Jaywing Regulatory News (JWNG)

Date: 5 July 2017

On behalf of: Jaywing plc ("the Company")

Embargoed: 0700hrs 5 July 2017

Jaywing plc

Preliminary Results 2017

Jaywing plc (AIM: JWNG), the data driven, insight and creative agency, is pleased to announce its audited preliminary results for the year ended 31 March 2017

Financial highlights from continuing operations

* Revenue less direct costs of sale

** Before share based charges, exceptional items and acquisition related costs

*** As a percentage of gross profit

# Following issue of 10 million shares for Bloom acquisition

Highlights:

· Two strategically important acquisitions, the formation of a Marketing Technology division and an international footprint

· Strong cash generation, with net debt reduced by £1.79m and now represents 0.7x EBITDA** (2016: 1.2x).

· Gross profit (fee income) up 13% to £35.98 million (2016: £31.79 million)

· Adjusted EBITDA up 12% to £4.86m (2016: £4.33m)

· Two thirds of gross profit visible six months in advance, half visible 12 months in advance

· Reported loss after tax £2.98m (2016: £0.70m profit) incurred after £2.90m of goodwill impairment charges and £1.11m of costs relating to acquisitions

· One in three of our top 50 clients buying more than one service line

· Small reduction in margin as a result of investment in Marketing Tech products

Outlook:

We have had a good start to the year in new business, particularly in Epiphany, and cross selling more widely, and the Australian business is growing ahead of the UK. We are however seeing some delay and caution in spend for a small number of clients, but overall we feel optimistic for the year ahead.

Commenting on the results, Ian Robinson, Chairman of Jaywing, said:

"It has been another year of significant progress for Jaywing. In the year ended 31 March 2017 we achieved growth in gross profit and EBITDA of 13% and 12% respectively, whilst net debt reduced by £1.8m on the back of strong cash generation and free cash flow of £2.9m. Our two acquisitions have provided the business with a dedicated Marketing Technology division and the first step in our international expansion.

We are also pleased to announce that we intend to implement a progressive dividend policy starting from the financial year ending 31st March 2018."

Enquiries:

Chief Executive's Report

Shaping up nicely

I'm pleased to report that in the last 12 months we have taken some important steps in creating the future shape of the business whilst delivering some impressive financials in what has been one of the most tumultuous periods any of us can remember!

Jaywing today is a data science-led agency and consultancy with a marketing tech division and the beginnings of an international footprint. Together these provide scalability, access to faster growth and help in differentiating our digital agency services. Jaywing's technical innovation is underpinned by profitable, resilient and growing digital services and strong client relationships, which reduces the financial risk and ensures that products are developed in response to genuine client need.

Continued growth through collaboration

We achieved growth of 13% in gross profit and 12% growth in EBITDA. Taking out the impact of our acquisitions and our investment in the development of our marketing technology through the bottom line, we were able to maintain our organic EBITDA growth of 7%.

Our collaborative operating model has been key to this. One in three of our top 50 clients are now buying more than one proposition, which is up from one in four last year. We are also seeing a significant increase in the number of cross-propositional new business wins. In particular, we are finding that we are able to differentiate ourselves by integrating our marketing technology into our digital agency service offerings.

Our efforts have not gone unnoticed in the industry. It was great to see Jaywing named as 'Integrated Agency of the Year' at the annual Prolific North awards again in May of this year.

Once again the media and analysis segment saw the strongest growth with gross profit increasing by 20% including acquisitions and by 12% without. Epiphany, our search and online media division performed well, particularly in programmatic display advertising. Our data science consultancy enjoyed strong demand from lenders for its IFRS9 compliance proposition. This was helped by the introduction of our Horizon modelling technology in October. Growing the media and analysis segment has been our focus for some years and now accounts for 60% of our gross profit, up from 33% three years ago.

Resilience and cash generation still strong

An attractive feature of the business is our high level of contracted recurring gross profit, two thirds of which is now visible six months in advance, with half visible 12 months in advance. Both of our acquisitions are performing well in this respect, which is perhaps no surprise as it was one of our key targeting criteria!

Client concentration risk remains low, with no one client accounting for more than 6% of our gross profit. We also take comfort from our sector concentration risk, which is also low.

As a consequence of this, we continue to see strong cash generation. Net debt at the year end was £3.5m, a reduction of £1.8m from the previous year. Free cash flow was £3.0m.

Jaywing Intelligence

Following the acquisition of Bloom in September 2016, we have separated out its marketing technology from the digital agency and created a marketing tech division rebranded as Jaywing Intelligence in May 2017. We now have a dedicated team working on the development of new marketing technology that incorporates the use of Artificial Intelligence and Virtual Reality.

