Gb Group Regulatory News (GBG)

GB GROUP PLC

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

Half year results for the six months ended 30 September 2023

GB Group plc (AIM: GBG), the experts in digital location, identity verification and identity fraud software, announces its unaudited results for the six months ended 30 September 2023.

Financials

Notes: 1Defined within note 22 to the Half Year Results. 2Normalises for impact of the net gain on foreign exchange, which in 1H23 was an unusually large £6.3million gain primarily related to intercompany loans vs. a £0.3million gain in 1H24. 3 This measure is defined within note 10 to the Half Year Results. Growth percentages are calculated with reference to the actual unrounded figures in the primary financial statements and so might not tie directly to the rounded figures found in this release if recalculated.

Chris Clark, CEO, commented:

"We are pleased with the first-half performance, Location and Fraud delivered good growth and transaction volumes within Identity have stabilised. At the same time, our continued focus on structural efficiency savings has already achieved an annualised run-rate reduction in operating expenditure of £10 million, while maintaining investment in our differentiated product portfolio. While the subdued macroeconomic environment may persist, we continue to expect some year-on-year Identity revenue growth in the latter part of the current year, and I am confident that our strong discipline on cost, good momentum with customer wins and high retention leave GBG very well positioned to deliver our FY24 profit expectations.

I am particularly pleased that Dev Dhiman will become GBG's next CEO following my retirement in January. His understanding of our business, markets and culture has delivered excellent results leading our business in APAC and he is the right person to guide GBG through the next phase of its evolution. I wish him, and all our team members, the very best for the future."

Chief Executive Officer's review

A good first half; excellent strategic progress and performance in line with our expectations

At GBG, every day we build, collaborate and partner to create a world where everyone can transact online with confidence. With the digital marketplace continuing to evolve, GBG's customers and their consumers will increasingly rely on the internet to supply and access public and commercial services. We fully expect that this enduring demand will provide a long runway of growth to trends such as digital transformation, increasing regulation across a diverse range of markets and an ever-growing need to protect against fraud.

Within a fragmented and competitive global Identity market, GBG has continued to innovate and drive differentiation to stand out from our peers, demonstrating our industry leadership position. Having successfully launched Multi-Bureau, GBG GO and our next-generation address capture solution to market in the last year, our momentum has continued with several new propositions that demonstrate our ongoing innovation and expertise including GBG Trust, GBG Identity Score and a new Global Store Finder product for Location.

Our first-half financial performance was pleasing despite the macroeconomic conditions. Both Location and Fraud delivered good performance with high single-digit growth in Location and low double-digit growth in Fraud. The decline in Identity was in line with our expectations, and excluding the impact of cryptocurrency customers, revenue was flat with strong growth in APAC offsetting a tough prior-year comparator in the Americas.

Over the last 18 months, GBG has faced two significant headwinds to growth; firstly, the general macroeconomic conditions, which have led to higher inflation and monetary tightening by central banks, has suppressed consumer demand leading to lower transactional volumes for GBG; secondly, specific headwinds related to changes in consumer behaviours following the end of the COVID-19 pandemic has driven demand reductions in the internet economy, particularly fintech businesses.

Given a more subdued macroeconomic outlook, the first of these headwinds may persist into our next financial year; however, the headwinds from the post-pandemic reduction in activity have begun to subside and we are encouraged by the stabilisation of monthly transaction volumes in Identity during the year to date. While we will continue to face tough year-on-year comparatives until the latter part of the year, we do expect to achieve some year-on-year Identity revenue growth.

We have delivered excellent strategic progress in our efforts to drive simplification and efficiencies that will increase the effectiveness of our business going forward. These initiatives, which began during FY23, have already achieved an annualised run-rate reduction in our operating expenditure of £10 million. In an environment in which businesses are experiencing greater uncertainty and lengthening of sales cycles, this work underpins the Board's confidence that GBG will deliver its profit expectation for FY24 and is positioned to be a more resilient and profitable business going forward.

