BLTG.L Regulatory News (BLTG)

24 September 2019

Blancco Technology Group plc

Final results for the year ended 30 June 2019

Excellent year of growth following appointment of new management team and implementation of strategy

Blancco Technology Group plc (AIM: BLTG, "Blancco", the "Company" or the "Group"), a leading global provider of mobile device diagnostics and secure data erasure solutions, is pleased to announce its final results for the year ended 30 June 2019.

FINANCIAL AND OPERATIONAL HIGHLIGHTS

·; Data Centre / Enterprise revenue increased by 20% to £10.3 million (FY 2018 restated*: £8.6 million)

o Channel sales increased by 48% to £5.3 million (FY 2018 restated*: £3.6 million), now representing 48% (FY 2018 restated*: 38%) of total Data Centre / Enterprise revenue

·; Mobile revenue increased by 4% to £10.0 million (FY 2018 restated*: £9.7 million)

·; IT Asset Disposition ("ITAD") revenue increased by 18% to £10.2 million (FY 2018: restated* £8.6 million)

·; Employee headcount increased by 12% to 272 at the end of June 2019 (30 June 2018: 243), largely driven by an increased investment in Research & Development

·; Investment in R&D continuing to build protected IP position with seven patents filed for in the period

·; In April 2019, entered into a Consulting Agreement ("Consulting Agreement") with ZroBlack LLC ("ZroBlack") to work with Blancco developers to create a solution that will significantly reduce the time required to complete diagnostic and erasure procedures on a mobile handset

POST PERIOD END HIGHLIGHTS

·; Acquisition of Inhance Technology ("Inhance") for total consideration of €5.25 million on 11 July 2019

·; Placing of 8,000,000 new ordinary shares on 11 July 2019, generating £10.0 million before expenses to support the acquisition of Inhance, strengthen the balance sheet and refinance $1.5m spent on developing new IP in accordance with the Consulting Agreement with ZroBlack

CURRENT TRADING

·; The new financial year has begun well and provides confidence in another period of strong progress, operationally and financially, in line with market expectations

·; The integration of Inhance is progressing well with the acquisition on track to be earnings enhancing in the new financial year

·; The first phase of the ZroBlack innovation has been released and sold into a major mobile carrier

*Prior year results have been restated following the implementation of new accounting standards, IFRS15 and IFRS9. See note 1.1 for details.

**Adjusted profit measures are stated after excluding expenses relating to share option schemes, exceptional costs and incomes and the amortisation of acquired intangible assets

*** Adjusted operating cash flow is operating cash flow excluding taxation, interest payments and receipts and exceptional payments

Matt Jones, Chief Executive said:

"These results are testament to the hard work and progress delivered by Blancco over the last financial year. We have continued to strengthen our management team and implemented a strategy to focus on our three key markets of Data Centre / Enterprise, Mobile and ITAD. We have already seen that this strategic focus has generated good revenue growth in the year which has also seen strong conversion into profit despite the costs of making investments in the business which will underpin continued growth.

In the coming periods we anticipate that regulatory and environmental factors will drive further growth in the Data Centre / Enterprise market. The investments made in the Mobile offering over the past year, and particularly the recent acquisition of Inhance and Consulting Agreement with ZroBlack, will position Blancco to be a clear leader in the provision of a full-suite of diagnostic and erasure solutions for the fast-growing market for used mobile devices.

We therefore look forward with great confidence to another year of further growth of the business."

Enquiries:

There will be a presentation for analysts held at 0900hrs today at the offices of Buchanan, 107 Cheapside, EC2V 6DN. Please contact blancco@buchanan.uk.com if you would like to attend. An audio webcast of this briefing will subsequently be available later in the day via the following link:  https://webcasting.buchanan.uk.com/broadcast/5d53bd66a98d141c9d04c584

CHAIR'S STATEMENT

Summary

In my statement of last year, I reported that the Company had recruited a new Executive team who had in turn strengthened the management team to drive the business forward. The Board is delighted with the progress made by the Company over the first financial year since making those appointments.

