Jaywing Regulatory News (JWNG)

Date: 13 July 2011

On behalf of: Digital Marketing Group plc ("DMG", "the Company" or "the Group")

Embargoed: 0700hrs 13 July 2011

Digital Marketing Group plc

Preliminary Results 2011

Digital Marketing Group plc (AIM: DIGI), the UK's largest digital marketing specialists, today announced its preliminary results for the year ended 31 March 2011.

IMPROVED SECOND HALF, NET DEBT AT £4.2 MILLION DOWN £3.1 MILLION

Performance Highlights

·; Revenues £44.7m (2010: £48.5m)

·; Gross profit £36.0m (2010: £35.5m)

·; Adjusted* EBITD £5.8m(2010: £8.3m)

·; Adjusted* profit before tax £4.8m (2010: £7.2m)

·; Adjusted* basic earnings per share 5.52p (2010: 8.77p)

·; Net cash flow generated from operations £5.3m (2010: £8.4m)

·; Net debt £4.2m (2010: £7.3m)

·; Statutory loss before tax and after amortisation, share based payment charges and exceptional charges £13.5 million (2010: loss £1.4m)

*Adjusted means before amortisation, share based charges, impairment and exceptional items

Commenting on the results, Stephen Davidson, Chairman of Digital Marketing Group plc, said: "The start to the year again has been a mixed bag. The performance of our data services business has improved markedly and our Technology business continues to perform very well. The new business pipeline within our Agency business is better than at the same time last year. However our Agency clients continue to defer expenditure decisions which is impacting the financial performance."

Enquiries:

Notes to Editors:

§ Digital Marketing Group (AIM: DIGI) listed on AIM in October 2006, employs over 500 people.

§ Digital Marketing Group is the UKs biggest digital marketing agency (Campaign Magazine Jan 2011).

Chairman's statement

For the year ended 31 March 2011 the Group reported an operating profit before interest, tax, depreciation, amortisation, share based payment charges and exceptional items of £5.8 million (2010: £8.3 million). Revenue has fallen from £48.5 million to £44.7 million, whereas gross profit has improved from £35.5 million to £36.0 million. This is a result of the change in the mix of our revenue with an increase from Technology and a decrease within our Agency business.

We have completed the consolidation of the business into a single brand, 20:20. Based on this consolidation we present our number in the three practice areas the businesses are reported internally, namely 20:20 Agency, 20:20 Technology and 20:20 Dialogue (data services). Disclosed under other income are distributions received from the administrator of a previous client. These receipts have reduced to £1.3 million from £1.7 million received in the year to 31 March 2010. It is anticipated that further dividends will be made but the quantum will reduce. In May 2011 we received a further distribution of £0.3 million. 

To complete the consolidation of the business it is intended to put a resolution to members at the Annual General Meeting to change the name of the Group to WEARE 2020 plc.

Our debt at the year-end was £4.2 million down from £7.3 million last year. We will make the final payments on the deferred consideration for the acquisition of our Technology business in the first half of this financial year of £2.4 million. The Group will then have only £0.3 million of deferred consideration payments to make.

As testing market conditions continue, the Board has reviewed, in accordance with IAS 36, the carrying value of our intangible assets and goodwill held on the balance sheet. As a result of this review an impairment loss of £15.3 million (2010: £3.8 million) has been recognised in accordance with the requirements of IFRS.

On 3 April 2011 Ben Langdon, the Group's founding CEO, resigned. I would like to thank Ben for his hard work and dedication to the business over the last six years. The Board is conducting a strategic review of the business and will begin a process to identify a replacement in due course.

As for the previous year, the year to 31 March 2011 has been tough but our management and employees have worked very hard to deliver these results. I would like to thank all staff and clients for their continuing commitment.

Outlook

The start to the year again has been a mixed bag. The performance of our data services business has improved markedly and our Technology business continues to perform very well. The new business pipeline within our Agency business is better than at the same time last year. However our Agency clients continue to defer expenditure decisions which is impacting the financial performance.

Stephen Davidson

Chairman

12 July 2011

Business Review

Digital Marketing Group plc reported a statutory loss before tax of £13.5 million (2010: loss £1.4 million). The adjusted performance at the operating performance line, before interest, tax, depreciation, amortisation, share based payment charges and exceptional items, shows profits of £5.8 million (2010: £8.3 million).

During the year the Group benefited from the receipt of £1.3 million (2010: £1.7 million) from the administrator of a client where a contractual obligation existed. Removing the benefit of these receipts from the above adjusted numbers results in an operating performance for the year of £4.5 million compared to £6.6 million for the year ended 31 March 2010. A further distribution has been received by the Group in May 2011 in the sum of £0.3 million. Based on communication from the administrator, the Board believes there will be further distributions but do not know the quantum.

