FreeAgent Holdings PLC Full Year Results (2026H)

TIDMFREE

RNS Number : 2026H

FreeAgent Holdings PLC

06 June 2017

6 June 2017

FreeAgent Holdings plc

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

Full year results for the year ended 31 March 2017

   -     Strong growth in customer base drives revenue and increases visibility - 

FreeAgent Holdings plc, a provider of cloud-based Software-as-a-Service ("SaaS") accounting software solutions and mobile applications designed specifically for UK micro-businesses, today announces its full year results for the year ended 31 March 2017.

Financial Highlights

   --     Revenue increased by 41% to GBP8.0m (FY 2016: GBP5.7m) 
   --     Gross profit increased by 38% to GBP6.6m (FY 2016: GBP4.8m) 
   --     Gross profit margin 82% (FY 2016: 84%) 

-- Adjusted* EBITDA GBP0.7m loss (2016: GBP0.2m loss) reflects planned investments in customer acquisition, particularly in the practice channel

-- Net loss of GBP2.9m, including share-based payment expense of GBP0.8m, as the Group continues to invest in scaling its business (2016: GBP1.3m)

-- Statement of Financial Position strengthened with GBP4.3m of net cash at year end (31 March 2016: GBP1.8m)

   --     Loss per share of 13p (2016: 43p) 

-- Annualised Committed Monthly Recurring Revenue (ACMRR) at period end increased by 26% to GBP8.6m (Mar 2016: GBP6.8m)

-- Residual lifetime value of future subscription payments from the Group's current customer base increased to GBP34m (31 March 2016: GBP26m)

Operational Highlights

   --     Accounting Practice Clients strengthened to 33,147 (FY 2016: 16,705) 
   --     Direct Clients increased to 17,500 (FY 2016: 15,741) 

-- High levels of customer satisfaction - Net Promoter Score (NPS) of 72 and low direct customer churn rates averaging 1.6% during the year

-- Successful placing of GBP8m of new equity and admission to "AIM" (Alternative Investment Market of the London Stock Exchange) in November 2016

Commenting on today's results, Ed Molyneux, Chief Executive, said:

"2017 was a very good year for FreeAgent. The successful IPO and continued progress against our strategy have delivered financial metrics that are in line with or exceeding market expectations. Demand for FreeAgent is robust and the environment for micro-businesses in the UK remains attractive. The Group continues to deliver against its stated strategy and the Board expects further positive progress to be made in 2018."

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

*Adjusted for share based payment expenses which are a non-cash cost to the Group.

For further information, please contact:

 
  FreeAgent Holdings plc               via FTI Consulting, 
                                        LLP 
  Ed Molyneux, CEO 
   Katherine Tenner, CFO 
 
  N+1 Singer                           [phone] 
  Sandy Fraser (Corporate Finance) 
 
  FTI Consulting, LLP                  [phone] 
  Chris Lane, Emma Appleton, 
   Tom White 
 

Chairman's statement

This set of results marks our inaugural year as an AIM quoted Plc. We have established an experienced Board of Directors with a clear focus on delivering the strategy and results that were set out in the Admission Document at the time of our Initial Public Offering ("IPO") in November 2016, whilst also providing timely and clear communications and governance process for our institutional and retail shareholders.

The market for our accounting software and services is the micro-business sector, and their accountants and other financial services providers. This is a substantial volume market in the UK, with micro-businesses accounting for 95% of the UK's 5.5 million businesses, and we continue to make progress in gaining market share, particularly through the accounting practices that serve this sector. I am pleased with the progress we have made against our stated strategy and with our investment in people, systems and processes we are well placed for further successful progress in the coming year.

All financial metrics are in line with or exceeding market expectations. Revenue for the year was GBP8.0m (FY 2016: GBP5.7m) and included strong progress in our accountancy practice sales channel. Annualised Committed Monthly Recurring Revenue (ACMRR) rose 26% to GBP8.6m (Mar 2016: GBP6.8m).

