Gresham Regulatory News (GHT)

14 March 2023

Gresham Technologies plc

Annual Financial Report Announcement

Gresham Technologies plc (LSE: "GHT", "Gresham", "Group", "Company"), the leading software and services company that specialises in providing solutions for data integrity and control, banking integration, payments and cash management, is pleased to announce its audited results for the financial year ended 31 December 2022 ("FY22").

Financial Highlights

Operational Highlights

Outlook

(1) Adjusted EBITDA refers to earnings before interest, tax, depreciation and amortisation, adjusted for one-off exceptional charges and share-based payments. (see note 5 of the Group financial statements).

(2) Adjusted EBITDA less capitalised development spend and any IFRS16 lease-related cash payments.

(3) Diluted earnings per share, adjusted to add back share-based payment charges, deferred tax charge on the intra-group sale of IP, exceptional items and amortisation from acquired intangible assets.

(4) Excludes any IFRS16 lease-related payables.

(5) The Electra acquisition completed on 22 June 2021.

(6) Percentage increases stated above are based on rounding to the nearest £'000 as disclosed at detailed level within this report.

Ian Manocha, CEO, commented:

"We are pleased to report on a year of profitable growth and operational advancements that have delivered a step-change in the Group's strategic position as a primary software partner in financial markets. The Group's financial performance for the year, ahead of initial expectations, reflects the building blocks put in place over the last three years, with benefits from cross-selling momentum, operational synergies and a greatly expanded market opportunity starting to be realised.

As the macro environment remains challenging for many businesses within the financial sector, it has served to highlight the necessity for digital transformation and automation to streamline processes and ultimately achieve cost saving synergies whilst also complying with increasing regulation. With a core customer base spanning more than 275 organisations across 30 countries and significant visibility of revenues with £42m of FY23 orders already under contract, the Board looks ahead with confidence in the Group's continued success."

Presentations and Documents

A presentation for analysts will be held at 9am GMT today via conference call and a separate presentation for existing and potential shareholders will be held at 12.30pm GMT today via the Investor Meet Company ("IMC") platform, details of which are set out in the Company's announcement dated 14 February 2023.

A copy of the presentation to be tabled at both sessions is available on Gresham's website: www.greshamtech.com.

A copy of this announcement has been submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism and www.greshamtech.com/investors.

The Annual Financial Report 2022 will be sent to shareholders in due course.

Enquiries

Inside information

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 ("MAR"). Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

Note to editors

Gresham Technologies plc is a leading software and services company that specialises in providing real-time solutions for data integrity and control, banking integration, payments and cash management. Listed on the main market of the London Stock Exchange (GHT.L) and headquartered in the City of London, its customers include some of the world's largest financial institutions and corporates, all of whom are served locally from offices located in the UK, Europe, North America and Asia Pacific.

Gresham's award-winning Clareti software platform is a highly flexible and scalable platform, available on-site or in the cloud, designed to address today's most challenging financial control, risk management, data governance and regulatory compliance problems. Learn more at www.greshamtech.com.

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

In accordance with the Disclosure and Transparency Rules, the extracts below are from the Annual Financial Report 2022 in un-edited full text. In order to comply with the regulatory requirement to include un-edited text in this Annual Financial Report Announcement, page and note references refer to page and note numbers in the Annual Financial Report 2022.

CHAIR'S STATEMENT

Dear shareholder

Overview

I am pleased to report on another period of sustained progress for Gresham Technologies. This year has seen the full benefits of our M&A and integration programme being realised through the transformational acquisition of Electra, while the optimisation of our sales team has meant that core product lines have performed consistently across a mixture of industries and geographies as more global financial institutions invest in Gresham's expanded suite of solutions. The Group's progression against its strategic vision has been a result of strong leadership, market-leading solutions and a highly committed and talented global team.

Throughout the period under review, we have built upon the momentum delivered in FY21 and continued to execute effectively against our growth strategy. We secured 12 new Clareti customers, including substantial long-term agreements with three global Tier 1 financial institutions, and successfully executed on our land and expand strategy by winning new projects with existing clients and resulting in ARR net retention levels in excess of 100%.

Overall, the Group's performance has been strong with two upgrades to forecasts during the year. Revenue for the period was significantly up 32% to £48.7m (2021: £37.0m), adjusted EBITDA increasing 43% to £10.3m (2021: £7.2m), and operating profit increasing by £3m to £3.5m (2021: £0.5m). In a year that has seen a number of challenging macroeconomic headwinds impacting the wider sector, this is an outstanding achievement for the Group.

Based on the overall financial performance and the cash within the business, the Board will be recommending a final dividend of 0.75 pence per share (2021: 0.75 pence) at the forthcoming AGM.

Delivery against our strategic vision

2022 saw strong progress against the major strategic goals identified by the Board, including:

People and culture

I am delighted to report that we have had another "best ever" result from our annual Employee Engagement Survey. This continues a six-year trend of improvement in overall engagement, with a response rate increase to 72% and an overall engagement score of 82% (2021: 78%).

Gresham's excellent culture is exemplified by our high staff retention rate, something of an anomaly for the sector. As a people-oriented business, Gresham goes to great lengths to remain competitive as an employer and ensure that it is a welcoming and rewarding environment for all of its staff.

