K3 Business Technology Group Regulatory News (KBT)

KBT 

K3 BUSINESS TECHNOLOGY GROUP PLC

("K3" or "the Group" or "the Company")

Unaudited Interim Statement

For the

Six months to 31 December 2010

KEY POINTS

Financial Key Points

·; Revenue up 5% at £24.67m (2009: £23.52m) − includes contribution of £1.22m from two acquisitions in Q2 and benefit of acquisitions earlier in 2010. Challenging market backdrop

·; Adjusted profit from operations*1 up 14% at £6.24m (2009: £5.49m)

Profit from operations up 7% at £4.66m (2009: £4.34m)

·; Profit before tax up 8% at £4.23m (2009: £3.91m)

·; Good cash flows - operating cash generation of £4.91m, 79% of adjusted profit from operations*1

·; Adjusted earnings per share*2 up 13% to 16.9p (2009: 15.0p)

Basic earnings per share*³ up 9% to 12.7p (2009: 11.6p)

·; Increased banking facilities negotiated in September 2010. Net debt at 31 December 2010 of £11.48m (2009: £5.38m, 30 June 2010: £10.98m) after £5.0m drawdown to fund acquisitions.

·; No interim dividend in line with dividend policy but final dividend expected

·; Board views full year prospects for the Group positively

Operational Key Points

·; Strong sales to existing customers - enhanced Group's margins

- K3 customer base now totals c. 1,800 up from 1,500 in 2009

·; Good profit performance across both core Software Divisions

·; Managed Services Division - good progress and significant growth potential

- Panacea acquisition (in Q2) added skills, critical mass and recurring income

- recurring income run rate at 31 December 2010 increased to £3.28m (2009: £1.37m)

- major agreement (in February 2011) with SYSPRO for exclusive provision of hosting SaaS services to SYSPRO customers worldwide

- cross-selling opportunities to K3 customers remain significant

- acquisition strategy will help to accelerate growth

·; Post period-end acquisition of Sense (announced today)

- will be readily integrated within Manufacturing Software Division

- adds c. 40 new customers and recurring software licence income

Commenting on the results, Tom Milne, Chairman of K3, said,

 "We are pleased with K3's performance over the six months to 31 December 2010. Results were supported by the high levels of recurring income the Group enjoys from annual software licence and support renewals across our very large customer base. In addition, the key acquisitions we made between March and June 2010 have helped to move the business forward.

We made good progress in the first half with our Managed Services Division and, as we continue to expand, the development of our Managed Services activities will remain a major focus. We believe that there is large untapped demand across our customer base for these services and, as we add new customers across the Group, we are finding there is a ready opportunity to sell our Hosting and Managed Services offering.

Looking ahead, we view K3's growth prospects positively. There is a high degree of robustness to the Group's income - approximately £20m (44%) of the Group's annual revenues are recurring and another £19m of sales were generated from existing customers in the last 12 months to December. K3 also generates good cash flows. With the growth opportunities available and our strong financial position, we expect K3 to continue to make good progress over the remainder of the financial year and beyond."

Notes:

*¹Adjusted profit from operations for the six months ended 31 December 2010 is calculated before amortisation of acquired intangibles of £1.43m (2009: £1.15m) and acquisition costs of £0.15m (2009: £nil).

*²Adjusted EPS for the six months ended 31 December 2010 is calculated before amortisation of acquired intangibles (net of tax) of £0.93m (2009: £0.83m) and acquisition costs (net of tax) of £0.15m (2009: £nil).

*³Basic EPS for the six months ended 31 December 2010 is calculated after amortisation of acquired intangibles (net of tax) of £0.93m (2009: £0.83m) and acquisition costs (net of tax) of £0.15m (2009:£nil).

Enquiries:

OVERVIEW

Results for the six months to 31 December 2010 are very encouraging and continue to illustrate the robustness of K3's earnings, which are underpinned by high levels of annual recurring income.