The team quickly implemented a strategy to focus on the three key markets of Data Centre / Enterprise, Mobile and ITAD. The Data Centre / Enterprise and ITAD markets are supported by an established product set that has enabled strong growth in the period. We identified that the Mobile market was a more competitive market that would require investment in R&D and marketing to facilitate faster growth. This investment has been ongoing throughout the year and has been enhanced further by the acquisition of Inhance and the Consulting Agreement with ZroBlack that have taken place in recent months. We now believe that we have the most complete proposition in the market for the provision of a full suite of diagnostic and erasure solutions for resold mobile handsets.

We have seen a period of good organic revenue and profit growth. We also generated strong cash flows from these results that enabled the net debt position to be cleared prior to year-end. We have seen growth in all three of the key markets and also in each of the three geographies (EMEA, North America and APAC) in which we operate during the period.

The results validate the strategy announced twelve months ago along with the strength of the management team that has implemented it. The team has rebuilt confidence in the Company which was demonstrated in the support gained for the recent share placing and raising of £10 million to fund the acquisition and Consulting Agreement and to improve the working capital position of the Company.

Outlook

The Board is confident of further revenue and profit growth in the periods ahead. The recent fines issued for GDPR data breaches are increasingly incentivising companies to protect data that they hold through to the end of the full life cycle and also to consider the volume of information that they hold. Blancco has a solution that will benefit from these regulatory drivers and is confident in delivering growth in the Data Centre / Enterprise market in particular. It is anticipated that these regulatory drivers will also drive further growth in the ITAD market where Blancco has a market leading position.

Following the R&D investment made in the year and recent acquisitions, we now have a complete proposition in the Mobile market that will enable growth to accelerate in the coming year.

We would like to thank shareholders for their ongoing support and look forward with confidence to the continued growth that Blancco is positioned to deliver.

Rob Woodward

Chair

CHIEF EXECUTIVE'S REPORT

A year ago, we announced a strategy to focus on three key markets being Data Centre / Enterprise, Mobile and ITAD, in which the Company already had a strong competitive position. The Group is delivering on this strategy and cementing its position as a leading cyber security and mobile diagnostics business, with international revenues growing in our key markets.

Business overview 

Data Centre / Enterprise

We have seen strong levels of revenue growth in the Data Centre / Enterprise market with revenue growing by 20% to £10.3 million (FY 2018 restated[1]: £8.6 million). There continues to be a focus on developing indirect sales through channel relationships to grow revenues in this market and so we are delighted that channel sales grew by 48% to £5.3 million (FY 2018 restated: £3.6 million) and now represent 48% of total Data Centre / Enterprise revenues.

This growth is being driven by the pressures of regulation such as GDPR and increased cyber security risks. Recent months have seen the first fines for data breaches under GDPR that came into effect from May 2018. In the first year, 200,000 investigations took place with 64,000 being upheld. Whilst GPDR only relates to organisations trading in Europe, similar data privacy laws are being established in other parts of the world and most notably in North America with the introduction of legislation such as the California Consumer Privacy Act.

The increased level of penalties is causing organisations to focus on how they manage the full data life cycle. Organisations need to be selective over the data that they hold, and to make sure that they have the necessary controls in place to protect that data. The final part of the lifecycle is how data is managed that is no longer required, known as Data Sanitisation, where organisations need to ensure that data is permanently erased and that there is an audit trail to demonstrate that the erasure has taken place.

The primary competition in this market comes from the physical destruction of assets. The Group believes Data Sanitisation is only at the early stages of mainstream adoption, and that there is significant scope for further growth in this market within which it is well placed to be the clear market leader.

The full suite of Blancco products works across various data storage media, including a cloud environment where they can be used to erase data, whether it be on an individual file or device basis or a full data migration to an alternative cloud provider. Blancco has over twenty years' experience of providing data erasure solutions and has accreditations with over fifteen governing bodies and leading organisations around the world. It is important for our customers to be able to demonstrate to their security auditors that data has been erased by a credible organisation and that there is an auditable record of that erasure.

