Learning Technologies Group Regulatory News (LTG)

Learning Technologies Group plc

HALF YEAR RESULTS 2018

Learning Technologies Group plc ("LTG" or the "Company"), the leading integrated learning and talent software and services provider, is pleased to announce its half year results for the six months ended 30 June 2018.

Key Financial highlights

· Revenues up 60% to £33.8m

· Organic revenues up 10% on a constant currency basis (excluding CSL)

· Strong EBIT margin performance; 26.3% (H1 2017: 17.8%)

· Adjusted diluted EPS increased by 140% to 1.122p (H1 2017: 0.468p)

· Business model continuing to support robust margin progression

· Strong cash generation with significant funding capacity for further acquisitions

· Interim dividend of 0.15p; a 67% increase on 2017

Strategic highlights

· Significant expansion in recurring software revenues via transformational PeopleFluent acquisition

· Strong recurring revenue growth, c70% on a pro forma basis; H1 2018: 51% (H1 2017: 37%)

· Integration of PeopleFluent ahead of expectations and adds talent capability and US reach

· Increased revenue diversity with majority now generated outside the UK

· Active pipeline of attractive acquisition opportunities

Outlook

· Full year profit will be significantly ahead of the Board's expectations based on the upgraded PeopleFluent EBIT margin

· High recurring revenue provides good visibility into 2019

· Healthy order book and strong margins provide further confidence

Commenting, Jonathan Satchell, CEO of LTG, said:

"The first half of 2018 has been pivotal for LTG with the PeopleFluent acquisition confirming our shift towards recurring software revenues, and significantly increasing our US presence. Together with NetDimensions, PeopleFluent demonstrates our ability to successfully integrate businesses and drive growth and margin progression through operating model improvements.

Alongside our track record of delivering organic growth and substantial margin improvements, LTG has a strong balance sheet and acquisition pipeline, and is well placed to continue its strategy of consolidating the high growth corporate e-learning market. A robust performance from our core business and the successful integration of PeopleFluent underpins our confidence that full year profit will be significantly ahead of the Board's expectations."

Financial summary

Operational highlights

Software & Platforms - 51% of Group revenues (H1 2017: 40%)

· NetDimensions returned to organic growth at a substantially lower cost base; renewal rate in excess of 100% in H1 2018, plus new sales wins 500% higher than H1 2017

· Integration of PeopleFluent acquisition ahead of expectations; the Board now expects the EBIT margin of PeopleFluent to be at least 25% in 2019

· Merging NetDimensions and PeopleFluent's talent software businesses - substantial benefits to be gained from leadership, operational and revenue synergies

· Rustici and gomo continue to show strong organic growth

Content & Services - 49% of Group revenues (H1 2017: 60%)

· In-line performance despite tough prior year comparators in LEO and Preloaded

· CSL project revenues completed in H1 2018 as anticipated

· Margin progression from 9% in H1 2017 to 18% in H1 2018

Analyst and investor presentation

LTG will host an analyst and investor presentation at 9 a.m. today, Tuesday 25 September 2018, at the offices of Numis.

Capital Markets Day

LTG expects to host a Capital Markets Day for analysts and investors on Thursday 15 November 2018.

Enquiries:

About LTG

LTG is a leader in the high growth workplace learning industry. The Group offers end-to-end learning and talent solutions ranging from strategic consultancy, through a range of content and platform solutions to analytical insights that enable corporate and government clients to meet their performance objectives.

LTG is listed on the London Stock Exchange Alternative Investment Market (LTG.L) and headquartered in London. The Group has offices in Europe, the United States, Asia-Pacific and South America.

Further information on the Group is available at www.ltgplc.com

Chairman's Statement

Introduction

The Board is delighted to report that Learning Technologies Group plc ('LTG') has made excellent progress over the period. The transformational acquisition of PeopleFluent Holdings Corp ('PeopleFluent') in May 2018 moves LTG into the adjacent talent software market, complementing the Group's strengths in learning software, content and services, whilst substantially deepening the Group's presence in the US market. This has been achieved while the rest of the Group has delivered strong operating margins and NetDimensions, acquired in 2017, has been integrated ahead of expectations.

