EMIS.L Regulatory News (EMIS)

14 March 2018

EMIS Group plc

("EMIS Group" or "the Group")

Final Results for the year ended 31 December 2017

EMIS Group plc (AIM: EMIS.L), the UK leader in connected healthcare software and services, today announces its final results for the year ended 31 December 2017.

Financial highlights

1 Excludes capitalisation and amortisation of development costs, amortisation of acquired intangibles and exceptional items. Operating exceptional items comprise reorganisation/cost reduction programme costs of £5.8m (2016: £3.6m), service level reporting charges of £11.2m (2016: £nil) and goodwill impairment of £nil (2016: £4.6m). Earnings per share calculations also adjust for the related tax and non-controlling interest impact.

2 Stated after deduction of capitalised development costs of £4.4m (2016: £5.7m) and of the cash impact of exceptional items of £5.2m (2016: £3.1m).

Operational highlights - strong financial position and underlying growth

· The Group continues to be financially strong, completing 2017 with recurring revenues up 4% representing 83% of total revenues, a net cash position of £14m and access to debt facilities of up to £60m

· Excluding £3.5m of new investment into Patient during the year, adjusted operating profit improved by 5%

· Legacy issues being proactively managed with NHS Digital, with an £11.2m provision made to cover potential financial settlement and costs to remedy past issues

· Progressive dividend policy maintained, with a 10% increase versus last year and total payments to shareholders of over £15m in 2017

EMIS Health Primary, Community & Acute Care - continued progress

· Leading position in UK GP market maintained, growing market share by 1% to 56% (2016: 55%)

· Achieved accreditation from NHS Digital to deliver Electronic Prescription Service to dispensing doctor market

· Community market share of 17% (2016: 16%), moving up to the number two position in the market

· Encouraging performance for Acute division in H2, maintaining market share with improving momentum in revenue and cost control

EMIS Health Community Pharmacy - strong financial performance

· Moved to joint market leadership with 37% market share (2016: 37%)

· Roll-out of next generation dispensary pharmacy management product (ProScript Connect) on track

· EMIS Web being introduced to community pharmacy market, representing exciting new opportunity

Specialist & Care - improving operational and financial performance

· Maintained position as leading software provider in English diabetic retinopathy screening with a 76% market share (2016: 77%) and as leading outsourced provider of services with a 26% market share (2016: 18%)

· Achieved good revenue growth, with further operational efficiencies under new management delivering a profit in H2 and for the year

Patient - gaining momentum

· Investment in developing future business model increased, in line with plans

· Patient.info upgraded to optimise user experience for all mobile platforms, with 15 million unique users visiting the site each month

· Patient Access used by an average of 1.5m users each month, generating 4.5m transactions

Andy Thorburn, Chief Executive Officer of EMIS Group, said:

"EMIS Group has been built on solid foundations, which remain firmly in place today. We continue to lead the way in joined-up healthcare IT, with market-leading positions, high levels of recurring revenue and a strong financial position. Whilst we are proud of what we have already achieved in delivering connected healthcare, we are continuing to build on this with operational enhancements and key projects that will give us a stable platform for future growth.

"I believe that the robust management of legacy matters is essential, to both enhance our culture and improve performance going forward. This means being more performance-led, with greater accountability, improved operational execution and an increased focus on our customers, users, partners, patients and their needs. To support this, I have engaged closely with senior NHS figures, and have committed the Group to further strengthen its alignment with the strategic priorities of its key customers and users over the period ahead, placing EMIS Group firmly at the heart of the connected IT future of the NHS.

"While our focus currently is on dealing with a number of key projects set out in today's announcement, we are also working on our detailed plans for growth. I look forward to sharing more details of this with the market and our shareholders later in the year, as the Group continues to invest and adapt to the new models of care that are emerging digitally across our markets."

There will be an analyst meeting today at 9.00am at Numis Securities, 10 Paternoster Square, London EC4M 7LT. Please contact Florence Mayo at MHP Communications on 020 3128 8572, emis@mhpc.com, for details.

