Jaywing Regulatory News (JWNG)

Date: 12 July 2016

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

Embargoed: 0700hrs 12 July 2016

Jaywing plc

Preliminary Results 2016

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 2016.

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

Highlights:

· Gross profit (fee income) up 7% to £31.8 million (2015: £30.1 million)

· Adjusted EBITDA up 6% to £4.3 million (2015: £4.1 million)

· Adjusted EBITDA margin increased by 0.1% to 13.6%

· Launch of Almanac, the Company's Big Data management Platform

· Launch of collaboration with Data Science Institute at Imperial College London

Outlook:

· Encouraging start to the new financial year as a result of the momentum seen in the final quarter of 2015/16

· The impact of the EU Referendum remains to be seen, but presents both risks and opportunities

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

"I am delighted to report on another year of significant progress for Jaywing. In the year ended 31 March 2016 we achieved organic growth in gross profit and EBITDA of 6% and 7% respectively. The Media and Analysis segment achieved even stronger organic growth with gross profit increasing by 9% and EBITDA increasing by 13%."

Enquiries:

Chief Executive's Report

I'm delighted to report that the last 12 months has been one in which we've made tremendous progress strategically, operationally and very importantly, financially.

Our data science led proposition has appealed to new and existing clients alike. This, along with the hard work and dedication of our people, has resulted in us exceeding our plan for organic growth.

We are now starting to see the benefits from the time and energy we have invested over the past four years in establishing our One Company operating model. There is now a tremendous amount of collaboration right across the business. This results in better solutions for our clients, more opportunities to cross-sell and stickier client relationships.

Our approach of fully integrating the companies we acquire, whilst difficult to achieve, is proving to be very effective. That's because becoming an integral part of Jaywing has lots of advantages. There is a broader proposition to offer clients, an existing Jaywing client base into which to sell new services and opportunities for the people in the acquired businesses to work with and learn from specialists in associated fields. The result is that the combined business moves forward stronger than before.

The changes that we made last year to the Board, in adding additional members to the Executive team, have given us greater bandwidth whilst allowing individuals to have far greater focus. Consequently, a lot more has been achieved, giving us the confidence to push forward with even greater ambition.

Organic UK growth ahead of expectation

We achieved strong organic growth rates in the UK (6% in gross profit and 7% in EBITDA), especially given that we have one of the largest operations in the UK outside of the Global agency groups, and the slowing of growth in the UK economy.

The low concentration risk of our client base together with the high percentage of contracted recurring revenues (over 50%) and our focus on data science led digital marketing has enabled us to improve our performance despite the market conditions.

Well-tuned growth engine

The Media and Analysis segment has continued to been our main growth engine, achieving 13% growth in both gross profit and EBITDA.

Search marketing revenues have continued to grow at a similar rate to the previous period but with the proportion of paid search advertising increasing. This, along with growth in programmatic display and mobile advertising revenues, is a very positive development. It allows us to exploit our data science capabilities whilst strengthening our relationship with Google, Microsoft and Sky, enabling us to provide more sophisticated and measurable advertising solutions for our clients.

Data and analysis revenues continue to be strong with high demand for our services. Regulatory accounting standard changes under IFRS9 saw an increased requirement for sophisticated data modelling for all lending organisations with most lenders needing to fully comply by January 2018. We are already helping banks and building societies such as Royal Bank of Scotland, Nationwide and The Coventry as well as several challenger banks including Shawbrook Bank and Paragon Bank. However, there are still numerous organisations who are yet to select partners and prepare.

We have also seen 2% gross profit growth in our Agency segment, which is a considerable improvement from the previous year when we saw gross profit contract by 6%.

Resilient and cash generative

We continue work to improve the resilience of our revenue. Around two thirds of our revenue is now visible six months in advance. This visibility drives cash generation, improves cash flow and reduces risk. In addition to this, our client concentration is low, with no individual client accounting for more than 6% of total gross profit.