Key to our long term success as a SaaS (Software as a Service) business, and the achievement of our transition to profitable growth, is the timely scaling and matching of revenue acquisition and operational investment. The Board will continue to monitor this closely and also ensure we maintain the high levels of customer satisfaction that drive our low levels of customer attrition.

FreeAgent is well positioned in a high growth market, is well funded and has a determined management team, backed up with in-depth subject matter experts, skilled digital software developers and sales and marketing professionals.

Activity levels in the early weeks of the new financial year have been positive, and the pipeline of new business opportunities remains strong. As a result, I expect that the 2018 financial year will see further positive progress for FreeAgent. Furthermore, HMRC's recent update on the timetable for the implementation of its Making Tax Digital ("MTD") agenda has confirmed the positive market drivers underpinning FreeAgent's business model and I am confident that with continued focus we can deliver on the long term value proposition our plan promises.

Andy Roberts

Chairman

5 June 2017

Chief Executive's Statement

Our vision: Making businesses happier and more successful by putting them in control of their finances.

A few weeks before our financial year end, we celebrated the tenth anniversary of the founding of FreeAgent. I am really proud of what we have built in that intervening decade - a significant and growing base of happy customers, considerable momentum in our distribution channels, and a committed and talented team of employees with a business infrastructure primed to deliver further growth.

Of course, the period also marked a very significant milestone on that journey - our flotation on AIM, which was achieved against a backdrop of considerable post-Brexit uncertainty in the public markets. The oversubscribed IPO validated our firm belief that AIM is the right capital environment to achieve our goal of building an enduring, market-leading position in our industry and beyond. I am delighted that I am able to affirm the confidence of our investors and report growth in line with or exceeding market expectations in this, our first full year results as a quoted company.

The flotation has resulted in a significant inflow of equity financing to accelerate our progress. We continue the single-minded pursuit of our strategy of focus and differentiation, which has 3 key elements:

1. Grow core business with a strict focus on UK micro-businesses and their accountants

Revenue for the period was up 41% to GBP8.0m (Mar 2016: GBP5.7m) and our forward-looking expectations - measured by our Annualised Committed Monthly Recurring Revenue (ACMRR) - rose 26% to GBP8.6m (Mar 2016: GBP6.8m).

As well as strong revenue growth, we are pleased to report that during the period we successfully added GBP8m in customer LTM (lifetime margin), net of customer churn, thereby increasing the estimated residual margin of our customer base from GBP26m to GBP34m.

As outlined in our AIM Admission Document, our focus on micro-businesses (those with fewer than 10 employees, which comprise 95% of all businesses in the UK) contrasts markedly with our principal competitors who position themselves more towards the 'small' businesses universe of 5-50 employees.

We continue to see strong structural growth in this UK micro-business market, with self-employment continuing to rise faster than growth in numbers of larger businesses (https://www.gov.uk/government/statistics/business-population-estimates-2016).

In recent months we have also learned more detail around the HMRC's 'Making Tax Digital' (MTD) agenda, which represents the biggest change to tax administration in the UK for a generation. All businesses except the very smallest (those with turnover below GBP10,000) will be required to manage their tax affairs digitally, and update HMRC at least quarterly with summary accounting information. HMRC has confirmed that some businesses will start to be impacted from April 2018 and by 2020 all businesses will be within the MTD regime. FreeAgent is well placed to support these businesses as MTD progresses.

Further evidence of the inherent attraction of our business model is that we have been starting to observe a sea-change in the attitudes of accounting professionals towards cloud accounting. The benefits of sharing a single accounting picture with clients have become more widely understood. And micro-business owners themselves have increasingly high expectations of all aspects of their lives being catered for digitally, driven by the stratospheric rise of e-commerce and social media. Those clients' expectations in their dealings with their accountant are no exception.

