                                     ------------  --------------  ----------  -------------  ---------- 
 Current assets                            84,299           (697)      83,602         70,049      78,174 
 
 Total assets                             317,715        (23,029)     294,686        272,270     277,790 
                                     ============  ==============  ==========  =============  ========== 
 
 Retained earnings                         38,516           (399)      38,117         31,831      36,560 
 Other equity                             118,437               -     118,437        106,476     106,250 
                                     ------------  --------------  ----------  -------------  ---------- 
 Equity attributable 
  to shareholders                         156,953           (399)     156,554        138,307     142,810 
                                     ------------  --------------  ----------  -------------  ---------- 
 
 Loans and borrowings             c        95,188        (19,284)      75,904         33,805         289 
 Other non-current 
  liabilities                              14,926               -      14,926         11,742      14,127 
                                     ------------  --------------  ----------  -------------  ---------- 
 Non-current liabilities                  110,114        (19,284)      90,830         45,547      14,416 
 
 Loans and borrowings             c         8,094         (3,346)       4,748          3,339      34,998 
 Other current liabilities                 42,554               -      42,554         85,077      85,566 
                                     ------------  --------------  ----------  -------------  ---------- 
 Current liabilities                       50,648         (3,346)      47,302         88,416     120,564 
 
 Total liabilities                        160,762        (22,630)     138,132        133,963     134,980 
                                     ------------  --------------  ----------  -------------  ---------- 
 
 Total equity and 
  liabilities                             317,715        (23,029)     294,686        272,270     277,790 
                                     ============  ==============  ==========  =============  ========== 
 
   2    Segmental Reporting 

Information about reportable segments

 
                                                Managed services                                                          Software                                                    Total 
                                                  and consulting 
                                                   2019                               2018                               2019                               2018                               2019       2018 
                                                GBP'000                            GBP'000                            GBP'000                            GBP'000                            GBP'000    GBP'000 
 
 Revenue by segment 
 Revenue                                         45,235                             42,463                             71,441                             63,111                            116,676    105,574 
 Cost of sales                                 (34,411)                           (33,293)                           (34,286)                           (28,399)                           (68,697)   (61,692) 
 
 
 Gross profit                                    10,824                              9,170                             37,155                             34,712                             47,979     43,882 
 
 

Geographical location analysis

 
                    2019     2018 
                 GBP'000  GBP'000 
 
UK                31,272   29,891 
Rest of Europe    21,920   17,483 
North America     49,599   47,105 
Asia Pacific      13,885   11,095 
 
 
Total            116,676  105,574 
 
 
   3    Revenue 

Disaggregation of revenue

 
                                                     Managed services                                                      Software                                                            Total 
                                                       and consulting 
                                                        2019                             2018                             2019                             2018                              2019                             2018 
                                                     GBP'000                          GBP'000                          GBP'000                          GBP'000                           GBP'000                          GBP'000 
 
 Revenue by industry 
 FinTech                                              45,235                           42,463                           44,565                           40,252                            89,800                           82,715 
 MarTech                                                   -                                -                           22,429                           19,789                            22,429                           19,789 
 Other                                                     -                                -                            4,447                            3,070                             4,447                            3,070 
                             -------------------------------  -------------------------------  -------------------------------  -------------------------------  --------------------------------  ------------------------------- 
                                                      45,235                           42,463                           71,441                           63,111                           116,676                          105,574 
                             -------------------------------  -------------------------------  -------------------------------  -------------------------------  --------------------------------  ------------------------------- 
 
 
 Type of good or service 
 Sale of goods - perpetual                                 -                                -                            3,160                            6,615                             3,160                            6,615 
 Sale of goods - recurring                                 -                                -                           28,293                           23,823                            28,293                           23,823 
 Rendering of services                                45,235                           42,463                           39,988                           32,673                            85,223                           75,136 
                             -------------------------------  -------------------------------  -------------------------------  -------------------------------  --------------------------------  ------------------------------- 
                                                      45,235                           42,463                           71,441                           63,111                           116,676                          105,574 
                             -------------------------------  -------------------------------  -------------------------------  -------------------------------  --------------------------------  ------------------------------- 
 
 Timing of revenue 
 recognition 
 At a point in time                                        -                                -                            3,160                            6,615                             3,160                            6,615 
 Over time                                            45,235                           42,463                           68,281                           56,496                           113,516                           98,959 
                             -------------------------------  -------------------------------  -------------------------------  -------------------------------  --------------------------------  ------------------------------- 
                                                      45,235                           42,463                           71,441                           63,111                           116,676                          105,574 
                             -------------------------------  -------------------------------  -------------------------------  -------------------------------  --------------------------------  ------------------------------- 
 
   4    Dividends 

An Interim dividend of 8.50p per share will be made for the six months to 31 August 2019. This will be paid to shareholders on 5 December 2019 to shareholders on the register on 15 November 2019. The shares will be marked Ex-Dividend on 14 November 2019.

   5    Earnings per Share 

Basic earnings per share for the six months ended 31 August 2019 has been calculated on the basis of the reported profit after taxation of GBP6.6m (H1 2019: GBP5.9m) and the weighted average number of shares for the period of 26,396,587 (H1 2019: 25,767,759). This provides basic earnings per share of 25.2 pence (H1 2019: 23.0 pence).