I am pleased to report that the Group's profitability continues to improve, with adjusted profit from operations*1 for the six months up by 14% year on year to £6.24m and adjusted earnings per share*2 up by 13% to 16.9p year on year. This was achieved against a challenging market backdrop, with revenues up by 5%, helped by acquisitions in 2010, to £24.67m against the equivalent period in 2009. The strong improvement in the Group's profitability reflects the higher level of services in the sales mix as well as the increasing element of our own Intellectual Property ("IP") in sales, which enhances margins. K3 continues to generate good cash flows and the Group's banking facilities offer ongoing support for both our acquisition strategy as well as our working capital needs.

In K3's last Annual Report, we stated that we had made strategically important progress in expanding the Group's growth opportunities. In particular, we highlighted the developments in our Hosting and Managed Services activities, encompassing Cloud Computing solutions and 'Software as a Service' ("SaaS"). I am pleased to report that revenues from this Division, while still relatively small, have increased more than fourfold in the period, helped by our acquisition of DigiMIS in March 2010 and Panacea Limited in November 2010. Panacea provides managed services and IT solutions to both Microsoft and Sage users and its addition has brought additional expertise as well as critical mass to our Managed Services activities. After the period end, we agreed a global deal with SYSPRO for the exclusive provision of hosting SaaS services to SYSPRO customers, which has significant potential.

As we look ahead, we see excellent opportunities to offer our expanded Hosting and Managed Services offerings to both our existing client base of 1,800 customers and to new customers. The development of our Hosting and Managed Services has huge potential to drive K3's long-term contracted revenues and cash generation and will remain a major focus for us over the next few years.

We are also pleased to announce today the acquisition of Sense Limited, a provider of Dynamics AX solutions to the manufacturing and distribution markets. The business fits our acquisition strategy; it is highly synergistic and easy to integrate, adding critical mass to our existing Dynamics AX business unit and strengthening our market positioning. It also brings a recurring income stream and a further 40 customers to whom we can offer additional services, including hosting.

As we continue to build the business, our strategy remains focused on both organic growth and growth via complementary acquisitions. As we have previously noted, growth opportunities for K3 have opened up significantly through certain key steps we have taken. One of the most valuable assets we hold is our extensive customer base which generated £20m of annual licence revenue (44% of total revenue) and £19m of additional revenue in the twelve months to the end of December 2010. The ongoing expansion of our hosting and managed services across our client base will help to build our recurring revenues further and the acquisition of new customer bases will accelerate this process.

K3 is financially and operationally well-placed. Our strong product offering and cash flows will help to support our growth and we view prospects for the remainder of the year positively.

FINANCIAL RESULTS

For the six months to 31 December 2010, the Group generated revenues of £24.67m, representing an increase of 5% over the prior period (2009: £23.52m). The two acquisitions (Panacea Ltd in November 2010 and certain assets of FD Systems Ltd in December 2010) made a contribution totalling £1.22m of which £0.66m was from Managed Services. The Retail Software Division contributed revenues of £12.60m (2009: £13.26m) to the Group's results, with the Manufacturing Software Division contributing £9.35m (2009: £9.91m) and the Managed Services Division £1.68m (2009: £0.36m) to the overall outcome. An initial contribution of £0.47m was made by our IP Division and there were Sage-related sales of £0.57m from the acquisitions of Panacea Ltd and the FD Systems Sage 200 business.

Adjusted profit from operations*1 for the six month period rose by 14% to £6.24m on the comparable period last year (2009: £5.49m) and profit from operations increased by 7% to £4.66m (2009: £4.34m).

Acquisition costs for the period amounted to £0.15m (2009: £nil) due to the change in accounting standard which requires that such costs be expensed in the period incurred.

Profit before tax for the six months rose by 8% year on year to £4.23m (2009: £3.91m) and adjusted earnings per share*2 increased by 13% to 16.9p (2009: 15.0p). Basic earnings per share rose by 9% to 12.7p (2009: 11.6p). This is stated after amortisation of acquired intangibles (net of tax) of £0.93m (2009: £0.83m) and acquisition costs of £0.15m (2009: £nil).

The tax charge for the period was £0.98m (2009: £1.05m) and includes the benefit of a £0.42m credit, primarily relating to deferred tax on acquired intangibles (2009: £0.23m).

