Freeagent Holdings Regulatory News (FREE)

FreeAgent Holdings plc

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

Interim results for the six months ended 30 September 2017

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 unaudited interim results for the six months ended 30 September 2017.

Financial Highlights

· Revenue increased by 28% to £4.6m (H1 2017: £3.6m)

· Gross profit up 22% to £3.7m (H1 2017: £3.0m)

· Gross profit margin 80% (H1 2017: 84%)

· Adjusted EBITDA loss £0.3m (H1 2017: loss £0.4m), as expected

· Net loss of £1.0m, reflecting planned growth in further customer acquisition and support costs and increased investment in product development (H1 2017: £1.3m)

· Net cash of £3.4m as at 30 September 2017 (H1 2017: £0.6m)

· Residual lifetime value of future subscriptions from existing customer base increased by 15% to £44.0m (H1 2017: £38.1m)

· Good revenue visibility maintained with ACMRR up 17% at £9.0m (H1 2017: £7.7m)

Operational & Strategic Highlights

· Accounting practice clients increased to 37,600 (H1 2017: 29,485)

· Direct clients increased to 18,247 (H1 2017: 16,724)

· Strategic partnership with the RBS Group (RBS) building momentum with RBS customer portal activated during September

o Initial RBS monthly subscribers 571 (H1 2017: nil)

o Post period-end: a further c1,200 monthly subscribers were added. Total c1,800 as at 4 December 2017

· Customer Net Promoter Score (NPS) remained high at 72

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

"The first half has seen FreeAgent report continued strong revenue growth with an evolving channel mix. Growth has continued in both our direct sales and practice sale channels and, whilst the rate of growth in our practice sales has been tempered by changes to IR35 'off-payroll' legislation which has affected public sector contractors, the underlying market drivers remain intact as accounting professionals transition towards digital accounting to cater for all their business requirements.

Considerable progress has been made in developing our strategic partnership with the RBS Group, with the Bank's customer portal going live towards the end of the financial period and initial monthly subscriptions by early adopters in line with our expectations. RBS' commitment to the project is evidenced by significant sector and financial support, and the endorsement of senior RBS management. We look forward to reporting further progress with the rollout in the second half."

The glossary on page 5 contains definitions and basis of calculation of SaaS metrics.

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

Chief Executive's Statement

During the six-months ended 30 September 2017, the Group continued to show strong growth in overall revenue. In H1 2018 revenue was £4.6 million, representing a 28% increase compared to H1 2017 (£3.6M). Gross margins remained high at over 80% (H1 2017: 84%).

As at 30 September 2017, the Group had a total of 61,037 subscribers, an increase of 18% over H1 2017 (H1 2017: 51,865). The Group's growth in the period was underpinned by continued positive business metrics.

The best measure of financial value created by the business during the period is the movement in the estimated residual lifetime value of future subscriptions from our existing customer base. At the period end this was £44.0m (H1 2017: £38.1m) which is comprised of £21.3m (H1 2017: £18.6m) from our direct customer base and £22.7m (H1 2017: £19.5m) from our accountancy practice channel.

Churn remained low in the direct channel at 1.5% (H1 2017: 1.5%), but increased in the practice channel due to the impact of IR35 legislation. This created a one-off impact for those practices supporting contractors supplying the public sector, which we expect will reduce over time on the assumption that future underlying churn rates will reflect our historic experience. As a result, churn in the practice channel was 2.9% (H1 2017: 2.0%).

Importantly, all SaaS businesses need to demonstrate healthy customer acquisition economics, as measured by LTM/CAC, defined as the customer acquisition cost ("CAC") calculated per customer and compared to the lifetime margin expected to be generated from that customer ("LTM").

Using churn rates to approximate LTM, as we have reported previously, the Group achieved LTM/CAC ratios of 2.8x (H1 2017: 3.8x) for direct customers and 1.9x (H1 2017: 4.6x) for accountancy practice clients, reflecting the one-off spike in practice channel customer churn noted above.

On an alternative basis, using Acquired Residual Lifetime Value, which we are now able to directly calculate, the Group achieved LTM/CAC ratios of 3.2x for direct customers and 3.3x for accountancy practice clients. We believe this calculation more accurately reflects the economics of acquiring new customers and we intend to track both measures going forward.

Annualised Committed Monthly Recurring Revenue ("ACMRR"), which includes committed new customer subscriptions during the next 12 months in accordance with contracts agreed with accountancy practice customers, increased to £9.0 million as at 30 September 2017, up 17% on H1 2017 (£7.7m).

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 £17.96 (H1 2017: £17.63) in the direct channel and £9.92 in the practice channel (H1 2017: £10.86) during the six-month period.

Strategy and New Revenue Channels

FreeAgent's vision is "Making businesses happier and more successful by putting them in control of their finances."

