BLTG.L Regulatory News (BLTG)

14 March 2017

BLANCCO TECHNOLOGY GROUP PLC

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

HALF YEARLY RESULTS

Blancco Technology Group plc, the leading global provider of secure data erasure solutions and mobile device diagnostics, is pleased to announce its half yearly results for the six months to 31 December 2016.  

Financial highlights

· Revenue of £14.2 million (H1 2016: £9.9 million), an increase of 43% in Sterling terms, or 28% in constant underlying currencies

· Group Adjusted Operating Profit of £3.6 million (H1 2016: £2.7 million), an increase of 33%, in Sterling terms, or 26% in constant underlying currencies. Operating loss of £0.4 million (H1 2016: £0.2 million profit) after acquisition costs from previously announced office buy out activity

· Continuing adjusted earnings per share of 3.90 pence (H1 2016: 2.43 pence), an increase of 60%

· Reported loss per share of 7.95 pence (H1 2016: 0.26 pence profit), reflecting share based payment charges driven by increases in the value of the Group, losses on disposal of the Digital Care mobile insurance business in September, and costs of acquiring minority interests in Blancco local subsidiaries

· Net debt at period end of £5.9 million (30 June 2016: £1.0 million net cash), reflecting timing of operating cash collection (adverse impact of £2.2 million), acquisition activity including minority interests in France and Australia (cost of £1.9 million) and final fees associated with the disposal of the previous repair and insurance businesses (cost of £2.0 million)

· Half yearly dividend of 0.70 pence per ordinary share (H1 2016: 0.66 pence per share)

Operational highlights

· Organic sales growth in constant currencies of 21%, comprising 11% growth in erasure and 200% growth in diagnostics (on a proforma basis)

· 44% increase in enterprise customers with a contract value greater than £0.1m within US and EMEA

· Significant expansion of erasure sales capabilities, including increases in the direct sales team, establishment of the new partner business development team, and the first Blancco offices opened in China and Singapore

· Strengthening of management team with addition of: Chief Revenue Officer, Steve Holton, and Chief Strategy Officer, Richard Stiennon

· Further strengthening of our patents and certification portfolio, including the SSD patent being extended to the Japanese market, with several patents pending.

· Sale of the mobile insurance business in September 2016, allowing the Group to complete its transition to a pure play software business.

Pat Clawson, CEO of Blancco, said:

"Growth in the first half was positive, across both product lines and geographies. The long-term opportunity for Blancco's market leading products is compelling and, with a significant investment in increased sales capacity in the first half, the board is confident of delivering market expectations for the full year."

Unless otherwise stated, defined terms used in this announcement have the meanings as given to them in the glossary at the end of this announcement

Enquiries:

Blancco Technology Group Plc +44 (0) 20 3657 7000

Pat Clawson, Chief Executive Officer

Simon Herrick, Interim Chief Financial Officer

Peel Hunt LLP (Nominated Adviser and Broker) +44 (0) 20 7418 8900

Edward Knight

Euan Brown

Panmure Gordon (UK) Limited (Joint Broker) +44 (0) 20 7886 2500

Dominic Morley, Corporate Finance

Charles Leigh Pemberton, Corporate Broking

Tulchan Communications +44 (0) 20 7353 4200

Tom Murray

Matt Low

www.blancco.com

CHAIRMAN'S STATEMENT

I am pleased to report Blancco's half yearly results for the six-month period to 31 December 2016.

Overall performance was significantly boosted by the effects of currency in the period, but underlying constant currency growth remained strong at 28%. Erasure growth was below trend but management has now taken the actions in growing sales capacity and expect this to normalise in the second half and beyond.

Progress in diagnostics was particularly encouraging. The Xcaliber business acquired in January is now fully integrated and management is deliveringa very large client roll out, winning new clients and building a sales pipeline.

The focus of activity in the period has been additionally on the final stages of the transformation of Blancco into a pure-play software group, with the disposal of Digital Care in September, and the buy-out of minority interests in various of the Group's subsidiaries. These are now complete and leave the Group well positioned for further growth.

The fundamental nature of the Blancco business has not changed since its acquisition by the Group in 2014: it was then, and it is now, the clear market leader in the rapidly growing area of data erasure. However, at acquisition, the Blancco business had made £9.8 million of revenue in its latest reported year (to December 2013) whereas over the last 12 months (to December 2016), Blancco had revenue of £24.9 million. Blancco is now doing the things that successful software businesses at a much larger scale need to do: patenting and defending IP, continually upgrading its base of employee talent, acquiring and synergising bolt-on technologies, and driving debate in our end markets.

My involvement with Blancco Technology Group Plc and its precursor, the electronic repair provider Regenersis Group Plc, goes back to 2011. I have determined that it is now the right time for me to hand over to a new Non-executive Chairman to steer Blancco through the next leg of its development. I am delighted that Rob Woodward, currently one of our Non-executive Directors, and the Chief Executive of STV Group Plc, has agreed to accept this role.