Strategic progress

We remain resolute and focused on delivering our purpose as a business - to build trust in a digital world. The key trends such as digital transformation, industrialisation of fraud, customer friction and increasing regulation, will drive enduring demand in the markets in which we operate. A focus on using our identity and fraud expertise to deliver innovation enables the differentiation of our globally relevant identity fraud solutions. GBG has an increasing right to win in a large and fragmented marketplace, as customers require increasingly sophisticated onboarding journeys combining identity and fraud services to safely operate online and maximise the good consumers they can onboard.

The ongoing investment in our feature-rich portfolio of solutions reflects the increasing convergence of identity and fraud as well as the role that greater location confidence plays in establishing trust with a consumer. Recent coverage by leading industry analysts such as Juniper Research and Liminal recognise the leading role we are playing in delivering solutions that add significant value to our customers, enabling their consumers to transact online with confidence. GBG is well-positioned to accelerate cross-selling and up-selling of our solutions to existing under-penetrated customers and capture business through expansion into new geographies and sectors.

In the first half of the year, we were particularly pleased by the progress we made with two strategic initiatives; using innovation to differentiate our customer proposition and becoming a more effective and efficient organisation through simplification and prioritisation.

1) Driving increased differentiation through continued innovation

As we look to enhance our customer relationships, we are developing ways to add more value to their identity lifecycle, at the point of onboarding through to in-life. Over time this means global identity fraud propositions that leverage our strong core capabilities to combat origination fraud. Our identity fraud expertise, deep sector experience and commercial innovation will underpin this move. For example, we are building demand through GBG Identity Score, a product that consolidates our global expertise into a metric from 0-1000 to help customers understand the confidence they can have in an identity outcome and the level of onboarding risk. It will be an important differentiator as customers turn to GBG as their identity knowledge partner to achieve a competitive advantage. Notably, GBG Score powers our International Identity Index, which is helping the market understand identity data diversity on a global scale and supporting greater levels of identity inclusion.

Building on the success of our fraud networks in the Americas and customer response to our Alerts product in Australia, we are also in a pre-launch phase of GBG Trust, a global fraud network powered by the millions of transactions enabled through our data and document verification networks. This is an increasing capability for GBG to provide unique fraud indicators and insight to complement the regulatory decisioning we provide. These innovations along with those launched in the prior year such as Multi-Bureau and GBG GO expand the opportunities that we can develop with existing customers or to penetrate verticals such as the fast-growing gaming sector in the Americas.

Location is continuing to drive innovation that helps simplify the complexity of global premise-level address data for our customers, reducing the impact of failed deliveries in e-commerce and operational inefficiencies that result from poor address data quality. In the first part of the year, we successfully launched our Digital-first platform to enable Location to increase the accessibility of its products to customers in 45 countries globally, while delivering further innovation to the market with the introduction of a Global Store Finder product, supporting the broader emergence of 'click & collect' delivery. This ongoing innovation includes new AI capabilities to strengthen Location's competitiveness and enrich the way customers benefit from one of the most comprehensive and up-to-date global addressing solutions in the market.

As a business, GBG has understood the potential of artificial intelligence (AI) for some time; utilising Computer Vision Machine Learning over the last decade to power our solutions. We have built a dedicated team specialising in data science, our expertise leverages AI and machine learning (ML) to tackle increasingly complex challenges such as those countering the fast-evolving and sophisticated threat from bad actors harnessing generative AI. This is already making a difference, with AI/ML deployed across our solutions to detect altered or fake ID documents, predict behaviour indicative of fraud and increase our levels of global address accuracy.

2) Driving cost efficiency through simplicity and prioritisation

Strong strategic progress has also been delivered in terms of accelerating our journey towards becoming a global organisation. We are driving efficiency by taking advantage of the scale we have built as a result of our previous acquisitions to achieve synergies and increase the effectiveness of our business. Our strategic actions cover three key areas; operational efficiency, product & technology and go-to-market activity. Several strategic workstreams are addressing these areas covering proactive management of headcount, process simplification, greater alignment of our portfolio to reduce duplication and tightened control of discretionary spend.

This relentless focus on driving simplicity and efficiency will maintain GBG's ability to prioritise the disciplined investment required to optimise our core solutions in a competitive market. During the first-half, for example, we have combined our regional Identity and Fraud product and technology teams to form a single global function pursuing strategic differentiation. This will result in greater collaboration to accelerate our product pipeline, helping us to integrate new features and products into our established solutions, alongside increasing commercial innovation, to ensure our go-to-market processes can launch new solutions at pace. These initiatives, which began during FY23, are ongoing and we have already achieved an annualised run-rate reduction in operating expenditure of £10 million. This will support our underlying margin in the shorter term, while importantly, enabling GBG to be a more resilient and profitable business over the longer term.