I would like to take this opportunity to thank our team across the globe for their hard work and dedication throughout the year, without whom the successes during the year would not have been possible.

ESG

The Board is committed to operating the business in a sustainable way, which includes managing our impact on the environment, our social responsibilities to our people and those within our communities, improving outcomes for our customers, and operating as an ethical business through direct and indirect practices. Further details of the Group's ESG strategy can be found starting on page 27.

During the period, Gresham released a comprehensive statement regarding the Task Force on Climate-Related Financial Disclosures ("TCFD") for financial year 2021. Disclosure for 2022 can be found starting on page 30. 

Outlook

Following another successful year, which has seen the Group build on the momentum of previous periods, I am pleased to say that Gresham has finished 2022 as a stronger company. Despite the challenges that macro headwinds have brought to most industries and businesses, we have continued to deliver against our strategic priorities and established a strong foundation upon which to achieve scalable growth and fully capitalise on the opportunities available in the market.

As we continue to progress, the Group will focus on:

The Board remains confident in the year ahead and the medium-term opportunity for Gresham to address the expanded market opportunity in front of us.

Peter Simmonds

Non-Executive Chair

13 March 2023

CEO'S STATEMENT

Dear shareholder

Overview: step-change in strategic opportunity

2022 has been a very pleasing year, with operational progress right across the Group and a step-change in strategic opportunity, reflecting all the building blocks we have put in place over the last three years. In particular, the successful integration of the 2021 Electra acquisition has not only delivered initial contract successes but, combined with our established Clareti team and roadmap, is opening up far more extensive client conversations. The proof points of that progress includes the high retention rate of Electra clients, a number of cross-sell wins, and upgrades in our trading performance through the year; resulting in positive Clareti cash EBITDA as operating synergies have materialised.

Our Clareti technology solutions now provide major banking and investment management clients with the tools to connect, reconcile and control their data, enabling them to automate their post-trade business processes and have confidence in their digital operations. In the year, we signed 12 new clients to reach more than 275 across 30 countries and successfully added some of the world's largest financial companies. This included one of world's largest asset managers that signed a contract for Control and Data Services in the cloud to replace a legacy reconciliation product and to streamline its data aggregation processes. The US-based firm, consistently ranked in the top five global asset managers by AUM, will partner with Gresham to consolidate all market-facing reconciliations and data controls for their corporate business onto a modern cloud platform with an initial order value of $1.9 million.

We have also won key contracts in Europe and Asia Pacific, highlighting the global challenges facing the financial sector, the repeatability of our solutions and the increasing maturity of our sales efforts. During the period, we also saw wins in the payments, energy and digital asset sectors, as well as our core capital markets segments.

Clareti ARR grew £4.1m, or 17%, to £28.1m and recurring revenues increased by 46%, up £8.6m, to £27.4m, highlighting the significant scale-up of the business over the last year. Higher gross margins, as well as the growth in revenues, contributed to Clareti Cash EBITDA of £1.1m and, at Group level, cash EBITDA up 76% to £4.4m. We finished the year with a strong balance sheet, including cash balances of £6.3m after making the first deferred consideration payment for Electra.

Market: continuous waves of regulation and digital optimisation

A number of key drivers continue to support our growth outlook:

Managing risk and regulation

All businesses need to invest in their core processing systems and data platforms to create more intelligent and automated solutions that reduce the need for manual interventions and the risk of error. Within the financial services sector, this has been compounded over the last 15 years by growing regulatory pressures and scrutiny. This increases the need for financial institutions and banks to have timely and accurate processing, coupled with greater transparency and accountability. Our software helps companies connect, reconcile and control the many disparate sources of transaction, finance, and risk data to ensure accurate day to day processing, and to satisfy and report on new and existing regulations.

Given the size of our client base, this underpins a steady flow of up-sell contracts and services opportunities for Gresham. New regulation drivers in 2022 included The European Market Infrastructure Regulation ("EMIR") Refit which is designed to amend and simplify European markets infrastructure and brings with it major changes, including an uplift in the number of reportable data items.

In the US, the Securities and Exchange Commission have proposed shortening the standard settlement cycle for most broker-dealer securities transactions from two business days following the trade date (T+2) to one business day (T+1), with implications for how broker-dealers, investment advisers and clearing agencies process institutional trades.

The pressure on public finances globally has also meant there is now an even greater focus by government departments and regulators on maximising their collection of taxes, with implications right across the eco-systems of many financial companies. Further regulation and heightened scrutiny increase the need for banks and fund managers to review, simplify and potentially upgrade their systems. The global market for regulatory reporting solutions is expected to reach USD $1.16bn by the end of 2026, with a CAGR of 19.5%.

Digital automation and platform modernisation

Aligned with the above, we are part of our clients' investment to digitise their processes, reduce their operating costs through automation, and serve their customers better. We are part of programmes globally aimed at improving the quality, connectivity and exploitation of data to deliver more intelligent business outcomes. Of particular note are the ageing legacy reconciliation systems implemented on-premise throughout the industry during the 1990s and early 2000s, which are expected to be replaced by modern, more flexible, often cloud-based alternatives, over the coming years.

