Last checked at 1 Sep 2008 07:00
KBT
1 September 2008
K3 BUSINESS TECHNOLOGY GROUP PLC
("K3" or "the Group")
Announces
Half Year Results
For the six month period to 30 June 2008
Key Points
Revenue increased by 26% to £17.1m (2007: £13.6m)
Adjusted profit from operations rose by 82% to £2.32m (2007: £1.27m). Profit from operations rose by 44% to £1.51m (2007: £1.05m) - see notes below
Adjusted EPS increased by 22% to 5.6p (2007: 4.6p). Basic EPS of 3.1p (2007: 3.8p) reflects impact of amortisation charges and tax rates - see notes below
Strong results reflect benefits of acquisitions made in 2007
Integration of acquisitions and reorganisation now substantially completed - ongoing cost base reductions and operational efficiency improvements
Recurring revenues from annual licence and maintenance fees materially increased - profitability and cash flow benefits fall largely in second half of the year
New business pipeline across both Divisions remains encouraging but toughening market conditions
Board continues to seek further complementary acquisitions and views prospects for the Group positively
Commenting on the results, Tom Milne, Chairman of K3, said,
"K3 has undergone a step change over the course of the last 18 months, with the addition of three complementary businesses which enhance our core software product offering, add new skills and market sectors, and enlarge our customer base.
We enter the second half of the financial year with strong pipelines and a number of deals at an advanced stage. Whilst the closing of certain major deals will continue to be a key factor in our business performance in the second half, I am also pleased to highlight the growth in our recurring revenues. This element of our income, derived from software licence fee renewals and support revenues, provides financial robustness in the current toughening economic climate.
We continue to seek complementary acquisitions in line with our stated strategy and, meanwhile, consider that the Group remains well positioned to make good progress in the second half of the year and beyond."
NOTES
Adjusted profit from operations is calculated before amortisation of acquired intangibles of £0.75m (2007: £0.17m) and share-based payments of £0.06m (2007: £0.06m).
Adjusted EPS is calculated before amortisation of acquired intangibles (net of tax) of £0.54m (2007: £0.12m) and share-based payments (net of tax) of £0.04m (2007: £0.04m).
Basic EPS is calculated after amortisation of acquired intangibles (net of tax) of £0.54m (2007: £0.12m) and cost of share based payments (net of tax) of £0.04m (2007: £0.04m). It should be noted basic earnings per share is expected to rise significantly in the second half of the year, reflecting the impact of the second half weighting of profit generation from our largest manufacturing software acquisition, McGuffie Brunton.
Enquiries:
| K3 Business Technology Group plc | Andy Makeham (CEO) | T: 020 7448 1000 (today) |
| David Bolton (CFO) | Thereafter 01282 864 111 | |
| Biddicks | Katie Tzouliadis | T: 020 7448 1000 |
| Daniel Stewart (NOMAD) | Paul Shackleton | T: 020 7776 6550 |
CHAIRMAN'S STATEMENT
OVERVIEW
I am pleased to report that the Group has continued to perform well. Revenue in the first half of the year rose by 26% to £17.1m and adjusted profit from operations*1 by 82% to £2.32m. These strong results reflect the benefits of the three acquisitions we made over the course of 2007, which have added strength and depth to our existing operations.
We have now successfully completed the integration of our acquisitions within our two Divisions and are very pleased with their respective performances to date. As well as broadening our product range and enhancing growth opportunities, our acquisitions have materially increased the proportion of our recurring revenues, adding to the Group's financial robustness.
Looking ahead, we remain one of Microsoft's larger business partners in the UK and are well placed to benefit from Microsoft's ongoing investment in business solutions. While market conditions are tougher, we believe that the Group's strong balance sheet and cash generative model will help to underpin our performance as we look to continue to grow K3, both organically and by acquisition.
Financial Results
For the six months to 30 June 2008, Group revenue rose by 26% to £17.1m (2007: £13.6m), with the Retail Software Division contributing £10.45m (2007: £8.74m) and the Manufacturing Software Division contributing £6.66m (2007: £4.72m) to this result.