Our highly engaged team

The performance of our people is integral to sustaining our differentiation, and we are proud of the high levels of team engagement that we achieve throughout the business. The emphasis we place on team well-being and performance underpins the strong and resilient culture at GBG and supports our ability to drive continuous improvement and evolution. The passion, collaboration and deep expertise that our team consistently demonstrate in customer engagements have contributed to year-on-year improvements to our Net Promoter Score and customer satisfaction, which are comfortably above the industry benchmarks, in addition to the recognition in the extensive number of responses received to our Voice of Customer feedback programme.

Reflecting on the first-half, maintaining our high levels of engagement has been more challenging and has required proactive effort in an environment where headcount has been actively managed down and outcomes for the variable pay elements of remuneration have been relatively low. It is in that context that we are particularly pleased that our latest Gallup survey achieved our highest participation level to date and indicated that our engagement levels remain high, with 88% of our team recommending GBG as a great place to work.

Trading performance

Both revenue and adjusted operating profit are in line with the trading update released on 19 October 2023. On a reported basis, first-half revenue of £132.4 million declined 1.1%. On a constant currency basis, revenue grew by 1.8% and, excluding the impact of the year-on-year decline in cryptocurrency customer revenues, first-half growth was 3.3%. While the group continues to enjoy high levels of absolute customer retention, the group's level of revenue growth has been impacted by reductions in demand related to two headwinds as discussed above, this includes a more subdued general macroeconomic outlook and a post-pandemic reduction in activity from 'internet economy' customers, predominantly in the Americas.

During the first-half, our gross margin moderated to 69.2% (1H23: 71.1%) reflecting the revenue mix across segments and channels alongside higher cloud hosting costs. However, this was more than offset by a continued focus on driving group-wide simplicity and efficiency, as outlined above. We made excellent first-half progress; the group's adjusted operating expenses were £6.1 million or 8.3% lower than the prior year despite inflationary pressure. As a result, adjusted operating profit excluding the net gain on foreign exchange increased by 7.9% to £23.6 million, with our operating profit margin on that basis expanding by 150bps to 17.8%.

Location (27.6% of the Group's revenues)

Location had a good first-half and revenue grew 8.1% on a constant currency basis to £36.6 million. This reflects resilient demand across the diverse sector and geographic use cases for our location intelligence solutions with new customers and partners, including Deutsche Telekom, Credit One and Moody's Analytics, who have chosen to work with GBG to improve operational efficiency and reduce fraud through enhanced global addressing data. In addition, the effectiveness of our ongoing cross-sell and up-sell initiatives and pricing strategies have helped to offset the continued softer transactional volumes in e-commerce volumes experienced by some customers.

Identity (57.9% of the Group's revenues)

Overall performance for Identity in the first-half was in line with our expectations, as revenue decreased by 2.8% on a constant currency basis to £76.6 million. Excluding the year-on-year decline in cryptocurrency customer revenue, Identity saw a marginal decrease of 0.5%. Strong APAC growth, driven by momentum in Australia and New Zealand, was offset by the tough prior-year comparator in the Americas. We continue to drive momentum in cross-sell/up-sell activity driven by the structural growth opportunities in our markets which GBG has considerable capacity to address through its layered capabilities. We have continued to drive new logo acquisition, with diverse names such as Cash Factory and a US satellite and mobile network provider in the Americas, Standard Bank, LemFi, DAZN Bet and Instapro Group in EMEA and Australian Unity Wealth, Monash University and Tabcorp in APAC. As we move into the second half of the year, it is encouraging that, as expected, our monthly transaction volumes in Identity have now stabilised and we still expect to deliver some year-on-year revenue growth in the latter part of the year.