The fall in operating performance of £2.1 million reflects the continued difficulty in the financial services sector of our data services business (Jaywing), which saw a decline of 57.2% in operating profits and the Agency business where we saw the full year impact of the loss of significant clients within the direct marketing and Search Engine Optimisation/Pay Per Click parts of that business. Gross profit within the Agency business fell from £15.8 million to £12.6 million. However, the data services business has started the current financial year well ahead of the previous year and also ahead of its internal budget. As this is a consultancy led business it is difficult to predict if this will continue throughout this financial year but the first quarter performance indicates data services has already made a significant proportion of the profit contribution this business made for the full year to 31 March 2011.

Our Technology business reported a 25% increase in its operating performance from £1.6 million to £2.0 million on increased revenues to £11.0 million from £6.5 million for the year ended 31 March 2010. We are accredited by IBM for their Websphere and Sterling products and we believe this relationship will continue to enhance the performance of the Group in the future.

The second half of the year saw an improvement in the operating performance of the Group. The table below shows the adjusted first and second half year analysis and adjustments made against the reported numbers:

Including other income the Group produced £3.3 million adjusted operating profit in the six months to 31 March 2011 against £2.5 million in the first half. Excluding other income, the improvement in operating performance is more notable with an adjusted operating profit before other income of £2.8 million for the six months to 31 March 2011 compared to £1.6 million in the first half of the financial year ended 31 March 2011.

The segmental performance of our business, now shown in the three practice areas of Agency, Technology and Dialogue (data services), is shown below together with the comparative performance from the previous year.

Segmental performance

For the year ended 31 March 2011

Liquidity review

The Group has renewed its banking facilities for a further three years from June 2011. The Group's facilities comprise an amortising revolving credit facility for an initial £6.3 million and a bank overdraft of £1.0 million. The existing term loans mature in October 2011.

The consolidated cash flow statement shows the Group to have generated cash from operating activities of £5.3 million (2010: £8.4 million) before changes in working capital.

We paid £0.6 million in tax (2010: £2.4 million) which is down on the previous year due to the benefit of the share based payment charge allowed on exercise of share options. In addition, we repaid £1.8 million of term loans (2010: £1.8 million) and reduced the revolving credit facility by £1.2 million (2010: increased £0.6 million).

As at 31 March 2011 the Group had net debt of £4.2 million (2010: £7.3 million).

Impairment

As required by IAS 38 we have carried out an impairment review of the carrying value of our intangible assets and goodwill. We calculate our weighted average cost of capital with reference to long term market costs of debt and equity and the Company's own cost of debt and equity, adjusted for the size of the business and risk premiums. Based on this calculation a rate of 12.7% has been derived. This is applied to cash flows for each of the business units using growth rates in perpetuity of 2% from 2018. As a result of these calculations the Board have reviewed the carrying value of intangible assets and goodwill on the Group's balance sheet and have recognised an impairment charge of £15.3 million (2010: £3.8 million).

Contingent payments

The estimate of payments to be made for past acquisitions is £2.6 million (2010: £4.2 million). £2.4 million for the purchase of 20:20 Technology (formerly known as CyberDMG) has crystallised and is due for payment between May and September 2011. £250,000 is due for the purchase of 20:20 London and is subject to performance criteria being met.

Key performance indicators

For the year ended 31 March 2011 the following KPIs were set:

·; Recovery in our data services division.

·; Winning of blue chip digital accounts through the new 20:20 pillar.

·; Increased sales of Digital Brain: Search as well as more profitable social media marketing assignments.

·; Emergence of 20:20 Mobile as a significant revenue generator, focused on applications, mobile content, games and commerce.

In the second half of 2011 we began to see an improvement in the data services division and this has continued into the first quarter of the financial year ending 31 March 2012. We continue to win clients throughout the Group. Significantly we have been added to the Sky roster and have begun some work on their behalf. In the current economic market it has been difficult to sell Digital Brain Search and we have mothballed this product to allow the market to pick up and focus our resources on existing capability. We continue to exploit the mobile platform for our clients with innovative ideas where we have produced an eCommerce mobile solution for Comet to a mobile centric site on behalf of Carlsberg.

Our aim for the current financial year is to improve the performance of each of our practice areas and reinforce our credentials within the market place as a leading player in the digital marketing space.

Keith Sadler

Chief Operating Officer

12 July 2011Consolidated statement of comprehensive income

Consolidated cash flow statement

Consolidated statement of changes in equity

Notes to the preliminary announcement of results

Principal accounting policies

Digital Marketing Group plc is a Company incorporated in the UK.

The financial information set out in this preliminary announcement does not constitute statutory information as defined in section 434 of the Companies Act 2006.

The consolidated balance sheet at 31 March 2011 and the consolidated statement of comprehensive income, consolidated cash flow statement, consolidated statement of changes in equity and associated notes for the year then ended have been extracted from the Group's 2011 statutory financial statements upon which the auditor's opinion is unmodified and does not include any statement under section 498 (2) or (3) of the Companies Act 2006.