Within the Retail Software Division, Landsteinar Nederland, the Holland-based retail software business we acquired in August 2007, contributed revenue of £2.43m and results from the Manufacturing Software Division included a full six month contribution from McGuffie Brunton (compared to a three month contribution in the prior year) and an inaugural contribution of £1.14m in revenue from Index, which we acquired in December 2007.
Adjusted profit from operations*1 rose by 82% to £2.32m (2007: £1.27m) while profit from operations increased by 44% to £1.51m (2007: £1.05m). Group profit before tax increased by 12% to £0.91m (2007: £0.81m). Adjusted earnings per share*2 rose by 22% to 5.6p (2007: 4.6p). After amortisation of acquired intangibles (net of tax) of £0.54m (2007: £0.12m) and cost of share based payments (net of tax) of £0.04m (2007: £0.04m), basic earnings per share were 3.1p (2007: 3.8p). It should be noted earnings per share are expected to rise significantly in the second half of the year, reflecting the impact of the second half weighting of profit generation from our largest manufacturing software acquisition, McGuffie Brunton.
The tax charge of £0.17m includes the benefit of £0.21m credit relating to deferred tax on acquired intangibles (2007: £0.05m). In 2007 the tax charge benefited from a credit of £0.15m for the change in the rate of deferred tax.
At 30 June 2008, the Group had an overdraft of £0.77m (2007: cash of £1.20m) and bank loans of £15.19m (2007: £8.46m). In the second half, we expect strong cash flow arising from customers' annual licence fee and maintenance and support renewals, specifically in our Manufacturing Software Division where we expect to bill in excess of £6m in the final quarter of the year.
In May we acquired an investment in a company, Lumos Services Limited, which provides support services to our Group. It is accounted for as an associate and has broken even since the date of our acquisition.
Dividends
As expected, and in line with last year, when K3 commenced the payment of dividends, there is no interim dividend but the Directors will be proposing a final dividend with the results for the full financial year.
*1 calculated before amortisation of acquired intangibles of £0.75m (2007: £0.17m) and share-based payments of £0.06m (2007: £0.06m)
*2 calculated before amortisation of acquired intangibles (net of tax) of £0.54m (2007: £0.12m) and share-based payments (net of tax) of £0.04m (2007: £0.04m)
Operational Review
Retail Software Division
Revenue at the Retail Software Division in the first half of the financial year increased by 20% to £10.45m (2007: £8.74m) and adjusted profit from operations*3 rose by 96% to £1.61m (2007: £0.82m). Landsteinar Nederland, which we acquired in August 2007, contributed £2.43m to revenue and £0.83m to adjusted profit from operations*4. Revenue within the existing business was 8% down on last year at £8.02m (2007: £8.74m) and adjusted profit from operations*5 reduced slightly by 5% to £0.78m (2007: £0.82m). This reflected tougher sector conditions and some slippage in deals we expected to close in the first half.
In total, during the first half, our existing Retail Software business won five new contracts, with notable wins in the Online/Multi-Channel, Fashion and Brewery and Drinks sectors, and Landsteinar Nederland secured four major deals. These included the commencement of the roll-out of CRM functionality to IKEA's franchise operations.
The integration of Landsteinar Nederland has gone well and we have now recruited a new Sales Director for the business, which traditionally made minimal investment in sales and marketing given its strong relationship with IKEA. While sales to existing non-IKEA customers have been lower than expected in the first half of the financial year, we see a strengthened pipeline to support the second half.
We have reorganised the Retail Software Division generally both to improve operational efficiencies and ensure that the cost base remains at an appropriate level. As we enter the second half of the financial year, we have signed two key deals and expect to recognise additional revenue from two other major contracts. In a more difficult marketplace, our pipeline of opportunities is encouraging and continuing strong demand for our online/multi-channel retail IT solution is helping to offset some slowdown for store-based IT systems. Our focus is on a number of key deals within our prospect list which, if concluded, will help to underpin our performance expectations for the second half.
Manufacturing Software Division
Revenue at the Manufacturing Software Division increased by 41% to £6.66m (2007: £4.72m) and adjusted profit from operations*6 by 88% to £1.02m (2007: £0.54m). These substantial increases in revenue and profits reflected the benefits of the two manufacturing software businesses, McGuffie Brunton and Index, which we acquired last year as well as pleasing performances from our existing operations.
