Altitude Group Regulatory News (ALT)

Altitude Group plc

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

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2017

Altitude Group plc (AIM: ALT), the operator of a leading marketplace for personalised products, announces its interim results for the six month period ended 30 June 2017.

Financial Highlights

· Increased profitability in core business; encouraging progress in the development of Channl business

· Revenues of £3.0m (H1 2016: £3.0m) including a first time revenue contribution of £0.3m following the acquisition of AdProducts.comLimited ("ADP") in early June 2017

· Gross margin maintained (excluding ADP) of 78.8% (H1 2016: 78.9%)

· £0.3m of cost savings in adjusted administrative expenses* to £1.4m (H1 2016: £1.7m)

· Adjusted operating profit* £0.8m (H1 2016: £0.7m) an increase of £0.1m or 20.6%

· Profit before taxation £0.5m (H1 2016: £0.4m), an increase of £0.1 or 20.5%, including first time contribution from ADP of £47,000

· £2.5m new equity raise (before expenses) to finance and accelerate future growth of Channl in the US and UK, including the £0.8m acquisition of the trade and certain assets of Ad Products.com Limited a UK based supplier of promotional products

· Group remains free of bank borrowing, with net cash resources of £2.1m (30 June 2016: £0.4m; 31 Dec 2016: £0.7m)

* before share-based payment charges, amortisation of intangible assets and exceptional expenses.

Operational Highlights

· Appointment to the Board of Nichole Stella as President of the US Operations

· Channl revenue initiated in US and UK. Over 100,000 Channl US sites and over 250 UK sites now created for distributors and their end user customers with enhanced user experience

· Acquisition of the trade and certain assets of Ad Products.com Limited, a UK based supplier of promotional products, for £0.8m

· New suppliers to Channl added in both the US and UK - Primeline (US), The Pen Warehouse and Snap Products (both UK) and ADP (UK, in-house). Product range to be extended in 2017 to include print services in partnership with major US tier one provider

· Terms agreed for enhancing and extending our partnership with AI Mastermind ("AIM"), the US based promotional products distributor buying group. Channl will be combined with Altitude's full cloud based CRM and order management system, providing the c.1,400 AIM members, with a proven system, through which both ecommerce and non ecommerce orders can be processed on a Channl "throughput" pricing model

Webinar

The Company will be holding a webinar at 12.30 p.m. on Wednesday 27 September 2017 which all shareholders are invited to attend. In order to join the webinar please register at the link below. After registering you will receive a confirmation email containing information about joining the webinar.

https://attendee.gotowebinar.com/register/1749159558187366401  

Executive Chairman, Peter Hallett, commented:

"We have learned a great deal from the successful launch of Channl earlier this year in the US and more recently in the UK, which we believe has reaffirmed its attractiveness to distributors, as a free, best in class online trading platform, and to end users as the "easiest way to buy personalised promotional products". 

The Board believes that the business is on the correct path in the US and will deliver significant future revenue as we establish our own permanent and scalable engagement team in the US under Nichole's leadership. Channl will be marketed intensely to a targeted number of distributors and will increase the potential throughput from the existing $1.2 billion revenue AIM membership by combining the Channl ecommerce platform with our full order management and CRM system. In addition we will continue to progress discussions with other potential enterprise level partners.

We are also encouraged by recent progress made by Channl in the UK, a market of circa £1 billion of revenue, which represents a major and immediate opportunity. Expanding our Channl product offering with the addition of new suppliers - namely Primeline in the US and Ad Products, The Pen Warehouse and Snap Products in the UK - will increase the attraction of Channl to distributors and their end user customers.

We are increasingly confident that Channl is a major conduit for distributors and end users as the market inevitably migrates transactions online and we look forward to updating shareholders on future progress."

Enquiries:

Chairman's Statement

I am pleased to present the interim results for the six months ended 30 June 2017 during which the business has increased adjusted operating profit* to £0.8m (H1 2016: £0.7m) and profit before taxation to £0.5m (H1 2016: £0.4m). The results include a first time profit contribution of £47,000 from the Ad Products business ("ADP") which we acquired in June 2017.