Underpinning business success

Our software not only enables businesses to survive in the modern era, but importantly, to become more competitive through access to information and agile decision-making, which underpins the launch of new products and innovative customer propositions. Given the tightening economy and ever competitive nature of financial markets, the operating efficiencies we deliver are greatly valued by our clients.

Expanding market

The factors above underpin growth from our existing base and traditional markets. However, the overall size of the addressable market for Clareti solutions and the competitiveness of our offerings are continually expanding, and we are increasingly looking for opportunities to diversify further into new markets such as retail banking and payments, energy and the control of digital asset data processing. At a high level, the risk management software market is valued at around $35bn and is expected to grow at a CAGR of 10%+ in the medium-term.

Helping our clients manage macro headwinds

The macro and market backdrop will mean that banks and fund management companies are mindful of ensuring value for money as they review their IT budgets. Consequently, decision-making cycles are likely to increase. However, these large enterprises have often patched together legacy solutions or relied on in-house teams to build and maintain software, with the obvious challenges of retaining know-how. The result is often inaccurate, incomplete and poor-quality data, frequent breakages, a black-box of manual workarounds and quick fixes, and platforms that struggle in terms of volume and speed as new regulations layer on further demand and complexity.

In addition, as companies, CIOs and COOs pause for breath, they are under pressure to focus on remaining agile and competitive, as well as compliant, and are faced with dealing with unexpected challenges such as remote working. In many cases we will respond to RFPs to replace legacy systems, and in 2022 we won a number of contracts where we replaced older competing technology, processes and platforms built in-house over time. This all provides opportunity for Gresham and adds to our own operational protection even as economies struggle. Within banking, there are business and product lines where a higher interest rate environment is in fact favourable to financial success, and here there will be a desire to reinvest in technology along the way.

Operational progress: executing on our strategy

Post the transformative acquisition of Electra, we have been focused on integrating the business, processes and people, and building a go-to-market platform and optimising our product roadmap. This will propel us towards our ambition of creating a leading £100m ARR fintech with high margins, strong cash generation, and attractive valuation multiples typical of large mature enterprise software firms.

Products and solutions: optimising our roadmap and branding

During the year we have seen the benefits of re-packaging our platform capabilities, including Electra assets, into three Clareti product lines: Control, Data and Connect; each with its own roadmap to encourage agility and innovation. Our products can be combined to quickly deliver complete digital solutions for customers into environments where generic solutions are inadequate. They are available on a subscription basis in the customers' data centres, or on a software-as-a-service basis in a Gresham-hosted cloud. Optional subscriptions for the collection and aggregation of external data and/or the provision of managed services are also available as routes to ARR up-sell. 

Control

Clareti Control, our flagship offering, is an "out-of-the-box" enterprise-grade business self-service platform for the reconciliation, exception management and control of "any and all" transaction data in financial markets. Clareti Control is now well established in the market for "non-core" data problems such as inter-systems reconciliations, with dozens of successful implementations. Over the last few years, we have invested heavily into developing functionality for the "core" cash and securities reconciliations market, which legacy vendors have dominated for nearly three decades. We have now completed large-scale legacy vendor product migrations in the US, Asia and Europe; delivering exceptional improvements in match rates, operating efficiencies, and total cost of ownership. A high-performance upgrade loading and matching technology went live at several customers, providing a path to solving the next generation of problems as financial markets move to ever tighter processing cycles.

Whilst many of our earlier customers chose to deploy Control on-premise, our Clareti-as-a-Service cloud offering is gaining traction in the market, and during the year we processed over 4.4 billion records in the cloud on behalf of our customers. We continue to invest in cloud-native architecture, thin-client user interfaces, and self-service functionality.

Data and Connect

Our Data and Connect solutions allow customers to participate in the complex inter-connected global financial system without needing to be concerned with third party data access, integration risk, cost, and time to market.

Our Data solution provides a cloud data collection and aggregation service for investment managers and fund administrators. On average, a US medium-sized buy-side firm uses 59 data feeds, and we collect over 2,500 sources of data across our cloud, highlighting the complexity for the client and the breadth of our solution. Last year, our Data service processed over 14.5 billion records from our secure data centres and operated with exceptionally high levels of service and support. We now retrieve, process and deliver data to over 275 investment managers. Our goal is to become the leading independent provider of bank and custodian account data to the investment management industry. We are investing to streamline the tooling that underpins the Data service which will enable us to further improve margins as we scale.

Our Connect solutions enable customers to interact with their bank partners for payments and statements, support straight through processing to trading venues, connectivity to regulatory reporting venues, and interoperability with other industry applications. Connect provides not only connectivity but intelligent control over highly complex real-time data flows. During 2022 we went live with several customers on our latest cloud native platform and will progressively migrate our installed base across to the new technology. 

Digital Banking

Over the last few years, we have reported regularly on the progress of our strategic innovation partnership with ANZ. I am pleased to confirm that the first product deliverable from the partnership, a cloud-native bank account platform, successfully progressed into first production use at the end of the year. ANZ continues to fund the product development work via a chargeable Innovation Service, and an exciting roadmap for future funded releases has been jointly mapped out. We intend to promote this solution in the global market in 2023 under a new product brand. Launch plans are prepared and we look forward to sharing further details in due course.