A new interim CFO, Simon Herrick, and new Non-executive Director (NED) and Senior Independent Director (SID), Philip Rogerson, are also welcomed to the Board.

Simon Herrick has previously held CFO roles at Crew Clothing Company Ltd, Debenhams PLC, Northern Foods PLC and Kesa Electricals PLC and is currently a NED/SID for Ramsdens Holdings PLC. A process to appoint a permanent CFO is underway and we will announce the outcome of this in due course.

Philip has vast experience in UK directorship roles and is currently Chairman of Bunzl plc and De La Rue plc and Advisory Board of North & East London Commissioning Support Unit of the NHS. Philip has also previously held Board roles at numerous other leading companies including Aggreko plc and Davis Service Group plc.

I feel confident the new Board will continue Blancco's successful global expansion on a continued high growth trajectory and that it will become a very substantial business, both in its erasure and its diagnostics segments.

Matthew Peacock

Non Executive ChairmanCHIEF EXECUTIVE'S REPORT

I am pleased to report Blancco Technology Group's results for the six months ending 31 December 2016.

Revenues of £14.2 million (2016 H1: £9.9 million) increased by 43%. Our Data Erasure division contributed £12.4 million (H1 2016: £9.9 million) while our Mobile Diagnostics division contributed £1.8 million (H1 2016: £nil on a consolidated basis, £0.6 million on a pro forma basis prior to acquisition).

Adjusted Operating Profit was £3.6 million (2016: £2.7 million), an increase of 33%. Adjusted earnings per share from continuing operations were 3.90 pence (2016 H1: 2.43 pence), an increase of 60%. Further details of these results are contained in the Group Financial Review.

The focus of the first half of our 2017 financial year has been on completing the Group's transformation into a pure play software business, and investing in developing our direct and indirect sales channels. Through the period, we continued to see high levels of customer retention and recurring revenue across our business.

In erasure, Blancco grew its sales at a rate of 10% on an underlying constant currency basis, which is a performance below the long term trend. The root cause of this slow down was insufficient headcount in the direct sales force, which with hindsight we did not expand sufficiently over the previous financial year, when the revenue line grew by 35%. From a sales force sizing perspective, strong performance with large orders over the previous financial year allowed the business to expand revenues ahead of its sales force capacity.

This sales force sizing issue has been addressed in the half year just ended, in two ways, driven by our new Chief Revenue Officer, Steve Holton. Firstly, we have added 17 new direct sales employees across our geographies, which has begun to grow the sales and pipeline in the second half of the year. Secondly, we have built out the partner business development function announced in our last results, with five relatively senior hires. This is a key means to achieving our stated goal of becoming the de facto standard in data erasure and mobile diagnostics globally in addition tothe market leader.

We have estimated that our global market opportunity is in excess of £4 billion, and most of this is in larger enterprises that require both end-of-life and active erasure solutions. To capture this market we need to partner with incumbent enterprise service providers, such as Value Added Resellers (VARs) and Managed Service Providers (MSPs). We believe that the way to step change the attachment of professional, certified erasure to corporate end-of-life devices is for incumbent IT service providers to provide our services to their enterprise clients in a format as simple as a "tick box on a web form". Increasing awareness remains one of our key objectives: as our recent survey of over 2,000 enterprise IT professionals showed that over half believed that deleting and reformatting permanently erased all data on a device.

Development of the new partner business has to date established 23 new partner channels, which will allow Blancco to be integrated onto their platforms as the default data erasure solution for their customers.

Erasure growth was once again led by our Mobile Erasure and Active Erasure (previously called Live Environment Erasure) areas up 41% and 11%, respectively in constant currency terms. End of life erasure increased by 4% in constant currencies, and was the area in which the direct sales force capacity constraint was most felt. End of life erasure is also a key focus for our new partner business development team.

Looking across our major erasure geographies, we saw a rebound in Europe (growth of 21% on a constant currency basis) where we made significant investments in restructuring and expanding the direct sales force in financial year 2016, in response to growth falling to 8% last year. In the US, our sales force going into the period was undersized and we grew at a rate of 13% on a constant currency basis, following a strong performance in 2016.

In diagnostics, progress was very encouraging in the first half of the financial year, following the acquisition of Xcaliber completed in January. On a proforma basis, revenue grew by 200% to £1.8 million, and the business generated a profit of £0.3 million. We cemented our flagship relationship with a large US carrier rolling out our in-store mobile diagnostics solution to their 6,000 stores across North America, and are now carrying out over 100,000 in-store diagnostics events every week. This has resulted in a large drop in the number of mobile phones that need to be returned to their factory for testing, representing a considerable cost saving and return on investment for the carrier. We also signed a number of new clients including a European mobile carrier and a global online retailer. We are able to offer an integrated end-to-end mobile solution from diagnosing problems to permanently erasing devises at the end-of-life, which we believe will be a key differentiator going forward. The sales pipeline in this division is also strong, and the business is scaled in terms of headcount to deliver significantly larger revenues and increase its operating profit margin.