Results

Financial comparatives for prior periods are reported on a restated basis; further details are provided below.

In the six months ended 30 June 2018, revenues increased by 60% to £33.8 million (H1 2017: £21.1 million) with like-for-like revenues on a constant currency basis (excluding the post-acquisition contribution of PeopleFluent, restating NetDimensions as if it had been owned for 6 months in both periods, and excluding the exceptional contribution from the Civil Service Learning ('CSL') contract) increased by 10% to £25.8 million. With the acquisitions of NetDimensions and PeopleFluent as well as the strong organic growth in the Group's other software licencing businesses, recurring licence fee and support contract revenues increased from £7.7 million in H1 2017 to £16.5 million in H1 2018, an increase of 113%.

Adjusted EBIT* grew by 137% to £8.9 million (H1 2017: £3.8 million) with margins increasing from 18% in H1 2017 to 26% in H1 2018 following the successful restructuring of NetDimensions during the summer of 2017.

Operating profit of £0.9 million (H1 2017: loss of £0.9 million) is stated after amortisation of acquired intangibles, various acquisition earnout charges, share-based payments, and integration costs. Following the acquisition of NetDimensions, amortisation of acquired intangibles increased to £5.7 million (H1 2017: £3.0 million). Acquisition-related deferred consideration and earnout charges increased to £1.5 million (H1 2017: £0.7 million) and relate primarily to the anticipated earnout resulting from Rustici's incremental revenue growth during the final year of their three-year earnout agreement. Integration charges of £0.1 million relate to PeopleFluent; the majority of the anticipated integration costs related to PeopleFluent will be incurred during the second half of the year.

Transaction costs relating to the acquisition of PeopleFluent were £2.6 million (H1 2017: £1.0 million) and interest on borrowings, was £0.5 million (H1 2017: £0.3 million).

The Group reported a net profit of £1.3 million for the six months ended 30 June 2018 attributable to the owners of the parent company (H1 2017: loss of £2.2 million).

The basic earnings per share in H1 2018 was 0.221 pence (H1 2017: loss of 0.454 pence). Adjusted diluted earnings per share as set out in Note 5 increased by 140% to 1.122 pence (H1 2017: 0.468 pence).

At the time of the acquisition of PeopleFluent, LTG entered into a new debt facility with Silicon Valley Bank ('SVB') and Barclays Bank for $63 million. The facility comprises a $42 million term loan repayable in quarterly instalments of $2.1 million, and a $21 million multi-currency revolving credit facility, both available for five years. The new SVB debt facility replaced LTG's previous £20 million debt facility. The facility is subject to various financial covenants and interest is charged at between 160 and 210 basis points above LIBOR based on the covenant results.

LTG raised £115.8 million through financing activities during the period (H1 2017: £51.1 million) comprising £83.7 million resulting from the issue of shares, primarily related to a placing in April (net of share issue costs), and net incremental debt financing of £32.3 million as set out above. The Company converted £72.0 million of the placing proceeds into USD on the 27 April 2018 pending completion of the PeopleFluent acquisition. The subsequent movement in the exchange rate between conversion and completion of the PeopleFluent acquisition on 31 May resulted in an exceptional foreign exchange gain of £3.6 million.

LTG maintained strong operating cash flows in the period. Net cash flow from operating activities (excluding deferred consideration payments relating to 2017) was £11.0 million (H1 2017: £2.4 million). Excluding the exceptional foreign exchange gain and transaction costs relating to the acquisition of PeopleFluent and acquisition related deferred consideration payments, operating cash flow conversion was 112% (H1 2017: 113%).

In H1 2018 approximately 59% of LTG's business was undertaken for customers outside of the UK and a growing percentage of the Group's revenues are denominated in USD. Net USD cash inflows are used as an internal hedge against the USD loan capital and interest repayments helping to reduce the business' overall exposure to exchange rate volatility. At 30 June 2018 gross cash was £32.1 million and net debt was £15.7 million (31 December 2017: gross cash was £15.7 million and net cash was £1.0 million).

Overall net assets increased to £162.9 million at 30 June 2018 (31 December 2017: £75.4 million) and shareholders' funds increased from 13.2 pence per share to 24.4 pence per share.