FreeAgent remains well positioned to scale and develop in the following ways:

· Growing the core business with a strict focus on UK micro-businesses and their banks and accountants

· Providing a premium, differentiated product experience

· A continued focus on innovation

FreeAgent has made progress in the first half against the strategic levers noted above, as outlined at the time of IPO.

FreeAgent's revenue is generated through direct sales, indirectly through accountancy practices and through the banking channel, including a developing strategic partnership with RBS.

Growth in the direct sales channel remains buoyant and we continue to see a good return on the investments we make in our customer acquisition strategies. A number of tactics are employed, including tried-and-tested digital marketing (pay-per-click advertising, content-driven marketing etc). We are also building on our ability to analyse and segment customer behaviour, thereby seeking to increase conversion rates and further drive the growth of this channel.

Accountancy practice channel revenues continued to grow in the period, although this growth was tempered due to the effect on public sector contractors of changes in the IR35 legislation. This impacted those accountancy practice customers who provide Personal Services Company (PSC) support for contractors supplying public sector organisations. Despite this specific challenge, the practice channel still represents a significant opportunity for the Group to gain market share. It is in this context that we continue to drive thought leadership and awareness of the benefits of digitisation within the accountancy market. FreeAgent remains at the forefront in supporting accounting professionals as they move towards cloud accounting to cater for all of their business finance requirements and we will look to maintain and build our market presence in this important channel.

Our strategic relationship with RBS (incorporating the Royal Bank of Scotland and NatWest) continues to grow from small beginnings earlier in 2017, when FreeAgent was selected ahead of all of our competitors to supply an integrated banking-accounting proposition for RBS customers. Since that time FreeAgent and the Bank have together engaged in wide-ranging activities to integrate systems and create roll-out processes. In the six months ended 30 September 2017, £0.26 million of revenues were generated from advanced integration activities specifically for RBS and this revenue stream is expected to continue in 2018 as we enhance our offering for RBS business banking customers.

RBS's positive engagement with FreeAgent is evidenced by significant sector and financial support, and the endorsement of senior RBS management. Although in the early stages of rollout, with the Bank's customer portal activated shortly before the end of the financial period, early customer adoption rates have been very encouraging. 571 monthly subscribers were recognised at 30 September 2017 and more than 1,200 were added post period-end, now totalling c1,800 as at 4 December 2017. Looking ahead, we expect to deepen our partnership with this important customer as FreeAgent is introduced on a progressive basis to the Bank's c 665,000 strong micro-business customer base.

One of the primary drivers of both accounting practice and the wider banking channel's interest in FreeAgent is the forthcoming transition to a digital tax regime - HMRC's Making Tax Digital (MTD) agenda. Despite a softening in the original highly-ambitious timetable for delivery, work continues apace at both HMRC and with software vendors to support the necessary new interfaces and processes. In April 2019 those customers filing VAT returns will do so within the new MTD system, and from 2020 onwards it is highly likely that other areas of business tax will follow suit. FreeAgent is exceptionally well positioned to help businesses manage this transition smoothly, and similarly, despite the delayed timescales, we are seeing accountants and banks alike increasingly keen to support their clients' migration to digital systems.

Even in advance of MTD, our strategy of differentiation drives us to deliver a fully-integrated compliance solution for our customers - everything from time-slips to tax returns, and to continue to invest in simplifying our customers' lives and helping them be more successful with their digital accounting. As the final piece of this compliance solution, during the second half FreeAgent will become the first accounting software provider to launch the integrated digital filing of corporation tax and statutory accounts, which will significantly streamline the compliance process for businesses and their accountants alike.

To maintain this pace of strategic innovation, we have continued to invest in staff, systems and processes during the period. We have successfully attracted talent accordingly and have strengthened our team since IPO: employee headcount (131 employees) has increased by 22% on H1 2017 (H1 2017: 107 employees).

Current Trading and Outlook

FreeAgent is now operating successfully across three complementary market channels (direct, practice and banking) and our cash resources will be deployed across further functionality advances and specific customer acquisition strategies to service these markets, in line with our stated strategy.

The Group will also continue to explore with RBS opportunities for adding further value to the Bank and its customers in terms of additional functionality, particularly around data insights and open banking.

Operating costs have grown in line with management expectations as the Group continues to consolidate and grow market share through a land, expand and retain strategy. Our balance sheet is strong with net cash balances at the period end of £3.4m and we anticipate monthly EBITDA break-even towards the end of calendar year 2018.

We expect to report further strategic progress and solid business growth during the second half, building on the achievements of the first six months of the year.

Ed Molyneux

Chief Executive

5 December 2017

Glossary

Subscriber: Subscriber means each unique subscription by an accounting partner, an end user or a financial institution.

ACMRR: Annualised Committed Monthly Recurring Revenue represents actual monthly recurring revenue at 30 September 2017 multiplied by 12, plus any incremental revenue committed from accounting partners within the next 12 months. Accordingly, it provides a 12-month forward view of revenue.