In the period we strengthened and completed our senior management team bringing in Steve Holton as president and Chief Revenue Officer to run sales globally, and Richard Stiennon as our Chief Strategy Officer. Steve joined us from Good Technology in July and, as we acquire 100% stakes in the majority of our sales offices, has established a truly global sales team with a consistent sales offering and level of service worldwide. He is also responsible for the introduction of the partner business development model globally. Richard Stiennon leads the company's overall corporate strategy. This includes long-term strategic planning, product positioning, public affairs, industry analyst relations, joint ventures and industry partnerships. Richard is a former VP Research for industry analyst firm Gartner, Inc. and has held executive positions at Fortinet, and Webroot Software.

Blancco has successfully pursued a strategy of building presence in new markets via shared equity arrangements with well-placed entrepreneurial local partners and management. In this period we opened new sales offices in China and Singapore (which has already contributed to revenues in the period) and plan to further expand our sales operations into South America. As businesses reach scale in their territories, Blancco has bought out its minority partners, gaining full control and the ability to integrate seamlessly with its global operations. Following on from the acquisition of our minority stakes in the USA and Sweden in 2014 and Central Europe in 2015, in the period we bought out our minority partners in France and Australia, as well as increasing our stake in South East Asia to 70%.. After the period end, we additionally bought out our minority partner in Canada, and increased our stake in our Mexico business to 70%.

We strengthened our patent and certification portfolio with SSD patent granted in Japan, and erasure patents pending in Mexico, France and Germany, to complement our existing SSD patents in Europe, and the U.S., which will further strengthen our market leadership. Our accreditations now extend to over 17 worldwide erasure certifications, supporting 22 unique algorithms. We believe there are considerable barriers to entry for our erasure products; not only do we have more patents and certifications than any of our competitors, the Blancco brand is seen as the de facto standard in the ITAD industry, where we dominate, have the largest customer base, strong barriers to entry and a global international sales force with offices in 15 countries.

Financial Results

Blancco's revenue increased by 43% to £14.2 million (H1 2016: £9.9 million).

Group Adjusted Operating Profit was £3.6 million (H1 2016: £2.7 million) an increase of 33%, with growth under constant currency of 26%. Adjusted earnings per share were 3.90p (H1 2016: 2.43p), an increase of 60%. Further details of these results are contained in the Group Financial Review.

Gross margins increased from 89% to 97%. Cost of sales are largely hardware and consultancy services that we provide on a small number of implementations.

Blancco has continued to invest in its organisation and operations, with senior management appointments to complete the international senior management team and investment in our sales function. Investment has been focused both in our direct sales force, where we added 17 new employees, and in establishing a dedicated indirect channel sales team to drive further sustainable growth. Blancco's overhead (sales, general and administration) costs were £9.4 million (H1 2016: £5.3 million), and £8.7 million (H1 2016: £5.0 million) before depreciation and amortisation. The increase of £3.7 million breaks down as follows:

· £1.5 million is a result of consolidating the overheads of the Xcaliber business.

· £1.3 million is the impact of the weakening of the Sterling which has resulted in an increase of the costs incurred in foreign currencies.

· £1.3 million is predominantly in salaries, including commissions and bonuses for the 12 new sales heads and five channel sales team members, which now represent approximately half of group overheads.

The divisional adjusted operating profit margin has reduced to 31.1% (H1 FY16: 35.4%), which is a product of:

· Lower blended margin since the new diagnostics business which is still in growth and investment phase and is at this stage generating lower margins than the Group's core erasure product.

· The sales investment which has incurred cost during H1 but is only starting to see pipeline development and revenues in H2.

Cash flow

Adjusted operating cash flow for continuing operations was £0.8 million (H1 2016: £3.2 million). Operating cash flow in the period was significantly below the high levels that the business customarily generates, representing operating cash flow conversion of 22% (H1 2016: 119%). There are several factors which drove this.

Firstly, we are finding that large orders from sophisticated clients are on occasion coming with longer payment terms which may straddle the period end. In the period just ended, collection of a single debtor from a LATAM IBM Government contract before 31 December would have increased operating cash flow conversion from 22% to 81%. This particular piece of business is a good example of the types of opportunity Blancco is increasingly able to win, with Blancco subcontracting a multi-million dollar erasure service to a very large enterprise IT firm, which is in turn contracting to a government body, on a data security project with a duration of across our financial year and various payment stage gates. It is also in a developing market where customary payment terms are longer than in our US, European or Japanese businesses. While there is no doubt that this is good business for Blancco, it introduces more volatility into our cash flow profile.

In previous periods, the Group has increased its level of subscription licence deals with its customer base, resulting in cash on certain deals being collected in advance of the recognition of revenue. In the current period, the business has moved further towards larger enterprise customers, including the multi-year, multi-million dollar US diagnostics contract with a large carrier. This shift has reduced the cash conversion percentage as our debtor cycle has increased.

