Learning Technologies Group Regulatory News (LTG)

Learning Technologies Group plc

HALF YEAR RESULTS 2019

Strong sales and margin expansion drives EBIT and cash generation

Learning Technologies Group plc ("LTG" or the "Company"), the provider of services and technologies for digital learning and talent management, is pleased to announce its half year results for the six months ended 30 June 2019.

Strategic highlights

·; Strong Group EBIT margin performance and cash generation

·; Cross-selling initiatives driving sales momentum

·; PeopleFluent progressing well - confident of return to growth in 2020

·; Content & Services displaying significant improvement versus H2 2018, with momentum in LEO and Preloaded, reflecting focussed investment in sales

·; Launch of Instilled Learning Experience Platform ('LXP')

·; Successful acquisition of BreezyHR, integrated swiftly and now delivering impressive revenue growth

Financial highlights

·; Revenue up 85% to £62.6m (H1 2018: £33.8m), 74% recurring revenue (H1 2018: 51%)

·; Software & Platforms (68% of Group revenue)

o Organic revenue up 7%, excluding PeopleFluent

o PeopleFluent successfully managing retention rates to stabilise revenues

o Growth across Rustici, gomo and Watershed

o BreezyHR integration completed and growing strongly

·; Content & Services (32% of Group revenue)

o Organic revenue (excluding CSL contract) down 3% but confident of strong organic growth for FY 2019

o Excellent sales momentum supports expectation of strong H2 for LEO and Preloaded

o Cross-selling supporting recent wins

·; Adjusted EBIT ahead of expectations, up 134% to £19.4m (H1 2018: £8.3m)

·; Strong margin progression, with EBIT margins up 660 basis points to 31.1%

·; Adjusted diluted EPS of 2.228 pence, up 117%

·; Proposed interim dividend of 0.25 pence, up 67%

·; Good cash generation, resulting in net debt of £13.9m following $12.7m acquisition of Breezy and net debt : EBITDA of 0.3x (H1 2018: 0.8x)

·; Robust balance sheet and debt facility supports strong acquisition pipeline

Current trading and outlook

·; FY2019 in line with upgraded expectations, as announced on 22 July 2019

·; Software & Platforms performing well aided by high growth acquisitions and new product developments

·; Content & Services expected to deliver organic growth of c.8% in FY2019

·; Strong cash generation since period end; net debt at end August 2019 down to £7.8m

·; Active pipeline of strategic acquisition opportunities with significant funding capacity

·; Sales pipeline and high proportion of recurring revenue underpins the Board's confidence for 2019 performance

Jonathan Satchell, CEO of LTG, said:

"In the first half of 2019 both our divisions have delivered a strong performance, with Software & Platforms delivering an increasing proportion of high margin recurring revenues from software licenses, and organic sales momentum greatly increasing in Content & Services.

"The Group continues to deliver excellent shareholder value by efficiently transforming recently acquired businesses, with PeopleFluent successfully integrated and expected to return to growth in 2020 and BreezyHR, acquired in April 2019, achieving significant growth and showing great promise.

"Our first half performance increased recurring revenues and robust current trading provides great confidence for the year ahead to deliver further organic growth, strong margins and excellent cash generation. On the back of this momentum, we are investing in H2 2019 to drive sales further, as well as supporting organic growth initiatives into 2020."

Financial summary:

Analyst and investor presentation

LTG will host an analyst and investor presentation at 8.30 a.m. today, Monday 16 September 2019, at LTG's offices.

Enquiries:

About LTG

LTG is a leader in the growing workplace digital learning and talent management market. 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 close the gap between current and future workforce capability.

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

Chairman's Statement

Introduction

The Board is delighted to report that Learning Technologies Group plc ('LTG') has made excellent progress over the period, particularly with its ongoing transition towards a software licence model delivering high margin, recurring revenues. The integration of the transformational acquisition of PeopleFluent Holdings Corp ('PeopleFluent') in May 2018 has been completed successfully and, as planned, the acquired business is on track to return to growth in 2020. It is pleasing to see a significant improvement in Content & Services' performance compared to H2 2018, driven by a greater focus on sales and a number of large contract wins. At the same time the Group has delivered continuing strong operating margins, enabling management to invest further in R&D and incremental sales initiatives, resulting in some notable successes in cross-selling.