Jaywing Intelligence enables marketers to make much faster, fully informed commercial decisions. It uses advanced mathematical algorithms and machine-learning to make automated real-time marketing decisions. In addition, 3D data visualisation through Virtual Reality helps bring complex analysis to life for our clients. It is already being used by more than 15 clients, including Sky, ITV, Anytime Fitness Australia and KPMG, across a variety of sectors.

Due to development requirements, we have chosen not to invest in CAPEX in the way we had originally intended and this has delayed anticipated revenues from new sales. The £700k we had earmarked for this will now largely be expensed through the profit and loss account this year and next.

Jaywing Intelligence sits neatly alongside our collaboration with the Data Science Institute at Imperial College London. Our three and a half year cognitive marketing research programme has continued during the year but has now been expanded to explore Artificial Intelligence. We have also used our Imperial College collaboration to generate paid work helping clients on their own innovation programmes.

Jaywing in Australia

In July 2016, we acquired a majority stake in Digital Massive, a search agency based in Sydney. It was rebranded Jaywing in March and its services have expanded following collaboration with our team of experts at Epiphany (our search marketing and online media division) in the UK.

Consequently, the team has been able to sell more services into existing clients and win larger contracts through their business development activities. This has resulted in growth rates that have exceeded both our expectations and the growth rates we are experiencing in the UK.

The next 12 months and beyond

Market Conditions

Predictions of UK Digital Media Spend show continuing growth (7% CAGR to 2020) with Search and Display both predicted to grow well overall (7% and 12% respectively). Mobile platforms are the focus for this growth. Programmatic spend is projected to grow more quickly at 14% CAGR to 2020.

Growth rates in Digital ad spend are similar in Australia at 7% CAGR over the same period with the wider South-east Asia region projected to grow more rapidly at 13%. In addition, adoption rates for AI based technology in Marketing are significantly higher in the Asian region.Clients' interest in digital investment fits well with the specialisms offered by Jaywing through our interdisciplinary teams including an increased focus on measurement and attribution and continuing investment in predictive analytics.Recent research also suggests that the creative and data-led sides of marketing are coming closer together as Chief Marketing Officers recognise the importance of both disciplines.Some caution has recently crept into the market, however, with at least two commentators reducing their outlook for ad spend growth in the UK, citing political uncertainty as having a suppressing effect on clients' plans.

(Source eMarketer 2017).

General Data Protection Regulation (GDPR)

GDPR comes into force on 25 May 2018 putting increased responsibility and constraints on a brand's use of personal data including a need for clear and conscious opt in.

Many organisations are relating to GDPR simply in terms of risk management as the regulation gives rise to the possibility of incurring large fines for non- compliance. However, GDPR is likely to have a significant impact on the volume of individuals that a brand can directly communicate with and therefore potentially threaten the commercial model of business to consumer brands.

Companies need to sort out their data processes, understand their customers through use of data science and deliver exceptional brand led communications to gain customer opt in. Consequently, we believe that GDPR presents Jaywing with a considerable opportunity given the specialist skillsets that exist within the business spanning data science, digital marketing, brand communications, social media and paid digital media.

Outlook

In terms of new business, this financial year has started well, particularly in our search and online media division Epiphany, as has cross-selling. However, outside of our contracted revenues, a late Easter and snap election has delayed spend on a few client projects. In addition, we've seen a small number of our clients in the retail sector take a more cautious approach to their marketing spend. Internationally, our Australian operation continues to enjoy growth ahead of what we are seeing in the UK.

Overall, on balance we are optimistic that we will be able to continue to deliver growth this financial year. Beyond that, we remain very confident in Jawing's future growth prospects.

Strategic update

Our strategy is to innovate, scale and grow

Innovate

Having created Jaywing Intelligence our immediate priority is to accelerate licence sales and the development work associated with doing that. Initially our sales effort will focus on existing Jaywing clients in the UK and Australia. However, to sell to other organisations, we will also adopt the sales and marketing approach used so effectively by Epiphany.

Outside of Jaywing Intelligence we will continue to put our energies into our unique collaboration with the Data Science Institute at Imperial College London.

Scale

Our strategy here is to scale the business internationally through the distribution of our marketing technology products and the acquisition of complementary businesses.

This is critical in order to increase our market capitalisation, improve the liquidity of our stock and achieve a rating commensurate with a business of our quality. It is also important to provide us with access to higher growth opportunities outside the UK given that a number of commentators are now predicting that growth in digital media may slow in the UK over time.