The ramifications for the accounting profession are tremendous. As software becomes increasingly capable of automating bookkeeping, accounting, reporting and even compliance, accountants find themselves needing to reposition as higher-value-add (and higher-margin) advisors. For most accountants this is a welcome shift, allowing them to support a larger number of businesses at lower cost. FreeAgent has been at the forefront of the process of digitisation of the accountancy profession since its inception.

FreeAgent is a strongly compliance-driven business, which is an enormously positive driver of both customer acquisition and retention. At the same time, it does mean that we are exposed to less favourable changes in legislation, including the Government's recent reform of the way companies contracting for services in the public sector are treated for tax, decreasing the likelihood that public sector service providers will choose to operate via a Personal Services Company (PSC). We did not see a material impact on our revenue in the period - these changes came into force as the period ended - but this may not preclude a future impact on the growth of revenue from our PSC-serving practice customers. We remain vigilant for any evidence of change in our customer behaviours.

Any growth business with aspirations of true scale is in a race to achieve widespread distribution before its competitors. FreeAgent is no exception, so we were particularly pleased in January to announce our partnership with the Royal Bank of Scotland Group (RBSG), whose micro-business customer base numbers 665,000 (including both the RBS brand in Scotland and the NatWest brand in England and Wales). Having come out on top in an industry-wide selection process in early 2016, we rapidly progressed to proof-of-concept stage and are now together planning to make FreeAgent available to all RBS/NatWest business banking customers during 2017. This partnership has been strongly supported by the clear vision of the RBSG senior leadership and will represent a considerable benefit for the bank's customers as we progressively integrate bank- and accounting-data. In an increasingly competitive market, with early successes being achieved by newer, born-digital 'challenger' banks, RBS's partnership rationale is clear. We believe this represents just the first jigsaw piece in a richer picture of financial services convergence that will be accelerated by the introduction of open banking- and payments-APIs from 2018 onwards.

2. A premium, differentiated product experience

Our market focus, described above, works hand-in-hand with our strategy of delivering a fully-integrated compliance solution for our customers - everything from timeslip to tax return. It is only by focussing on the relatively simpler businesses in the market that such a comprehensive capability can be delivered alongside great usability.

This strategy has delivered exceptional levels of customer satisfaction. The widely-recognised Net Promoter Score (NPS) methodology delivers a rating ranging from -100 to +100, with +50 considered to be very good. During the period our NPS surveys averaged a score of +72: truly exceptional and on a par with world-class performers like Apple, Amazon and JetBlue.

Despite these levels of satisfaction we do not stand still. We continue to make significant investments in simplifying our customers' lives and helping them be more successful. Those investments during the period resulted in key progress being made in mobile and compliance capabilities, and in the coming year we will be growing our investments in the Artificial Intelligence (AI) technologies that will power the next wave of value that we will offer our customers.

3. A continued focus on innovation

To drive innovation, FreeAgent is dedicated to fostering a strong corporate culture with an engaged and collaborative team. The period saw significant growth in the business to 125 employees (Mar 16: 93) and included the formal establishment of a People Operations function at FreeAgent. Beyond the baseline capabilities that might formerly have been referred to as 'Human Resources', we believe People Operations is responsible for the very operating system of our business, a business in which our ability to turn the team's 'activity' into 'value' far outweighs the tangible assets that sit on our balance sheet.

We believe the values, culture and processes that underpin the team's alignment are as much a system to be nurtured as the accounting software that we're building. They embody the mechanism by which we will maintain our competitive advantage, the reason why simply copying what FreeAgent launched last month does not represent a competitive threat.

There is more work to be done, of course. We are determined to create an extraordinary working environment, and to do so we continue to strive towards very high standards of diversity, performance and collaboration. Therein lies the true sustainability of the business.

Future Growth

The positive momentum generated in 2016 has continued and the environment for micro-businesses in the UK remains attractive, supported by HMRC's 'Making Tax Digital' agenda. The Group continues to deliver against its stated strategy and as we enter a new financial year the Board expects further positive progress to be made in the year ahead.