New contract wins

In addition to our Control and Data contract win with the top five global asset manager and the Connect win with Tier 1 bank announced in December 2022, we have had other notable new customer wins in the year. This included one of Europe's largest privately held banking and financial services firms that signed a contract for Clareti Control to replace legacy vendor products across its global asset management business, consolidating all reconciliations and data controls onto a single modern cloud platform. The initial contract has a minimum five-year term with total committed subscription fees in excess of £1m. In Asia, we signed one of Singapore's newest digital banks, and there were multiple new names in Europe, several of which are public references available on our website. 

Customer success - expanding within current clients

In May we were pleased to announce one of our largest ever contracts, a significant subscription agreement for Clareti software with an existing customer, one of the world's largest commercial and retail banks, for £6.3m (over five years). This followed an initial contract for the first deployment of Clareti Control within its UK operations in June 2020. As a result of the success of the initial project, the bank has chosen to adopt our technology as its single enterprise control platform across the entire UK business including retail accounts, cards, payments, and commercial banking. The platform will be used to deploy a range of new controls, as well as replace existing manual processes and legacy vendor solutions.

In December, we announced an initial $1.3m enterprise agreement with one of world's largest banks, to extend the use of Connect across their entire post-trade prime brokerage business. The solution will replace legacy FIX processing infrastructure to streamline market connectivity and client onboarding. The contract has a five-year committed term, with minimum incremental subscription fees and additional recurring usage-based fees. This award was particularly pleasing as we have been working directly with this client since our acquisition of Inforalgo in July 2020.

The two Tier 1 bank early adopters of our Control for Cash and Securities product are now live at scale and realising the benefits of replacing legacy systems. One of these implementations has delivered a 35% improvement in automated match rates, giving the client a substantial economic benefit in terms of headcount.

We continue to maintain and grow our relationship with long-standing client, ANZ Bank. In September, we signed contracts totalling over AUD $19m to cover the period until September 2023. This contributed to account growth of approximately 15%, with uplifts in both the Clareti and non-Clareti businesses from recurring software, recurring managed services, consulting and contracting services.

During the year, our professional service teams supported 64 new go-lives with customers and were engaged in over 150 active projects. We now have reference clients in all of our targeted industry segments and key geographies across the breadth of our solution portfolio.

People

Gresham's commitment to its people is at the centre of what we do. We continue to invest in both our team and our community to ensure we remain both an attractive and enjoyable work environment for current and future employees. These investments have focused on optimising operational efficiencies post-Electra through upskilling and consolidating, while providing all of the resources required to support our people in their work through collaboration tooling, on-line training, internal events, leadership and mental health accreditations. 

A stand-out in the year has been our success in hiring and building out our sales and marketing team. We now have a strong team in place across Europe, US and Asia; and, given the global breadth of our client wins over the last year, we believe this leaves us very well placed to expand within our current client base as well as win new ones.

These investments in our people have been a success and I am pleased to report a sixth consecutive record result from our annual employee engagement survey. It was hugely pleasing to see the total response rate increase to 72%, while our overall engagement score increased to 82%. We are particularly pleased to report that our newly added questions on diversity and inclusion scored very well and validate our efforts in that area.

Brand and vision

In the decade since commencing the Clareti business, Gresham has transformed into a respected provider of data and process control solutions to global financial markets. Our programme of acquisitions has further strengthened our market presence and extended our product portfolio and customer base. Our vision is for Gresham to become a world-leading provider of cloud-based post-trade solutions aligned with our mission of making business flow and reducing friction in financial markets.

Acquisitions

Over the last few years we have successfully made three small bolt-on acquisitions, C24, B2, and Inforalgo; each with c.£1m ARR when acquired. We have now fully integrated the transformational acquisition of Electra, which we made in 2021, contributing over £9m of ARR. All four acquisitions have been financially and strategically accretive and the average 3x ARR we have paid for these businesses highlights our discipline, track record and return for shareholders. We continue to look at acquisitions that are in-line with our strategic vision. However, we will remain focused on how we allocate capital and be selective in making further acquisitions.

Current trading and outlook: robust foundations and positioned to grow

Our success reflects our research, planning and focus on delivering value to our clients. The team's years of hard-work, together with significant investments in people and infrastructure, have put in place the building blocks of a diversified and scalable fintech platform with a market-leading product portfolio, highly invested cloud architecture, established blue-chip global customer base, and an ambitious, proven management team.

We have started 2023 well, and, while macro challenges persist, we have highlighted that the pressure for efficiency and competitiveness means our clients and target clients have a need to engage with us in tougher times as well as good ones. We have a business today which has a good balance between Europe and the US, and a growing presence in Asia, with a core addressable market greater than c.$500m and opportunity to expand further across the wider financial services sector.

We entered 2023 with very good visibility across both Clareti and non-Clareti, with over £42m of Group revenues already under contract and confidence in our growth outlook. We have a good pipeline of new clients in our core markets, and we also have demand in the insurance, energy, government and other sectors which we continuously look at how best to service. With the difficult economic backdrop, we continue to carefully manage product and people investments and ensure that, as the operating leverage of our model becomes increasingly evident, we can deliver sustained growth over the next few years.