This financial year saw the final earn-out payments for both the Epiphany Solutions Ltd and Iris Associates Ltd acquisitions. Both of these business have performed strongly since joining Jaywing and are now fully integrated. 

The next 12 months and beyond

Market conditions

In the aftermath of the EU referendum, there is some uncertainty, which may lead to delays or reductions in the marketing spend of some clients. It is in times such as these that resilience matters and we believe that we are well placed to weather this storm as we have a large proportion of our income that is recurring and are not exposed to currency risks. Whilst the EU Referendum decision brings with it some risks, it also is likely to provide some opportunities. Our clients are likely to need support in preparing for life outside of the European single market whilst marketers in general will be looking to improve the effectiveness of their media spend by increasing the proportion spent on digital channels or improving their use of digital media by taking a more sophisticated data science-led approach.

The migration of digital media consumption from personal computers to smartphones and tablets looks set to continue. The Internet Advertising Bureau reported an increase in digital adspend of 16.4% in 2015 to over £8.6bn, the highest rate since 2008. It attributed this to the increase in device ownership, with the average household now owning 8.3 internet enabled devices. The most popular internet device is the smartphone and mobile adspend accounted for the significant majority (78%) of the growth.

Our own data corroborates this continued growth in mobile device usage as we witnessed mobile search overtake desktop search for the first time. This is an area of strength for us and mobile strategies form a key part of our client development. Video spend, social media and digital display all saw healthy growth too with programmatic rising from 47% of digital display spend that we managed in 2014 to 60% in 2015. This is a trend that we expect to continue.

Promising start to the new financial year

We have enjoyed an encouraging start to the new financial year as a result of the momentum seen in the final quarter of 2015

/16 and the launch of our collaboration with the Data Science Institute at Imperial College London.

Strategic update

Sharpening our focus

We continue to sharpen our focus and concentrate on activities where we see the biggest opportunity to benefit from the use of data science and which offer attractive margins.

We have spent time reviewing the strategic options for our customer experience contact centre in Swindon. Whilst the margins here are lower than those elsewhere in our business, the long-term nature of the contracts is appealing as are the cross-selling opportunities they give rise to. Today's key battleground for customer experience outsourcing is around the use of data analysis and digital channels to create differentiation and improved margins. Consequently, this is a market where we have considerable competitive advantage. Whilst we do not have the capacity or desire to tender for the larger contracts, we believe the interests of shareholders are best served by retaining and filling our contact centre with high quality medium sized contracts from clients whose primary focus is on improving their customer experience.

Creating a low risk international growth platform


The UK remains a highly competitive market place with sophisticated buyers of our services. We have continued to observe higher growth rates in less mature and less competitive markets and have been exploring complementary strategies to accelerate our UK organic growth through the international distribution of our relevant products and services. We are particularly interested in those markets where English is a language used in business as this will allow our existing teams in the UK to communicate effectively.

We have spent time considering how best to exploit the search marketing opportunity in Australia, where we already have a small team. The adoption of search marketing is growing rapidly in Australia and whilst we have won a number of clients our efforts have been frustrated by our inability to recruit and retain talent. Therefore, we have been actively engaged in looking for a relatively small but rapidly growing entrepreneurially led agency to acquire. An agency that we can support strategically and operationally from the UK using a deal structure that sees the key people stay with the business beyond any earn-out. Our acquisition of Epiphany in the UK proved to be a key driver of grwoth and with our recent acquisition of Massive Group Pty we are effectively seeking to "play this hand" again but in a less developed market. In time, it will also provide the opportunity for us to distribute a broader set of our UK product and services.

In addition, we continue to explore opportunities to enter into a commercial joint venture or acquire a business with an established international distribution channel and/or a product suite that sits well alongside our own.

We have been active in identifying acquisition targets that have a more established and complementary product set. We have explored a wide variety of different businesses and business models and have largely dismissed pure play ad-tech as it is unlikely that such deals could be accretive for shareholders. Instead, we are targeting profitable digital agency businesses that have been successful in developing products.