Cash flow and banking

In September 2010, we negotiated increased banking facilities, including £7.50m of additional facilities for acquisitions. Part of this facility has been utilised in the period by drawing down £5.03m to make two acquisitions. Accordingly the net debt of the Group increased to £11.48m (2009: £5.38m, 30 June 2010: £10.98m). Operating cash flow in the first half was £4.91m, representing 79% of adjusted profit from operations*1. This compares to an exceptionally strong result in the same period in 2009 of £8.44m (arising from customer cash deposits from major new software deals), representing 154% of adjusted profit from operations*1. Finance costs at £0.42m were in line with the prior year due to the refinancing agreed and the timing of drawdown of acquisition facilities.

Dividend

In line with the Group's dividend policy, no interim dividend is proposed. The Directors intend to propose a final dividend with results for the full financial year.

Operational Review

Retail Software Division

For the six months to 31 December 2010, revenues at the Retail Software Division (which comprises our UK and Holland-based businesses supplying Microsoft Dynamics software) were £12.60m (2009: £13.26m). Adjusted profit from operations*3 were 30% higher than the prior period at £2.58m (2009: £1.99m).

The UK business (which includes Ireland) contributed revenues of £9.32m (2009: £11.33m) and against a background of new deal slippage, we signed eight major new contracts worth a total of £3.4m (2009: eight contracts, £5.3m, including one deal at £2.5m). In line with our strategy, we have been increasing our focus on account management and services to drive additional sales from the existing customer base. We are increasingly selling more of our own IP, which has enhanced margins, and this helped lift adjusted profit from operations*4 by 9% to £1.83m (2009: £1.68m). The pipeline of new opportunities for the business remains strong with several deals at an advanced stage of negotiation.

Our Netherlands-based business, K3 Business Solutions BV, has seen a significant increase in activity. As expected, this is in part due to the strengthening of our relationship with one of our major customers. It also reflects the benefits of the acquisition of the Pebblestone business in March 2010. K3 Business Solutions BV saw revenues increase by 71% year on year to £3.29m (2009: £1.92m) and adjusted profit from operations*5 more than doubled to £0.75m (2009: £0.31m). Over the first half, the business signed six major new contracts, worth a total of £0.64m (2009: four contracts, £0.50m). We also completed the integration of the Pebblestone business and I am pleased to report that its performance to date has exceeded our initial expectations. In addition, K3 Business Solutions BV enjoys strong relationships with a number of major global retailers and we are seeing a significant growth in demand that we expect to continue through 2011 and beyond.

Manufacturing Software Division

For the six months to 31 December 2010, the Manufacturing Software Division (which comprises three business units) delivered revenues of £9.35m (2009: £9.91m) and an adjusted profit from operations*6 of £3.29m (2009: £3.64m). Reflecting more challenging trading conditions, 13 significant new contracts worth a total of £0.93m were signed in the period (2009: nine contracts, £2.3m). The Division has one of the largest mid-tier manufacturing software customer bases in the UK, with approximately 900 customers and recurring income from annual licence and support renewals amounts to approximately £8.40m. Approximately 70% of this income falls in the first half and it continues to represent very stable and highly predictable earnings, reflecting the business critical nature of the systems we implement and support.

K3 Supply Chain Solutions ("SCS"), which supplies SYSPRO ERP solutions, performed robustly in a period where new software sales have proved difficult to close on a timely basis. Revenue was in line with the same period last year at £6.92m (2009: £6.95m) and the adjusted profit from operations*7 rose by 2% to £3.04m (2009: £2.95m). SCS closed 11 significant new contracts, worth a total of £0.46m (2009: seven contracts, £0.83m). SCS's results demonstrate the underlying strength of this business unit as the impact of the delay in closing new software wins was more than offset by sales to the existing customer base. Encouragingly, we are starting to see lead intake improving.