In the period, £1.3 million of exceptional (largely legal) M&A costs were incurred principally in relation to:

· Small but complicated acquisitions of 51% owned subsidiaries in France and Australia and a further stake acquired in South East Asia. While this does not generate an immediate benefit to revenues or profits (as these subsidiaries were already consolidated), it gives Blancco greater ability to direct sales activity and to promote stronger growth in future revenues and improved cash flow management in these locations, where growth has typically lagged behind the remainder of the Group.

· The Group has additionally expanded with new offices in China, Singapore and planned expansions in South America which have incurred fees in the current period.

Capital expenditure in the period was £1.5 million (H1 2016: £1.0 million), an increase of 50%, relating mainly to the ongoing development of the product portfolio.

Operating KPIs: Invoiced Sales and customer retention rates

Key Performance Indicators KPIs

* For customers spending over €10k per year

Technology and Development update 

Blancco development update

Blancco focused in the first half of the year on a range of development projects across its product portfolio. Two notable releases included the integration of Xcaliber diagnostic technology into the Blancco Mobile Device Eraser product and the addition of a command and control interface through the Blancco Management Console to the Blancco Drive Eraser. This two-way communication allows Blancco to integrate directly with its customers' asset management application to trigger an erasure event and monitor progress, which saves operator time and increases process efficiency.

Blancco continued its investment in expanding its intellectual property portfolio. Blancco has a US and European patent for its Solid State Drive (SSD) erasure technology and, new for this period, grant of this patent in Japan. This patent positions Blancco at the forefront of the rapidly-growing SSD erasure market and will oblige competitors entering this space to find a different method for reliable SSD erasure, which may prove difficult or even impossible. In addition, Blancco filed two new patents. The first patent-pending technology is an iterative erasure and verification process to remove previously stored content on mobile devices. The second patent-pending technology is for a Data Erasure Agent to remotely deploy Blancco's industry leading data erasure technology. This second patent filing is especially applicable to Blancco's OEM technology partners and will open further integration opportunities.

Legislative drivers

Secure data erasure is gaining in relevance and impact in large part due to new regulations and compliance requirements. The EU General Data Protection Regulation which provides for the "right to erasure" is going into full enforcement in every EU member state on May 25, 2018, only 14 months from now. In December, the UK announced that even post-Brexit GDPR will be its data protection regulation. This simplifies the task of future compliance for organizations while making it easier for Blancco to continue to message around data hygiene and erasure.

In the meantime the number of countries around the world with data privacy regulations has grown from just one in 1998 to 111 today. While the U.S. does not have a data privacy regulation, the important tenets of breach prevention and data disposal are incorporated in many U.S. regulations such as HIPAA, and global standards such as ISO 27001, 27018 and 27040. The US National Institute of Standards and Testing (NIST) Special Publication 800-88.1r provides Guidance for Media Sanitization.

Digital Care disposal (mobile insurance business)

We completed the sale of our Digital Care mobile insurance business in September 2016 which completed our exit from the repairs business which this was associated with. The consideration is contingent on meeting certain performance measures and the first payment will not become due until the next financial year. This business is presented as discontinued in our financial statements.

Conclusions and outlook

Blancco has a vision of becoming the global de facto standard for data erasure and diagnostics, and we are executing a clear strategy to achieve this. This has required building new capacities capable of triggering step changes in demand generation, such as marketing (to grow awareness of the data erasure issue) and partner business development (to make our products very simple and obvious for enterprises to access). It has also required a continued expansion and improvement in our senior team and our direct sales force. With investment in new capabilities weighted towards the first half of the year and a strong sales pipeline, the board remains confident in delivering market expectations for the full year.

Pat Clawson

Chief Executive Officer

GROUP FINANCIAL REVIEW

Segmental Results

Group Financial Review

The continuing business consists of the Erasure and Diagnostics divisions. The revenues and adjusted operating profit of these divisions comprise the Group's continuing operations as presented in these half yearly results.

The discontinued business comprises its mobile phone insurance activities which was sold in September 2016, and is presented separately in the financial statements.

The loss after tax for the period, including the impact of the required accounting for discontinued operations was £3.8 million (H1 2016: profit of £0.4 million). The loss before accounting for discontinued operations was £1.4 million (H1 2016: £0.7 million).

The full results of the discontinued business are presented in note 8.

Erasure Division

The Erasure division includes Blancco, the global market leader in data erasure software. The division's core products provide erasure across multiple platforms including servers, mobile devices, IT and other equipment. Our product offering includes the technologies developed internally and acquired through the previous acquisitions of SafeIT and Tabernus.

The Erasure division revenue increased to £12.4 million (H1 2016: £9.9 million), for the half year period. The growth has been driven across all operating locations, with Europe showing strong recovery. The mobile product has shown strong growth in the period as the product development continues to increase its marketability with upsell opportunities on the Group's traditional erasure platform and its complementary position alongside the Group's new mobile diagnostics product.

Adjusted operating profit was £4.1 million (H1 2016: £3.5 million), at a margin of 33%.

Diagnostics Division

The Diagnostics division is made up of solely Xcaliber Technologies, a smartphone diagnostics software business. The Group increased its stake in this business to 100% in March 2016 having previously held a minority share. Therefore the business was not consolidated in H1 2016. The business has been rebranded as Blancco Mobile Diagnostics.