Furthermore, increasing Environmental, Social and Governance pressures, along with the cost of physical destruction are causing organisations to look for alternative solutions such as using Blancco software to permanently erase data before reusing or reselling the physical assets.

Mobile

We highlighted when outlining our strategy in the Mobile market a year ago that this was a large market experiencing rapid growth. Counterpoint Research released a report recently that estimated that the market for resold mobile handsets will increase from 140 million devices in 2017 to 290 million devices in 2022. Before being resold, these handsets need to have diagnostic tests run on them to ensure that they are fully functioning and should be fully erased to ensure that no data from previous owners can be accessed.

The Mobile market is more competitive than the other markets in which Blancco operates and we have had the aim over the past twelve months to provide a broad range of software-based processing solutions that reach across the three major market sectors of Carrier, Retail and Third Party Logistics. This has resulted in a period of R&D investment supported by technology acquisitions.

Carriers and Retailers are primarily interested in winning new and retaining existing customers with the provision of the facility for customers to trade in their old handset in return for a discount on the purchase of a new handset being critical to that strategy. Blancco has been able for a number of years to run diagnostic tests on used handsets to identify if they are fully functioning but has only been able to do that through a tethered solution when a customer brings their handset into a retail store or third party logistics centre. In July 2019, we announced the acquisition of Inhance for consideration of €5.25 million (£4.7 million). The Inhance solution allows consumers to run diagnostic tests on their handsets through the remote use of an app that can use this information to provide a trade in value to the customer. The customer can then redeem this value by either taking the phone into a store or by making an online order. The app is also able to detect damage to the screen of a handset which is a capability that the previous Blancco solution did not have.

Third Party Logistics companies are used to take possession of the used handsets and prepare them ready for resale. The critical capability for these organisations is the ability to process handsets securely through diagnostic tests and erasure in the shortest timeframe to ensure that the handset loses as little value as possible while going through the warehouse. Much of our internal R&D investment has been expended in making advancements to shorten the amount of time required to process a handset.

In April 2019, Blancco entered into a Consulting Agreement with ZroBlack under which its development team agreed to develop intellectual property for Blancco that enables the Group's erasure and diagnostic solutions to reduce significantly the amount of time that it will take to complete diagnostic and erasure processes on a mobile handset. Under the terms of the Consulting Agreement, Blancco has paid US$1.5 million to ZroBlack for its development team to work alongside Blancco's developers to further develop this IP and the first implementation of the technology has been incorporated into the most recent software release.

As we enter the new financial year, Blancco believes that it now has the full solution to reach across all three market sectors of Carrier, Retail and Third Party Logistics. Whilst enhancements will continue to be developed, Blancco now has a diagnostic solution that can operate remotely or on a tethered basis, has a complete set of diagnostic tests that can be modified to the requirements of the customers and can run all of these processes more quickly than our competitors.

During this investment phase, we have seen modest revenue growth in Mobile over the year with a 4% increase to £10.0 million (FY 2018 restated: £9.7 million). Following the R&D investments we have made, we would expect to see increased growth in this area in coming periods .

ITAD

As we continue to cement our position as market leader in the ITAD market, we have seen a very strong performance over the year with revenue increasing by 18% to £10.2 million (FY 2018 restated: £8.6 million). ITAD services are provided on items of IT hardware where equipment is either being reused, resold or disposed of. Customers in this market are looking to partner with a credible organisation that can point to third party accreditations and provide them with an auditable record that data on any hardware has been permanently erased. With over twenty years of experience in this market, Blancco has an unrivalled list of accreditations and certifications in comparison to any of its competitors. Following a year of limited growth in FY 2018, FY 2019 saw growth ahead of overall market rates. While we expect further growth in this area it is a relatively mature market with revenue growth linked to the underlying performance of the IT recycling market and is anticipated to generate more modest growth in the next financial year.