Enquiries:

For further information, contact:

EMIS Group plc Tel: 0113 380 3000

Andy Thorburn, CEO

Peter Southby, CFO

www.emisgroupplc.com

@EMISGroup

Numis Securities Limited (Nominated Adviser & Broker) Tel: 020 7260 1000

Oliver Hardy/Simon Willis/James Black

MHP Communications Tel: 020 3128 8540

Reg Hoare/Giles Robinson/Charlie Barker

Notes to Editors

EMIS Group is the UK leader in connected healthcare software and services. Its solutions are widely used across every major UK healthcare setting from primary, community & acute care, to high street pharmacies and specialist care services. EMIS Group helps healthcare professionals in over 10,000 organisations share vital information, facilitating better, more efficient healthcare and supporting longer and healthier lives.

EMIS Group serves the following healthcare markets under the EMIS Health brand:

• Primary, Community & Acute Care, as the UK leader in clinical management systems for healthcare providers and commissioners. EMIS Health products, including the flagship EMIS Web, hold over 40 million patient records and are used by more than 100,000 professionals in nearly 6,000 healthcare organisations.

• Community Pharmacy, with the UK's single most used integrated community pharmacy and retail system.

• Specialist Care, as England's leading provider of diabetic eye screening software and other ophthalmology-related solutions.

These markets are also supported by other EMIS Group businesses:

• under the Patient brand, the UK's leading independent provider of patient-centric medical and wellbeing information and related transactional services.

• under the Egton brand, providing specialist ICT infrastructure, hardware and engineering services, and non-clinical software into health and social care.

• under the EMIS Care brand, providing healthcare screening programmes such as diabetic eye screening.

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am delighted to be your new CEO and I am looking forward to the challenges and opportunities ahead of us.

A period of change

EMIS Group's underlying performance for 2017 was in line with the Board's expectations, with solid progress delivered in the core business.

Unfortunately, the discovery in early 2018 of a failure to meet certain service levels and reporting obligations with our customer NHS Digital (NHSD), has had a significant negative impact on our 2017 results. A provision of £11.2m has been made to cover the potential financial settlement and costs to remedy these past breaches.

We have been undertaking a review of service level agreements (SLAs) with all of our customers across the Group and to date have found no other material issues. As a result, we believe the NHSD related breach to be a serious, but isolated incident.

The Group has maintained its leading position in its principal markets, with high levels of recurring revenue and a strong financial position. In Primary, Community & Acute Care, the Group's leading GP market share has moved forwards, while our Community market share has also continued to grow.

The roll out of ProScript Connect, the Group's next generation pharmacy dispensary management product, has continued, driving a strong performance in Community Pharmacy, whilst maintaining its leading market share. Specialist & Care delivered a return to profit in the second half of the year and our work to deliver an evolving online digital platform for our Patient business continued in line with our plans.

EMIS Group is proud that it has delivered consistent growth based on its market leading propositions such as EMIS Web since its foundation over thirty years ago, but I am mindful that the healthcare market in the UK is ever changing. As a result, I believe we need to continue to invest and adapt to the new models of care that are emerging digitally, in the community and across the broader care settings we serve.

Financial strength underpinning 2018 performance

The Group continues to be financially strong. We completed 2017 with recurring revenues representing 83% of total revenues, with a net cash position of £14m and with access to debt facilities of up to £60m.

At the same time, we have maintained our progressive dividend policy, with an increase of 10% compared to the last financial year and total payments to shareholders of over £15m in the year.

EMIS Group has made a positive start to 2018 and has already secured revenue for the year ahead amounting to over 90% of the revenue we reported in 2017.

Putting in foundations for the future

After joining the business in May 2017, I spent the first two months of my tenure on an initial assessment of the Group's business operations, customer service, technology and its leadership. I have spoken directly with our staff at all levels and sought feedback from our customers on their experiences of working with us.

During this process, I have been encouraged by the strength and growth potential of our core clinical management business, our medicines management portfolio, and the innovative solutions that we are delivering, for example in the community and digitally via our Patient business. These solutions are adding significant value across many healthcare settings, and the dedication and knowledge of our teams makes a difference to our customers on a daily basis.

However, there is still work to do. I strongly believe that the robust management of legacy matters is essential, to both enhance our culture and improve the Group's performance going forward. As such, I am committed to ensuring that we further improve our internal controls and execution, and that we continue to invest in our people and in upgrading our clinical management systems, while delivering industry leading customer service across the business.