ARPU: Average revenue per user is calculated as monthly revenue at 30 September 2017 divided by subscribers at that time.

Lifetime Value (LTV): LTV is the revenue expected from a subscriber over the lifetime of that subscriber. This is calculated by taking the average subscriber lifetime multiplied by ARPU. The residual LTV is the total LTV to be collected from all existing subscribers across their expected lifetimes.

Lifetime Margin (LTM): LTM is the gross margin expected from a subscriber over the lifetime of that subscriber. This is calculated by taking the average subscriber lifetime multiplied by ARPU multiplied by the gross margin percentage.

CAC: Customer acquisition costs including sales and marketing activities.

H1 2017: Is the six-months ended 30 September 2016

H1 2018: Is the six-months ended 30 September 2017

INDEPENDENT REVIEW REPORT TO FREEAGENT HOLDINGS PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2017 which comprises the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows and the notes to the interim financial statements.

We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on AIM which require that the half-yearly report be presented and prepared in a form consistent with that which will be adopted in the company's annual financial statements having regard to the accounting standards applicable to such annual financial statements.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

Our report has been prepared in accordance with the terms of our engagement to assist the company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'', issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial statements for the six months ended 30 September 2017 is not prepared, in all material respects, in accordance with the rules of the London Stock Exchange for companies trading securities on AIM.

BDO LLP

Chartered Accountants and Registered Auditors

Edinburgh

United Kingdom

5 December 2017

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Consolidated statement of comprehensive income

For the 6 months ended 30 September 2017

Consolidated statement of financial position

As at 30 September 2017

Consolidated statement of changes in equity

For the 6 months ended 30 September 2017

Consolidated statement of cash flows

For the 6 months ended 30 September 2017

Notes to the financial information for the 6 months ended 30 September 2017

1. Basis of preparation

The financial information presented in this interim results has been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards issued by the International Accounting Standards Board, as adopted by the European Union. The principal accounting policies adopted in the preparation of the financial information in this review are unchanged from those used in the group's financial statements for the year ended 31 March 2017 and are consistent with those that the group expects to apply in its financial statements for the year ending 31 March 2018.

The interim results for the periods ended 30 September 2016 and 30 September 2017 are unaudited but have been reviewed by the group's auditor. Full details of the accounting policies are included in the Report and Financial Statements for the year ended 31 March 2017.

Going concern

The financial information has been prepared on a going concern basis with the net assets of £4.6M at 30 September 17 (30 September 2016 net liabilities £408k).

The principal risks and uncertainties facing the group have not changed from those set out in the Report and Financial Statements for the year ended 31 March 2017.

The directors are comfortable that committed revenue already booked, current cash held in the bank and the continued growth of the various income streams will allow the business to meet all its obligations and objectives going forward.

Basis of consolidation

The financial information incorporates the results of FreeAgent Holdings plc and all of its subsidiary undertakings as at 30 September 2017. The results of the subsidiary undertakings are included from the date of incorporation.

2. Loss per share

At 30 September 2017, there were 3,161,424 (2016: 1,680,800) share options and 270,000 (2016: 449,330) warrants in issue. In accordance with IAS 33 where there is a loss for the year, there is no dilutive effect of options and warrants in issue.

3. Intangible assets

The group has capitalised £485k (2016: £352k) in respect of development costs. An amortisation charge of £318k (£332k) has been recognised in the consolidated statement of profit and loss and other comprehensive income for the 6-month period ended 30 September 2017.

4. Taxation

As at 30 September 2017, the tax credit in respect of qualifying research and development relating to the 31 March 2017 year end is still being considered by the directors who are confident that a valid claim for qualifying expenditure in excess of the £35k recognised in the financial statements for the year ended 31 March 2017, will be made. As the outcome is currently unknown, no further adjustment has been made to the credit previously recognised.

As at 30 September 2017, there is a further unrecognised and unquantified potential tax credit available to the group relating to qualifying expenditure on research and development in the six-month period ended 30 September 2017. The directors have not yet calculated the claim in respect of this expenditure which will be made based on the annual results for the year ending 31 March 2018. Accordingly, the directors have not recognised this potential asset at this time. A full assessment of the credit will be made and recognised in the annual financial statements.

5. Share based payments

The group operates a SAYE scheme. 570,804 options were issued during the period with an exercise price of 76 pence.

In addition, a new LTIP scheme for the members of the senior management team was launched in June 2017. 270,122 options were granted with an exercise price of £1.015 and will vest in 2020 upon achievement of certain performance criteria.

An expense of £78k has been recorded in the consolidated statement of comprehensive income in respect of share based payments for the 6-month period to 30 September 2017 (2016: £512k).

6. Related party transactions

There are no related party transactions.

7. Foreign exchange loss

The foreign exchange loss recognised in the period ended 30 September 2016 relates to the impact of currency movements on USD denominated loan funds.

8. Events after the reporting date

There are no events after the reporting date which require adjustment or disclosure.