The McGuffie Brunton business was merged with our existing core SYSPRO business in the second half of 2007 and the combined business was subsequently renamed K3 Supply Chain Solutions ("SCS"). I am pleased to report that SCS performed strongly in the first half of the current year, closing 10 deals in total. We have also extended SCS's product offering to include add-ons for distribution, CMS, APS and customer hosting. As previously mentioned, results from SCS, which comprises our core activity within the Division, are heavily weighted towards the second half of the year since annual licences and support contracts are always renewed in October.
Our Walton-on-Thames based business performed well in the first half and has added to its customer base.
The addition of Index, which offers Microsoft Dynamics AX software to the manufacturing and distribution sectors with a specialism in fresh food processing, has opened up a new related marketplace for us. We are pleased with its performance since its acquisition although a major new order expected to be delivered in the first half has been deferred. First half revenues therefore were exclusively generated from existing customers. Index's pipeline of potential new business remains strong although the timing of the signing of these typically large contracts is difficult to predict accurately.
Central Division
Central costs increased from £0.19m to £0.31m reflecting the costs of strengthening the central management team and the cost of aborted acquisitions of £0.06m (2007: £nil).
*3 calculated before amortisation of acquired intangibles of £0.37m (2007: £nil) and share-based payments of £0.03m (2007: £0.03m)
*4 calculated before amortisation of acquired intangibles of £0.37m and share-based payments of £nil
*5 calculated before amortisation of acquired intangibles of £nil (2007: £nil) and share-based payments of £0.03m (2007: £0.03m)
*6 calculated before amortisation of acquired intangibles of £0.38m (2007: £0.17m) and share-based payments of £0.03m (2007: £0.03m)
Outlook
The Group has undergone a step change over the course of the last 18 months, with the addition of three complementary businesses which enhance our core software product offering, add new skills and market sectors, and enlarge our customer base.
We enter the second half of the financial year with strong pipelines across both our Divisions and a number of deals at an advanced stage. Whilst the closing of certain major deals will continue to be a key factor in our business performance in the second half, I am also pleased to highlight the growth in our recurring revenues. This element of our income, which is derived from software licence fee renewals, and support and maintenance revenues, is highly predictable and provides financial robustness in the current toughening economic climate.
We continue to seek complementary acquisitions in line with our stated strategy and, meanwhile, consider that the Group remains well positioned to make good progress in the second half of the year and beyond.
Tom Milne
Chairman
1 September 2008
CONSOLIDATED INCOME STATEMENT
For the six months ended 30 June 2008
| Notes | Unaudited Six months to 30 June 2008 | Unaudited Six months to 30 June 2007 | Audited Year to 31 December 2007 | |
| £'000 | £'000 | £'000 | ||
| Revenue | 17,109 | 13,632 | 34,116 | |
| Profit from operations before amortisation of acquired intangibles and cost of share-based payments | 2,321 | 1,274 | 5,760 | |
| Amortisation of acquired intangibles | (750) | (167) | (896) | |
| Cost of share-based payments | (61) | (61) | (152) | |
| Profit from operations | 1,510 | 1,046 | 4,712 | |
| Finance income | 19 | 18 | 45 | |
| Finance costs | (621) | (255) | (1,081) | |
| Share of profit of associates | - | - | - | |
| Profit before taxation | 908 | 809 | 3,676 | |
| Tax expense | 2 | (166) | (35) | (761) |
| Profit for the period | 742 | 774 | 2,915 |
All of the profit for the period is attributable to equity holders of the parent.
| Earnings per share | 3 | |||
| Basic | 3.1p | 3.8p | 13.4p | |
| Diluted | 3.1p | 3.7p | 13.1p |
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
For the six months ended 30 June 2008
| Notes | Unaudited Six months to 30 June 2008 | Unaudited Six months to 30 June 2007 | Audited Year to 31 December 2007 | |
| £'000 | £'000 | £'000 | ||
| Exchange differences on translation of foreign operations | 874 | - | 1,082 | |
| Exchange difference on hedge of net investment in foreign operations | (467) | - | (536) | |
| Net profit recognised directly in equity | 407 | - | 546 | |
| Profit for the period | 742 | 774 | 2,915 | |
| Total recognised income and expense for the period | 1,149 | 774 | 3,461 |
All of the above recognised income and expense is attributable to equity holders of the parent.