As a Group, in support of our focus on improving our operational execution, we have been working over the last six months on a programme called "Think Big, Manage Small". Essentially, we are ambitious for the long-term growth of the Group but I believe by breaking down the business into smaller, more focussed teams, we will deal more effectively with the underlying challenges that need to be addressed before we scale to the next stage.

I have therefore structured our business into small units focussed on key market segments with product and development roadmaps evolving to meet the customer needs of each market. These teams are led by market experts whose role is to drive performance in each business unit. These changes have increased our internal accountability, reinvigorated our focus on customer service and produced cost savings.

I am also implementing solutions to the operational lessons we have learned following the recent discovery of the shortcomings in our customer and product support processes. It is clear that we have been under-resourced in both the support function and most importantly in the development team, which is something I am addressing as a key priority.

Operational improvement plans progressing

Since I joined the business, I have changed our Group Executive team with four executives leaving and three new executives joining the business, including a new Group Chief Technology Officer (CTO), all of whom have a track record of delivery in their specialist areas.

Our increased focus on operational execution during the second half, whilst not yet at the levels I expect across all parts of our business, is yielding results with encouraging momentum being delivered across the following areas:

· a new and exciting mobile responsive website at Patient.info;

· completion of our Patient Access 2.0 app which we will launch in the first half of 2018;

· steady progress in our roll-out of EMIS Web in Northern Ireland;

· good growth with Community customers confirming our number two market position;

· a significantly improved Symphony product supporting our unscheduled care customers;

· roll-out of our Child Protection Information Sharing module in Symphony;

· strong sales success in Egton, especially with our new Wi-Fi offerings for GP practices;

· continued development of our Partner ecosystem with 101 partners now connected;

· positive roll-out of ProScript Connect across our Community Pharmacy customer base;

· improved patient satisfaction in our EMIS Care clinics - screening 551,000 patients across the UK and Ireland; and

· saving time and money for customers, whilst improving patient care, with EMIS Mobile.

We will continue this operational focus for all of 2018 and, with our new leadership team in place, I expect our execution to continue to improve.

Performance culture

Underpinning our operational improvement plans is a new focus on metrics and key performance indicators. These objective measures, which are reviewed by the executive management team daily and weekly, are key to understanding our progress against our plans for all aspects of our business.

At all times we will maintain the highest level of clinical, ethical, legal, corporate standards and governance across the Group. This means making our customers and users the Group's common purpose, working in collaboration with them, and exceeding their expectations at every stage.

Key projects

In this period of change for the Group there are three key projects that will shape our business for the future. The management team is focussed on each one as follows:

1. IT Futures and its importance

The current framework agreement for GP Systems of Choice (GPSoC) formally ends on 27 March 2018. However, the 'call off' contracts that sit under the framework agreement, which cover the 4,100 GP practices in England we serve as well as centrally funded services such as patient facing services (e.g. Patient apps), have already been extended until 31 December 2018. We are in constructive discussions with NHSD to further extend those 'call off' contracts to the end of 2019, to ensure there is sufficient time to put in place its replacement framework agreement.

The next framework agreement for GP systems in England is called IT Futures and we expect the formal procurement process to commence later this year. We are already discussing IT Futures at the highest levels of NHS England and NHSD. We are aligned with NHS England's strategy and are currently working through the detailed requirements with NHSD as part of our preparation for the up and coming framework tender. Although there are no guarantees of success, I feel confident we are well placed to be successful in our bid.

2. EMIS Web clinical management system upgrade

In anticipation of the new IT Futures requirements, we have commenced an upgrade of our clinical management system, EMIS Web. Our upgraded system will be more modular in nature, further cloud-enabled and interoperable, and will have new flexible configuration tools to meet the emerging care models we are seeing across the NHS.

The upgrade programme is being led by our new CTO, together with our Group Development Director who was one of the original architects of EMIS Web over ten years ago. We are combining existing skills in our business with new technology skills to provide a more flexible and adaptable clinical management software platform to meet the new models of care that are emerging.

The upgrade will evolve over time with new, more flexible modules being introduced on a regular basis, thus minimising project execution risks.

3. NHSD service level issues

We are in discussions with NHSD on the settlement arrangements for the SLA issues we announced in January 2018. We expect that this process will take some time to conclude as our findings need to be independently validated. We are working constructively and collaboratively with our customer and will continue to keep the market updated.

