Freeagent Holdings Regulatory News (FREE)

6 June 2017

FreeAgent Holdings plc

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

Full year results for the year ended 31 March 2017

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

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

Financial Highlights

· Revenue increased by 41% to £8.0m (FY 2016: £5.7m)

· Gross profit increased by 38% to £6.6m (FY 2016: £4.8m)

· Gross profit margin 82% (FY 2016: 84%)

· Adjusted* EBITDA £0.7m loss (2016: £0.2m loss) reflects planned investments in customer acquisition, particularly in the practice channel

· Net loss of £2.9m, including share-based payment expense of £0.8m, as the Group continues to invest in scaling its business (2016: £1.3m)

· Statement of Financial Position strengthened with £4.3m of net cash at year end (31 March 2016: £1.8m)

· Loss per share of 13p (2016: 43p)

· Annualised Committed Monthly Recurring Revenue (ACMRR) at period end increased by 26% to £8.6m (Mar 2016: £6.8m)

· Residual lifetime value of future subscription payments from the Group's current customer base increased to £34m (31 March 2016: £26m)

Operational Highlights

· Accounting Practice Clients strengthened to 33,147 (FY 2016: 16,705)

· Direct Clients increased to 17,500 (FY 2016: 15,741)

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

· Successful placing of £8m of new equity and admission to "AIM" (Alternative Investment Market of the London Stock Exchange) in November 2016

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

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

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

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

For further information, please contact:

Chairman's statement

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

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

All financial metrics are in line with or exceeding market expectations. Revenue for the year was £8.0m (FY 2016: £5.7m) and included strong progress in our accountancy practice sales channel. Annualised Committed Monthly Recurring Revenue (ACMRR) rose 26% to £8.6m (Mar 2016: £6.8m).

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

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

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

Andy Roberts

Chairman

5 June 2017

Chief Executive's Statement

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

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

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

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

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

Revenue for the period was up 41% to £8.0m (Mar 2016: £5.7m) and our forward-looking expectations - measured by our Annualised Committed Monthly Recurring Revenue (ACMRR) - rose 26% to £8.6m (Mar 2016: £6.8m).

As well as strong revenue growth, we are pleased to report that during the period we successfully added £8m in customer LTM (lifetime margin), net of customer churn, thereby increasing the estimated residual margin of our customer base from £26m to £34m.

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

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

In recent months we have also learned more detail around the HMRC's 'Making Tax Digital' (MTD) agenda, which represents the biggest change to tax administration in the UK for a generation. All businesses except the very smallest (those with turnover below £10,000) will be required to manage their tax affairs digitally, and update HMRC at least quarterly with summary accounting information. HMRC has confirmed that some businesses will start to be impacted from April 2018 and by 2020 all businesses will be within the MTD regime. FreeAgent is well placed to support these businesses as MTD progresses.

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

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

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

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

2. A premium, differentiated product experience

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

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

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

3. A continued focus on innovation

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

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

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

Future Growth

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

Ed Molyneux

Founder and CEO

5 June 2017

Financial Review

Revenue

During 2017, FreeAgent increased revenue by 41% to £8.0m. Recurring revenue was 95% of all revenue, with the balance being made up of development income from our partnership with The Royal Bank of Scotland Group ("RBSG"). Our Annualised Committed Monthly Recurring Revenue ("ACMRR") was £8.6m.

The Direct channel, customers who come to our website and subscribe directly, continued to contribute more than 45% of our revenue for the year. Revenue in this channel has grown from £3.1m to £3.6m.

The Accounting practice channel contributed £3.3m to our revenue in the year to 31 March 2017, up 102% from the prior year. Expanding this channel continues to be an area of focus for the business. We have invested in growing the practice sales team from 19 at March 2016 to 26 at March 2017. Notwithstanding the Government's recent reforms to the tax treatment for self-employed contractors on public sector projects, we continue to see our greatest success in the contractor focused practice market.

The new relationship with RBSG, which was announced in January 2017, has generated revenue of £0.5m for the Group from development work completed to facilitate the launch of the partnership.

Operating Profit and Margins

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

The adjusted EBITDA for the year was a loss of £0.7m. This is an increase on the prior year EBITDA loss of £0.2m, which reflects our investments in customer acquisition, particularly in the practice channel.

Key Performance Indicators

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

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

Average revenue per user ("ARPU"), derived by dividing Monthly Recurring Revenue by the number of active subscribers within the relevant channel at any given point in time, was on average £17.65 in the direct channel and £10.46 in the practice channel during the twelve month period. These have both increased marginally on the prior year. A number of practices came to us from our historic partnership with IRIS, and these were typically lower priced deals. In recent months we have been able to price more favourably as a result of greater product functionality.

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

Cash and borrowings

The proceeds from the IPO in November 2016 delivered a net inflow of cash to the business of £5m, after repayment of the debt facility and costs of the IPO. I am pleased to report that FreeAgent's cash position remained strong at the financial year end, with £4.3m on the statement of financial position.

Tangible fixed assets

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

Development costs

We continue to balance the development of new features with ongoing maintenance and research activities. The capitalised development costs in the year to March 2017 (£379k) have decreased compared to the prior year (£969k), which partly reflects the deployment of our development team to work on the RBS project, all of the costs of which have been recorded as cost of sales in the statement of comprehensive income.

Taxation

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

Going concern

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

Katherine Tenner

Chief Financial Officer and Company Secretary

5 June 2017

Consolidated statement of comprehensive income

For the year ended 31 March 2017

Consolidated statement of financial position

As at 31 March 2017

Consolidated statement of cash flows

For the year ended 31 March 2017

Consolidated statement of changes in equity

For the year ended 31 March 2017