Results

With effect from 1 January 2019 LTG has adopted the new accounting standard IFRS16 - Leases. In addition, Adjusted EBIT* has been restated to include the impact of share based payments. Further details of these adjustments are provided below.

In the six months ended 30 June 2019, revenues increased by 85% to £62.6 million (H1 2018: £33.8 million) with like-for-like revenues on a constant currency basis (excluding the post-acquisition contribution of BreezyHR, the acquired PeopleFluent businesses, and excluding the exceptional contribution from the Civil Service Learning ('CSL') contract) increased by 2% to £27.0 million. The acquired PeopleFluent businesses contributed £35.1 million of revenue for H1 2019, compared to £36.0 million (3% decline) of revenue had they been owned for the entirety of H1 2018.

With the acquisition of PeopleFluent, Watershed and BreezyHR, as well as the strong organic growth in the Group's other software licencing businesses, recurring licence fee and support contract revenues increased from £16.5 million in H1 2018 to £41.3 million in H1 2019, an increase of 150%.

Adjusted EBIT grew by 134% to £19.4 million (H1 2018: £8.3 million) with margins increasing from 24.5% in H1 2018 to 31.1% in H1 2019, primarily as a result of the inclusion of PeopleFluent for the full period and operational synergies achieved ahead of plan.

Operating profit of £8.2 million (H1 2018: £0.9 million) is stated after amortisation of acquired intangibles, various acquisition earnout charges, share-based payments, and integration costs. Following the acquisition of PeopleFluent, amortisation of acquired intangibles increased to £10.2 million (H1 2018: £5.7 million). The share based payment charge increased to £1.0 million (H1 2018: £0.6 million) as a result of increased grants following the acquisition of PeopleFluent. Acquisition-related deferred consideration and earnout charges declined to £1.1 million (H1 2018: £1.5 million) and relate primarily to the anticipated earnout resulting from Watershed's and BreezyHR's incremental revenue growth during the first year of their respective three-year earnout agreements. There were no integration costs of note in H1 2019 (H1 2018: £0.1 million).

Transaction costs relating to the acquisition of BreezyHR were £0.3 million (H1 2018: £2.6 million) and interest on borrowings, was £0.9 million (H1 2018: £0.5 million). A finance charge of £0.2 million (H1 2018: £nil) relates to the Group's leases following adoption of IFRS16 (see Note 12).

The Group reported a net profit of £6.8 million for the six months ended 30 June 2019 attributable to the owners of the parent company (H1 2018: profit of £1.3 million).

The basic earnings per share in H1 2019 was 1.012 pence (H1 2018: 0.221 pence). Adjusted diluted earnings per share as set out in Note 5 increased by 117% to 2.228 pence (H1 2018: 1.028 pence).

At the time of the acquisition of PeopleFluent in May 2018, 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 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 maintained strong operating cash flows in the period. Net cash flow from operating activities (excluding deferred consideration payments relating to 2018) was £15.5 million (H1 2018: £11.0 million). Excluding the transaction costs relating to the acquisition of BreezyHR and acquisition related deferred consideration payments, operating cash flow conversion was 79% (H1 2018: 91%).

In H1 2019 approximately 79% 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 2019 gross cash was £21.1 million and net debt was £13.9 million (31 December 2018: gross cash was £26.8 million and net debt was £11.5 million). Following the period end net debt as at 31 August 2019 had reduced further to £7.8 million and the Group is on track to be unleveraged by the end of the year.

Overall net assets increased to £172.8 million at 30 June 2019 (31 December 2018: £168.8 million) and shareholders' funds increased from 25.3 pence per share to 25.9 pence per share.

Impact of adoption of new accounting policies

With effect from 1 January 2019 the Group has adopted a new accounting standard: IFRS16 - Leases. As a result the Group has recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities are measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019.

Further, with effect from 1 January 2019 the Board has resolved to report Adjusted EBIT inclusive, rather than exclusive, of the share based payment charge. This is to align the Group with guidance from the FRC's Corporate Reporting Thematic Review and to recognise that share based payment charges are a valid cost of the business and relieve the Group of an alternative cash expense.

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 accounting policy with regards share based payments had been adopted in the prior year. The modified retrospective approach has been applied to the prior period changes in respect of IFRS16 with a net charge to retained earnings as at 1 January 2019 of £2.3 million. There was a net credit to retained earnings in H1 2019 of £0.2 million.