As part of our improved service level performance management process we have also reviewed the SLAs in contracts for other customers and we can confirm that no other material breaches have been identified to date. All SLA performance metrics are now being managed on a daily and weekly basis as part of our new operational improvement plans and we are confident that EMIS Group now has the appropriate processes in place to ensure that such breaches are not repeated in future.

In order to manage these key projects, we expect that operational costs will increase by £3m in 2018, reducing to £2m in 2019 and will be fully normalised in 2020.

Summary and outlook

EMIS Group has been built on solid foundations, which remain firmly in place today. We continue to lead the way in joined-up healthcare IT, with market-leading positions, high levels of recurring revenue and a strong financial position. Whilst we are proud of what we have already achieved in delivering connected healthcare, we are continuing to build on this with operational enhancements and key projects that will give us a stable platform for future growth.

I believe that the robust management of legacy matters is essential, to both enhance our culture and improve performance going forward. This means being more performance-led, with greater accountability, improved operational execution and an increased focus on our customers, users, partners, patients and their needs. To support this, I have engaged closely with senior NHS figures, and have committed the Group to further strengthen its alignment with the strategic priorities of its key customers and users over the period ahead, placing EMIS Group firmly at the heart of the connected IT future of the NHS.

While our focus currently is on dealing with a number of key projects set out in today's announcement, we are also working on our detailed plans for growth. I look forward to sharing more details of this with the market and our shareholders later in the year, as the Group continues to invest and adapt to the new models of care that are emerging digitally across our markets.

OPERATIONAL REVIEW

2017 was a busy year for EMIS Group, and despite a tighter NHS budget environment, the Group continued to make solid progress in each element of its business. During 2017, our Primary, Community & Acute Care businesses came together under common leadership - reflecting the anticipated changes in NHS models of care intended to deliver more integrated care between hospitals, GP practices and community services. These changes have increased internal accountability, reinvigorated our focus on customer service and produced cost savings.

EMIS Health Primary, Community & Acute Care

Primary

EMIS Health grew its UK GP market share in the year by 1% to 56% and maintained its market leadership position.

EMIS Health now supports clinicians providing integrated care across 128 different clinical care pathways such as diabetes services, minor injury services and child and adolescent mental health services. This means high-quality, informed and integrated clinical care can be delivered.

The Group benefitted from strong market shares across all four nations of the UK, with a number one position in England (57% market share), number two in Wales (45%), number one in Northern Ireland (55%) and number one in Scotland (54%).

As announced on 30 January 2018, in 2019 and 2020 EMIS Health's market share in Wales, relating to just under 200 practices and approximately £2m of revenue per annum, will reduce as it was not appointed to the forthcoming NHS Wales GP framework agreement. While we submitted what we believed was a strong and competitive bid for the Welsh framework agreement, we were not prepared to sign up to some of the contract terms requested by the customer for a relatively small contract. However, we are a long term market player and remain committed to winning new business across Wales with other products and services in our portfolio.

We are actively involved in the Scotland bid which is a similar sized framework for the Group. We will continue to develop the bid over the coming months and proceed as appropriate.

During the period, EMIS Health achieved accreditation from NHSD to deliver its Electronic Prescription Service (EPS) to the dispensing doctor market. This is an important development for EMIS Health both in supporting our existing customer base while delivering new growth opportunities in this sector. This also aligns with a new technology foundation for dispensing doctors that will allow users to adopt the mandated dispensing standards as defined under the Falsified Medicine Directive (FMD).

EMIS Group supports the desire of NHS England to have more organisations connected in the UK healthcare ecosystem. EMIS Health has been building its own ecosystem of healthcare providers and recently added its 101st partner on the EMIS Web platform.

Egton, the Group's ICT infrastructure, engineering and non-clinical software division, performed well, expanding its range of software, hardware and services, including health administration, compliance software and GP practice websites. As part of a new suite of innovative products, Egton deployed Wi-Fi infrastructure and analytics to over 1,000 GP surgeries during 2017. New products for 2018 include a digitisation service, currently in pilot, which offers practices the ability to scan paper records, freeing up valuable practice space and supporting the NHS's "Paperless 2020" strategy.

Community

EMIS Health grew in the community segment in the year and moved up to number two in the market with a 17% market share (2016: 16%).