The Diagnostics division generated revenues of £1.8 million in the period. This growth follows a successful roll out of the US mobile carrier contract in May 2016 which has contributed to the results for the full six month period. We also signed a number of new international customers in the period including a European carrier.

The Diagnostics division recorded adjusted operating profit of £0.3 million for the period, having moved from a break even position in H2 2016, which has been driven by the revenue growth, net of new investments in the sales and development teams. The costs of the Diagnostic division are largely fixed and therefore the relatively low number of customers are spread thinly over a high cost base. As the division grows we expect to see incremental revenues and high gross margins improving the operating margins.

Impact of Revenue Recognition

Blancco has two main pricing models, volume-based pricing, where clients purchase a fixed number of erasure licenses, and subscription pricing, where clients purchase a time-bound right of use of Blancco products. From a revenue perspective, absent of any other significant deliverables, volume-based sales are recognised at the point of invoice (being the point at which the software is delivered), whereas subscription sales are recognised monthly over the term of the subscription (even if the subscription is invoiced as an up-front payment).

Invoiced Sales recognises both volume-based and subscription business in the same way, at the point of invoice, and is the main internal management measure of sales performance. This differs from the reported revenue figures as IFRS revenue recognition requires the business to defer the revenue earned on software subscriptions - which have a defined term - over the duration of the contract.

This has an adverse impact on revenue in the period in which the sale was made, as the revenue is held on the balance sheet and released in future periods as the contract is fulfilled. The impact is shown below:

The increase in revenue deferral in 2016 is a result of the increase in absolute sales generated in comparison to the prior year, which is continuing to add to the base and the Group's customer list.

The total deferred revenue for the continuing Group at 31 December 2016 was £5.7 million (H1 2016: £3.1 million) which represents revenue to be recognised in future periods.

Corporate Costs

Corporate costs of £0.8 million (H1 2016: £0.8 million). These are costs associated with running the plc and central functions.

Impact of Foreign Exchange Movements

One of the risks that the Group faces by doing business in overseas markets is currency fluctuations. In order to manage the Group's exposure to this, the CFO conducts a quarterly review of the Group's currency hedging activities and makes a formal recommendation for any changes to the Board every half year by exception.

The Group is well diversified across a number of currencies, with sterling representing only around 10% of revenues. Over the course of calendar year 2016, and principally as a result of the UK's decision to leave the European Union in June 2016, sterling has weakened against the main overseas currencies in which the Group trades, predominantly the Euro (comprising 20% of revenues), US Dollar (comprising 30%) and Japanese Yen (comprising 20%).

In comparison to the prior period, the main currencies in which the Group trades have strengthened by 14% on average and have generated a foreign exchange benefit as the overseas earnings are now worth more in sterling terms. The Group matches its revenues and costs denominated in the same currencies, which means that any improvement in revenues recognised in sterling is counteracted by higher sterling denominated costs, and the underlying impact on Adjusted Operating Profit is minimised.

The exchange rates applied at the period end are as follows:

A comparison of actual results to results on a constant currency basis is presented below:

The Group implements forward contracts for payments and receipts, where the amounts are large, are not denominated in the local country's functional currency, where the timing is known in advance, and where the amount can be predicted with certainty. In addition, the Group undertakes natural hedges by structuring and paying future earn-outs on acquisitions in the acquired company's local currency.

The Group has a mix of business across 10 currencies which provides smoothing of currency movements in any one country through a portfolio effect, although isolated movements in the Group's reporting currency, sterling, can impact on the reported results. The cash and loan balances held - and the revenues and costs incurred - in different currencies provide a natural hedge.

The Group does not undertake any cash flow or profit hedging activities to insulate from currency movements in respect of overseas earnings, specifically the conversion of its largely non-sterling generated income into the Group's reporting currency, sterling.

No other hedging activities are undertaken in respect of tangible and intangible fixed assets, working capital (such as stock, debtors, or creditors), or other balance sheet items, as these are generally small in nature in any one country. 

Acquisition of Non-Controlling Interests

In the period, the Group has continued to invest further in its minority offices and has increased stakes in the following offices.

On 18 August 2016, the Group acquired the remaining 49% it did not already own of the issued share capital of Blancco Australasia Pty. The consideration of AUD$0.1 million (£0.1 million) was funded through the Group's cash reserves.

On 11 October 2016, the Group acquired the remaining 49% it did not already own of the issued share capital of Blancco France SAS for an initial consideration of €0.1 million (£0.1 million) and a contingent consideration of €0.1 million (£0.1 million). The deferred consideration is payable in December 2017 and is dependent on the France business achieving certain revenue targets in the period from 1 July 2016 to 30 June 2017.

On 30 September 2016, the Group acquired an additional 19% stake in Blancco SEA Bhd Sdn, bringing its ownership to 70%. The consideration of $0.2 million (£0.2 million) was funded through the Group's cash reserves.