The table below sets out the effect of these adjustments on Adjusted EBIT:

Further details are provided in Note 12.

The full-year 2019 share based payment charge is expected to be approximately £2.8 million as a result of performance related share option grants made to the extended management team following the acquisition of PeopleFluent in May 2018, and the launch of a new Employee Stock Purchase Plan in the US with effect from May 2019.

Operational Review

Following the acquisition and successful integration of PeopleFluent, we have made a number of structural improvements to LTG to support our long-term prospects and performance. PeopleFluent's talent software solutions business has been combined with the NetDimensions' LMS software business (acquired in March 2017) to create a leading best-of-breed integrated platform, operating under the PeopleFluent brand. Together this combined business represents approximately half of LTG's revenue. PeopleFluent's workforce compliance and diversity business has been renamed 'Affirmity' and the company's contingent workforce management solutions provider has been renamed 'VectorVMS'. Both these businesses operate under their own management teams. KZO, an exciting video curation tool, was incorporated into the gomo business and rebranded 'gomo video'.

The acquired PeopleFluent business had experienced declining revenues for a number of years mainly as a result of low client retention rates on some of their products. LTG management guided in H1 2018 that the acquired business was anticipated to deliver annual revenues of c$98.0 million in 2018, declining to c$91.0 million in 2019 (as restated under IFRS15), and that management had the objective to return the acquired business to net sales and revenue growth by 2020. As a result of higher-than-expected retention rates in H1 2019, the substantial improvements being made to the software products, and encouraging new sales, the Board is increasingly confident that the acquired PeopleFluent business will deliver on its revenue targets in 2019 and return to growth in 2020.

Management have sought to address client churn firstly by transferring PeopleFluent's existing LMS customers to the industry leading NetDimensions LMS, and secondly by focussed investment in the talent acquisition platform. LTG has committed significant R&D investment to the acquired and integrated PeopleFluent talent acquisition platform. The acquisition of BreezyHR (see below for further details) whose award winning product features will be incorporated into the PeopleFluent enterprise solution, is further evidence of investment to support long-term organic growth. PeopleFluent will shortly launch the new updated talent acquisition functionality which we are confident will enhance the candidate experience on our platforms. PeopleFluent has invested heavily in developing new product features across its range of products. VectorVMS has also invested substantially in its product features and will launch a new mobile solution this month.

LTG's Software & Platforms division (excluding the acquired PeopleFluent business referenced above) continues to deliver good growth with revenue up 6.8% from £13.0 million in H1 2018 to £14.6 million in H1 2019. Watershed, acquired in November 2018, has grown revenues by 28.5% on a like-for-like basis and its software solutions are increasingly sold as part of integrated sales with other Group companies. The Group launched 'Instilled' in May 2019, a 'Learning Experience Platform' ('LXP') that leverages the capabilities of a number of LTG's software solutions including gomo video, Watershed, and Rustici's SCORM Engine. This LXP places the user experience at its heart, enabling learners to create, share and recommend content, empowering them to create their own 'learning journeys'.

Content & Services division (excluding the acquired PeopleFluent business referenced above and the CSL contract) revenues of £12.5 million were up 15.2% on H2 2018 and declined by 2.6% against tough prior year comparators. Content & Services projects are typically run on a fixed price, non-recurring basis, with a relatively short sales cycle.

Strong sales momentum from LEO and Preloaded has continued from Q4 2018 into H1 2019, with H1 2018 to H1 2019 sales growth of approximately 19% giving confidence that full-year organic revenue growth will be above trend at approximately 8%. Notable sales successes include a large multi-million dollar contract win for LEO in the US which in turn has resulted in a further substantial multi-year contract for the 3 products from the Software & Platforms division.

Recurring revenues have increased from £17.3 million (51.0%) in H1 2018 to £46.5 million (74.3%) in H1 2019. As well as high visibility of revenues, the Software & Platforms division generated adjusted EBIT margins of 35.6% in H1 2019 (H1 2018: 32.1%) primarily as a result of the inclusion of the PeopleFluent business for a full period and the successful integration of the business into LTG during the second half of 2018. Content & Services saw adjusted EBIT margins also increase from 16.7% in H1 2018 to 21.1% in H1 2019. Adjusted EBIT margins for both periods are stated inclusive of the share based payment charge.