We have had a number of encouraging conversations about product distribution with international agency groups, management consultancies and marketing automation providers. Whilst there was genuine interest in our tech it became evident that more development was required and more user cases were needed to enable third parties to use the products remotely and re-sell licences to their clients. This development work is now well progressed and we will pick up these conversations again once we have more user cases from our sales direct to clients.

Given the success we have seen with our acquisition in Australia, we are actively exploring the opportunity to invest in acquiring businesses in other overseas territories, or businesses that already have an established international footprint.

The key is to have a smart expansion strategy where we acquire complementary businesses with a good cultural fit, led by motivated people who want to stay involved, with good quality income streams and where our marketing technology not only adds value but can create consistency across territories in how our services are differentiated and delivered.

Grow

Taking encouragement from the exceptional levels of collaboration we are seeing across Jaywing, our aim is to create even greater client focus in order to increase our already impressive cross-sales ratio still further

.

This will involve taking new approaches to client relationship management, workflow, financial reporting and incentivisation.

Board refresh

Jaywing has a strong and tight Executive team. The Board was enlarged to five members when Rob Shaw (CEO UK and Australia) and Adrian Lingard (COO) joined the Board in 2015 to give us the bandwidth to execute our strategy and achieve our ambition.

Having led the business as Chief Executive for the past five years I am moving into the role of Executive Chairman with immediate effect to allow the opportunity for Rob Shaw to progress to the role of Chief Executive. Ian Robinson will stay on the Board as Deputy Chairman and Chair of Audit Committee. So, going forward the Board will comprise:

Martin Boddy Executive Chairman

Rob Shaw Chief Executive

Michael Sprot Chief Financial Officer

Adrian Lingard Chief Operating Officer

Andy Gardner Chief Strategy Officer (with a particular focus on international expansion)

Ian Robinson Deputy Chairman and Chair of Audit Committee

Philip Hanson Independent Non-Exec Director and Chair of Remuneration Committee

In summary, it has been another strong year financially and one in which we've made some excellent progress towards achieving our strategic goals. Today, Jaywing is a high quality and innovative data science led business with a high calibre management team and some amazing talent working collaboratively across it. Having built this platform, we have an ambitious strategy to scale the business and in so doing improve the rating and liquidity of our stock.

Finally, I'd like to thank all of our people for their ideas, enthusiasm and hard work as well as our investors and advisors for their continued support.

Martin Boddy

Chief Executive Officer

Jaywing plc

Chairman's Statement

Progress all round

I am delighted to report a year of significant progress for Jaywing in terms of both its business and financial strategies.

We have seen the benefit of our data science-led positioning and collaborative operating model in providing clients with innovative and seamlessly integrated solutions. This has resulted in one in three of our top 50 clients now buying more than one proposition. We have enjoyed organic EBITDA growth of 3%, although this includes an investment through the bottom line in the development of our Marketing Technology division. Excluding this expense, the organic EBITDA growth would have been 7%.

We have made two strategically important acquisitions. With Bloom we have acquired a number of innovative products and created a dedicated marketing technology division. Digital Massive, in Australia, (now re-branded Jaywing in) represents the beginning of our planned international expansion and is providing us with access to faster growth.

Financially, we achieved 13% growth in gross profit and a 12% growth in EBITDA overall. Cash generation was strong and resulted in a reduction of £1.8m in Net Debt, which ended the year at £3.5m. The Board considers this to be the appropriate time to announce a dividend policy, and is pleased to announce its intention is to implement a progressive dividend policy starting from the financial year ending 31 March 2018.

Over the past five years the business has changed shape considerably and this has been reflected in improvements to the quality of our income and in our growth rates. The Board recognises the need for increasing scale to maximise its operational efficiency as well as improving value for shareholders. We have a bold strategy to "innovate, scale and grow" and will be working hard to execute it successfully in the next period.

Finally, on behalf of the Board, I would like to thank all of our colleagues - the "Jaywingers" - for their continuing support and hard work in helping us to achieve the significant progress we have made to date and for the progress we continue to make towards our strategic objectives.

Ian Robinson

Chairman

Strategic Report

Business review

Gross profit grew by 13% to £36.0m, an increase of £4.2m from the prior year (2016: £31.8m). If the impact of acquisitions is excluded, there was organic growth of 5%, from £31.8m to £33.5m. The adjusted operating performance line, before interest, tax, depreciation, amortisation, impairment, share based payment charges, loss before tax on disposal, exceptional items and acquisition related costs, shows EBITDA of £4.9m (2016: £4.3m). This is growth of 12%. The EBITDA margin has reduced slightly by 0.1%, and this is due to the ongoing investment in Jaywing Intelligence being through the P&L, rather than CAPEX as originally intended.