Fraud (14.5% of the Group's revenues)

Strong first-half constant currency revenue growth of 10.5% in Fraud was underpinned by important contract renewals and new business wins. Southeast Asia continues to be an attractive market, where our fraud prevention and detection solutions are enabling customers to effectively meet evolving compliance requirements and counter the fast-growing Identity Fraud threat, with a number of leading financial services businesses across Indonesia, the Philippines and Thailand selecting GBG solutions in the first half of the year, alongside successful renewal with existing customers in APAC and EMEA.

Outlook and summary

The Board is pleased with both the strategic progress achieved and first-half financial performance against the backdrop of the continued macroeconomic conditions. Our ongoing focus on simplicity and efficiency has delivered a strong profit performance in the first-half and underpins our FY24 profit expectations, which will benefit from stronger margins in the second half. Second-half performance to date has been in-line with our expectations and we anticipate that FY24 revenue growth will be broadly in line with current expectations. The stabilisation we have seen in Identity supports our confidence in delivering some year-on-year Identity growth in the latter part of the year. 

As announced on 8 November 2023, I will be retiring from GBG and my full-time executive career at the end of January 2024. I am delighted that my successor, Dev Dhiman, currently managing director of our APAC region, has been chosen and promoted from within GBG. Looking to the future, I am confident that Dev will continue to focus on the strategic progress that enables GBG to maximise the opportunity in its markets to achieve profitable growth and deliver sustainable value for shareholders.

I wish to take this final opportunity to extend my sincere thanks to the entire team at GBG for all that we have achieved together over the last seven years, and also to all of our stakeholders for their ongoing support, especially our customers who are our foremost priority. It has been a real privilege to lead this fantastic business as we have become one of the global leaders in digital identity.

Chris Clark

Chief Executive Officer

On behalf of the Board

27 November 2023

Finance review

Revenue

GBG delivered revenue of £132.4 million (1H23: £133.8 million), a decrease of 1.1% on a reported basis, but representing growth of 1.8% at constant currency. Excluding the impact of the year-on-year decline in cryptocurrency customer revenues, first-half growth was 3.3%.

In the first-half, 94.3% (1H23: 93.2%) of our revenue came from the combination of subscription and consumption revenue models which demonstrates GBG's attractive, repeatable and cash-generative business model. Of this, software subscription1 revenue contributed £74.4 million, representing growth of 2.0%. Revenue from transaction/consumption of our solutions added a further £50.5 million, a decrease of 2.6%. Non-repeatable revenue streams, typically services, hardware and implementation fees, amounted to £7.5 million in the period (1H23: £9.0m).

Profitability

Gross margin was 69.2% (1H23: 71.1%) reflecting the revenue mix in the period both across our segments but also between direct and partner channels, in addition to an increase in cloud hosting costs.

The prior year included an unusually large FX gain of £6.3 million, primarily related to the retranslation of intercompany loans. The FX gain this year was £0.3 million and therefore overall adjusted operating profit has declined year-on-year.

Adjusted operating profit excluding gains on foreign currency for the first-half increased by 7.9% to £23.6 million (1H23: £21.8 million), which represents a margin of 17.8% (1H23: 16.3%). This improvement reflects a focus on cost efficiency with disciplined prioritisation of investment to capitalise on our long-term market opportunities.

Despite inflationary pressures our adjusted operating expenses were £6.1 million or 8.3% lower than the prior year. A key contributing factor to this has been our ongoing strategic focus on simplicity and efficiency. As a result of considered management of our team member recruitment and replacement of leavers, alongside a limited number of redundancies, our total headcount of 1,183 people on 30 September 2023 represents a 9% reduction since March 2022. In addition to a reduction in our people costs, savings have also been made through reviewing our physical office footprint and controlling discretionary spend in areas such as marketing and travel.

Further margin improvement is expected by the full year as our second-half revenues are traditionally stronger than the first-half, additionally, there will be a full six-month benefit of the cost reduction measures taken at different points during the first-half. Our continued focus on group-wide efficiencies and disciplined cost control underpins the Board's confidence that GBG will deliver its FY24 profit expectations.

On a reported basis, there was an operating loss of £52.6 million (1H23: £2.5 million profit) after taking account of £76.5 million of costs (1H23: £25.5 million) for amortisation of acquired intangibles, share-based payments and exceptional items. Of these costs, £74.7 million (1H23: £25.2 million) were non-cash items. The operating loss is primarily as a result of the £54.7 million non-cash impairment of goodwill detailed below.