After the period end, on 13 February 2017, the Group acquired the remaining 49% it did not already own of the issued share capital of Blancco Canada Inc. The consideration of CAD$0.2 million (£0.1 million) was funded through the Group's cash reserves.

Also after the period end, on 9 February 2017, the Group increased its stake in the issued share capital of Software Blancco S.A. de CV Mx from 51% to 70% for deferred consideration of USD$1.2 million (£1.0 million) with the first 50% payment six months after completion and the remaining 50% twelve months after completion.

Dividends paid to Non-Controlling Interests

On 27 September 2016, a dividend was declared and paid by Blancco Japan Inc. The total dividend of ¥57.0 million (£0.4 million) was paid, of which ¥27.9 million (£0.2 million) was paid to the minority shareholder, representing its interest in the subsidiary of 49%. This resulted in a cash outflow for the Group of £0.2 million and a corresponding reduction in the non-controlling interest reserve held on the balance sheet. The reduction in the reserve represents the realisation of cash from the subsidiary and therefore a reduction in the minority shareholder's interest in the net assets of Blancco Japan Inc.

Disposal of Mobile Insurance Business

The discontinued operations generated a loss for the period of £0.5 million on a total revenue of £1.7 million (H1 2016: £99.9 million revenue and £1.1 million profit). The result for the period represents the mobile insurance business only, compared to the combined Repair Services and insurance business in the prior year. The mobile insurance business saw a slowdown in sales and profitability in the period prior to disposal as customers deferred spending in light of the pending disposal.

Disposal costs, over and above those incurred in the disposal of the Repair Services Business in April 2016, are presented within deal fees in the income statement and total £0.5 million.

On 19 September 2016, the Group reached an agreement to sell the mobile insurance business to Mazovia Capital for contingent consideration payable over 2 to 3 years.

Exceptional Acquisition and Restructuring Costs

The Group has undertaken acquisitions of non-controlling interests in the period which have incurred exceptional acquisition expenses.

These acquisition costs amounted to £1.3 million (H1 2016: £0.9 million).

Exceptional costs in the continuing business amounted to £0.5 million which predominantly relate to legal fees associated with the Group's patent defence (H1 2016: £nil).

In the discontinued business, the M&A costs totalled £0.5 million (H1 2016: £1.9 million) and relate to the disposal of the mobile insurance business. The costs in the prior period relate the disposal related costs of the Regenersis Repair Services Business, with the majority of the costs of this disposal being incurred in H2 2016, the period in which the business was sold.

The restructuring costs in the discontinued business were £0.1 million (H1 2016: £0.2 million) and relate to the costs of restructuring the mobile insurance business in preparation for sale.

Amortisation of Internally Generated intangible assets

The activity of the R&D team is split between research and administration activity which is not eligible for capitalisation, and development time which is required to be capitalised under IFRS. Amortisation of internally generated intangible assets which have been generated by the Group is presented within adjusted operating profit.

The amortisation charge for the period is £0.6 million (H1 2016: £0.3 million) and is increasing over time due to the accumulation of capital expenditure since the acquisition of Blancco in April 2014. The Group is continuing to invest greater amounts each year in its development activities and amortises the expenditure over the period the version of the product is expected to be in use, generally four years. The amortisation is therefore currently lagging behind the capitalised development expenditure of £1.0 million in the period.

Amortisation of Acquired Intangibles

Amortisation of acquired intangible assets acquired as part of the Group's previous M&A activity was £1.3 million (H1 2016: £1.3 million). These intangibles relate to the acquisition of Blancco in 2014, SafeIT in 2014, Tabernus in 2015 and Xcaliber in 2016.

Share Based Payments

Share based payments charge was £1.0 million (H1 2016: £0.4 million) and represents the impact of the Group's Software LTIP for senior executives, full details of which are provided in the Annual Report and Accounts for the year ended 30 June 2016.

The Software LTIP rewards participants for growth in the total value of the company at the end of the award vesting period, in comparison to the valuation on inception. A charge of £0.7 million for the period represents the accumulated growth in value for the participants. The remaining charge of £0.3 million is in respect of a Regenersis legacy ISP3 scheme which lapsed in January 2017.

Net Financing Expense

Net financing expense was £0.7 million (H1 2016: £0.5 million). Included within the financing costs are:

· The unwind of the time value of money on the deferred contingent consideration payable in future periods for the Group's acquisitions, which represents a non-cash charge of £0.3 million (H1 2016: £0.1 million). The increase is a result of the contingent consideration recognised on the Xcaliber acquisition in January 2016.

· The cost associated with the Group's banking facility of £0.4 million (H1 2016: £0.4 million), primarily interest.

The finance income represents the interest earned on cash holdings around the Group.

Taxation

The total tax charge was £0.3 million (H1 2016: £0.4 million) and is lower due to the lower operating profit generated in the period.