Impact of adoption of new accounting policies

With effect from 1 January 2018 the Group has adopted two new accounting standards: IFRS15 - Revenue from Contracts with Customers, and IFRS9 - Financial Instruments. The financial comparatives used for prior periods in this report are restated to reflect the impact on the financial results for the Group as if the new standards had been adopted in the prior year. The impact of adoption of IFRS15 is that revenues and adjusted EBIT were reduced by £0.4m in H1 2017 and £0.7 million for the full year. The impact of adoption of IFRS9 is immaterial and no adjustment has been made. Further details are provided in Note 12.

The post-acquisition results for PeopleFluent are reported in line with LTG's accounting policies. Prior to acquisition, PeopleFluent did not capitalise R&D. The consolidated post-acquisition results for June 2018 for PeopleFluent include capitalised R&D of £0.1m.

Update on NetDimensions integration

At the time of the 2017 Interim results the Board was able to confirm that the operational cost synergy target of $8 million had been exceeded ahead of time. The Board further indicated that it expected new sales to pick-up in 2018 and for revenues to increase with effect from 2019. At the time of the 2017 annual results reported in March 2018 the Board was delighted to confirm that encouraging new sales had been made in Q4 2017.

We have seen this positive trend continue in H1 2018, with recurring revenues (including upsells) now totalling 103% and new sales 500% ahead of the prior year. Owing to the multi-year nature of these sales we expect to see 2018 revenues increase moderately on a like-for-like basis.

Acquisition and integration of PeopleFluent

As the pace and progress of technology and innovation increase, corporates and government bodies are realising that to succeed, they must invest in programs and technologies to manage change, develop skills, grow knowledge, and instil desired attitudes and behaviours in their staff and their 'extended enterprises', including suppliers and partners. To do so, their talent strategies are increasingly focusing on learning. By combining PeopleFluent's talent software with LTG's learning platforms and services, the Group offers a compelling suite of industry leading solutions.

On 31 May 2018 LTG completed the acquisition of PeopleFluent, the leading independent provider of cloud based integrated recruiting, talent management, and compensation management solutions. PeopleFluent is headquartered in Waltham, Massachusetts and generates approximately 85% of its revenues in the US. The business is a strong strategic fit with LTG, allowing LTG to offer a full suite of products and services to its customers and substantially deepen its presence in the high growth US market.

PeopleFluent was acquired for $143.1 million in cash by way of a reverse subsidiary merger. Final consideration is subject to a post-closing review process that is due to be completed before the end of 2018. There are no deferred consideration obligations. The total consideration and fair value adjustments to the assets and liabilities set out on in Note 11 are provisional and represent management's best estimates at this time. The offer was financed by way of a placing of 86.7 million LTG shares issued at 98.0 pence per share and a new debt finance facility, details of which are set out in Note 10.

At the time of the placing LTG set out an ambitious plan to restructure the PeopleFluent business, to improve working practices and to realise substantial synergies. The Board is pleased to report that the integration of PeopleFluent into the Group has exceeded management expectations. The transformation program will continue during the second half of 2018, with the majority of the full-year synergies and settled cost base being completed by Q4 2018. There will be further operating cost reductions achieved throughout 2019, as contracts with external suppliers come to the end of their current terms.

At the time of the acquisition, PeopleFluent comprised five key businesses:

· Talent Acquisition, Talent Management, Compensation and LMS ('Talent') - software platforms

· Workforce Compliance and Diversity ('WCAD') - platform and services business enabling US corporates to monitor their compliance with federal affirmative action plans

· Vendor Management Services ('VMS') - platforms business allowing corporates to outsource the payment of their contractor workforce

· Workforce Planning & Analytics ('WPA') - organisation charting software

· KZO - advanced video content platform

As part of the integration, PeopleFluent's Talent business will be merged with NetDimensions under the PeopleFluent logo. The enlarged group will offer a best-of-breed integrated platform solution encompassing PeopleFluent's leading talent and compensation software with NetDimensions' leading Learning Management System. The combined business will enjoy annualised revenues of c$80 million and will be headquartered in the US. Although the integration will not be fully complete until Q4 2018 we have already seen new cross-sell wins as the power of this combined offering resonates with clients. PeopleFluent will also incorporate the WPA charting software tool.

