Learning Technologies Group Regulatory News (LTG)

6 September 2016

Learning Technologies Group plc

(AIM: LTG)

Interim Results 2016

Learning Technologies Group plc ("LTG" or the "Group"), the global integrated e-learning technology and services business, is pleased to announce interim results for the six months ended 30 June 2016, which demonstrate substantial profit and earnings growth in line with the Board's expectations.

Financial highlights:

· Revenue increased to £12.8 million (H1 2015: £8.4 million) - up 52%- The proportion of recurring revenues is now 25% (H1 2015: 8%)

· Adjusted EBITDA* more than doubled at £3.2 million (H1 2015: £1.3 million) - up 145%

· Adjusted EBITDA* margin improved by ten percentage points to 25.4% (H1 2015: 15.8%)

· Adjusted diluted earnings per share of 0.483p (H1 2015: 0.232p per share) - up 108%

· Operating cash flows strong, despite significant investment in CSL project and IP development

· Interim dividend of 0.07p per share (H1 2015: 0.05p) - up 40%

Operational highlights:

· Focus on extending and deepening best working practices across the Group has improved margins

· Acquisition of Rustici, places LTG at the heart of global e-learning interoperability standards

- Delivers substantial recurring revenues and already performing ahead of Board's expectations

· Strategic investment in ground-breaking Watershed business - USD3 million for 27% equity stake- Analytic tools which show the impact and effectiveness of learning programmes

· Good progress in LEO's landmark UK Civil Service Learning (CSL) project in partnership with KPMG LLP

- Significant upfront investment being funded from operating cash flows

- Revenues expected to accrue in Q4 2016 and accelerate substantially in 2017

· Further acquisition opportunities being evaluated and pursued, particularly in the US and UK

Andrew Brode, Chairman of LTG, said:

"The Group continues to make strong progress in its strategic ambition to build a diversified international business with revenues of £50 million. The acquisition of Rustici and investment in Watershed bring exciting new capabilities to the Group, which will enable us to take learning to the heart of the business strategy at Board level. Our ability to deliver a truly blended learning experience to large organisations has been confirmed by the CSL project win with our partner KPMG. We will continue to capitalise on our existing strengths to deliver further profitable organic growth, whilst seeking new acquisition opportunities to extend the Group's reach and scale."

*Adjusted EBITDA excludes the amortisation of acquisition-related intangibles assets, the amortisation of internal capitalised development costs, depreciation, share of losses on associates, acquisition earnout charges, share based payment charges and other exceptional items.

Enquiries:

Notes to Editors

LTG was created with the purpose of building a market-leading business of substance and scale within the exciting and fast-growing learning technologies sector and the Group's award-winning businesses are at the forefront of innovation and best practice in this sector.

It is LTG's aim to create a broad capability, international learning technologies business with revenues in excess of £50m, which it will achieve through organic growth complemented by strategic acquisitions.

Since LTG listed on AIM in November 2013, it has made a number of strategic acquisitions to grow its business:

April 2014 LINE

May 2014 Preloaded

July 2015 Eukleia

January 2016 Rustici and 27% equity stake in Watershed

LINE was merged with the original business, Epic, to form LEO, a market-leading learning technologies firm with unrivalled capability to provide custom solutions to its corporate and government clients. It is joined by BAFTA award-winning applied games studio Preloaded, who bring learning games specialism to the Group and by Eukleia, experts in governance, risk and compliance (GRC) in the financial services sector. Most recently, Rustici brings the global leader in the support and development of the universal technical standards for the entire e-learning industry into the Group.

Chairman's Statement

Introduction

LTG performed well in the first half, delivering substantial growth in revenue and profit and making excellent progress in its strategic ambition to build a diversified international business of scale, with revenues in excess of £50 million, through organic growth and acquisition. Margins continued to strengthen across our businesses and I am pleased to report that the Group's profit and earnings for H1 were in line with the Board's expectations.

In December 2015, we announced that LTG had won a landmark contract, alongside our strategic partner KPMG UK LLP, to design and deliver blended courses that incorporate a combination of digital, informal and classroom components for the UK Civil Service ('CSL'). A substantial number of learning components were created by LTG in H1 and the entire library will be delivered by the year-end. Revenues from this material contract will begin to accrue in Q4 2016 with the majority of returns expected in 2017 and 2018.