The consolidated cash flow statement shows Jaywing to have generated cash from operating activities of £3.9m (2016: £2.8m) after changes in working capital. This is shown in the table below.

A loss after tax of £3.0m has been generated (2016: profit of £0.7m), which is principally explained by the impairment in the carrying value of goodwill in our Contact Centre. We have taken this decision following the loss of a major client in the year and a challenging outlook due to cost increases from a rent review, the national living wage and the apprenticeship levy. Over the period we have owned this business we have generated profits in excess of the amount paid.

We incurred £1.1m of one-off costs from the acquisitions of Digital Massive and Bloom, which are included within the loss after tax.

Jaywing continues to be cash generative from operating activities as shown in the table. Net debt has decreased from the prior year by £1.8m and is now £3.5m (2016: £5.3m). This is 0.7x adjusted EBITDA (2016: 1.2x).

Banking facilities comprise a term loan for £2.2m, a revolving credit facility for £3.5m and a bank overdraft of £2.0m. There was headroom of £4.2m at the year end.

The business operates in three segments: Agency Services, Media & Analysis and Central Costs. The segmental performance of our business in these practice areas is shown in Note 1 to the Consolidated Financial Statements, together with the comparative performance from the previous year.

The Media and Analysis segment, which represents 60% of Jaywing's total gross profit, has performed strongly again with gross profit growing by 20% from £18.0m to £21.6m and EBITDA growing by 11% from £5.4m to £6.0m. The Agency Services segment has also grown, with gross profit increasing by 4% and EBITDA increasing by 17%, due to the mix of revenues and a change in the management structure for Content Marketing area.

The table below shows the adjusted operating profit of Jaywing analysed between the two half years and adjustments made against the reported numbers:

Excluding other income, Jaywing produced £2.8m adjusted operating profit after interest in the six months to 31 March 2017 and £2.1m in the first half.

The table below shows the trend of gross profit and EBITDA over the last four six-monthly periods:

Continuing business EBITDA

Impairment

As required by IAS 36, we have carried out an impairment review of the carrying value of our intangible assets and goodwill. We calculated 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 10.6% (2016: 13.5%) has been derived. This is applied to cash flows for each of the business units using growth rates in perpetuity of 2% from 2020/21. As a result of these calculations the Board has concluded that the carrying values of the HSM Limited goodwill on Jaywing's balance sheet needs to be impaired and therefore a charge of £2.9m has been made (2016: £nil).

 Dividend Policy

We intend to implement a progressive dividend policy. The first dividend is to be declared based on the results to 31 March 2018. Full details will be provided with the interim results in November 2017.

Key performance indicators

Over the last 12 months, the key areas of focus have been:

- Improved resilience

- Increased sales / cross sales

- Strong cash generation

- International expansion

- Technology development

Progress against these is described in the Chief Executive's report.

Overall it has been another strong year financially for Jaywing, with growth in both operating segments. The business continues to be cash generative, allowing net debt to be reduced. The share price has performed well, with the issue of equity for the acquisition of Bloom bringing in new institutional investors. We have also been more active with retail investors and as a result have seen an increase in the volume of trades.

Consolidated statement of comprehensive income

Consolidated cash flow statement

The accompanying notes form part of these consolidated financial statements.

Consolidated statement of changes in equity

Principal accounting policies

Jaywing plc is a Company incorporated in the UK and is AIM listed.

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 2017 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 2017 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 set out in the most recently published statutory financial statements have been followed. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these 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 the period up to 30 September 2018 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. Furthermore, 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 the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

1. Segmental analysis

The Group reports its business activities in two areas: Agency Services and Media & Analysis, its two primary business activities. Central Costs represents the Group's head office function, along with intragroup transactions.

The Group primarily derives its revenue from the provision of digital marketing services in the UK. Approximately £1,250,000 of sales were made to clients in Australia. During the year and prior year no customer included within either sector accounted for greater than 10% of the Group's revenue.

For the year ended 31 March 2017

For the year ended 31 March 2016

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 years to 31 March 2016 and 31 March 2017 the Group received money from the administrator of a client for a contractual obligation to perform services on their behalf. During the year the Group received a further distribution of £26,000. 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. Operating expenses

Wages and salaries include £305,000 (2016: £Nil) of post-acquisition employment costs relating to the purchase of Massive Group PTY, £Nil (2016: £175,000) of post-acquisition employment costs relating to the purchase of Iris Associates Limited, and £Nil (2016: £38,000) of post-acquisition employment costs relating to the purchase of Epiphany Solutions Limited.