The business has continued to intensively focus on identifying the best route to market for the Channl online trading platform, to release the enormous potential we believe it has to disrupt the personalised and promotional products, signage and printed wearables markets in the US and the UK. I am pleased to report that sales orders are now being transacted through the Channl platform in both the US and UK, more details of which are outlined below. In a progressive first six months of the year, the effort expended by our small management team has been total and I begin my statement by thanking them for their commitment.

We are delighted that Nichole Stella has joined us as a key executive board director and President of US Operations. Nichole will be based permanently in the US and will be singularly focussed on driving significant revenue through the Channl platform. 

I set out below a summary of our progress and improved strategic direction during the current year. We believe the data is supportive of the Board's initial optimism for the potential of Channl, and market expectations for accelerating Channl revenue in 2018. As announced today, our efforts with our US partner AI Mastermind ("AIM"), the 1,400 member promotional products distributor buying group accounting for $1.2 billion of end-user annual revenue, have culminated in an extension and expansion of our partnership agreement which we believe will yield significant Channl revenue to the Group in 2018.

During the period the Group successfully completed an equity fund raise of £2.5 million, the proceeds of which are being used to finance and accelerate the growth of Channl in the US and UK, including the £0.8m acquisition of the trade and certain assets of Ad Products.com Limited, a small UK based promotional product supplier. The acquisition of ADP has facilitated the launch of Channl to distributors in the UK as it has secured the Group's own UK supply source and provides access to distributors at a trading level.

* before share-based payments, amortisation of intangible assets and exceptional expenses

Channl US

We have continued to improve the functionality and user experience of the Channl trading platform, and increase the products available for personalisation and purchase on it. To this end, we are delighted to announce that we have agreed a supply partnership with Prime Resources Corp of Bridgeport, Connecticut, USA, trading as Primeline, who will complement the current Aprinta promotional products and print services offer in partnership with a major US tier one provider.

Shareholders will be aware that at the end of February 2017 we commenced the process of digital marketing engagement with distributors for whom we have created free and live Channl web sites, branded with their personal and unique logos. The process is aimed at leading the distributor along a pathway to trading online through the free Channl platform, and also creating individual Channl web sites for their end user customers, pre-loaded with the end user customer logos, for direct online ordering. This ostensibly "push" approach is reliant on the cooperation and engagement of the distributor.

We continued creating US Channl web sites through to early summer 2017, and have currently created over 22,000 for distributors and resellers, and more than 100,000 end user sites on behalf of distributors. We have been steadily and commensurately digitally marketing to these businesses, via our supply partner Aprinta, and through our distributor buying group partner, AI Mastermind ("AIM"). We are pleased to report that the total number of visits to Channl websites has grown exponentially since March 2017 and during August increased by approximately 55% with an average visit duration exceeding 37 minutes which demonstrates the level of interest the sites are creating. In addition, the important "bounce" rate (being the percentage of people who visit the website and immediately leave having not gone beyond the home page) for the period has been exceptionally low at 22.9% with the average number of pages viewed per visit exceeding 35 pages.

Strategy development

Our initial marketing of Channl was conducted through a staged high volume and high frequency acquisition email blast programme. This strategy was based on tactics used by technology companies such as Shopify and Uber to acquire merchants and drivers respectively, where there is evidence of interest. Key performance indicators highlighted good engagement with the target distributor and reseller audience. Open rates ("OR") of our unsolicited emails averaged 31% for AIM distributor members and 9% for Aprinta sourced distributors. In addition, the click through rates ("CTR"), calculated as a percentage of OR, were similarly strong at 23% for AIM distributors and 4.2% for Aprinta distributors. These rates compare favourably with similar ecommerce digital marketing success rates and are especially strong in relation to AIM members,which had the benefit of marketing support from the buying group.