Ed Molyneux

Founder and CEO

5 June 2017

Financial Review

Revenue

During 2017, FreeAgent increased revenue by 41% to GBP8.0m. Recurring revenue was 95% of all revenue, with the balance being made up of development income from our partnership with The Royal Bank of Scotland Group ("RBSG"). Our Annualised Committed Monthly Recurring Revenue ("ACMRR") was GBP8.6m.

The Direct channel, customers who come to our website and subscribe directly, continued to contribute more than 45% of our revenue for the year. Revenue in this channel has grown from GBP3.1m to GBP3.6m.

The Accounting practice channel contributed GBP3.3m to our revenue in the year to 31 March 2017, up 102% from the prior year. Expanding this channel continues to be an area of focus for the business. We have invested in growing the practice sales team from 19 at March 2016 to 26 at March 2017. Notwithstanding the Government's recent reforms to the tax treatment for self-employed contractors on public sector projects, we continue to see our greatest success in the contractor focused practice market.

The new relationship with RBSG, which was announced in January 2017, has generated revenue of GBP0.5m for the Group from development work completed to facilitate the launch of the partnership.

Operating Profit and Margins

Our gross profit margin remained strong at 82%, despite the lower margin development income earned in the year.

The adjusted EBITDA for the year was a loss of GBP0.7m. This is an increase on the prior year EBITDA loss of GBP0.2m, which reflects our investments in customer acquisition, particularly in the practice channel.

Key Performance Indicators

 
                          31 March 2016         31 March 2017 
--------------------  --------------------  -------------------- 
                        Direct    Practice    Direct    Practice 
--------------------  --------  ----------  --------  ---------- 
  Gross subscribers 
   added                5,149      7,669      5,020      16,442 
--------------------  --------  ----------  --------  ---------- 
  ARPU                  17.44      10.29      17.65      10.46 
--------------------  --------  ----------  --------  ---------- 
  LTM/CAC                3.8        3.2        2.9        6.1 
--------------------  --------  ----------  --------  ---------- 
  Churn                  1.6%        -         1.6%       1.9% 
--------------------  --------  ----------  --------  ---------- 
 

*Estimated underlying churn of practice clients (data unavailable for 2016).

The gross subscribers added is the total new subscribers added in the 12 month period and does not include churn. Progress in the direct channel has remained consistent with the prior year as we have turned our focus to the practice channel where we have seen considerable growth in the last 12 months.

Average revenue per user ("ARPU"), derived by dividing Monthly Recurring Revenue by the number of active subscribers within the relevant channel at any given point in time, was on average GBP17.65 in the direct channel and GBP10.46 in the practice channel during the twelve month period. These have both increased marginally on the prior year. A number of practices came to us from our historic partnership with IRIS, and these were typically lower priced deals. In recent months we have been able to price more favourably as a result of greater product functionality.

LTM/CAC, which consists of the lifetime margin that might be generated from that customer ("LTM") and compared to customer acquisition cost ("CAC") calculated per customer and provides a ratio of the cost of acquiring a customer compared to the expected return from that customer, was 2.9x for direct customers and 6.1x for accountancy practice clients. Churn remained low in the direct channel at 1.6% and in the practice channel the company continues to see positive revenue renewal.

Cash and borrowings

The proceeds from the IPO in November 2016 delivered a net inflow of cash to the business of GBP5m, after repayment of the debt facility and costs of the IPO. I am pleased to report that FreeAgent's cash position remained strong at the financial year end, with GBP4.3m on the statement of financial position.

Tangible fixed assets

As we continue to grow the team, we have invested in a second floor in our headquarters in Edinburgh. This had been partially fitted out and occupied by 31 March 2017, with the second phase expected during 2018. We also continue to invest in our infrastructure and plan, on an ongoing basis, to ensure that we have capacity in our servers to host our growing customer base.