In January 2016, we announced the acquisition of Rustici Software LLC ('Rustici') in the US, the acknowledged global leader in digital learning interoperability, which enables online learning content and management systems to communicate and work together. The initial upfront acquisition cost of USD23.6 million was part funded by a USD20 million loan. Rustici has substantial recurring revenues and has performed ahead of the Board's expectations in the period under review.

At the same time, the Group acquired 27% of Watershed Systems Inc ('Watershed') for USD3 million. Watershed is developing a SaaS-based learning analytics capability, which evaluates the impact and effectiveness of learning programmes. Although this is in the early stages of development, Watershed is making tangible progress, signing up a number of global customers and generating compelling and objective insights into the effectiveness of e-learning interventions.

Results

In the six months ended 30 June 2016, revenues increased by 52% to £12.8 million (H1 2015: £8.4 million) and adjusted EBITDA grew by 145% to £3.2 million (H1 2015: £1.3 million), reflecting a 10 percentage point increase in adjusted EBITDA margins from 15.8% to 25.4%.

The increase in the adjusted EBITDA margin is a result of increased economies of scale, improved working practices, a favourable movement in currency exchange rates in H1 2016, equivalent to £96,000, and a change in the revenue mix of the Group towards higher margin licence revenues following the acquisition of Rustici. This margin improvement demonstrates LTG's ability to drive operational synergies in acquired businesses and we believe that these margin improvements are sustainable. Recurring licence fee and support contract revenues increased from 8% in H1 2015 to 25% in H1 2016.

Operating profit of £0.6 million (H1 2015: £0.3 million) is stated after amortisation of acquired intangibles, depreciation, various acquisition earnout charges, unrealised foreign exchange differences on borrowings, share based payments, share of losses on investments and integration costs. Following the acquisitions of Eukleia Training Limited ('Eukleia') and Rustici, amortisation of acquired intangibles increased to £1.5 million (H1 2015: £0.4 million). The net charge for the unrealised foreign exchange loss on the USD20 million loan taken out in January 2016 was £0.1 million (H1 2015: £nil).

A net tax credit of £0.5 million (H1 2015: £0.1 million) includes a release of deferred tax liabilities, created from acquired intangibles.

The Group reported a net profit of £0.4 million for the six months ended 30 June 2016 (H1 2015: £0.4 million).

The basic earnings per share in H1 2016 were 0.094 pence (H1 2015: 0.099 pence). Adjusted diluted earnings per share as set out in Note 5 increased by 108% to 0.483 pence (H1 2015: 0.232 pence).

LTG maintained strong operating cash flows in the period. Operating cash outflows of £0.7 million (H1 2015: inflows of £0.5 million) are stated after the payment of the transaction bonus to Rustici employees of USD2.0 million (see Note 12) and upfront costs related to the CSL project.

As part of the financing of the Rustici acquisition the Group entered into a USD20 million term loan. The loan is amortised over five years and repayable in quarterly instalments with a final bullet payment in January 2019. Interest is payable based on USD LIBOR, plus a 2.0% margin and the loan is subject to various financial covenants.

Approximately 32% of LTG's business is undertaken for customers outside of the UK and a growing percentage of the Group's revenues are denominated in USD and Euros. Net USD cash inflows are used as an approximate internal hedge against the USD loan capital and interest repayments; therefore the business' overall exposure to exchange rate volatility is limited. At 30 June 2016 gross cash was £4.3 million and net debt was £9.9 million (31 December 2015: gross and net cash of £7.3 million).

Overall net assets increased to £31.1 million at 30 June 2016 (31 December 2015: £25.5 million) and shareholders' funds increased from 6.3 pence per share to 7.4 pence per share.

Operational Review

LTG has built on the operational successes of 2015 in the first half of the year by extending and deepening best working practices across the Group. Our aim is to deliver a first class experience to our customers every time, ensuring that our staff are optimally trained and work effectively. This focus on best practice has also improved margins across our businesses because we deliver the majority of our projects 'right first time', avoiding costly rework.