These interactions took the distributor through to the Channl distributor site engagement stage but did not extend the marketing to the end user customer. The engagement of the end user customer is reliant on an introduction of the Channl site to them by the distributor as the "owner" of the customer relationship. 

Our key learning here is that high volume digital marketing to, and creation of sites for, the distributor alone is not sufficient to drive the distributor to market the platform to their end user customers, and could not be relied upon alone to generate significant end user order volume. We therefore moved to a more intensive marketing and support trial with a handful of distributors where we provided:

· on-site training of the Channl solution to distributor staff

· on site distributor Q&A during launch

· technical distributor support provided from the UK

The impact of this intensive marketing and support programme was immediate and positive:

· distributors were motivated to send out personalised sites to end user customers as they became appreciative of the benefits that Channl offered both them and their cutomers;

· immediate 23% OR and 13% CTR on personalised end user customer marketing emails;

· significant increases in page views by end users - over 5,000 page views to a single distributor website in one day; and

· order intake was immediate and in one instance increased from zero to an weekly average of 48 sustained over a 4 week period

· generated an average order value of $300

These early results confirmed that the most effective way for Channl to achieve end user engagement and transactional revenue is by engaging more fully with distributors to encourage end user engagement. The key to this improved distributor engagement is education and technical support - ensuring the distributor understands the benefits provided to all parties by Channl and giving them the confidence and help to make the roll out of Channl to their customer base as easy as possible.

 As a result of these learnings we understand that our approach in the US must behighly focussed:

· We have held back on the number of sites being generated, and are focussed on quality of engagement rather than quantity of sites created; we have the ability to scale up at will

· We are in the process of building our own high quality engagement team, located in the US, which will provide the support intensity required to engage targeted distributors

· We have recruited a permanent high calibre US based business leader, Nichole Stella, to drive the acceleration of engagement. Nichole brings a huge amount of knowledge and experience of the US market and will bring sector focus and expertise to our Channl business

AI Mastermind

Today we have announced that we have agreed terms for an enhanced and extended partnership agreement with AIM which provides for the Channl ecommerce platform to be combined with the Group's comprehensive CRM and sales order management system and in doing so provide the 1,400 members of AIM with an industry specific and proven cloud based order management system through which both ecommerce and non ecommerce orders can be processed on a Channl "throughput" pricing model. The platform will be provided to AIM for free with Altitude taking a share of the throughput revenue. This extended partnership agreement is exactly in line with our new focussed strategy explained above and has come about as a result of the intense marketing and support programme that we have undertaken with AIM in recent months.

We have already created Channl web sites for virtually all the 1,400 AIM distributor members, each of whom are substantial distributors across the US, with revenue ranging from $0.5 million to $3million, and in total accounting for end user revenue of c.$1.2 billion. The benefits provided by engaging with these Channl websites will be promoted to AIM members by AIM directly through the member's portal on an exclusive basis with comprehensive support provided by Altitude.

The enhanced product will be available to members in early 2018.

Other US Channl opportunities

In addition to the above we are making good progress in discussions with potential large US enterprise customers seeking partnership deals, which would provide enterprise partners with access to the Channl trading platform technology under a "White Label" arrangement on a "share of throughput" pricing model. We are confident of making progress in this area and are in active discussions with a number of potential enterprise level customers.

Finally, we will be actively targeting business start-ups, taking a lead from the Shopify business model. Channl has huge potential as an easy, low cost, start-up business for those seeking a secondary source of income and looking for a home based solution.

As a result of these positive early data points, the Board is very confident for the potential of Channl to generate and accelerate revenue in line with expectations for 2018.

UK Business

The business has a strong market position in the UK promotional merchandise industry. The market, whilst smaller than the US, is still estimated to be worth in excess of £960 million in 2016, growing by approximately 6% annually .

It is estimated that the market comprises approximately 1,975 distributors and £720 million (74.4%) of the market revenue is derived from the top 343 (17.4%) distributors.