The NHS continues to innovate with new models of care in the community to relieve pressure from front line services in hospitals across the UK. EMIS Health can help by providing software for doctors and nurses 'on the go' in the community who visit patients at home. EMIS Health is upgrading EMIS Web and investing in dedicated product and development teams to meet the challenges of the future, working closely with its community market user group.

We expect to see further growth in this market in 2018 and beyond. The goal in the mid-term is to consolidate our number two market position and aim for market leadership over time.

The potential for joined-up care across healthcare localities using EMIS Web continues to grow. Currently EMIS Health has a strong presence in community and 100% presence in primary care within 42 Clinical Commissioning Groups (CCGs) (2016: 38).

Acute

The main driver for acute trusts is the paperless initiative, best represented by the Global Digital Exemplar (GDE) Programme, supported by central NHS funding. EMIS Health operates in the best of breed sector of the acute market, and is holding market share well thanks to the strong clinical and functional software in our current portfolio.

With a new management team in place, the Group was encouraged with performance in the Acute division in the second half of 2017, with improving momentum in revenue and cost control.

EMIS Health invested further into its A&E system, Symphony, to better meet the market's needs in 2017 and beyond. We retained our number two position in this market, and increased market share by 2% to 19% (2016: 17%).

The medicines management element of the Acute business continued to perform well, holding the number two market position and increasing market share by 1% to 29% (2016: 28%). Further work is being carried out to deliver new technology ahead of the mandated dispensing standards as defined under the FMD.

EMIS Health Community Pharmacy

EMIS Health Community Pharmacy (EHCP) continued to grow well in 2017, maintaining its market share at 37% (2016: 37%), thereby becoming the joint market leader.

The roll-out of our new ProScript Connect software is progressing well, in line with our plans. Customer feedback has been positive and EHCP expects all of its direct customers to be on this upgraded software by the end of 2018.

The Celesio roll-out to the AAH Pharmaceuticals independent estate continues, and EHCP expects good growth from this in 2018 with the majority expected to be completed by the end of the year. The Lloyds element of the roll-out is likely to be delayed as the customer has another major IT project to complete ahead of deploying ProScript Connect.

EHCP recently introduced EMIS Web into community pharmacy, opening up a new market for the product. EMIS Web will support community pharmacies with Patient Group Directions (PGD) - delegated small procedures that can be undertaken in English pharmacy consulting rooms such as travel or flu vaccinations - alleviating some pressure on GPs and A&E departments.

Integration between our primary care system, EMIS Web, and community pharmacy system, ProScript Connect will provide pharmacists with full access to patients' GP records (with appropriate consent) and the ability to record information that can be shared with the GP.

Specialist & Care

Specialist & Care has maintained its position as the leading software provider in English diabetic retinopathy screening with a 76% market share (2016: 77%).

In our 2017 half year results announcement, the Group highlighted a risk to its market share in this area because EMIS Health Specialist had not been selected as a partner for Public Health England's (PHE) national screening platform, which was intended to achieve a standardised local programme operation through common IT system design and core functionality.

PHE has postponed this procurement process and moved its focus to the implementation of interval-based screening. We continue to work closely with the national team to ensure its successful implementation.

EMIS Care remains the clear market leader in outsourced diabetic eye screening and ophthalmology imaging services with a 26% market share (2016: 18%).

In 2017, EMIS Care successfully mobilised the following mainly three year initial-term contracts, which have an initial total contract value of £19m:

· Lancashire Lot 2 (North Lancashire & Fylde Coast - from the NHS)

· West Yorkshire Lot 2 (Bradford, Huddersfield & Calderdale - from the NHS, EMIS Care and 1st Retinal Screen)

· Bath, Swindon and Wiltshire (from the NHS and Virgin Care)

· Surrey (from Virgin Care)

· Plymouth (from the NHS)

Patient

EMIS Group has made good progress in its patient-facing business during 2017, investing in key developments to provide a platform for growth in the medium-term.

Patient.info, which enables the general public to self-care by searching for high-quality information relating to clinical conditions, has been upgraded to optimise its user experience for all mobile platforms. We re-designed the information architecture, so that multiple content formats can be discovered easily. Rich-media formats have been introduced, including short-form video content from some of the UK's leading clinical consultants. In 2017 an average of 15 million unique users visited the site each month.