In LEO Learning ('LEO'), we have developed a greater focus on account management and market sector expertise; we are beginning to see the benefits of this approach, as we extend and strengthen our relationships with customers and move towards the delivery of a complete end-to-end solution. At Jaguar Land Rover, for example, LEO is working across multiple departments, including global dealer training, marketing, manufacturing, brand experience, and HR. Calling on the expertise of other LTG businesses when required, LEO is delivering a wide range of products and services, including electronic pocket guides, systems analysis, consulting, project leadership, video production, blended learning, virtual reality and even augmented reality. We are finding that this single account management strategy works especially well with a number of our key customers, who are aiming to reduce the number of their suppliers whilst retaining a broad range of capability and innovation.

LEO has invested substantially in developing the blended learning modules for the CSL project in the first half of the year. The size of the LEO contractor workforce has been increased rapidly and the management's initial focus on this landmark project has impacted moderately on the new business win rate elsewhere in LEO in H1 2016. As the project moved out of the initiation phase into production during Q2, we were able to apply more management resource to developing the sales pipeline and are already seeing renewed sales momentum in H2 2016. We anticipate that the production phase, and associated upfront investment, will be completed by the end of 2016. Revenues from the CSL project will begin to accrue in Q4 2016 before escalating from 2017 onwards.

In the US, we opened a production office in Bloomington, Indiana. The LEO US business had a slow start to the year but, alongside the appointment of a new Senior VP, LEO US has won some significant contracts and the prospects for H2 2016 are significantly improved.

Our joint venture, LEO Brazil, has made steady progress in H1 2016, despite the turbulence in the Brazilian economy. Other LTG companies are working alongside LEO Brazil to deliver high volume, high quality content for our international customers.

Preloaded, LTG's 'games with purpose' developer, has had a strong first half in 2016. This talented team has been greatly enhanced by the recruitment of a new MD and Technical Director. Their high quality work has been well received, which is affirmed by the further contracts we have already won in H2 2016. Later this month Penguin Random House will launch an interactive app, developed by Preloaded, that re-imagines Stephen Hawking's book A Brief History of Time, bringing its complex ideas and concepts to life for a new generation. This prestigious project demonstrates LTG's ability to take complex subject matters and convert them into compelling learning interactions for a wide range of users.

Eukleia, the Group's specialist governance, risk and compliance ('GRC') business, was fully integrated into the Group in 2015. Whilst EBITDA increased during the first half of 2016, revenues were down on the comparative prior period, as regulatory initiatives in the City of London abated in the run up to the EU Referendum. While we continue to assess the impact of the Brexit vote on the GRC environment, we are encouraged by the take-up of training initiatives since the vote. Developments such as the implementation of the Market Abuse Regulations are good examples of the constant regulatory changes affecting the financial sector and the imperative of delivering up to date training. Eukleia continues to extend its success to contiguous corporate market sectors and we are also launching a New York office for this business before the end of the year.

gomo Learning, which delivers a SaaS based tool for creating, hosting and tracking multi-device learning content for mobile workforces, had an excellent start to the year. Having won the prestigious 2015 Gold Award for the Brandon Hall Best Advance in Content Authoring Technology, the business proceeded to add to its already enviable roster of blue-chip customers, achieving particular success in the US market. It is our continued investment in the gomo platform which ensures that gomo remains the leading SaaS authoring tool on the market. A number of gomo customers have gone on to buy services from other LTG business units.

The acquisition of Rustici and its subsequent integration has been achieved successfully. We relocated the team to new offices in Nashville in May and the business has performed ahead of our expectations in H1 2016. Rustici gives LTG a unique software product offering that underpins the global e-learning market, as well as recurring revenues with high retention rates. Further details of this acquisition are included in Note 12.

Alongside the acquisition of Rustici, the Group invested USD3 million in a 27% share of the tech start-up Watershed. It has made good progress in its development of analytic tools that enable customers to track and assess the effectiveness of their learning programmes through the interrogation of 'big data'. These insights will help LTG in its ambition to 'move learning to the heart of business strategy' by enabling business managers to objectively understand the return on their investment in learning programmes within the corporate and government workplace. Our share of losses in Watershed in H1 2016 was £0.1 million.

Dividend

On 4 July 2016, the Company paid a final dividend of 0.10 pence per share, giving a total dividend for 2015 of 0.15 pence per share. This represented a 50% increase on the dividend paid compared to 2014. Given its confidence in the continuing success of the Group, the Board is pleased to announce that it has approved an interim dividend of 0.07 pence per share (2015: 0.05 pence per share). This will be paid on 28 October 2016 to shareholders on the register at 7 October 2016.