The company delivers the National Show for the industry annually in January, which welcomes over 2,000 distributor and reseller delegates. We also produce the free monthly trade magazine "PPD" with a circulation of approximately 9,000, and the two leading trade catalogues each year "Envoy" and "Spectrum". In addition the company provides its industry specific and unique ERP system "Promoserve" to over 75 subscribers on a monthly recurring revenue basis as "software as a service" ("SaaS"), along with other numerous trade specific applications including web stores, search engines and logo software.

Therefore the development of a UK Channl trading platform represents a credible, natural and compelling progression and business proposition for UK distributors, providing businesses, who typically could not afford or do not wish to risk the required investment, the ability for their customers to trade promotional merchandise online.

We acquired the trade and certain assets of Ad Products.com Limited ("ADP") in June of this year in order to facilitate the creation of a UK Channl trading platform. The acquisition enables us to manage and control the products we choose to curate on Channl. We have also recently supplemented the Channl product offerring by signing additional supply partnerships with The Pen Warehouse, Snap Products and Pinpoint Badges.

Following the acquisition of ADP, we have developed a separate UK Channl platform and commenced marketing to distributors in the UK. Over 250 UK Channl sites have been created to date, each one createdby the relevant distributor.

Average OR from the acquisition email campaign is circa 14.9% of which the CTR is 4.7%, resulting in 236 distributors now currently deemed as "acquired" as a Channl distributor. These rates are commensurate with accepted ecommerce marketing campaign "norms". However, similarly to the US, basic digital marketing engagement with distributors alone is not sufficient to generate end user engagement and revenue throughput. We therefore launched weekly webinars, which quickly expanded to three times a week due to demand, which also enable capture of contact details for subsequent follow up. Supplemented by call centre support, the success of this more intense approach has been evidenced through a 39% conversion rate of "acquired" distributors to "marketing to end user" status by the end of July, which in turn led to orders being generated commencing in August. We also provide the distributor with weekly email offers and content for them to access and send to their end user customers. 

It is early days, but we are greatly encouraged by the speed of response of the end user customers and the generation of orders.

It should be noted also that Channl can provide incremental revenue and margin for ADP as a supplier, in addition to Channl gross transactional revenue ("GTR" or share of throughput).

Results

Revenue was £3.0m (H1 2016: £3.0m) with a first time revenue contribution of £0.3m from ADP.

Underlying revenue reduced by £0.3m in the existing business due to the elimination of unprofitable activity in the exhibitions business (£0.1m), a decline in advertising revenue in publications of £0.1m, and a reduction of £0.1m due to the rephasing of publication revenue into H2 as a result of migration to a monthly recurring revenue package offer.

Growth in UK technology revenue was largely offset by erosion in unsupported legacy US revenue, leaving revenue flat at £1.2m (H1 2016: £1.2m).

Gross profit of £2.2m (H1 2016: £2.4m) includes a first time contribution from ADP of £0.1m. As stated above £0.1m of the underlying decrease represents a rephasing into H2, and £0.2m from reduced unprofitable exhibition activity and reduced advertising revenue. Underlying margin, excluding ADP, was 78.8% (H1 2016: 78.9%)

However, the reported net reduction in gross profit of £0.2m has been offset by a reduction in administrative expenses (before share based payment charges, amortisation of intangible assets and exceptional expenses) of £0.3m, or 16.7% to £1.4m (H1 2016: £1.7m). The underlying savings rise to £0.4m or 22.3% on exclusion of ADP administrative expenses.

Adjusted operating profit* of £0.8m (H1 2016: £0.7m) increased by £0.1m or 20.6%. Excluding the first time contribution of ADP of £46,000, the underlying increase in adjusted operating profit was 13.8%.

Exceptional charges of £0.1m relate to the completion of the reorganisation of the UK business head office (H1 2016: £0.1m). Share based payment charges of £27,000 (H1 2016: £28,000) and amortisation charges of £161,000 (H1 2016: £143,000) were largely unchanged.