With the support of shareholders in building our platform, and the hard work of our talented global team, we have created the foundations for success and remain confident in our ambition to build a £100m ARR SaaS business with best-in-class performance metrics expected of a valuable global financial technology company of substantial scale.

Ian Manocha

Chief Executive

13 March 2023

FINANCIAL REVIEW

Forward-looking annualised recurring revenue ("ARR")

Our ARR is an aggregated value of all recurring revenues that are either fully or partially contracted for the next twelve months and/or are highly expected to renew in the next twelve months. Future uplifts in variable usage or contingent recurring fees are not included in ARR, unless they are contractually certain with all deliverables having already been met.

Our ARR from our strategic growth business, Clareti, is a critical KPI for the Group as it provides a forward-looking view of the minimum expected revenues in the next twelve months; which gives confidence to business planning and investment decisions. The organic Clareti ARR growth in 2022 was £4.1m, an increase of 17% on the opening Clareti ARR position. Included within this organic growth is the impact of the foreign exchange movements in the year, which contributed £1.8m, the prior year benefitting by £0.3m; therefore the constant currency organic ARR growth grew from £2.2m in the prior year to £2.3m in 2022. Whilst still strong double digit constant currency organic growth, this is behind our target rate of 20%+. Our retention and upsell measures remain strong, with the trailing twelve-month net Clareti ARR retention rate being 102%, a reduction from the 106% rate in the prior year (both on a constant currency basis). We calculate our net ARR retention rate as ARR from the end of the period from customers existing at the start of the period, divided by ARR at the start of the period. There remains a significant market opportunity to both upsell and cross-sell to our continually growing existing customer base that we are strategically investing in capturing. Going forward, we expect to improve these rates to at least 2021 levels.

ARR from our Other businesses have fallen by £0.6m to £3.5m in 2022, largely as a result of our decision to discontinue supporting the last remaining line from our own high-margin legacy solutions. It remains encouraging to see the ongoing longevity of these business lines continuing to provide predictability and further ability to invest with confidence in the Clareti business.

In addition to Group ARR of £31.6m, expected revenues from non-recurring contracts in place as at 31 December 2022 total £10.4m, giving visibility over £42.0m of revenue for 2023 before any new or incremental contracts are won.

Income Statement

Constant currency Income Statement headlines

Due to the levels of transactions occurring in currencies other than the Group's functional reporting currency of GBP, largely USD and AUD, the Group has benefitted to a material degree from the weakness experienced in the GBP throughout the year. The table below shows 2022 performance if transactions had been reported on the same average exchange rates for the year as 2021 had been.

Revenues

Our income is analysed between revenues from Clareti Solutions and from our 'Other' non-strategic solutions and services, revenues from each business of these business segments are then broken into:

Given the transformational nature of the Electra acquisition, we have also broken out the Clareti business to show Electra revenues (and gross margin in the Earnings section below) as individual line items within the Clareti business.

Clareti Solutions

Clareti recurring revenues increased by 46%, up £8.6m on 2021, which included a full year contribution of £11.6m from Electra against a £5.3m contribution in 2021 (since the acquisition late in June 2021). Excluding the impact of Electra, Clareti recurring revenues increased by 17%, or £2.3m since the prior year. These increases were as a result of new recurring revenue sales, increased consumption of Clareti solutions from our existing customers, and currency gains of £1.4m; £1.2m of which coming from predominantly USD-based Electra business. 

Clareti non-recurring revenues increased by 21%, up £1.4m on the prior year, with a relatively small services contribution from Electra in both years. Excluding the impact of Electra, the increase was 17%. This increase is being driven by new implementations associated with the increase in Clareti recurring revenues and £0.3m of currency gains.

Other Solutions & Services

Total revenues from Other solutions and services increased by 15% to £13.2m, exceeding our original expectations. This business line includes revenues from a legacy partner relationship where we act as a reseller of third party software; our sole remaining, own IP, legacy software product (EDT) which we discontinued support for on 31 December 2022; and our contracting services business where we provide fixed margin services at a margin of 13% under twelve-month contractual terms.

Recurring revenues within the Other solutions and services portfolio decreased by 7% to £4.3m as a result of own-IP software customers not renewing contracts and slightly lower end-user consumption fees from existing customers of our reseller arrangement. Non-recurring Other revenues, the vast majority of which is our contracting services business, increased by £2.0m compared to 2021. The mix of revenues within the Other solutions and services portfolio continues to evolve, being increasingly weighted towards lower margin business lines. We continue to manage the portfolio carefully benefitting from good visibility of customer intentions.

Earnings

Gross margin

Across all business segments, the majority of our cost of sales is made up of: (i) customer-specific third party costs incurred in providing our hosted cloud solutions; (ii) third party contractor costs incurred by our contracting services business; and (iii) fixed-term payrolled employees that provide fixed margin contracting/recruitment services to ANZ.

In line with long-standing Group strategy, the growth in the high margin Clareti business has offset the continued and expected decline in gross margin being generated from the legacy Other solutions and services businesses. At a Group level, gross margins have increased from 68% to 70%. These percentage margins are not changed to any material degree when considered on a constant currency basis. 

The gross margin within Clareti business (including Electra) has increased from 84% to 86%, due to the continued growth of the high margin recurring revenues.