Diluted earnings per share for the six months ended 31 August 2019 has been calculated on the basis of the reported profit after taxation of GBP6.6m (H1 2019: GBP5.9m) and the weighted average number of shares after adjustment for the effects of all dilutive potential ordinary shares 27,496,863 (H1 2019: 27,341,839). This provides diluted earnings per share of 24.2 pence (H1 2019: 21.7 pence).

The Board considers that adjusted earnings is an important measure of the Group's financial performance. Adjusted earnings in the period was GBP10,892k (H1 2019: GBP10,571k), which excludes the amortisation of acquired intangibles of GBP1,850k, (H1 2019: GBP1,846k) share-based payments of GBP1,578k (H1 2019: GBP1,543k), acquisition costs of GBP871k (H1 2019: GBP1,582k), loss on foreign currency translation of GBP548k (H1 2019: GBP46k), share of loss of associate GBP8k (H1 2019: GBP6k) and associated taxation impact of these adjustments of GBP604k (H1 2019: GBP384k). Using the same weighted average of shares as above provides adjusted basic earnings per share of 41.3 pence (H1 2019: 41.0 pence) and adjusted diluted earnings per share of 39.6 pence (H1 2019: 38.7 pence).

   6    Property, plant and equipment 
 
                              Leasehold          Plant and         Office furniture     Right-of-use            Total 
                           improvements          equipment                  GBP'000           assets 
                                GBP'000            GBP'000                                   GBP'000          GBP'000 
 Cost 
 At 1 March 2019                  5,092             16,151                    1,201                -           22,444 
 Adjustment on initial 
  application of IFRS 
  16                                  -                  -                        -           23,159           23,159 
 Additions                           18              1,211                       10                -            1,239 
 Exchange adjustments                76                620                       10              762            1,468 
                         --------------  -----------------  -----------------------  ---------------  --------------- 
 At 31 August 2019                5,186             17,982                    1,221           23,921           48,310 
                         --------------  -----------------  -----------------------  ---------------  --------------- 
 
   Depreciation 
 At 1 March 2019                  2,099              9,425                      758                -           12,282 
 Charge for the period              189              1,224                      116            1,557            3,086 
 Exchange adjustments                45                258                       10               32              345 
                         --------------  -----------------  -----------------------  ---------------  --------------- 
 At 31 August 2019                2,333             10,907                      884            1,589           15,713 
                         --------------  -----------------  -----------------------  ---------------  --------------- 
 
 
                              Leasehold          Plant and         Office furniture   Right-of-use          Total 
                           improvements          equipment                  GBP'000         assets 
                                GBP'000            GBP'000                                 GBP'000        GBP'000 
 Cost 
 At 1 March 2018                  3,622             12,840                      869              -         17,331 
 Additions                        1,005              1,208                      252              -          2,465 
 Exchange adjustments                38                  7                        4              -             49 
                         --------------  -----------------  -----------------------  -------------  ------------- 
 At 31 August 2018                4,665             14,055                    1,125              -         19,845 
                         --------------  -----------------  -----------------------  -------------  ------------- 
 
   Depreciation 
 At 1 March 2018                  1,696              7,357                      564              -          9,617 
 Charge for the period              302              1,112                       81              -          1,495 
 Exchange adjustments                 6                 35                        1              -             42 
                         --------------  -----------------  -----------------------  -------------  ------------- 
 At 31 August 2018                2,004              8,504                      646              -         11,154 
                         --------------  -----------------  -----------------------  -------------  ------------- 
 
 
Carrying amounts 
At 1 March 2018     1,926  5,483  305       -   7,714 
                    =====  =====  ===  ======  ====== 
At 31 August 2018   2,661  5,551  479       -   8,691 
                    =====  =====  ===  ======  ====== 
At 1 March 2019     2,993  6,726  443       -  10,162 
                    =====  =====  ===  ======  ====== 
At 31 August 2019   2,853  7,075  337  22,332  32,597 
                    =====  =====  ===  ======  ====== 
 
   7    Loans and borrowings 
 
                          31 August  31 August  28 February 
                               2019       2018         2019 
                            GBP'000    GBP'000      GBP'000 
Current liabilities 
Secured bank loans            4,651      3,339       34,909 
Lease liabilities             3,443          -           89 
 
 
                              8,094      3,339       34,998 
 
 
Non-current liabilities 
Secured bank loans           75,638     33,805            - 
Lease liabilities            19,550          -          289 
 
 
                             95,188     33,805          289 
 
 
   8    Trade and other payables 
 
                      31 August  31 August  28 February 
                           2019       2018         2019 
                        GBP'000    GBP'000      GBP'000 
Current liabilities 
Trade payables            7,143      6,632        6,638 
Other payables           11,117      9,852       10,191 
Accruals                    888        901          699 
Deferred income          17,546     16,078       19,537 
Government grants           698        899          390 
NCI forward                   -     41,327       40,091 
 
 
                         37,392     75,689       77,546 
 
 
 
                          31 August  31 August  28 February 
                               2019       2018         2019 
                            GBP'000    GBP'000      GBP'000 
Non-current liabilities 
Government grants             2,729      1,360        2,597 
Accruals                      1,044          -          703 
 
 
                              3,773      1,360        3,300 
 
 
   9    Interim Report 

Copies can be obtained from the Company's head and registered office: 3 Canal Quay, Newry, Co. Down, BT35 6BP and are available to download from the Company's web site www.firstderivatives.com.

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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