Patient Access enables citizens to view their clinical record including test results, build their own Personal Health Record which they can share with their GP, book appointments directly with their GPs, securely message their GPs and order repeat medications. On average, 1.5 million users generate 4.5 million transactions on Patient Access each month. Patient will launch the Patient Access 2.0 app in the second half of 2018, following final NHS approvals.

Patient Access will evolve in the coming months to deliver rich new features including triage, video consultations, medical adherence planning tools and on-demand delivery options for repeat medications.

Through Patient, EMIS Group is building the UK's first digital healthcare marketplace. Its objective is to provide alternative private sector digital healthcare solutions to complement the NHS and to help take pressure off key public services.

The marketplace will initially focus on PGD services, linking the consumer with their local pharmacy for approved clinical services. In the next stage it will include new emerging digital players on a single platform, with both private and public-sector digital services made available to all UK citizens, on any device, anytime, anywhere.

2018 will continue to be an investment year for Patient as it builds and strengthens the key elements of its strategy. This work is expected to lead to new revenue growth in 2019 and beyond.

FINANCIAL REVIEW 

In the year ended 31 December 2017 the Group delivered a steady financial performance with underlying improvement in all key financial metrics when taking into account the planned investment in the Patient business.

Adjusted operating profit for the year, as set out in the table below, was £37.4m (2016: £38.8m) with statutory operating profit, reduced by exceptional charges for the reorganisation programme and by service level reporting charges, at £10.6m (2016: £23.5m). A reconciliation between the operating profit measures is given in the Group statement of comprehensive income.

Group revenue increased by 1% to £160.4m (2016: £158.7m), including revenue from the 2016 Intrelate acquisition in Primary, Community & Acute Care of £0.9m (2016: £nil).

Segmental performance

In the Primary, Community & Acute Care business, profit grew by 3%, despite a 2% revenue reduction, thereby strengthening the operating margin by 1.7%. The revenue reduction was a consequence of lower levels of activity in Acute and a reduction in some GPSoC discretionary revenue streams, including the revenue related to funded hosting assets. Profit nonetheless moved forwards as a result of the cost-saving and reorganisation measures taken by the Group over the past two years.

Performance in the Community Pharmacy division was again positive, with the roll-out of the new ProScript Connect product into the estate moving ahead as planned, laying the foundations for further growth in 2018.

Specialist & Care delivered revenue growth as expected with the successful implementation of the new contracts won during 2016. Profit was flat year-on-year, but having absorbed start-up costs during 2017 and delivered operational efficiencies under new management, it was encouraging to note an improving trend and to record a profit for H2 and for the year as a whole. 

In Patient, investment in developing the future business model increased as the year progressed, in line with the plan previously announced. This investment will continue during 2018, as Patient develops its media business and builds a new transactional platform. 

Summary segmental performance

1. Excludes capitalisation and amortisation of development costs, amortisation of acquired intangibles and exceptional items.

Revenue

Group recurring revenue, principally licences, maintenance & software support, hosting and other support services, was £133.5m (2016: £128.5m), up 4% and representing 83% of total revenue (2016: 81%). This high level of recurring revenue and the strength of the Group's customer relationships continue to provide an excellent foundation for the business to invest with confidence in developing future products and services, as well as providing good visibility of future financial performance.

The drivers of revenue change within the Group included the following:

· licences, slightly higher at £55.1m (2016: £54.8m), with growth in areas such as Community offset by a reduction in some GPSoC and one-off Community Pharmacy revenues;

· maintenance & software support, which increased overall to £41.4m (2016: £38.6m) with growth in subscription fees in a number of areas of the Group, including practice Wi-Fi;

· other support services, driven higher by the new contracts implemented in EMIS Care to £32.5m (2016: £29.3m);

· training, consultancy and implementation, which reduced to £12.4m (2016: £14.6m), with fewer new implementation projects in Primary, Community & Acute Care;

· hosting, which was lower at £11.6m (2016: £13.1m), as a result of a reduction in funded hosting asset and cost-plus revenues (offset by lower depreciation and costs); and

· hardware revenues, which were lower at £7.4m (2016: £8.3m).

Profitability

Adjusted operating profit reduced by 3% to £37.4m (2016: £38.8m). However, this is after taking account of the £3.5m of new investment in the Patient business during 2017. Excluding Patient's results, which were reduced in 2017 by this investment, adjusted operating profit across the Group grew by 5%. In a lower-growth revenue environment, this was achieved principally through tight cost control.