CONSOLIDATED BALANCE SHEET
As at 30 June 2008
| Notes | Unaudited As at 30 June 2008 | Unaudited As at 30 June 2007 | Audited As at 31 December 2007 | |
| £'000 | £'000 | £'000 | ||
| ASSETS | ||||
| Non-current assets | ||||
| Property, plant and equipment | 1,398 | 1,221 | 1,305 | |
| Goodwill | 31,677 | 21,770 | 31,494 | |
| Other intangible assets | 12,071 | 7,882 | 12,282 | |
| Deferred tax assets | 391 | 255 | 466 | |
| Investment in associates | 210 | - | - | |
| Total non-current assets | 45,747 | 31,128 | 45,547 | |
| Current assets | ||||
| Trade and other receivables | 9,683 | 8,650 | 10,984 | |
| Cash and cash equivalents | - | 1,198 | 3,085 | |
| Assets held for resale | - | 183 | - | |
| Total current assets | 9,683 | 10,031 | 14,069 | |
| Total assets | 55,430 | 41,159 | 59,616 | |
| LIABILITIES | ||||
| Non-current liabilities | ||||
| Long-term borrowings | 5 | 12,811 | 7,347 | 12,437 |
| Other non-current liabilities | 6 | 334 | - | 564 |
| Deferred tax liabilities | 3,503 | 2,105 | 3,508 | |
| Total non-current liabilities | 16,648 | 9,452 | 16,509 | |
| Current liabilities | ||||
| Trade and other payables | 7 | 9,962 | 10,267 | 14,704 |
| Current tax liabilities | 180 | 1,524 | 639 | |
| Short-term borrowings | 5 | 3,877 | 1,931 | 4,043 |
| Total current liabilities | 14,019 | 13,722 | 19,386 | |
| Total liabilities | 30,667 | 23,174 | 35,895 | |
| EQUITY | ||||
| Share capital | 5,939 | 5,437 | 5,926 | |
| Share premium account | 1,619 | 1,540 | 1,588 | |
| Other reserves | 10,448 | 8,064 | 10,448 | |
| Translation reserve | 938 | (15) | 531 | |
| Retained earnings | 5,819 | 2,959 | 5,228 | |
| Total equity attributable to equity holders of the parent | 4 | 24,763 | 17,985 | 23,721 |
| Total equity and liabilities | 55,430 | 41,159 | 59,616 |
CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 30 June 2008
| Unaudited Six months to 30 June 2008 | Unaudited Six months to 30 June 2007 | Audited Year to 31 December 2007 | |
| £'000 | £'000 | £'000 | |
| Cash flows from operating activities | |||
| Profit before tax | 908 | 809 | 3,676 |
| Adjustments for: | |||
| Share based payments charge | 61 | 61 | 152 |
| Depreciation of property, plant and equipment | 166 | 151 | 308 |
| Amortisation of intangible assets and development expenditure | 859 | 263 | 1,078 |
| Write down of investments | - | 25 | - |
| Loss (profit) on sale of property, plant and equipment | - | 10 | (4) |
| Loss (profit) on sale of disposal group | - | (64) | 121 |
| Interest received | (19) | (18) | (45) |
| Interest expense | 621 | 255 | 1,081 |
| Decrease in trade and other receivables | 1,304 | 916 | 594 |
| Decrease in trade and other payables | (4,530) | (3,659) | (733) |
| Cash (absorbed by) generated from operations | (630) | (1,251) | 6,228 |
| Interest paid | (664) | (246) | (1,243) |
| Income taxes paid | (640) | (202) | (2,074) |
| Net cash (absorbed by) generated from operating activities | (1,934) | (1,699) | 2,911 |
| Cash flows from investing activities | |||
| Acquisition of subsidiaries, net of cash acquired | (38) | (9,229) | (18,947) |
| Acquisition of associates | (210) | - | - |
| Deferred consideration paid | (9) | (47) | (121) |
| Development expenditure capitalised | (424) | (144) | (372) |
| Proceeds from sale of trade investments | - | 1,190 | 1,398 |
| Proceeds from sale of disposal group | - | 1,081 | 1,081 |
| Purchase of property, plant and equipment | (259) | (105) | (271) |
| Proceeds from sale of property, plant and equipment | - | - | 51 |
| Interest received | 19 | - | 45 |
| Net cash absorbed by investing activities | (921) | (7,254) | (17,136) |