4. Tax expense

5. (Loss) / profit per share

(Loss) / profit per share has been calculated by dividing the (loss) / profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year.

The calculations of basic and diluted (loss) / profit per share are:

Weighted average number of ordinary shares in issue:

The basic and diluted earnings per share are the same due to the Group being loss making.

Adjusted earnings per share

Adjusted earnings per share have been calculated by dividing the profit attributable to shareholders before amortisation, charges for share options and acquisition related costs during the year 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. Acquisition of subsidiaries

During the year the Group made two acquisitions. On 8 July 2016 Jaywing plc acquired 75% of the ordinary shares in Massive Group PTY ("Digital Massive") for cash consideration of AUS$2,667,000 (£1,558,000) (excluding legal and professional fees of £412,000 which have been expensed through the statement of comprehensive income in administration expenses in the year). AUS$2,000,000 (£1,144,000) of this was paid on completion, with a further AUS$667,000 (£414,000) paid in October 2016. Additional consideration is payable, separate to the acquisition costs, for the continuing employment and future services provided by the former owners of Digital Massive. The amount recognised in the statement of comprehensive income as an expense during the year is £305,000, which represents the total amount earned as at 31 March 2017. This amount has been provided for within accruals and deferred income. Further amounts are payable as they are earned up to a maximum amount of AUS$1,500,000, including the AUS$500,000 (£305,000) recognised during the year, up until July 2018.

The final 25% of the share capital is subject to a put / call option from July 2020. This will be valued at a multiple of the average audited EBITDA for the previous two financial years, subject to a maximum total consideration payable of AUS$12 million for the entire business.

Jaywing has a small search marketing team in Sydney and knows the market well. The acquisition of Digital Massive allows Jaywing to consolidate its existing client relationships and take full advantage of the rapidly growing market in Australia. In time, it will also provide the opportunity for the Group to distribute a broader set of its UK products and services.

In the period since acquisition the subsidiary contributed £1,064,000 to Group revenues, £310,000 of EBITDA and £310,000 to the consolidated profit attributable to shareholders for the year ended 31 March 2017. The assets and liabilities acquired were as follows:

Summary of net cash outflow from acquisitions:

The fair value of trade and other receivables are equal to the gross contractual amounts receivable and at the acquisition date all amounts were expected to be collected.

The goodwill amount represents intangible assets that do not qualify for recognition through the separability criterion or the contractual-legal criterion. This consists of cross-selling opportunities and expected synergies.

On 31 August 2016 Jaywing plc acquired 100% of the ordinary shares in Bloom Media (UK) Limited ("Bloom") for cash consideration of £2,407,000) (excluding legal and professional fees of £224,000 which have been expensed through the statement of comprehensive income in administration expenses in the year). This was all paid on completion. Additional consideration is payable, separate to the acquisition costs, for the continuing employment and future services provided by the former owners of Bloom. Further amounts are payable as they are earned up to a maximum amount of £5,750,000, up until July 2018.

A new company, Jaywing Innovations Ltd ("JI") was incorporated to run the Company's MarTech strategy. This is owned 75% by Jaywing, and 25% by management. On 31 August 2016, the products owned by Bloom and the Almanac product owned by Jaywing were hived across into the company.

The 25% of the share capital owned by management is subject to a put / call option from July 2020. This will be valued at a multiple of the average audited EBITDA for the previous two financial years, subject to a maximum total consideration payable of £4 million for the 25% stake.

The acquisition of Bloom is expected to accelerate the Group's strategy and will provide Jaywing with a suite of innovative digital products, including a social media and behavioural analytics tool. The acquisition also brings significant expertise to the Group. Alex Craven, founder of Bloom, will remain employed in the business and will be responsible for leading the development of the Group's enlarged product set. The acquisition will also increase Jaywing's scale in digital marketing in the UK and is expected to provide opportunities to cross-sell existing products and services into the Bloom client base.

In the period since acquisition the subsidiary contributed £1,817,000 to Group revenues, £271,000 to EBITDA and £134,000 to the consolidated profit attributable to shareholders for the year ended 31 March 2017. The assets and liabilities acquired were as follows:

Summary of net cash outflow from acquisitions:

The fair value of trade and other receivables are equal to the gross contractual amounts receivable and at the acquisition date all amounts were expected to be collected.

The goodwill amount represents intangible assets that do not qualify for recognition through the separability criterion or the contractual-legal criterion. This consists of cross-selling opportunities and expected synergies.

The results for the Group had the acquisition during the year been at the beginning of the year can be analysed as follows:

Note:

This information is based on the management accounts for Digital Massive and Bloom.

7. Property, plant and equipment

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

8. Goodwill