Earnings per share

The business has shown strong adjusted EPS growth to 3.90 pence (H1 2016: 2.43 pence) driven by the growth in Blancco revenues and margins. The basic loss per share of 3.70 pence (H1 2016: 1.18 pence) is a result of the amortisation of acquired intangibles on the Group's historic acquisitions as well as fees for acquisitions which the Group anticipated will generate benefits in future periods.

Cash and Working Capital

Group review - Cash Flows

The cash flows of the discontinued operations have been removed from the individual captions in the cash flow statement and are presented separately.

There has been a reduction in net cash since June 2016 for the following reasons:

· The continued investment in our operating locations of £1.9 million, representing

o Costs of acquisition of non-controlling interests in Australia, France and South East Asia

o Expansion into new territories: China, Singapore and Latin America

· A large customer payment of £2.2 million delayed from H1 2017 to H2 2017 due to staging of contract delivery in the larger contract between IBM and the end user

· Engagement in patent defence to protect the market leading position of the business, and other exceptional restructuring costs, totalling £0.4 million

· Cash flows associated with the discontinued business and disposal of the mobile insurance business of £2.0 million, representing:

o The budgeted final deal fees associated with the Repair Services Business of £0.8 million

o Lower than expected sales activity in the insurance business in the period as customers deferred spend during the disposal process, resulting in an adverse result of £0.7 million

o Deal costs associated with disposal of £0.5 million.

Adjusted Operating Cash Flow ("AOCF") was £0.8 million (H1 2016: £3.2 million), with adjusted cash conversion of 22% (H1 2016: 119%). The reduction in AOCF is largely a result of the timing of receipt of cash for one contract debtor in LATAM for £2.2 million. The licence deliverable forms part of a larger contract where our delivery is complete but the wider contract is subject to various staged payments.

The group has additionally seen pressure on the debtor cycle as new contracts with larger enterprise customers have pushed the sales model away from cash up front and more towards over the term contract payments. Growth into new territories and up front costs associated, have also resulted in a cash outflow, for which the working capital cycle should improve once the sales teams in these locations are fully in place. Tax and interest paid are in line with prior periods, although a higher outflow for tax is expected during H2 2017 as tax falls due for the prior financial year in a number of the Group's locations.

Capital expenditure and R&D qualifying for capitalisation was £1.5 million (H1 2016: £1.0 million). Of this capital expenditure, £1.0 million (H1 2016: £0.7 million) was incurred in the ongoing development of the Blancco product range. The increase represents the new development activity on the mobile diagnostics product, acquired with Xcaliber in 2016. The remaining expenditure relates to purchase of property, plant and equipment and investment in the Group's operating systems.

Dividend paid of £1.0 million represents both the dividend paid to shareholders of the Group of £0.7 million and dividends paid to minority shareholders of the Group's subsidiaries of £0.3 million, which includes the dividend paid to the Japanese and former Australian minority shareholder.

Other movements of £0.1 million (H1 2016: £0.8 million outflow) include changes in the value of overseas cash held on deposit when translated back into Sterling at the exchange rates prevailing at the end of the period.

Net debt of £5.9 million (FY16: net cash of £1.0 million; H1 2016: net debt of £8.9 million) comprised gross debt of £9.2 million (FY16: £3.7 million, H1 2016: £20.1 million), and cash and cash equivalents of £3.3 million (FY16: £4.8 million, H1 2016: £11.2 million).

Dividend

The Board is pleased to announce a half year dividend of 0.70 pence per ordinary share. This will be paid on 16 June 2017 to shareholders on the register on 12 May 2017. The ex-dividend date will be 11 May 2017.

As previously announced, the Board has adopted a progressive dividend policy which reflects the long term earnings and cash flow potential of the group. The full year dividend will be split approximately 1/3 half yearly dividend and 2/3 final dividend, subject to the retention of funds needed to fund the future growth of the Group's business and its strategic aims.

Post Balance Sheet Events

Acquisition of Non-Controlling Interests

On 9 February 2017, the Group acquired a further 19% of the issued share capital of Software Blancco S.A. de CV Mx, bringing the Group's stake to 70%. The consideration of USD$1.2 million (£1.0 million) is payable in two tranches, the first 50% due six months after completion and the remaining 50% due twelve months after completion.

On 13 February 2017, the Group acquired the remaining 49% it did not already own of the issued share capital of Blancco Canada Inc. The consideration of CAD$0.2 million (£0.1 million) was funded through the Group's cash reserves.

Exercise of Share Based Payment

On 8 February 2017, following approval by the Company's remuneration committee, Pat Clawson exercised vested awards under the Software LTIP. This exercise was satisfied by the transfer of 115,295 ordinary shares of 2p each in the Company from the Company's Employee Benefit Trust. Pat sold 85,991 of these Ordinary Shares on 9 February 2017 at a price of 280p per share to satisfy tax liabilities relating to the exercise and for his personal financial purposes and he retained the remaining 29,304 Ordinary Shares.

Pat Clawson

Chief Executive Officer

Notes to the Half Year Report

For the six months ended 31 December 2016

This half yearly report has been prepared on the basis of the accounting policies expected to be adopted for the year ended 30 June 2017. These are in accordance with the Group's accounting policies as set out in the latest audited annual financial statements for the year ended 30 June 2016. The Group's accounting policies can also be found on the Group's website.