Included within administrative costs are software maintenance and development costs of £0.1m, (H1 2016: £0.1m), as the Group has maintained its support and development of its proprietary software assets. In addition, the Group capitalised £0.2m of software development costs (H1 2016: £0.2m). The current level of expensed and capitalised development costs is representative of an adequate maintenance level of expenditure and continuous improvement of proprietary software assets including Channl.com, Promoserve and artworktooltm.

The resulting operating profit and profit before tax for the period was £0.5m (H1 2016: £0.4m), an increase of 20.5%.

Basic earnings per share were 1.05p (H1 2016: 0.96p), an increase of 9.4% and fully diluted earnings per share were 1.00p (H1 2016: 0.87p) an increase of 13.8%.

Net cash outflow from operating activities was £0.7m (H1 2016: inflow of £0.3m), of which £0.3m of outflow was attributable to the build-up of working capital from trading the ADP assets acquired. The underlying outflow of £0.4m was largely attributable to a pay down of year end creditors, and deferment of customer advance deposits taken on the 2018 show. This will be recovered during H2.

Expenditure on the acquisition of ADP was £0.8m and the cash outflow from investment in intangible assets was lower at £0.1m (H1 2016: £0.2m).

Financing activities comprised £0.5m from the exercise of share warrants by Zeus Capital on 30 January 2017 and £2.4m from the share placing and exercise of share options on 17 May (net of preliminary expenses of £0.1m). The share warrants were granted to Zeus Capital Limited, the Company's Financial and Nominated Adviser at the time of the Company's admission to trading on AIM in November 2005. The Company has issued and allotted the requisite 1,500,060 shares at a price of 36p which were admitted to trading on AIM on 3 February 2017. 

The net cash increase in cash and cash equivalents was £1.4m (H1 2016: £0.1m).

The Group remains debt free and had cash resources as at 30 June 2017 of £2.1m (H1 2016: £0.4m).

* before share-based payments, amortisation of intangible assets and exceptional expenses

Board and Senior Management Changes

On 25 January 2017 we announced several board changes. I became Executive Chairman with immediate effect and the following appointments effected from 1 February 2017:

· Martin Varley appointed as President

· Sanjay Lobo joined us and was subsequently appointed to the Board as UK based Managing Director on 3 April 2017; and

· Gellan Watt joined as Independent Non-Executive Director

In addition it was announced that Richard Sowerby would step down from the Board with effect from 30 April 2017. We thank Richard for his tremendous contribution to the business.

My appointment to part time Executive Chairman is intended to be a temporary measure whilst we seek to appoint a full time Chief Financial Officer.

More recently we announced the appointment of Nichole Stella as President of USA Operations and as an Executive Director of the board with effect from 25 September 2017. Nichole brings an extensive industry network in the US and a vast amount of knowledge and experience across all aspects of our business.

Throughout her career, Nichole has driven various organisations to embrace change and implement new scaling strategies through creative and innovative thinking. Nichole has been known to the business for over six years and we are delighted that she is joining the Board to accelerate Channl transactional revenue in the USA.

Nichole was a leading force with the Promo Marketing Media Group, a division of Napco Media (North American Publishing Company), for the last 12 years and served as President and Chief Revenue Officer of the group since 2013. Promo Marketing Media Group is a leading source of services and information to the promotional product and print distributor industries in the USA. With a combined audience of nearly 40,000 distributors, the group is the premiere source for industry news and produces two magazines ('Promo Marketing' and 'Print + Promo') as well as events, newsletters, online search tools, marketing and lead generation services, custom publishing and video production services.

Following the appointment of Nichole, and as announced on 13 September 2017, Sanjay Lobo has resigned from the business.

In addition to these board changes we were also delighted to announce the appointment of Henry Joseph-Grant to our senior management team in July. Henry has significant experience in technology lead aggregator businesses having been a key member of the Just Eat team from start-up to its $2.4 billion IPO. Henry will have responsibility for building a high-performance sales team focused on growing the number of merchants using Channl.