Development costs

We continue to balance the development of new features with ongoing maintenance and research activities. The capitalised development costs in the year to March 2017 (GBP379k) have decreased compared to the prior year (GBP969k), which partly reflects the deployment of our development team to work on the RBS project, all of the costs of which have been recorded as cost of sales in the statement of comprehensive income.

Taxation

The income tax credit for both the current and prior year relates to Research & Development tax credits. We continue to invest in Research & Development activity and, while this is an area of ongoing review by HM Revenue & Customs, we expect to be able to claim these tax credits for the foreseeable future, albeit at a reduced level.

Going concern

The Group has considerable financial resources following the IPO with sufficient cash on the Group statement of financial position to support us through the growth period of the next 18 months and to expected profitability and cash positive performance in line with our internal forecasts.

Katherine Tenner

Chief Financial Officer and Company Secretary

5 June 2017

Consolidated statement of comprehensive income

For the year ended 31 March 2017

 
 
                                                          2017         2016 
                                                       GBP'000      GBP'000 
 
Revenue                                                  8,011        5,679 
 
Cost of sales                                          (1,423)        (925) 
 
Gross profit                                             6,588        4,754 
 
Administrative expenses                                (9,028)      (5,783) 
 
Loss from operations                                   (2,440)      (1,029) 
 
Finance expense                                          (601)        (294) 
 
Loss before tax                                        (3,041)      (1,323) 
 
Tax credit                                                 159           50 
 
Loss for the year                                      (2,882)      (1,273) 
 
  Other comprehensive income 
 
Items that will be reclassified 
 subsequently to profit or 
 loss: 
 Exchange differences on 
 translation of foreign operations                           -            1 
 
Total other comprehensive 
 income                                                      -            1 
 
Total comprehensive loss 
 for the year attributable 
 to shareholders of the parent                         (2,882)      (1,272) 
 
 
 
 
  Loss per share attributable 
  to the ordinary equity holders                          2017         2016 
  of the company                                         pence        pence 
 
Basic and diluted loss per 
 share                                                    (13)         (43) 
 
 

Consolidated statement of financial position

As at 31 March 2017

 
                                         2017        2016 
                                      GBP'000     GBP'000 
Assets 
 Non-current assets 
 Property, plant and equipment          1,079         710 
Intangible assets                       1,638       1,903 
 
                                        2,717       2,613 
Current assets 
Trade and other receivables             1,139         604 
Corporation tax receivable                209          49 
Cash and cash equivalents               4,264       1,819 
 
                                        5,612       2,472 
Total Assets                            8,329       5,085 
Liabilities 
Non current liabilities 
Bank borrowings                             -       2,059 
  Long term provisions                    151         100 
 
                                          151       2,159 
Current liabilities 
Trade and other payables                2,713       2,079 
Provisions                                 10          39 
Bank borrowings                             -         414 
 
                                        2,723       2,532 
Total liabilities                       2,874       4,691 
 
NET ASSETS                              5,455         394 
 
Issued capital and reserves 
 attributable to owners of 
 the parent 
Share capital                             407           1 
Share premium                          13,048       6,189 
Share based payment reserve               286         656 
Foreign exchange reserve                 (10)        (10) 
Retained earnings                     (8,276)     (6,442) 
 
TOTAL EQUITY                            5,455         394 
 
 

Consolidated statement of cash flows

For the year ended 31 March 2017

 
 
                                                   2017        2016 
                                                GBP'000     GBP'000 
 
Cash flows from operating 
 activities 
Loss for the year                               (2,882)     (1,273) 
Adjustments for: 
Depreciation of property, 
 plant and equipment                                271         189 
Amortisation of intangible 
 fixed assets                                       644         601 
Gain on disposal of property, 
 plant and equipment                                (2)           1 
 Foreign Exchange                                   324           - 
Share based payment expense                         802           - 
Finance costs                                       601         294 
Income tax credit                                 (159)        (50) 
 
                                                  (401)       (238) 
 