All International Financial Reporting Standards ('IFRS'), International Accounting Standards ('IAS') and interpretations currently endorsed by the International Accounting Standards Board ('IASB') and its committees as adopted by the EU and as required to be adopted by AIM listed companies have been applied. AIM-listed companies are not required to comply with IAS 34 'Interim Financial Reporting' and accordingly the Company has taken advantage of this exemption.

In preparing the prior year interim report, certain lines of business have been reclassified as discontinued and the primary statements adjusted accordingly, and in line with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.

The financial information in this half yearly report does not constitute statutory accounts for the six months ended 31 December 2016 and should be read in conjunction with the Group's annual financial statements for the year ended 30 June 2016. 

The condensed consolidated half yearly financial statements for the six months to 31 December 2016 have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Half yearly Financial Information.

This unaudited half yearly report was approved by the Board of Directors on 14 March 2017.

As outlined in the Group Strategic Review, the Group's management structure is reported in two distinct Divisions:

· The Erasure division focuses on development and delivery of data erasure Software, including the original Blancco erasure products as well as the erasure technologies from SafeIT and Tabernus which were separately acquired.

· The Diagnostics division represents Xcaliber Technologies, a smartphone diagnostics software business which is now fully owned by the Group following acquisition in March 2016. This has now been renamed Blancco Mobile Diagnostics.

3. Taxation

The tax charge for the six months to 31 December 2016 is based on the estimated tax rate for the full year in each jurisdiction.

The effective tax rate on AOP is 21.8% (H1 2016: 20.7%). The marginal increase reflects a small shift in mix of operating profit generated in higher tax rate jurisdictions.

5. Profit for the period

Profit for the period for the entire group has been arrived at after charging/(crediting):

The figures for the Group's continuing operations are as follows:

6. Acquisition costs

Acquisition costs relate to the M&A activity within the period, with the most significant costs relating to the buyouts of minority shareholders in France, Australia and SEA as well as the set-up of new regional structures in Asia and Latin America.

Deal costs not included above relate to the disposal of the Insurance Business totalling £0.5 million for the period (H1 2016: £1.9 million) as they are presented within discontinued operations.

7. Exceptional restructuring costs

Exceptional restructuring costs relate to integration of acquired businesses and patent defence.

The loss on disposal reconciliation for the disposal of the mobile insurance business is as follows:

No proceeds have been recognised for the contingent consideration on this disposal as it is not possible to reliably measure the value.

The cash flows associated with the discontinued operations are as follows:

The total facility available to the Group is £11.5 million (30 June 2016: £11.5 million; 31 December 2015: £39.0 million). The facility expires on 31 October 2019, and all banking covenants were met during the period.

10. Acquisitions

Acquisition of Non-controlling Interests

On 18 August 2016, the Group acquired the remaining 49% of the share capital of Blancco Australia Pty which it did not already own for a cost of AUD$0.1 million (£0.1 million). There is no earn-out.

On 11 October 2016, the Group acquired the remaining 49% of the share capital of Blancco France SAS which it did not already own for a cost of €0.1 million (£0.1 million). An earn out is in place, payable in December 2017, based on sales in the period July 1 2016 to June 30 2017. Expected pay-out is €0.1 million. The acquisition included a transfer of the remaining 51% of the shares from Blancco Oy to Blancco Finland Acquisitions for a consideration of €0.3 million as a loan.

On 30 September 2016, the Group acquired the 49% of the share capital of Blancco SEA Bhd Sdn, taking ownership to 70% for a cost of $0.2 million (£0.2 million). There is no earn-out.

The buyouts of non-controlling interests do not require a fair value assessment as they were already under control of the Group when the initial Blancco acquisition was completed on 16 April 2014. 

In accordance with IFRS 10, "Consolidated Financial Statements", the purchase prices for each acquisition have been taken directly to the P&L reserve, in addition to the non-controlling interest in the balance sheet attributable to Blancco Sweden SFO, Blancco US LLC and Blancco Central Europe GmbH as at the respective acquisition dates.

Contingent Cash Consideration on Acquisitions in the Prior Year

The Tabernus acquisition includes an earn-out based on earnings, to be paid in September 2018. The estimated cash outflow at the time of settlement will be $2.0 million (£1.3 million). A deferred liability of $1.4 million (£0.9 million) has been established which represents the fair value at the acquisition date, using a discount rate of 12%. At 31 December 2016, the deferred liability was $1.7 million (£1.3 million).

The Xcaliber investment on the 17 March 2016 includes an earn-out to be paid over various stages of the next 3 years. The estimated cash outflow at the time of settlement will be $4.7 million (£3.3 million). A deferred liability of $3.8 million (£2.7 million) has been established which represents the fair value at the investment date, using a discount rate of 14%. At 31 December 2016, the deferred liability was $3.6 million (£2.9 million).

11. Intangible assets