Impairment of goodwill

Significant increases to central bank interest rates since 31 March 2023 have resulted in an increase in the pre-tax discount rate applied to the US cashflows in our impairment assessment, from 12.3% at 31 March 2023 to 13.0%, which has resulted in an exceptional non-cash goodwill impairment charge of £54.7 million. More detail can be found in Note 13 to the accounts.

Net finance costs

The net finance charge of £4.7 million was £2.1 million higher than the prior year, with £4.3 million (1H23: £2.1 million) of the cost relating to interest on the variable rate Revolving Credit Facility. The increase is due to the changes in interest rates relative to the prior year, with the US Secured Overnight Financing Rate (SOFR) increasing from 2.98% on 30 September 2022 to 5.31% on 30 September 2023.

Taxation

The tax credit for the six-month period was £2.1 million (1H23: £0.7 million charge). The tax charge on adjusted profit before tax was £6.0 million (1H23: £6.7 million), representing an effective tax rate of 31.2% (1H23: 26.4%). The main drivers of the rise in the adjusted effective rate of tax is an increase in the UK statutory tax rate from 19% to 25% from 1 April 2023 as well as the impact on deferred tax assets of US State tax rate changes. The tax rate attributable to US State taxes has fallen largely due to changes in the calculation method for some US States. GBG Americas has significant deferred tax assets that have been revalued at the lower tax rate resulting in a tax charge that is fully recognised as a discrete item in the six months ended 30 September 2023.

Our guidance for the full year effective tax rate remains unchanged in the range of 25% - 27%.

Earnings per share

Diluted EPS is a loss of 21.8 pence per share (1H23: loss of 0.3 pence per share), primarily due to the non-cash impairment of goodwill charge.

Adjusted diluted EPS of 5.1 pence per share (1H23: 7.3 pence per share) declined year on year due to the reduction in the reported adjusted operating profit (which includes the unusually large FX gain in the prior year) as well as the impact of the higher interest expense cost explained above.

Group cash flow and balance sheet

GBG remains focused on maintaining a strong balance sheet to support sustainable growth.

During the first six months of the year, the Group's operating activities before tax payments generated £22.9 million of cash and cash equivalents (1H23: £15.3 million) with strong year-to-date EBITDA to cash conversion of 102.0% at 30 September 2023 compared to 57.5% at 30 September 2022. This improvement was due to a number of specific non-recurring factors which distorted the cash conversion in the prior period, with the 1H24 performance more reflective of historic levels.

During the period to 30 September 2023, net repayments against the revolving credit facility were £5.0 million, resulting in outstanding balances of $139 million (31 March 2023: $149 million) and £10 million (31 March 2023: £7 million).

Overall, our net debt at 30 September 2023 decreased by £1.2 million since 31 March 2023 to £104.8 million. This was despite a negative £1.4 million translation impact from the conversion of the US denominated debt into pound sterling, the £10.1 million full year dividend payment, £1.2 million payment of contingent consideration related to the Cloudcheck acquisition in February 2022 and exceptional cash costs of £2.8 million.

We expect one-off cash costs such as those above to be lower in the second half and therefore anticipate continued strong cash generation will enable us to reduce net debt more substantially by the year-end, reducing the impact of high interest rates. Between 30 September 2023 and the date of this report, further repayments of $3m and £3m have already been made, while our cash generation has enabled the current net debt position to reduce to approximately £95 million.

We were very pleased that on 27 October 2023, we agreed the second of two one-year extension options on our existing Revolving Credit Facility, so that the Group has access to a £175 million facility until July 2026 and a £140 million facility until July 2027.

David Ward

Chief Financial Officer

On behalf of the Board

27 November 2023

Notes: 1Software subscriptions can be term-based where the agreement entitles the customer to use a GBG solution for a fixed period of time (fair use volume limits applies) or consumption-based, whereby a customer buys usage credits in advance which entitle them to use of GBG's solutions up to a fixed quantity (and within a fixed time period).

Upon disposal of investments held at fair value through other comprehensive income or foreign operations, these elements of other comprehensive income will be recycled to the Consolidated statement of profit or loss.

Condensed Consolidated Statement of Changes in Equity