| Cash flows from financing activities | |||
| Proceeds from issue of share capital | 35 | 180 | 263 |
| Proceeds from long-term borrowings | - | 8,600 | 16,586 |
| Payment of long-term borrowings | (1,022) | (834) | (1,915) |
| Payment of finance lease liabilities | (33) | (62) | (125) |
| Dividends paid | (119) | - | - |
| Net cash (absorbed by) generated from financing activities | (1,139) | 7,884 | 14,809 |
| Net change in cash and cash equivalents | (3,994) | (1,069) | 584 |
| Cash and cash equivalents at start of period | 3,085 | 2,267 | 2,267 |
| Exchange gains on cash an cash equivalents | 132 | - | 234 |
| Cash and cash equivalents at end of period | (777) | 1,198 | 3,085 |
NOTES TO THE HALF-YEAR STATEMENT
1. Basis of preparation
The financial information presented in this documentation has been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations that are expected to be applicable for the year ending 31 December 2008. These are subject to ongoing review and endorsement by the European Commission, and possible amendment by the International Accounting Standards Board (IASB), and are therefore subject to possible change. Further standards or interpretations may also be issued that could be applicable for the year ending 31 December 2008. These potential changes could result in the need to change the basis of accounting or presentation of certain financial information from that presented in this document. The group may need to review some accounting treatments used for the purpose of this document as a result of emerging industry consensus on practical application of IFRS and further technical opinions. This could mean that the financial information in this document may require modification until the group prepares its complete set of IFRS financial statements for the year ending 31 December 2008.
The financial information in this statement relating to the six months ended 30 June 2008 and the six months ended 30 June 2007 has neither been audited nor reviewed pursuant to guidance issued by the Auditing Practices Board. The comparative figures for the year ended 31 December 2007 do not amount to full statutory accounts within the meaning of section 240 of the Companies Act 1985. Those accounts have been reported on by the group's auditors and delivered to the registrar of companies. The audit report was unqualified, did not include references to matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain a statement under section 237(2) or (3) of the Companies Act 1985.
2. Tax expense
| Unaudited Six months to 30 June 2008 | Unaudited Six months to 30 June 2007 | Audited Year to 31 December 2007 | |
| £'000 | £'000 | £'000 | |
| Current tax expense | |||
| UK corporation tax and income tax of overseas operations on profits for the period | 330 | 366 | 1,220 |
| Adjustment in respect of prior periods | (88) | (96) | (119) |
| Total current tax expense | 242 | 270 | 1,101 |
| Deferred tax expense | |||
| Origination and reversal of temporary differences | 134 | (35) | 66 |
| Deferred tax on intangible assets recognised in business combinations | (210) | (50) | (254) |
| Previously unrecognised deferred tax assets assessed as recoverable at the end of the period | - | (24) | |
| Effect of change in rate of deferred tax | - | (150) | (128) |
| Total deferred tax expense | (76) | (235) | (340) |
| Total tax expense | 166 | 35 | 761 |
3. Earnings per share
The calculations of earnings per share are based on the profit for the financial period and the following numbers of shares:
| Unaudited six months to 30 June 2008 Number of shares | Unaudited six months to 30 June 2007 Number of shares | Audited year to 31 December 2007 Number of shares | |