WCAD, which previously operated under the PeopleFluent brand, has been renamed Affirmity. We believe this will alow Affirmity, which already accounts for approximately a quarter of US affirmative action plans produced, to grow its market share, and also expand into other markets where regulations over workforce diversity and inclusion are increasing.

Similarly, VMS has been given greater independence and we look forward to announcing a new brand and strategic developments in due course.

KZO offers an exciting video software tool that enables users to collaborate, share comments and auto-translate audio into multiple written languages. Already offered as part of the PeopleFluent Talent platform, the KZO product has been rebranded 'gomo video' and will be offered as part of LTG's award winning gomo learning SaaS based learning solution. The market has reacted positively, and the first cross-sells have already been achieved.

As with prior acquisitions, LTG is looking to leverage off the best practice and synergies afforded by its central services (including HR, Finance, IT, Facilities, Legal, Marketing, Bid and Hosting). The scale of PeopleFluent and its presence in the US has meant that LTG has been able to base many of its US central service functions on PeopleFluent's existing infrastructure, particularly in its Raleigh office in North Carolina. CRM, finance and payroll systems are in the process of being integrated into the merged PeopleFluent operations (incorporating NetDimensions in particular). LTG has relocated from its Cannon Street base to Fetter Lane, the same location as PeopleFluent's London office, affording greater flexibility and interactions across LTG's UK businesses. PeopleFluent's New Orleans office has been closed.

Management have re-prioritised investment in the R&D roadmap, and reviewed working practices. As a result, they have substantially restructured the product management and engineering teams and the PeopleFluent sales team under the leadership of NetDimensions' Global Head of Sales. Although the PeopleFluent businesses enjoy a high level of recurring revenues, churn rates on some products have been high over the past few years. At the time of the acquisition, LTG management signalled that they anticipated it would take some time to increase retention rates and generate material new sales, which would mean that revenues would continue to decline in the near term before returning to revenue growth from end 2019. LTG management also stated that they expected PeopleFluent's EBIT margins to be not less than 20% in 2019. As a result of the successful integration program the Board anticipates that EBIT margins for PeopleFluent in 2019 will now be not less than 25%.

Operational Review

The acquisition of NetDimensions in March 2017 and PeopleFluent in May 2018 has seen a marked transformation in the Group from 27% recurring revenues in 2016 to 51% recurring revenues in H1 2018 (and c70% recurring revenues on an annualised basis). Software & Platforms, which represented 40% of revenues in H1 2017 represented 51% of revenues in H1 2018 (and c68% on an annualised basis).

As well as high visibility of revenues, the Software & Platforms division generated adjusted EBIT margins of 34% in H1 2018 (2017: 37%); the H1 reduction reflecting the lower contribution of PeopleFluent in June 2018 and a Q4 weighting in on-premise software licence sales. Content & Services saw adjusted EBIT margins remain stable at 18% between 2017 and H1 2018.

In addition to the encouraging new sales trends seen in NetDimensions (explained above), LTG's Software & Platforms division continues to deliver strong growth with Rustici delivering revenue growth of 8% and gomo 42%.

Content & Services projects are typically run on a fixed price, non-recurring basis, with a relatively short sales cycle. The key Content & Services businesses (LEO, Preloaded and Eukleia) saw exceptional growth in 2017. In H1 2018 LEO reported revenue growth of 16% (excluding the CSL project) whilst Preloaded and Eukleia saw declines of 9% and 4% respectively. Against strong prior year comparatives, we expect the Content & Services division to report low single digit organic growth in 2018.

Revenues from the CSL contract, being delivered alongside our strategic partner KPMG LLP, completed in H1 2018 as expected.

Corporate Governance

With effect from September 2018 LTG has adopted the QCA Corporate Governance Code. Further details can be found on the Company's website at www.ltgplc.com.

I am delighted that Aimie Chapple joined the Board as a Non-Executive Director with effect from 3 September 2018. Aimie was a senior partner in Accenture and during her 25-year consulting career has led practices in management consulting and human performance and innovation. She has extensive experience of operating in the US and UK markets. Aimie joins the Audit and Remuneration Committees.