As planned and described in the revenue section above, the Other solutions and services business mix has continued to move in balance towards the lower margin software reselling and contracting services business lines from our higher margin legacy owned IP (EDT), which we discontinued support of on 31 December 2022.

Adjusted EBITDA

Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is analysed excluding exceptional items and share-based payment charges; which is consistent with the way in which the Board reviews the financial results of the Group. We also consider this to be consistent with the manner in which similar small-cap LSE (or AIM) listed companies present their results and how we understand the global investment community assesses performance, with this particularly being the case for growth shares in which the recurring cash performance is considered important. However, whilst we consider them consistent and appropriate, this EBITDA measure and the cash adjusted EBITDA measure below are not necessarily directly comparable to other companies as they are not strictly governed IFRS accounting measures, nor should they be considered as a substitute for, or superior to, any IFRS measures.

Group adjusted EBITDA has improved by £3.1m, or 43%, since the prior year with margin improving by 2% to 21% in 2022. This is as a result of the existing higher margin Clareti business continuing to grow and beginning to drive improved operational leverage as it scales along with the impact of the Electra acquisition, which offset the continued reducing margin of the Other solutions and services business lines. Whilst we will ensure that we maximise the current market opportunity through appropriate strategic investments, we do expect to continue to see improvements to these margins in future years. 

Cash Adjusted EBITDA

Cash adjusted EBITDA refers to adjusted EBITDA reduced by the value of capitalised development spend and any IFRS16 lease-related cash expenses classified as depreciation and interest. We consider this a good measure of cash profitability for a modern SaaS business who continue to invest in product development to ensure they remain market leading.

Group cash adjusted EBITDA has also improved on the prior year, with £1.9m of the £3.1m improvement in adjusted EBITDA (mentioned above) dropping through to improvement cash EBITDA. The £1.2m difference between the improvements in the two EBITDA measures is as a result of a full year of capitalised development spend and IFRS 16 lease-related cash expenses in the acquired Electra business. This has resulted in a cash adjusted EBITDA margin of 9%, an improvement of 2% on the prior year. Like adjusted EBITDA, we expect to see continued improvements in these margins in future years.

The Clareti standalone business reached an important milestone during 2022, becoming cash adjusted EBITDA positive for the first time, generating a margin of 3%. As the Clareti business continues to scale this will continue to drive Group cash adjusted EBITDA improvements.

Statutory profit/(loss) after tax and Adjusted diluted EPS

There has been an increase in statutory profit after tax to a profit of £2.9m from a loss of £1.0m in the prior year. This increase of £3.9m is due to the combination of: improved adjusted operating profit of £2.9m as a result of the growth and improved profitability of the Group; offset by: reduced exceptional expenses of £1.3m (see below); increased share-based payment charges of £0.6m; increased amortisation on acquired intangibles largely due to a full year of amortisation of the intangibles acquired through the Electra acquisition in June 2021 of £0.6m; and a reduced tax charge of £1.0m.

Adjusted diluted EPS has improved by 50% to 7.5 pence per share. Adjusted earnings used in this calculation adjust the statutory result after tax for: exceptional items; amortisation of acquired intangibles, share-based payments and the deferred tax charge in relation to the sale of the IP acquired with Electra from the US to the UK business (see taxation below).

Exceptional items

During the year, the Group recognised exceptional costs of £0.2m, all of which were one-off costs in relation to the integration of the Electra business. In 2021, £1.8m of exceptional costs were recognised, of which: (i) £1.3m were acquisition costs in relation to the acquisition of Electra on 22 June 2021; and (ii) £0.5m related to various integration expenses in relation to the same acquisition. Offsetting the exceptional costs in 2021 was exceptional income of £0.3m, which occurred from currency hedging activities taking place to fund the USD denominated Electra acquisition. There was no such exceptional income in 2022.

Taxation

For the year ended 31 December 2022, the Group has recorded a net tax charge of £0.4m (2021: £1.4m). The material drivers for the variance from the prior year being: an increase in overseas current tax charges of £0.5m as a result of the increased profits from our US and Australian operations as those businesses continue to grow, with US taxes also increasing as a result of the Electra acquisition; and the prior year including a one-off deferred US tax charge of £1.4m as a result of the Group's long-term global tax planning, part of which included the sale of the IP acquired in the Electra acquisition from our US business to our UK business to ensure the UK remains the centralised IP generating entrepreneur within the Group.

Cashflow

The Group's financial position remained very strong throughout 2022. At a headline level, the cash balance at the year-end of £6.3m was behind that of the prior year-end of £9.1m. Whilst the total deferred consideration payments from acquisitions made during the year of £4.4m explains much of this, there are also a number of other movements beneath the headline balances which are described below.

Operating cashflow, excluding working capital and exceptional items, has increased by £3.1m to £10.3m in the year as a result of the improved cash EBITDA of the Group; including the Clareti business becoming cash EBITDA generative for the first time.

Operating cash outflow from exceptional items has reduced by £1.3m to £0.2m. The prior year included increases that were one-off in nature, with the significant majority being advisory and integration fees in respect of the Electra acquisition; the outflow during 2022 being the finalisation of the Electra integration. 