Those financial statements have not yet been delivered to the registrar of companies.

The consolidated financial statements consolidate those of the Company and its subsidiaries (together referred to as the 'Group').

The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (Adopted IFRSs). The consolidated financial statements have been prepared under the historical cost convention, except for certain financial instruments that are held at fair value.

The accounting policies which remained unchanged from the previous year, unless otherwise stated, have been applied consistently to all periods presented in those consolidated financial statements.

Judgements made by the Directors in the application of these accounting policies that have a significant effect on the consolidated financial statements together with estimates with a significant risk of material adjustment in the next year are discussed in note 12.

Going concern

The Directors have reviewed the forecasts for 2011/12 and 2012/13 which have been adjusted to take account of the current trading environment. The Directors consider the forecasts to be prudent and have assessed the impact of them on the Group's cash flow, facilities and headroom within its banking covenants. Further, the Directors have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities. Based on this work, the Directors are satisfied that the Group has adequate resources to continue in operational existence for 12 months from the date of these accounts. For this reason they continue to adopt the going concern basis in preparing the financial statements.

1. Segmental analysis

The Group now reports its business activities in three areas: Agency, Dialogue and Technology, its three primary business activities. In previous years this has been reported on a pillar business activity basis based around geography and business activity. The comparative information has been amended to reflect this change of management reporting. Unallocated represents the Group's head office function, along with intragroup transactions.

The Group derives its revenue from the provision of digital marketing services in the UK to customers all of which are based in the UK. No single customer accounts for more than 10% or more of the Group's revenues.

For the year ended 31 March 2011

Unallocated assets and liabilities consist predominantly of cash, external borrowings and deferred tax liabilities on intangible assets which have not been allocated to the business segments. All of the Group's assets are based in the UK.

Capital additions; Property, plant and equipment

2. Other operating income

During the year to 31 March 2011 and 2010 the Group received part settlement from the administrator of a client for a contractual obligation to perform services on their behalf. It is anticipated there may be further distributions in the future but the Board is unaware of the quantum or timing of these potential receipts.

3. Other operating expenses

Exceptional costs of £464,000 represents compensation for loss of office in respect of a director and the costs of closure of an operating site.

4. Tax expense

5. Loss per share

Loss per share has been calculated by dividing the profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. As the basic earnings per share is a loss a dilution does not take place.

The calculations of basic and diluted earnings per share are:

Weighted average number of ordinary shares in issue:

Adjusted earnings per share

Adjusted earnings per share have been calculated by dividing the profit attributable to shareholders before amortisation and charges for share options by the weighted average number of ordinary shares in issue during the year. The numbers used in calculating the basic and diluted adjusted earnings per share are reconciled below:

6. Property, plant and equipment

The assets are covered by a fixed charge in favour of the Group's lenders.

7. Goodwill

Goodwill and other intangible assets have been tested for impairment by assessing the value in use of the relevant cash generating units. The value in use calculations were based on projected cash flows in perpetuity. Budgeted cash flows for 2011/2012 were used. Subsequent years were based on reducing rates of growth declining to a 2% growth rate by 2018.

The average year on year growth in earnings before interest, tax, depreciation and amortisation (EBITDA) which has been used as the basis for forecasting cash flows for each of the cash generating units when testing for impairment were:

The growth rates shown are the average applied to the cash flows of the individual cash generating units and do not form a basis for estimating the consolidated profits of the Group in the future.

The discount rate used to test the cash generating units was the Group's pre-tax Weighted Average Cost of Capital ("WACC") of 12.7% (2010:12.9%). The individual cash generating units were assessed for risk variances from the WACC, but in the absence of geographical risk, currency risk and any significant price risk variations, the WACC was used for all the cash generating units.

The reason for the impairment is the current economic environment and the future assumed expectations for each of the business units.

As a result of these tests a total impairment of £15.3 million (2010: £3.2 million) was considered necessary, £14.1 million of which relates to goodwill and £1.2 million relates to other intangible assets.

The Directors have performed sensitivity analysis in relation to the WACC used which showed that further impairment would be required for WACCs above 12.7%. At a discount rate of 13.7% a further impairment charge of £398,000 would be required.

The Directors have also performed sensitivity analysis in relation to the year on year growth in EBITDA. If the growth rates were to be reduced by 1.0% (from 10% to 9% and 5.0% to 4.0%) no additional impairment charge would be required. 

8. Other intangible assets

The cost of customer relationships was determined as at the date of acquisition of the subsidiaries by professional valuers. The valuations used the discounted cash flow method, assuming rates of customer attrition at 10% and sales growth at 2% each year. The discount rate applied at that time to the future cash flows were specific to each subsidiary and were all in the range 14.6% to 15.5%.

Goodwill and other intangible assets have been tested for impairment. The method, key assumptions and results of the impairment review are detailed in note 7. On the basis of this review the carrying value of these intangible assets has been impaired.

9. Bank and overdraft, loans and borrowings