As always, our acquisitions will focus on businesses that are not part of a sales process and will pay particular attention to the fit of the key talent within them. 

Innovation in data science

Jaywing hit the news in 2016 with the launch of our collaboration in the field of cognitive marketing with the Data Science Institute at Imperial College London. Not only was our media coverage unparalleled but so was the level of client engagement with almost one hundred clients attending the launch event.

Whilst this is a three and a half year research programme, there are opportunities to deliver some early benefits as the collaboration will involve live client projects. Encouragingly, it has already led to a number of clients asking us to get involved in their strategic innovation projects, especially those clients who have a unique data asset.

2016 also saw the launch of Almanac, our Big Data management platform following several months of product development and testing. The platform is vital to us as it is the bedrock on which a suite of innovative products are currently being developed.

So, in summary, we have made tremendous progress in the last 12 months, have exceeded our financial expectations and have the team in place to move forward with confidence.

Our focus on data science and our One Company approach are working well in terms of attracting and retaining clients and talent. We have an exciting strategy to scale the business by adopting a low risk international distribution model and have a strong sense of how best to execute this.

It is a pleasure to lead this talented and highly collaborative group of people.

Martin Boddy

Chief Executive Officer

Jaywing plc

Chairman's Statement

I am delighted to report on another year of significant progress for Jaywing. In the year ended 31 March 2016 we achieved organic growth in gross profit and EBITDA of 6% and 7% respectively. The Media and Analysis segment achieved even stronger organic growth with gross profit increasing by 9% and EBITDA increasing by 13%.

In line with our strategic objectives we have created a strong growth platform for the business underpinned by a strong focus on data science. Epiphany (search marketing) has now been successfully integrated with Jaywing and all our business areas are now working more closely together to deliver more effective and efficient service offerings to our clients.

Our collaboration with the Data Science Institute (DSI) at Imperial College demonstrates our commitment to advancing the boundaries of data science. The research we are conducting with them is at the cutting edge of cognitive technology, and could change the way we approach the creation of creative content and media buying.

There has been a steady increase in the number of clients taking up our integrated service offerings which provide clients with a seamless link between the services we offer. This is supported by collaboration and teamwork across our internal teams which increases productivity as well as delivering better outcomes for our clients.

As part of our longer term objectives we have continued to invest in product development through the bottom line. One of the exciting outcomes of this has been the recent launch of Almanac, our Big Data management platform, which we will be using to deliver a number of smart data driven products.

Finally, on behalf of the Board, I should like to thank all our colleague's - the "Jaywingers" for all 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

Profit after tax has increased significantly to £0.7m in the year ended 31 March 2016. This compares to a loss of £1.5m in the prior year.

Gross profit grew organically by 6% to £31.8m, a £1.7m increase (2015: £30.1m). The adjusted operating performance line, before interest, tax, depreciation, amortisation, share based payment charges, loss before tax on disposal, exceptional items and acquisition related costs, shows EBITDA of £4.3m (2015: £4.1m). This is organic growth of 7%, showing an improving EBITDA margin.

The consolidated cash flow statement shows Jaywing to have generated cash from operating activities of £3.6m (2015: £2.8m) before changes in working capital. This is much higher than the profit after tax of £0.7m and is reconciled in the table below.

Jaywing continues to be cash generative from operating activities as shown in the table. Net debt has however increased slightly from the prior year to £5.3m (2015: £5.2m). This is due to earn-out payments of £1.7m (2015: £1.4m) for the acquisitions of Epiphany Solutions Ltd and Iris Associates Ltd. These are the final payments and there are no further amounts due.

Due to a stronger than forecast Q4, the trade debtor balance was higher than anticipated at the year end. This has subsequently converted to cash in the early part of the 2016/17 financial year.