| Weighted average number of shares: | |||
| For basic earnings per share | 23,672,029 | 20,513,650 | 21,695,518 |
| Exercise of share-based payments | 556,285 | 519,905 | 641,022 |
| For diluted earnings per share | 24,228,314 | 21,033,555 | 22,336,540 |
Adjusted earnings per share calculations have been computed because the directors consider that they are useful to shareholders and investors. These are based on the following profits and the above number of shares:
| Unaudited six months to 30 June 2008 | Unaudited six months to 30 June 2007 | Audited year to 31 December 2007 | |||||||
| Earnings | Per share amount Basic | Per share amount Diluted | Earnings | Per share amount Basic | Per share amount Diluted | Earnings | Per share amount Basic | Per share amount Diluted | |
| £'000 | p | p | £'000 | p | p | £'000 | p | p | |
| Earnings per share (eps) | 742 | 3.1 | 3.1 | 774 | 3.8 | 3.7 | 2,915 | 13.4 | 13.1 |
| Amortisation of acquired intangibles (net of tax) | 540 | 2.3 | 2.2 | 117 | 0.5 | 0.5 | 492 | 2.3 | 2.2 |
| Share-based payments (net of tax) | 43 | 0.2 | 0.2 | 43 | 0.3 | 0.2 | 106 | 0.5 | 0.4 |
| Loss on sale of disposal group (net of tax) | - | - | - | - | - | - | 137 | 0.6 | 0.6 |
| Adjusted eps | 1,325 | 5.6 | 5.5 | 934 | 4.6 | 4.4 | 3,650 | 16.8 | 16.3 |
The loss on sale of a disposal group (net of tax) in 2007 relates to Elucid.
4. Consolidated reconciliation of changes in equity
| Unaudited As at 30 June 2008 | Unaudited As at 30 June 2007 | Audited As at 31 December 2007 | |
| £'000 | £'000 | £'000 | |
| Opening equity | 23,721 | 14,428 | 14,428 |
| Issue of ordinary shares, net of costs | 44 | 2,711 | 5,632 |
| Share-based payment (debit) credit | (23) | 102 | 221 |
| Own shares acquired | (9) | (30) | (21) |
| Translation differences on overseas operations | 407 | - | 546 |
| Dividends to equity holders | (119) | - | - |
| Profit for the period | 742 | 774 | 2,915 |
| Closing equity | 24,763 | 17,985 | 23,721 |
5. Loans and borrowings
| Unaudited As at 30 June 2008 | Unaudited As at 30 June 2007 | Audited As at 31 December 2007 | |
| £'000 | £'000 | £'000 | |
| Non-current | |||
| Bank loans | 12,762 | 7,150 | 12,378 |
| Finance lease creditors | 49 | 69 | 59 |
| Other loans due to related parties | - | 128 | - |
| 12,811 | 7,347 | 12,437 | |
| Current | |||
| Bank loans and other facilities | 3,203 | 1,307 | 3,346 |
| Finance lease creditors | 20 | 96 | 43 |
| Loans from related parties | 654 | 528 | 654 |
| 3,877 | 1,931 | 4,043 | |
| Total borrowings | 16,688 | 9,278 | 16,480 |
6. Other non-current liabilities
| Unaudited As at 30 June 2008 | Unaudited As at 30 June 2007 | Audited As at 31 December 2007 | |
| £'000 | £'000 | £'000 | |
| Deferred consideration | 267 | - | 474 |
| Other | 67 | - | 90 |
| 334 | - | 564 |
7. Trade and other payables
| Unaudited As at 30 June 2008 | Unaudited As at 30 June 2007 | Audited As at 31 December 2007 | |
| £'000 | £'000 | £'000 | |
| Trade payables | 2,329 | 2,808 | 2,733 |
| Other tax and social security taxes | 1,725 | 1,302 | 2,694 |
| Other payables | 341 | 175 | 623 |
| Deferred consideration | 50 | 248 | 320 |
| Accruals | 1,974 | 1,414 | 3,458 |
| Total financial liabilities, excluding loans and borrowings, classified as financial liabilities measured at amortised cost | 6,419 | 5,947 | 9,828 |
| Deferred income | 3,543 | 4,320 | 4,876 |
| 9,962 | 10,267 | 14,704 |
8. The above information is being sent to the shareholders and is available from the Company's
website, www.k3btg.com, and from its registered office: Linden Business Centre, Linden Road, Colne, Lancashire, BB8 9BA.