The operating margin reduced to 23.3% (2016: 24.4%), but excluding Patient improved by 1% to 24.9% (2016: 23.9%).

Group staff costs increased as, although staff numbers at the year-end were unchanged at 1,922 (2016: 1,922), the average headcount increased to 1,906 (2016: 1,875). However, the allocation of those staff across the Group has changed over the year, with increases in India (up from 128 to 197) and EMIS Care (up from 221 to 299) being offset by reductions in the Primary, Community & Acute Care segment in particular. With further investment in development and customer-facing functions now underway, staff numbers and costs are expected to rise during 2018.

The Group has recognised two operating exceptional items in 2017. The first relates to the reorganisation programme, which was extended in the second half of the year as the incoming CEO made further changes in shaping the business and preparing it for future growth, including a number of replacement hires at senior levels. The cost of the programme was £5.8m.

The second, a charge of £11.2m, relates to the service level reporting issue announced in January 2018. The provision reflects the estimated cost of settling the issue with NHSD and the cost of remediating the software code to address the problem backlog present at the year end, together with associated professional fees. This is a slightly higher cost than that indicated in our January 2018 announcement of upper single digits of millions of pounds, updated having undertaken further analysis.

After accounting for the exceptional items, the capitalisation and amortisation of development costs, and for the amortisation of acquired intangibles, statutory operating profit was £10.6m (2016: £23.5m).

Taxation

The tax charge for the year was £2.1m (2016: £5.2m). The effective tax rate for the year was 19.8% (2016: 20.0%).

Earnings per share (EPS)

Adjusted basic and diluted EPS were 47.2p and 47.0p respectively (2016: 49.4p and 49.2p). The statutory basic and diluted EPS were both lower at 12.8p (2016: 30.4p and 30.3p respectively) as a result of the exceptional items and an increase in the amortisation of capitalised development costs.

Dividend

Subject to shareholder approval at the Annual General Meeting on 1 May 2018, the Board proposes an increase in the final dividend to 12.9p (2016: 11.7p) per ordinary share, payable on 4 May 2018 to shareholders on the register at the close of business on 3 April 2018. This would make a total dividend of 25.8p (2016: 23.4p) per ordinary share for 2017. This is 10% higher than in the prior year, reflecting the Group's strong financial position, the Board's commitment to increasing dividends at least in line with underlying profit growth and its continued confidence in the Group's prospects.

Cash flow and net cash/(debt)

The principal movements in net cash/(debt) were as follows:

Having absorbed the Patient investment in the year, net cash generated from operations increased by 17% to £44.4m (2016: £38.0m), with a strong working capital improvement compared to the prior year, in part assisted by an increase in deferred income. Net cash from operations is stated after expensing the cash cost of the exceptional costs in the year of £5.2m (2016: £3.1m). On an adjusted basis, adding back this cost, cash flow from operations was 21% higher than in 2016.

Net cash spent on capital expenditure (excluding capitalised development costs) was broadly consistent at £6.6m (2016: £5.9m). Capital additions in the year included £4.0m on computer equipment (£1.2m of which related to funded hosting contract assets) and £1.0m on programme assets in EMIS Care.

After tax, dividends and other payments, the total net cash inflow of £14.4m resulted in a year-end net cash position of £14.0m (2016: net debt of £0.4m). At 31 December 2017, the Group had available bank facilities of £30.0m committed until June 2020, with an accordion arrangement to increase the quantum up to £60.0m and further options to extend the period up to June 2022.

Group statement of comprehensive income

for the year ended 31 December 2017

1 Including reorganisation/cost reduction programme costs of £5,688,000 (2016: £3,387,000).

2 Including contract asset depreciation of £1,285,000 (2016: £1,955,000), reorganisation/cost reduction programme costs of £112,000 (2016: £243,000), service level reporting charges of £11,188,000 (2016: £nil) and goodwill impairment of £nil (2016: £4,616,000).

3  Excluding amortisation of computer software used internally of £1,049,000 (2016: £919,000).

Group balance sheet

as at 31 December 2017

Group statement of cash flows

for the year ended 31 December 2017

Cash and cash equivalents of £13,991,000 (2016: £1,521,000) comprise cash of £13,991,000 (2016: £4,303,000) and a bank overdraft of £nil (2016: £2,782,000).