Banking facilities comprise a term loan for £2.1m, a revolving credit facility for £3.5m and a bank overdraft of £2.0m. There was headroom of £2.3m at the year end. £1.1m of the term loan has also been repaid during the year.

The business operates in two segments: Agency Services and Media & Analysis. The segmental performance of our business in these two 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 nearly 60% of Jaywing's total revenue has performed strongly again with gross profit growing by 13% from £18.7m to £21.2m and EBITDA growing by 13% from £4.6m to £5.2m. The Agency Services segment has also grown, with both gross profit and EBITDA increasing by 2%.

During the year, Jaywing benefited from the receipt of £0.1m (2015: £0.1m) from the administrator of a client where a contractual obligation existed. Based on communication from the administrator, the Board believes there will be further distributions but the quantum will reduce.

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 £2.5m adjusted operating profit after interest in the six months to 31 March 2016 and £1.8m in the first half.

The table below shows the trend of increasing gross profit and EBITDA over the last five 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 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 13.5%(2015: 10.6%) has been derived. This is applied to cash flows for each of the business units using growth rates in perpetuity of 2% from 2019/20 (5% for HSM). As a result of these calculations the Board has concluded that the carrying values of intangible assets and goodwill on the Jaywing's balance sheet do not need to be impaired and therefore no charge has been made (2015: £Nil).

Key performance indicators

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

- Improved resilience

- Increased sales / cross sales

- Innovation

- Strong cash generation

Progress against these is described in the Chief Executive's report on page 3.

Principal risks and uncertainties

The principal risks and uncertainties of the Company are outlined on page 10.

Overall it has been a strong year financially for Jaywing, with organic growth in both segments. The business continues to be cash generative, and the resilience of income will enable this to continue going forward.

Consolidated statement of comprehensive income

Consolidated cash flow statement

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 2016 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 2016 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 11.

Going concern

The Directors have reviewed the forecasts for the years ending 31 March 2017 and 31 March 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. Unallocated 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 £250,000 of sales were made to clients in Australia. During the year no customer included within either sector accounted for greater than 10% of the Group's revenue. During the prior year one customer included within the Media & Analysis segment accounted for greater than 10% of the Group's revenue. This customer accounted for £4,524,000 of Group revenue.

For the year ended 31 March 2016

For the year ended 31 March 2015

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 2015 and 31 March 2016 the Group received part settlement from the administrator of a client for a contractual obligation to perform services on their behalf. During the year we received a further distribution of £71,000. 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 £175,000 (2015: £211,000) of post-acquisition employment costs relating to the purchase of Iris Associates Limited, and £38,000 (2015: £1,059,000) of post-acquisition employment costs relating to the purchase of Epiphany Solutions Limited.

An amount of £500,000 is held in Escrow in relation to the disposal of Tryzens Limited in September 2013. In March 2015 the Company received notification of a claim from the acquirer for the full value of the monies held in escrow. Negotiations are at an advanced stage and the expectation of the Directors is that the claim will be settled for £349,000. This has been provided for in the accounts.

4. Tax expense

5. Profit / (loss) per share

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

The calculations of basic and diluted profit / (loss) 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, 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. 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 2015/16 to 2018/19 were used. These were based on a one year budget with growth rates of 5% to 10% applied for the following three years. Subsequent years were based on a reduced rate of growth of 2% into perpetuity (5% for HSM due to the nature of that part of the business).

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:

These growth rates are based on past experience and market conditions and discount rates are consistent with external information. 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 13.5% (2015:10.6%). 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 same WACC was used for all the cash generating units.

As a result of these tests no impairment was considered necessary (2015: £Nil).

The Directors have performed a sensitivity analysis in relation to the WACC used, which showed that an impairment would be required for WACCs of 14% and above. At a discount rate of 14% a charge of £431,000 would be required.

The Directors have also performed a sensitivity analysis in relation to the year on year growth in EBITDA. If the growth rates were to be reduced by 1% in each CGU no impairment charge would be required.