Matt Jones

Chief Executive Officer 

CHIEF FINANCIAL OFFICER'S REPORT

This is the first set of the Group's financial statements in which IFRS15 'Revenue from Contracts with customers' and IFRS9 'Financial Instruments' has been applied. IFRS15, replacing IAS18 Revenue, establishes a framework for recognising revenue on contracts with customers including timing and value of recognition. IFRS9, replacing IAS39 Financial Instruments: Recognition and Measurement, sets out the requirements for measuring financial assets and financial liabilities.

The full disclosure of the impact of these restatements is in note 1.1.

Revenue

Blancco's revenue for the period was £30.5 million (FY 2018 restated: £26.9 million), representing growth of 13%. Growth rates on a constant currency basis were very similar at 12%.

As can be seen from the table below, the Group is experiencing revenue growth across all three markets and all three geographies.

Revenue breakdown

Revenue on software sales is recognised according to the terms of individual contracts, which fall into two types; either a volume or subscription basis:

·; Volume contracts. Where Blancco products are sold on a volume basis, a finite number of "uses" are delivered. Revenue is recognised on delivery, as this is the point at which control is transferred to the customer, and there are no continuing obligations to the Group. There is no change in recognition profile under IFRS15

·; Subscription contracts. Under IAS18, revenue was deferred and recognised over the length of the user agreement. Under IFRS15, revenue is recognised at specific points throughout the contract term at which point delivery has or (in the case of ongoing performance obligations) is expected to take place. In the majority of cases, delivery takes place concurrently with the invoice being issued, at the outset of a contract (or is part delivered if the customer is invoiced periodically), and accordingly licence revenue aligns more closely to the point the invoice is booked with no revenue deferral. In cases where deliveries are expected to be made periodically throughout the contract term, sufficient revenue will be deferred to reflect management's best estimate of licences still to be delivered. In cases where a customer has been delivered licences in advance of an invoice being issued, a contract asset is recognised.

From a balance sheet perspective, the transition has resulted in a significant reduction in contract liabilities (previously denoted as deferred revenue), with the June 2018 balance being restated from £4.8 million to £0.7 million. This is a result of the impact on subscription contracts, described above, where the point of recognition of revenue is typically at the inception of the contract rather than over the contract term. Revenue deferrals are mostly now represented by timing delays between delivery and invoicing.

A contract asset has arisen from a small number of subscription contracts which were previously invoiced over the term but IFRS15 requires that the revenue be recognised on delivery at the start of the contract.

Profitability Measures

Adjusted operating profit was £3.5 million (FY 2018 restated: £2.9 million). Operating profit was £0.1 million (FY 2018 restated: £0.8 million operating loss). This year saw an increase in headcount from 243 at 30 June 2018 to 272 at the end of the financial year. This along with the increased investment in marketing which had previously been under invested has resulted in an 11% increase in Adjusted Administrative Expenses as detailed below.

We expect to see the cost base increase in the coming year as a full twelve month impact of the headcount increases made in FY 2019 come through. Whilst there will continue to be a cost base increase in future years as we resource ourselves to cope with anticipated growth, cost increases are anticipated at a slower rate than revenue growth resulting in increasing operating margins.

The Group released provisions recognised on acquisition of £0.7 million which has generated an exceptional income in the period of £0.6 million (FY 2018: £1.4 million exceptional cost). The costs in the prior year were associated with the restructure of the business during the first half of the year and legal costs associated with matters arising from the review of contracts for the years ended 30 June 2016 and 2017.

Cash and Working Capital

The Group generated strong levels of cash from operations during the year with the net debt position of £2.7 million at the end of the previous financial year being cleared and ended the year with a net cash position of £0.1 million. This was achieved despite the cash outflow of $1.5 million relating to the ZroBlack Consulting Agreement.