Acquisition and integration of BreezyHR

On 17 April 2019, LTG announced that the Company had entered into an agreement to acquire the entire issued and outstanding shares of capital stock of BreezyHR Inc. ('BreezyHR') for cash consideration of $12.7 million. Further performance based payments capped at $18.0 million are payable in cash to BreezyHR management and equity investors based on ambitious revenue growth targets in each of the years ending 31 December 2019, 2020 and 2021. Deferred contingent consideration will be charged to the income statement as the qualifying conditions are met.

BreezyHR is a fast-growing talent acquisition software business, providing small to medium sized businesses ('SMB') with feature-rich, intuitive and user-friendly recruitment software to optimise their recruitment processes and maximise productivity. The addition of BreezyHR to LTG's best-of-breed talent and learning businesses is expected to enhance the Group's position in the talent acquisition market. The acquisition extends the Group's existing enterprise client-base to include a new SMB audience, with typically faster self-service sales-cycles. Since its founding in 2014, BreezyHR's software has managed the recruitment of 15 million candidates across 10,000 companies in 72 countries.

We are delighted with the revenue growth rate of BreezyHR and expect it to achieve the full amount for the first year of the deferred consideration.

BreezyHR is now a business within PeopleFluent, part of LTG's Software & Platforms division. The post-acquisition results for BreezyHR are reported in line with LTG's accounting policies. Prior to acquisition, BreezyHR prepared accounts on a cash accounting basis and did not capitalise R&D. Further details are provided in Note 11.

Dividend

On 28 June 2019, the Company paid a final dividend of 0.35 pence per share, giving a total dividend for 2018 of 0.50 pence per share. This represented a 67% increase on the dividend paid compared to 2017. Given its confidence in the continuing success of the Group, the Board is pleased to announce that it has approved an interim dividend of 0.25 pence per share (2018: 0.15 pence per share), representing a 67% increase. This will be paid on 8 November 2019 to shareholders on the register at 18 October 2019.

Current Trading and outlook

The Board is delighted with the progress that the Group has made in the first half of 2019, in particular the acquisition and successful integration of BreezyHR and the launch of 'Instilled'. The Group's recurring software revenue base continues to grow alongside strong operating margin performance and cash generation and we are seeing the increasing success of cross-selling initiatives. Whilst we have not yet completed Q3, we are seeing evidence of this excellent trading momentum into the second half. This, together with retention rates in PeopleFluent and expected progress in Content & Services, underpins confidence in the outlook for the rest of the 2019 financial year.

The Board continues to actively pursue acquisition opportunities, particularly in the US, and in sectors that will extend LTG's domain specific expertise and broaden and increase its scale in markets in which LTG already has a leading presence. With continuing robust operating margins and a strong balance sheet the Board considers LTG well placed to achieve our strategic goal of run-rate revenues of £200 million and run-rate Adjusted EBIT** of at least £55 million by the end of 2021.

Andrew Brode

Chairman

16 September 2019

* 'Adjusted EBIT' is defined as the Group profit or loss before tax, excluding the amortisation of acquisition-related intangible assets, 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.

** 'Adjusted EBIT' target prior to accounting policy changes referenced in Note 12.

Consolidated statement of changes in equity

Consolidated statement of cash flows

 Notes to the consolidated financial statements for the six months to 30 June 2019

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 2019 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 2018 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. The six months to 30 June 2019 include the geographical location of the right of use assets identified as a result of adoption of IFRS 16 from 1 January 2019. These are not included in the prior period comparatives as a result of the use of the modified retrospective approach in application (see Note 12 for detail).

Information about reported segment revenue, profit or loss and assets

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

The total assets figure for 30 June 2019 is exclusive of deferred tax assets.

Information about major customers

In the six months to 30 June 2019 no customer accounted for more than 10 percent of reported revenues (H1 2018: no customer accounted for more than 10 percent of reported revenues).

4. Taxation

Taxation for the six months to 30 June 2019 has been calculated by applying the estimated tax rate for the current financial year ending 31 December 2019 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.

Adjusted EBIT in the adjusted earnings per share calculation is now inclusive, rather than exclusive, of the share based payment charge. The prior period comparatives have also been restated on a consistent basis, with share based payment charges included within the adjusted EBIT figure.

6. Intangible assets