K3 AX, our Microsoft Dynamics AX ERP business (specialising in process manufacturing), generated revenues of £1.27m (2009: £1.43m) and an adjusted loss from operations*8 of £0.22m (2009: profit of £0.19m). It closed two small deals in the first half, worth £0.47m in total (2009: two contracts, £1.5m). Larger deals remain in negotiation and we are optimistic of signing significant contracts in the second half. Over the period, we have invested in pre-sales and delivery resource. While this reduced profitability, we should feel the benefit in the second half and beyond. The acquisition of Sense Enterprise Solutions Ltd ("Sense"), announced today, is highly complementary. Sense adds critical mass, new skills and additional IP to our AX business unit along with 40 new customers and should be easily integrated. We also see good cross-selling opportunities.

Our Chertsey based small-business unit contributed revenues of £1.15m (2009: £1.53m) and an adjusted profit from operations*9 of £0.48m (2009: £0.50m). The unit continues to generate high levels of profitability and its customers, who typically run legacy systems, can be offered upgrade opportunities to our SYSPRO or AX solutions.

Hosting and Managed Services Division

Revenue rose by more than fourfold year on year to £1.68m (2009: £0.36m), reflecting the benefit of the acquisition of DigiMIS in March 2010 and Panacea in November 2010. However, as we are investing heavily in the business, profitability lagged revenue growth and adjusted profit from operations*10 was £0.15m (2009: £0.10m).

We see a substantial opportunity to develop our Managed Services offering and the acquisition of Panacea has added critical mass and extended our offering. With the addition of Panacea, annualised Managed Services revenues stand at £3.28m.

After the period end, in February 2011, we announced a potentially very significant development with SYSPRO, to provide hosted Software as a Service on an exclusive basis worldwide. As SYSPRO is a leading developer of ERP solutions for the manufacturing sector globally, with some 14,000 customers, this represents a very material opportunity for us and we will be working closely with the SYSPRO partner network, which spans 60 countries, to market our SaaS provision.

Sage Division

During the period, we made a strategic decision to enlarge the addressable marketplace for our Hosting and Managed Services offering by entering the Sage ERP marketplace. The acquisition of Panacea, in November 2010, was a key step in this development and we now have the expertise to support and host Sage applications. Panacea, together with the FD Systems Limited Sage 200 business we acquired at the end of December 2010, has brought us a combined Sage customer base of some 400 companies, delivering annualised sales of £4.7m. Approximately £2.4m of sales are recurring, derived from a mix of software licence and support renewals and, in future, hosting income. Mirroring the model we are deploying for our Microsoft and SYSPRO customers, we will be cross-selling Cloud Computing solutions to our new customer base.

As the adoption of Cloud Computing and Hosting increases, over time, we are confident that our growing Hosting and Managed Services Division will help to drive recurring income and deliver very high quality of earnings.

Intellectual Property Division

The Intellectual Property Division, established in June 2010, manages the portfolio of fashion/wholesale products acquired from Pebblestone as well as the Pebblestone reseller channel. In the period, the Division contributed sales of £0.47m and an adjusted profit from operations*11 of £0.36m.

Central costs

Central costs for the six months to 31 December 2010 were £0.14m, significantly down on the £0.24m reported in the same period last year which included the one-off costs of relocation and reorganisation of head office functions and the recognition of additional VAT costs. Underlying costs remain unchanged but subject to the operational performance of the Group.

Outlook

The strength and resilience of our model was clearly demonstrated in the first half results, with a steady sales performance and a pleasing growth in profits. Underlying this performance is our extensive customer base of some 1,800 companies, which generates high levels of recurring income for the Group, principally through annual software licence and support renewals but also through the sale of additional product and services. Now, as we develop our Hosting and Managed Services offering, we are seeing a new recurring revenue stream emerge across the client base. Over time, we believe there is very significant potential to develop this new recurring income stream, driven by the wider trend towards Cloud Computing solutions and we will be continuing to focus intensively on maximising the opportunities for K3 in this area. We believe that our recent global Hosting/SaaS agreement with SYSPRO worldwide is a major opportunity as is our entry into the Sage marketplace.

As we grow, we remain active in seeking further complementary and earnings enhancing acquisitions which fit our existing model and which will further strengthen the Group.

With the growth opportunities available and the strong financial platform in place, we remain excited about the future prospects for the Group.

Tom Milne

Chairman

K3 BUSINESS TECHNOLOGY GROUP PLC

CONSOLIDATED INCOME STATEMENT

For the six months ended 31 December 2010

All of the profit for the period is attributable to equity holders of the parent.