In May 2019, the Group announced it had successfully renewed and significantly expanded a three year contract with a US based, Fortune 500 software company. The contract will see the Group deliver its Drive Erasure solution across data centres around the world, generating revenues of approximately US$1.2 million over the duration of the contract. While the majority of revenues generated will be recognised over the subsequent three years in line with delivery, payment was received up front for the entire three year period resulting in recognition of a contract liability and cash. In the coming periods we will see revenue from the contract, but the cash has already been received which will dilute cash conversion modestly.

Capital expenditure and R&D qualifying for capitalisation was £4.4 million (FY 2018: £2.7 million), with the total inflated by the $1.5 million paid in relation to the ZroBlack Consulting Agreement. Of this capital expenditure, £2.6 million (FY 2018: £2.2 million) was incurred in the ongoing development of the product range. Amortisation of these costs totalled £2.2 million (FY 2018: £1.9 million), resulting in net capitalisation of £0.4 million (FY 2018: £0.3 million).

At the beginning of the year the Group had a contingent consideration balance of £2.2 million in relation to acquisitions made in prior years. Of this balance, £1.2 million related to the acquisition of Tabernus and was settled by the issue of 1.2 million ordinary shares in December 2018. The remaining balance related to the acquisition of Xcaliber and was directly related to the revenues arising from a customer contract. The majority of this balance was paid down through the year with a balance of £0.3 million remaining at 30 June 2019 that is expected to be fully cleared in the first half of the new financial year.

Dividend paid of £0.2 million (FY 2018: £0.2 million) represents the dividend paid to minority shareholders of the Group's Japanese subsidiary.

At 30 June 2019, net cash of £0.1 million (2018: net debt of £2.7 million) comprised long term borrowings of £6.5 million (2018: £8.9 million) and cash and cash equivalents, inclusive of overdraft balances, of £6.6 million (2018: £6.2 million).

Post Period End Events

On 11 July 2019, the Group announced it had raised £10 million, before expenses, through a placement of 8,000,000 new ordinary shares of 2p each in the capital of the Company at 125p per share. The net proceeds of the Placing were used: (i) to fund the cash element (€3.25 million) of the consideration for the acquisition of Inhance, (ii) to refinance the $1.5m payment made in relation to the ZroBlack Consulting Agreement and (iii) to pay down a proportion of the Group's current indebtedness and for general working capital purposes.

Summary & Outlook

The Group is pleased with the progress made in the financial performance of the business since the new strategy was put in place twelve months ago. Since the release of last year's results, we have seen a double digit increase in both revenue and profit of the Group and the net debt position was cleared through a good trading performance. Furthermore, the continued investment in R&D continues to build our protected IP position with seven patents filed for in the period.

Going into the new financial year, we have successfully completed the acquisition of Inhance and a £10 million fund raise that has provided the Group with a significantly stronger balance sheet and the ability to substantially clear any gross debt. The newly formed management team is now embedded into the business and the recent fund raise has ensured that the Company is well financed with a strong balance sheet.

Looking forward, the Board is confident in the Group's ability to drive strong levels of organic revenue growth and, combined with the operating leverage of the business, convert this into increasingly profitable performance in the years ahead in line with market expectations.

Adam Moloney

Chief Financial Officer

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2019

*restated - see note 1.1

*restated - see note 1.1

*Restated - see note 1.1

Notes to the Accounts

For the year ended 30 June 2019

The financial information does not constitute statutory accounts within the meaning of Sections 434 to 436 of the Companies Act 2006, but are derived from those accounts. Statutory accounts for the financial year ended 30 June 2018 have been filed with the Registrar of Companies and those for the financial year ended 30 June 2019 were approved by the Board of directors on 23 September 2019 and will be delivered in due course. The auditor has reported on those accounts, their report was unqualified and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006. Whilst the financial information included in this announcement has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU, this announcement does not itself contain sufficient information to comply with IFRS.

Going concern

The Group meets its day-to-day working capital requirements through cash reserves and a revolving credit facility which is not due for renewal until October 2020. In addition, a fund raise completed in July 2019 resulted in a net increase in cash of approximately £6.0 million after fees and payments for the acquisition of Inhance (see note 4), resulting in a significant level of headroom on the existing borrowing facility.