Group statement of changes in equity

for the year ended 31 December 2017

Notes to the preliminary announcement

for the year ended 31 December 2017

1. Basis of preparation

The financial information set out in this preliminary announcement does not constitute the company's statutory financial statements for the years ended 31 December 2017 or 2016 but is derived from those financial statements.

Statutory financial statements for 2016 have been delivered to the registrar of companies and those for 2017 will be delivered in due course. The auditors have reported on those financial statements; their reports were (i) unqualified (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The statutory financial statements for the year ended 31 December 2017 will be posted no later than 27 March 2018 to shareholders and, once approved, will be delivered to the Registrar of Companies following the Annual General Meeting on 1 May 2018.

Copies of the Annual Report and financial statements for the year ended 31 December 2017 will be available on the company's website (https://www.emisgroupplc.com/investors) from 27 March 2018 and from the Company Secretary, EMIS Group plc, Rawdon House, Green Lane, Yeadon, Leeds, LS19 7BY.

2. Segmental information

IFRS 8 Operating Segments provides for segmental information disclosure on the basis of information reported internally to the chief operating decision-maker for decision-making purposes. The Group considers that this role is performed by the main Board.

Since 2013 the Group has presented its results split into three segments: Primary & Community Care; Community Pharmacy; and Secondary & Specialist Care. The Primary & Community Care and Secondary (Acute) Care businesses are now under common leadership, and Patient has been established as a separate entity. Accordingly, the Directors have revised the segmental information in 2017 to better represent the Group's present structure, activities and the markets being served. The Group has four operating and reportable segments, all involved with the supply and support of connected healthcare software and services:

· Primary, Community & Acute Care;

· Community Pharmacy;

· Specialist & Care; and

· Patient.

Each operating segment is assessed by the Board based on a measure of adjusted operating profit. This measurement basis excludes exceptional items, the effect of capitalisation and amortisation of development costs, and the amortisation of acquired intangible assets. The Board considers this to provide the best measure of underlying performance as it excludes non-recurring costs, amortisation of acquired intangibles arising from business combinations and reflects the underlying in-year cost of development of software for external sale, as development is considered to be a core ongoing operating function of the business. Items are classified as exceptional due to either their nature or size. Exceptional items in 2017 relate to service level reporting charges and reorganisation costs. Group operating expenses, finance income and costs, cash and cash equivalents and bank loans and overdrafts are not allocated to segments, as group and financing activities are not segment specific.

Revenue excludes intra-group transactions on normal commercial terms from the Primary, Community & Acute Care segment to the Community Pharmacy segment totalling £4,545,000 (2016: £4,254,000), and from the Primary, Community & Acute Care segment to the Specialist & Care segment totalling £211,000 (2016: £97,000).

Revenue of £114,749,000 (2016: £112,396,000) is derived from the NHS and related bodies.

Revenue of £8,801,000 (2016: £7,270,000) is derived from customers outside the UK.

The reorganisation costs in 2017 and cost reduction programme costs in 2016 relate to redundancy and restructuring costs.

The service level reporting charges relate to the NHS Digital reporting issue and reflect the estimated cost of settling the issue with NHS Digital and the cost of remediating the software code to address the problem backlog present at the year end, together with associated professional fees. The charges are fully provided at 31 December 2017.

The impairment of goodwill in 2016 relates to the Specialist & Care cash-generating unit (CGU).

The gain on sale of associate in 2016 relates to the disposal of the Group's minority investment in Pharmacy2U.

The total current year tax charge includes a credit of £3,270,000 (2016: £726,000) in respect of exceptional items. The adjustments in respect of prior years principally relate to revisions made to claims for research and development expenditure.

The main rate of UK corporation tax reduced to 19% from 1 April 2017 and will further reduce to 17% from 1 April 2020.

A final dividend for the year ended 31 December 2017 of 12.9p amounting to approximately £8,124,000 will be proposed at the Annual General Meeting on 1 May 2018. If approved, this dividend will be paid on 4 May 2018 to shareholders on the register on 3 April 2018. The dividend is not accounted for as a liability in these financial statements and will be accounted for as an appropriation of distributable reserves in the year ending 31 December 2018.

8. Other intangible assets

10. Change in net (debt)/cash