K3 BUSINESS TECHNOLOGY GROUP PLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 31 December 2010

All of the total comprehensive income for the period is attributable to equity holders of the parent.

K3 BUSINESS TECHNOLOGY GROUP PLC

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

K3 BUSINESS TECHNOLOGY GROUP PLC

CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended 31 December 2010

K3 BUSINESS TECHNOLOGY GROUP PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 31 December 2010

K3 BUSINESS TECHNOLOGY GROUP PLC

NOTES TO THE UNAUDITED INTERIM STATEMENT

1. Basis of preparation

The consolidated interim financial information has been prepared in accordance with the accounting policies that are expected to be adopted in the Group's full financial statements for the year ended 30 June 2011 which are not expected to be significantly different to those set out in Note 1 of the Group's audited financial statements for the 18 months ended 30 June 2010. These are based on the recognition and measurement principles of IFRS in issue as adopted by the European Union (EU) and are effective at 30 June 2011 or are expected to be adopted and effective at 30 June 2011. The financial information has not been prepared (and is not required to be prepared) in accordance with IAS 34. The accounting policies have been applied consistently throughout the Group for the purposes of preparation of this financial information.

The requirements of IFRS 3 (revised 2008) Business Combinations has been adopted in these interim statements as this standard became effective for the Group on 1 July 2010.

The financial information in this statement relating to the six months ended 31 December 2010 and the six months ended 31 December 2009 has neither been audited nor reviewed pursuant to guidance issued by the Auditing Practices Board. The financial information for the period ended 31 December 2010 does not constitute the full statutory accounts for that period. The Annual Report and Financial Statements for the period ended 30 June 2010 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statement for the period ended 30 June 2010 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

2. Tax expense

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:

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:

In prior years, the adjusted earnings per share calculations included an adjustment for the cost of share-based payments (net of tax). This is no longer included as the directors consider the amounts to be immaterial and therefore not useful to shareholders and investors.

4. Acquisitions during the period

Panacea Limited

On 17 November 2010 the Company acquired the entire issued share capital of Panacea Limited. The consideration was £1.55m satisfied on completion in cash. Contingent consideration is also payable on the completion of certain contracts.

The following table sets out the book values of the identifiable assets and liabilities acquired and their values to the Group:

The contingent cash consideration payable is dependent on completion of certain contracts.

The intangible assets recognised in the adjustments relate to customer relationships. £0.85m of the deferred tax liability recognised relates to these intangible assets. The goodwill is attributable to the significant synergies which are expected to arise from the integration of this business with that of K3's existing Managed Services and other product offerings, and those intangibles such as the workforce which are not recognised separately.

FD Systems

On 23 December 2010 the Company acquired certain assets of FD Systems Limited. The initial consideration was £0.94m satisfied on completion in cash. Deferred consideration of £0.30m is payable, of which £0.26m was paid on 28 February 2011.

The following table sets out the book values of the identifiable assets and liabilities acquired and their values to the Group:

The intangible assets recognised in the adjustments relate to the intellectual property and customer relationships and a tax amortisation benefit. £0.36m of the deferred tax liability recognised relates to these intangible assets. The deferred tax asset of £0.06m relates to deferred income balances which have already been taxed on a receipts basis. The goodwill is attributable to the significant synergies which are expected to arise from the integration of this business with that of Panacea Limited, acquired in November 2010, and those intangibles such as the workforce which are not recognised separately.

5. Loans and borrowings

6. Other non-current liabilities

7. Trade and other payables

8. Events after the balance sheet date

On 7 March 2011 the Company announced that it has agreed to acquire the entire issued share capital of Sense Enterprise Solutions Limited ("Sense"), the provider of Microsoft Dynamics AX ERP solutions to the manufacturing and distribution markets. The initial consideration is £1.20m payable in cash on completion. In addition, a payment of £0.35m is being made in respect of surplus cash in the business at completion. Further consideration of up to £0.90m is payable is dependent on certain performance criteria.

9. 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: Baltimore House, 50 Kansas Avenue, Manchester M50 2GL.