The Group's forecasts and projections, taking account of possible changes in trading performance, show that it should be able to operate within the level of its current revolving credit facility. The Board therefore has a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

1.1 Prior Period Adjustment

This is the first set of the Group's financial statements in which IFRS15 'Revenue from Contracts with customers' and IFRS9 'Financial Instruments' have been applied. IFRS15, replacing IAS18 Revenue, establishes a framework for recognising revenue on customer contracts including timing and value of recognition. IFRS9, replacing IAS39 Financial Instruments: Recognition and Measurement, sets out the requirements for measuring financial assets and financial liabilities.

The Group has retrospectively applied both standards and the financial statements for the financial year ended 30 June 2018, including opening balances, have been restated.

IFRS9 has not had a material impact on the Group's financial results, impacting only debtor provisioning. IFRS15 has had the impact of earlier recognition of revenue on subscription contracts; previously recognised over the term of the agreement under IAS18, but now recognised at the point at which the customer obtains control of the product (generally at the point of licence delivery). There has been no material change in the recognition of volume contracts, which, under both IAS18 and IFRS15, are recognised at the point of delivery.

A summary of the impact of the prior period adjustments on the consolidated income statement and the consolidated statement of cash flows for the year ended 30 June 2018, as well as the consolidated balance sheet as at 30 June 2018 is as follows:

Consolidated Balance Sheet as at 30 June 2018

The weighted average number of shares and reconciliation between basic and diluted measures is presented below:

The bonus element increasing the basic number of shares used in the earnings per share calculation arises from the placing of 8,000,000 shares in July 2019 and represents the number of shares effectively issued without consideration, due to the issue price of 125 pence being at a discount on the market price of 127.5 pence prior to the placing. In accordance with IAS 33, the impact of the bonus element is allocated to all reporting periods prior to that in which the placing took place.

The dilutive share options are in respect of the shares awarded under the Blancco Performance Share Plan

3. Exceptional and acquisition (income)/costs

Exceptional income arises from the release of provisions recognised on the acquisition of Tabernus which the business deems to no longer be required. These cover items that are exceptional in nature and do not relate to the underlying operating expenses of the acquired business and accordingly the releases are recorded through exceptional income. In the prior period, exceptional restructuring costs related to costs associated with the restructure of the business during the first half of the year and legal costs associated with matters arising from the review of contracts for the years ended 30 June 2016 and 30 June 2017.

Acquisition costs relate to the acquisition of YouGetItBack Limited, trading as Inhance Technology, that was completed on 11 July 2019. Acquisition costs in the prior period exclude a small level of deal costs as they relate to the disposal of the Mexican entity and are presented within discontinued operations.

4. Subsequent events

On 11 July 2019, the Group agreed to acquire YouGetItBack Limited, trading as Inhance, for consideration of €5.25 million (£4.7 million), of which €3.25 million (£2.9 million) was satisfied in cash and €2 million (£1.8 million) of which was satisfied through the issue of 1,311,264 new ordinary shares of 2p each in the Company. The acquisition completed on 11 July 2019. Inhance was established in 2005 in Cork, Ireland and was initially focused on security tagging software, specifically for mobile handsets. In 2018, following a period of significant Research & Development investment, Inhance launched a mobile diagnostic product. The diagnostic solution is a retail focussed, app based solution experience that enables consumers to easily establish a trade in value for their handset and complete a trade in transaction without having to visit a retail store. The provisional acquisition accounting disclosures are presented in note 13 to the accounts.

Also on 11 July 2019, the Group raised £10 million, before expenses, through a placement of 8,000,000 new ordinary shares of 2p each in the Company at a price of 125p per share. The net proceeds of the placing were used to fund the cash element of the acquisition of Inhance, to refinance US$1.5 million of capital expenditure in relation to the development of certain IP with ZroBlack LLC, and to pay down a proportion of the Group's current indebtedness and for general working capital purposes. The total cash facility available to the Group remains at £12.0 million and is in place until 31 October 2020.