8. Other intangible assets

The cost of brought forward 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%.

Trademarks represent the trading names used by the company. These are estimated to have an economic life of 20 years. The valuation used the discounted cash flow method, assuming an estimated royalty rate of 2% and sales growth of 2% each year. The valuation assumes that each year 80% to 90% of revenues are generated using the Trademark and applied a discount rate of 19%.

The order book represents contracted revenues over the next 12 months. The valuation used the discounted cash flow method, assuming a net operating profit margin of 30.5%. The discount rate applied was 15.8%.

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, it has been concluded that there is no need to impair the carrying value of these intangible assets (2015: £Nil).

9. Bank and overdraft, loans and borrowings

As the loans are at variable market rates their carrying amount is equivalent to their fair value.

The additional borrowing facilities available to the Group at 31 March 2016 was £2.0 million (2015: £2.0 million) and, taking into account cash balances within the Group companies, there was £2.3 million (2015: £3.6 million) of additional available borrowing facilities.

A Composite Accounting System is set up with the Group's bankers, which allows debit balances on overdraft to be offset across the Group with credit balances.

Reconciliation of net debt

10. Share capital

Authorised:

Allotted, issued and fully paid:

The 5 pence ordinary shares have the same rights (including voting and dividend rights and rights on a return of capital) as the previous 50 pence ordinary shares. Holders of the 45 pence deferred shares do not have any right to receive notice of any general meeting of the Company or any right to attend, speak or vote at any such meeting. The deferred shareholders are not entitled to receive any dividend or other distribution and shall, on a return of assets in a winding up of the Company, entitle the holders only to the repayment of the amounts paid up on the shares, after the amount paid to the holders of the new ordinary shares exceeds £1,000,000 per new ordinary share. The deferred shares will also be incapable of transfer and no share certificates will be issued in respect of them.

11. Accounting estimates and judgements

Accounting estimates

Impairment of goodwill and other intangible assets

The carrying amount of goodwill is £30,446,000 (2015: £30,446,000) and the carrying amount of other intangible assets is £6,562,000 (2015: £8,065,000). The Directors are confident that the carrying amount of goodwill and other intangible assets is fairly stated, and have carried out an impairment review. The forecast cash generation for each CGU and the WACC represent significant assumptions and should the assumptions prove to be incorrect there would be a significant risk of a material adjustment within the next financial year. The sensitivity to the key assumptions is shown in note 7.

Share based payment

On 4 March 2015, share options were granted to employees in order to incentivise performance. These share options will vest based upon conditions which relate to either EBITDA performance in the period commencing 1 April 2015, or the share price at various future dates.

The share based payment charge consists of two elements, the charge for the fair value at the date of grant and a charge for the employer's NI. The fair value charge has been assessed using an external valuation company, and judgement has been made on the number of shares expected to vest based on the achievement of EBITDA and share price targets.

Accounting judgements

Recognition of revenue as principal or agent

The Directors consider that they act as a principal in transactions where the Group assumes the credit risk. Where this is via an agency arrangement and the Group assumes the credit risk for all billings it therefore recognises gross billings as revenue.

12. Annual reports and accounts

Copies of the annual report and accounts for the year ended 31 March 2016 together with the notice of the Annual General Meeting will be issued to shareholders shortly and will be available to view and download from the Company's website: jaywingplc.com.

13. Events after the end of the reporting period

On 8th July 2016, Jaywing plc announced that it had acquired 75 percent of the issued share capital of Digital Massive, a company registered in Australia, for an initial cash payment of AUS$2 million, plus an earn out consideration of up to AUS$2 million. From July 2020, the Company will, via a put and call option, be in a position to acquire the remaining 25 percent of Digital Massive's issued share capital, at a multiple of its average audited EBITDA for the previous two financial years, subject to a maximum total consideration payable of AUS$12 million for the entire business.

The acquisition is being funded through the Company's existing cash resources. The acquisition is expected to be earnings enhancing from completion.