Dale Solomon (Chief Operating Officer) will step down from the Board on 16 November 2018. Dale has been with the business since 2010 and has provided invaluable insight and drive in helping to grow and transform the Group, most recently leading the integration of PeopleFluent. The Board thanks Dale for his great contribution and wishes him and his family all the very best for the future.

Dividend

On 6 July 2018, the Company paid a final dividend of 0.21 pence per share, giving a total dividend for 2017 of 0.30 pence per share. This represented a 43% increase on the dividend paid compared to 2016. Given its confidence in the continuing success of the Group, the Board is pleased to announce that it has approved an interim dividend of 0.15 pence per share (2017: 0.09 pence per share), representing a 67% increase. This will be paid on 2 November 2018 to shareholders on the register at 12 October 2018.

Current Trading and outlook

The Board is delighted with the progress that the Group has made in the first half of 2018, in particular the acquisition and successful integration of PeopleFluent. The Group's recurring software revenue base continues to grow alongside strong operating margin performance and cash conversion. We are delivering this excellent trading momentum, and increased recurring revenue, into the second half, giving us confidence in the outlook for the rest of the year and further significant growth in 2019.

The Board continues to actively pursue acquisition opportunities, particularly in the US, and in sectors that will extend LTG's domain specific expertise and increase its scale in the advisory and content creation capabilities in the large North American market.

The Directors look forward to hosting a Capital Markets Day for analysts and investors on 15 November 2018 and to updating shareholders on progress towards delivering significant profitable growth in the underlying operating businesses during the remainder of 2018, with a view to the longer-term outlook for the Group.

Andrew Brode

Chairman

25 September 2018

* 'Adjusted EBIT' is defined as the Group profit or loss before tax, excluding the amortisation of acquisition-related intangible assets, share-based payment charges, acquisition related deferred consideration and earn-outs, finance expenses, the Group's share of profits or losses in associates and joint ventures and other specific items including exceptional foreign exchange movements.

Consolidated statement of changes in equity

Consolidated statement of cash flows

 Notes to the consolidated financial statements for the six months to 30 June 2018

1. General information

Learning Technologies Group plc ("the Company'') and its subsidiaries (together, "the Group'') provide a range of learning and talent software and services to corporate customers. The principal activity of the Company is that of a holding company for the Group, as well as performing all administrative, corporate finance, strategic and governance functions of the Group.

The Company is a public limited company, which is listed on the AIM Market of the London Stock Exchange and domiciled in England and incorporated and registered in England and Wales. The address of its registered office is 15 Fetter Lane, London, England, EC4A 1BW. The registered number of the Company is 07176993.

2. Basis of preparation

The unaudited consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU).

The interim results for the six months to 30 June 2018 are neither audited nor reviewed by our auditors and the accounts in this interim report do not therefore constitute statutory accounts in accordance with Section 434 of the Companies Act 2006.

Statutory accounts for the year ended 31 December 2017 have been filed with the Registrar of Companies and the auditor's report was unqualified, did not contain any statement under Section 498(2) or 498(3) of the Companies Act 2006 and did not contain any matters to which the auditors drew attention without qualifying their report.

The accounting policies used in preparing the interim results are the same as those applied to the latest audited annual financial statements except for the adoption of new and amended standards as set out in Note 12.

3. Segment analysis

Geographical information

The Group's revenue from external customers and non-current assets by geographical location are detailed below.

Information about reported segment revenue, profit or loss and assets

EBIT is the main measure of profit reviewed by the Chief Operating Decision Maker.

Information about major customers

In the six months to 30 June 2018 no customer accounted for more than 10 percent of reported revenues (H1 2017: 12%).

4. Taxation

Taxation for the six months to 30 June 2018 has been calculated by applying the estimated tax rate for the current financial year ending 31 December 2018 to an estimated tax adjusted profit figure.

5. Earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has share options that are dilutive potential ordinary shares.

In order to give a better understanding of the underlying operating performance of the Group, an adjusted earnings per share comparative has been included. Adjusted earnings per share is stated after adjusting the profit after tax attributable to equity holders of the Group for certain charges as set out in the table below:

6. Intangible assets

7. Other receivables, deposits and prepayments

8. Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise the following:-

9. Trade and other payables