The movement in working capital has reduced by £2.1m to negative £0.8m. There are a number of one-off items causing this swing, including a £0.5m payment of US sales tax in relation to the acquired Electra business which had originally been held back from the acquisition fees paid, and £1.0m of customer payments made early in December 2021 with early payment not occurring in 2022.

The Group received net tax of £0.6m in 2022, whereas during 2021 a net payment of £1.1m was made. Gross tax payments were made in the year of £1.9m (2021: £1.1m), the increase on the prior year largely as a result of increased profitability in Australia and the US; the latter also benefitting from a full year of the Electra business. During 2022 the Group also received gross tax receipts of £2.5m as a result of research and development activities performed during 2020 and 2021, where enhanced relief was available. No such reclaim was received in 2021, with the 2020 claim which was made during 2021 not being received from HMRC until January 2022.

The capitalised development expenditure of £5.2m has increased by £1.0m from the prior year, the increase coming from a full year of such expenditure from the acquired Electra business, as well as movements in foreign exchange rates and inflationary increases.

During 2022 the Group spent £0.8m on other capital spend, an increase of £0.7m. £0.6m of this increase was one-off in nature, in relation to the complete refurbishment of our New York office which re-opened in the third quarter.

During the year the Group paid £0.4m of contingent consideration in relation to the July 2020 Inforalgo acquisition, in the prior year the initial consideration of £0.9m was paid. The Inforalgo contingent consideration payments are now complete and were paid in full as the target metrics agreed with the sellers were fully met.

The Group paid £19.6m (net of cash acquired) of initial consideration to acquire Electra in June 2021, which was funded through a £20.2m (net of costs) capital raise. During the third quarter of 2022, upon meeting the success criteria measured on the first anniversary of the acquisition, the first contingent consideration payment was made in full of £4.0m.

The Group received £0.1m upon the exercise of share options during the year (2021: £0.1m).

Included within "Other" is the recording of negative effect of foreign exchange rate changes of £1.1m, arising upon the revaluation of Group's the non-GBP entity opening balance sheets upon consolidation, the equivalent in the prior year was a positive £0.2m.

As has been the strategy of the Group for a number of years, with increasing Clareti sales (now including Electra) from the growing annuity base and new customer wins, coupled with carefully selected and controlled investments, we expect the cash-generation capacity of the business to continue and are looking at opportunities to best utilise excess cash generated. In order to maximise our returns, we plan to increase levels of investment in distribution and customer success, whilst continuing to invest excess cash efficiently in bank deposits and giving appropriate consideration to M&A opportunities.

Consolidated statement of financial position

Property, plant and equipment and right-of use assets have increased to £0.9m and £1.6m, from £0.2m and £1.5m respectively, largely as a result of the extension of our Sydney office lease and New York office refurbishment. Our lease liabilities have also increased by equivalent amounts due to this lease extension. 

Intangible fixed assets remain the largest item on the balance sheet at £62.8m (2021: £62.3m), consisting of software development assets of £23.6m; separately identified assets acquired with previous acquisitions of £19.5m and goodwill of £19.7m.

Trade receivables increased from £3.8m to £4.8m and accrued income (a contract asset) have increased from £1.2m to £1.8m. Trade receivables have increased due to a combination of increased revenues and the prior year's cash balance benefitting from early receipts from a customer that did not reoccur in December 2022. Accrued income has also increased due to the increased revenues in 2022 as well as timing differences in December invoicing.

Income tax receivable has reduced from £1.1m to nil due to a timing difference in the receipt of funds from HMRC in relation to R&D credits, in which the cash from the 2021 claim in relation to 2020 activity was received in January 2022, whereas the cash from the 2022 in relation to 2021 activity was received in December 2022.

Deferred tax liabilities have decreased by £0.7m to £6.1m as a result of further research and development spend qualifying for enhanced tax relief increasing the liability by £1.1m offset by a reduction of £0.5m from the unwinding of timing difference arising on acquired intangibles, a £0.4m increase in tax losses available and a £0.5m increase in deferred tax on share options.

Non-current contingent consideration has reduced from £3.6m to nil and current contingent consideration has increased by £3.9m to £4.0m. The prior year current contingent consideration was in relation to the final contingent consideration payment due on the 2020 Inforalgo of £0.4m and the first contingent consideration payment of US$4.8m due on the 2021 Electra acquisition - both were paid in full during 2022. The remaining contingent consideration payment, now classed as current, is in relation to the final amount of US$4.8m due on the Electra acquisition, which is also expected to be paid in full during 2023.

Trade payables increased from £1.1m to £1.5m, which is largely aligned with the increased size of the business. Accruals increased to £4.3m (2021: £3.9m) with the increase largely being in relation to an increased bonus provision due to both a strong performance against set targets and reflecting a full years bonus at full rates for the former Electra employees. Contract liabilities have decreased from £12.0m to £11.1m largely due to the timing of and size of prepayments made in the non-Clareti business.

Financial outlook

Management are very pleased with the overall financial progress of the Group during 2022, delivering two upgrades to Group numbers. We are delivering growth which in turn is driving improved profitability, aided by synergies gained through the Electra acquisition. The constant currency organic growth in Clareti ARR was 10% for 2022, a respectable result but below our stated target of 20%+. Similarly, both net retention and new business generation growth rates were lower than in 2021, although the Group expects to return to target levels in 2023 and future years.