(Increase) in trade and 
 other receivables                                (535)       (406) 
Increase in trade and other 
 payables                                           847         518 
Increase / (Decrease) in 
 provisions                                        (29)         139 
 
Cash from operations                              (118)          13 
 
Income tax received                                   -         195 
 
Net cash flows from operating 
 activities                                       (118)         208 
 
Investing activities 
Purchase of property, plant 
 and equipment                                    (806)       (559) 
Proceeds from disposal of 
 property, plant and equipment                        5          11 
Development of intangibles                        (379)       (969) 
 
Net cash used in investing 
 activities                                     (1,180)     (1,517) 
 
Financing activities 
Issue of ordinary shares, 
 net of issue costs                               7,141         962 
Repayment of loan                               (2,977)           - 
 Drawdown of debt                                     -       1,292 
Finance costs                                     (421)       (279) 
 
Net cash from financing 
 activities                                       3,743       1,975 
 
Net increase in cash and 
 cash equivalents                                 2,445         666 
Cash and cash equivalents 
 at beginning of year                             1,819       1,153 
 
Cash and cash equivalents 
 at end of year                                   4,264       1,819 
 
 
 

Consolidated statement of changes in equity

For the year ended 31 March 2017

 
                         Share       Share    Share based      Foreign     Retained      Total 
                       capital     premium        payment     exchange     earnings     equity 
                                                  reserve      reserve 
                       GBP'000     GBP'000        GBP'000      GBP'000      GBP'000    GBP'000 
  1 April 
   2015                      -       4,503            656         (11)      (5,169)       (21) 
  Loss for 
   the year                  -           -              -            -      (1,273)    (1,273) 
  Translation 
   of foreign 
   subsidiary                -           -              -            1            -          1 
                    ----------  ----------  -------------  -----------  -----------  --------- 
  Total 
 
   Comprehensive 
   income for 
   the year                  -           -              -            1      (1,273)    (1,272) 
  Conversion 
   of loan 
   notes                     -         725              -            -            -        725 
  Issue of 
   share capital             1       1,014              -            -            -      1,015 
  Issue costs                -        (53)              -            -            -       (53) 
                    ----------  ----------  -------------  -----------  -----------  --------- 
  31 March 
   2016                      1       6,189            656         (10)      (6,442)        394 
 
  Loss for 
   the year                  -           -              -            -      (2,882)    (2,882) 
  Translation                -           -              -            -            -          - 
   of foreign 
   subsidiary 
                    ----------  ----------  -------------  -----------  -----------  --------- 
  Total 
 
   Comprehensive 
   income for 
   the year                  -           -              -            -      (2,882)    (2,882) 
  Share based 
   payment 
   charge                    -           -            802            -            -        802 
  Issue of 
   share capital           404       7,599              -            -            -      8,003 
  Exercise 
   of share 
   options                   1          21           (17)            -           18         23 
  Exercise 
   of warrants               1         124          (125)            -            -          - 
  Transfer 
   for fully 
   vested options            -           -        (1,030)            -        1,030          - 
  Issue costs                -       (885)              -            -            -      (885) 
                    ----------  ----------  -------------  -----------  -----------  --------- 
  31 March 
   2017                    407      13,048            286         (10)      (8,276)      5,455 
 
 
  Reserve                Description and purpose 
  Share capital        Nominal value of issued shares 
  Share premium        Amount subscribed for share capital in 
                        excess of nominal value less associated 
                        costs. 
  Share based          The share based payment reserve represents 
   payment reserve     equity settled share based employee remuneration 
                       until such share options are exercised. 

  Foreign exchange     The difference arising on the translation 
   reserve              of the assets and liabilities of the 
                        overseas subsidiary company into the 
                        presentational currency of the Group. 
  Retained earnings     All other net gains and losses not recognised 
                         elsewhere. 
 
 

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR BIGDLUBGBGRU

(END) Dow Jones Newswires

June 06, 2017 02:01 ET (06:01 GMT)