Outlook

We have learned a great deal from the successful launch of Channl earlier this year in the US and more recently in the UK, which we believe has reaffirmed its attractiveness to distributors, as a free, best in class online trading platform, and to end users as the "easiest way to buy personalised promotional products". 

The Board believes that the business is on the correct path in the US and will deliver significant future revenue as we establish our own permanent and scalable engagement team in the US under Nichole's leadership. Channl will be marketed intensely to a targeted number of distributors and will increase the potential throughput from the existing $1.2 billion revenue AIM membership by combining the Channl ecommerce platform with our full order management and CRM system. In addition we will continue to progress discussions with other potential enterprise level partners. 

We are also encouraged by recent progress made by Channl in the UK, a market of circa £1 billion of revenue, which represents a major and immediate opportunity. Expanding our Channl product offering with the addition of new suppliers - namely Primeline in the US and Ad Products, The Pen Warehouse and Snap Products in the UK - will increase the attraction of Channl to distributors and their end user customers.

We are increasingly confident that Channl is a major conduit for distributors and end users as the market inevitably migrates transactions online and we look forward to updating shareholders on future progress.

Peter J Hallett

Executive Chairman

26 September 2017

Consolidated income statement for the six month period ended 30 June 2017

Consolidated statement of changes in equity for the six month period ended 30 June 2017

Consolidated balance sheet as at 30 June 2017

Consolidated cash flow statement for the six month period ended 30 June 2017

 Notes to the half yearly financial information

1. Basis of preparation

This consolidated half yearly financial information for the half year ended 30 June 2017 has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2016. The Group's accounting policies are based on the recognition and measurement principles of International Financial Reporting Standards as adopted by the EU.

The consolidated half yearly report was approved by the Board of directors on 26 September 2017.

The consolidated financial information contained in the interim report has not been reviewed or audited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 and does not include all of the information and disclosures required for complete financial statements.

The financial information relating to the year ended 31 December 2016 is an extract from the latest published financial statements on which the auditor gave an unmodified report that did not contain statements under Section 498 (2) or (3) of the Companies Act 2006 and which have been filed with the Registrar of Companies.

2. Accounting policies

The consolidated financial statements in this half-yearly financial report for the six months ended 30 June 2017 have been prepared in accordance with the AIM Rules for Companies and on a basis consistent with the accounting policies and methods of computation consistent with those set out in the Annual Report and financial statements for the year ended 31 December 2016, except as described below. The Group has chosen not to adopt IAS 34 'Interim Financial Statements' in preparing these interim financial statements and therefore the Interim financial information is not in full compliance with International Financial Reporting Standards.

In preparing the condensed, consolidated financial statements, management are required to make accounting assumptions and estimates. The assumptions and estimation methods are consistent with those applied to the Annual Report and financial statements for the year ended 31 December 2016. Additionally the principal risks and uncertainties that may have a material impact on activities and results of the Group remain materially unchanged from those described in that Annual Report.

3. Operating Segments

Under IFRS 8 "Operating Segments" the Group has determined that it has one reportable segment, Technology & Information.

IFRS 8 has been applied to aggregate operating segments on the grounds of similar economic characteristics. This position will be monitored as the Group develops.

4. Acquisition of certain assets and business undertaking of Ad Products.com Limited

On 2 June 2017 the Group completed the acquisition of the trade and certain assets of Adproducts.com Limited, a small UK based trade supplier of promotional products ("the Acquisition"). Richard Sowerby, a director of the Group until 30 April 2017 , is a director of Adproducts.com Limited. These assets were acquired to help facilitate the launch of Channl to distributors in the UK by supplementing our UK supply base. The impact of the Acquisition on the results for the six months ended 30 June 2017 is summarised below:

5. Basic and diluted earnings per ordinary share

The calculation of earnings per ordinary share is based on the profit or loss for the period divided by the weighted average number of equity voting shares in issue.

6. Interim Report

The Interim Report is available to download from the Company's website at www.altitudeplc.com.