Whilst the strategic decision was taken to discontinue support for the Group's one remaining own-IP software product (EDT), the other (non-Clareti) software portfolio as a whole has continued to surpass expectations, although without the own-IP software revenues the general trend towards lower margin products and services will continue. We expect our contracting services business to remain relatively stable in 2023.

As has been the strategy for many years, we are successfully continuing to increase the levels of revenue predictability throughout the Group. In addition to the significantly increased Clareti recurring revenue base, we have high levels of contracted backlog of Clareti services for ongoing implementations and innovation services, and a high portion of the non-Clareti portfolio already is already under contract for 2023. Nevertheless, given the uncertain macro-economic environment, we intend to invest prudently in 2023, prioritising distribution, product and customer success, to ensure we are best placed to take advantage of the significant market opportunities.

Tom Mullan

Chief Financial Officer

13 March 2023

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The financial statements were approved by the Board of Directors and authorised for issue on 13 March 2023.

On behalf of the Board

Ian Manocha Tom Mullan

Chief Executive Chief Financial Officer

13 March 2023 13 March 2023

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOW

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1.  Basis of preparation

The Group's financial statements have been prepared in accordance with UK adopted international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with international financial reporting standards and international accounting standards as issued by the International Accounting Standards Board ("IASB") and Interpretations (collectively "IFRSs"). The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 December 2022.

The Group's financial statements have been prepared on a historical cost basis except contingent consideration.

The Group financial statements are presented in Sterling, which is also the Group's functional currency. All values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.

2.  Responsibility statements under the disclosure and transparency rules

The Annual Financial Report for the year ended 31 December 2022 contains the following statements:

The directors confirm that to the best of their knowledge:

The name and function of each of the directors for the year ended 31 December 2022 are set out in the Annual Financial Report 2022.

3.  Segment information

The segmental disclosures reflect the analysis presented on a monthly basis to the chief operating decision maker of the business, the Chief Executive Officer and the Board of Directors.

In addition, the split of revenues and non-current assets by the UK and overseas have been included as they are specifically required by IFRS 8 "Operating Segments".

For management purposes, the Group is organised into the following reportable segments:

· Clareti Solutions - supply of solutions predominantly to the finance and banking markets across Asia Pacific, EMEA and North America. Includes both software and services that can be accessed in the cloud, on-premise or deployed into hybrid environments. These primary offerings within this segment include:

o  Clareti Control products

o  Clareti Connect products

· Other Solutions - supply of a range of well-established solutions to enterprise-level customers in a variety of end markets

· Contracting Services - Supply of IT contracting services to one banking customer

Transfer prices between segments are set on an arm's length basis in a manner similar to transactions with third parties. Segment revenue, segment expense and segment result include transfers between business segments. Those transfers are eliminated on consolidation.

The Group has a customer relationship with one banking customer which is considered by the Directors to be individually significant; revenue from this relationship exceeded 10% of the Group's revenue, totalling £20,593,000 (2021: £17,618,000) which includes low margin contracting revenue of £10,229,000 (2021: £8,442,000).

Adjusting administrative items 

Operating performance is analysed excluding exceptional items, share-based payment charges and amortisation from acquired intangibles which is consistent in with the way in which the Board and most stakeholders review the financial performance of the Group. These adjusting items are all either non-cash or non-recurring IFRS expenses (or income) that do not reflect the underlying performance of the business. In the case of share-based payment charges, management acknowledge that these awards are potentially paid in "lieu" of cash salary or bonuses, however the actual charge represents a non-cash expense. Adjusting for these items is also consistent with the manner in which similar small and mid cap LSE (or AIM) listed present their results and how we understand the investment community to assess performance, where, for growth shares the recurring cash performance of the business is considered most important. In addition, these adjustments are also aligned with the performance methodology used by the panel of debt providers that tendered for the revolving credit facility established during the year in order to assess and continually monitor credit worthiness, risk and upon which covenants are set.

The adjusting administrative items are:

During the year the Group incurred £153,000 exceptional costs relating to legal and professional fees for the integration costs of prior year acquisitions.

During the year ended 31 December 2021 the Group incurred exceptional costs of £1,814,000 which included legal, due diligence and professional fees for the acquisition of Electra Information Systems and associated integration costs.

Exceptional legal and tax advisory costs were incurred in the year ended 31 December 2021 of £7,000 associated with implementation of a new ten-year share option incentive scheme. These costs are not expected to occur for a further ten years.

Exceptional income of £330,000 was recognised in the year ended 31 December 2021 on realising a gain on the completion of a contract to forward purchase US dollars. The contract was entered into to minimise the currency risk on the acquisition of Electra Information Systems. This income has been treated as exceptional as it is non-recurring.

Due to the amount and nature of amortisation of acquired intangibles and share-based payments both costs were treated as an adjusting administrative item.

Adjusted EBITDA

Adjusted EBITDA is disclosed within the financial statements to show the underlying performance of the group on a consistent basis and to aid understanding of the financial performance during the year.

Adjusted EBITDA is not an IFRS measure or not considered to be a substitute for or superior to any IFRS measures. It is not directly comparable to other companies.