Current Trading and outlook

The Board is pleased with the progress that the Group has made in the first half of 2016, in particular the strengthening of margins through best working practices and increased scale, as well as the successful of integration of Rustici.

While it is too early to identify any potential implications from the UK's likely exit from the European Union, we are confident that our strategic ambitions and proven track record in acquiring, integrating and growing businesses, both in the UK and abroad, will ensure the Group's continued progress.

LTG continues to pursue acquisition opportunities particularly in the US and UK and the Directors look forward to delivering significant profitable growth in the underlying operating businesses during the remainder of 2016.

Andrew Brode, Chairman

6 September 2016

Consolidated statement of changes in equity

(£'000)

Consolidated statement of cash flows

Notes to the consolidated financial statements for the six months to 30 June 2016

1. General information

Learning Technologies Group plc ("the Company'') and its subsidiaries (together, "the Group'') provide a range of e-learning services and technologies 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 Sherborne House, 119-121 Cannon Street, London, EC4N 5AT. 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 2016 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 2015 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.

3. Segment analysis

Geographical information

All revenues of the Group are derived from its principal activity, the production of interactive multimedia programmes. The Group's revenue from external customers and non-current assets by geographical location are detailed below.

Information about major customers

In the six months to 30 June 2016, the year ended 31 December 2015 and the six months to 30 June 2015, no customer accounted for more than 10 percent of reported revenues.

4. Taxation

Taxation for the six months to 30 June 2016 has been calculated by applying the estimated tax rate for the current financial year ending 31 December 2016 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. Investments accounted for using the equity method - Joint ventures

The movements in investments are as follows:

The Group holds a 50% interest in LEO Brasil Tecnologia Educaional Ltda ('LEO Brazil'); a joint venture. Where the Group's share of losses in a joint venture exceeds its interest in the joint venture the Group does not recognize further losses where it has no further obligations to make further payments. Such losses not recognized in the six months ended 30 June 2016 totaled £89,000.

8. Investments accounted for using the equity method - Associates

The movements in investments are as follows:

The Group acquired a 27% interest in Watershed Inc ('Watershed') on 29 January 2016 for a total consideration of $3.0 million (£2.1 million). The Group's share of losses of Watershed in the period ending 30 June 2016 was £0.1 million.

9. Other receivables, deposits and prepayments

10. Cash and cash equivalents

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

11. Trade and other payables

12. Acquisitions

On 29 January 2016 LTG acquired the entire issued share capital of Rustici Software LLC ("Rustici"), the global market leader in digital learning interoperability. Rustici was established in Nashville, USA in 2002 and has been instrumental in the support and development of the universal technical standards for the e-learning software industry. It is the acknowledged global leader in SCORM (Sharable Content Object Reference Model) conformance. SCORM is the de facto industry standard for e-learning interoperability, allowing online learning content and learning management systems to communicate and work together.

Rustici is also the co-creator of the next generation of learning interoperability standards, Tin Can API, or xAPI. This global standard was created to capture rich data on every aspect of learning experiences.

The consideration for Rustici comprised an initial payment of USD23.6 million of which USD18 million was paid in cash and USD5.6 million in new LTG shares to the vendors (issued at a price of 30.25 pence per share). Cash consideration was adjusted to take account of surplus cash in Rustici at completion.  

Further performance based payments, capped at USD11 million, are payable to the Rustici vendors and key employees based on ambitious revenue growth targets in each of the years ending 31 December 2016, 2017 and 2018, payable with up to 25% in new LTG shares at the option of the Company, and the remainder in cash. This capped contingent deferred consideration has been discounted using a discount factor of 10% and is held as a liability on the balance sheet. Of this contingent deferred consideration up to USD2 million may be payable to Rustici staff and will be recognised directly in the income statement as it does not meet the conditions to be recognised in the balance sheet under IFRS 3.

None of the goodwill recognised is expected to be deductible for income tax purposes.

The following table summarises the consideration paid for Rustici, the fair value of assets acquired and liabilities assumed at the acquisition date.

The fair value of the acquired intangible assets and deferred tax liabilities of £8,840,000 and £3,094,000 respectively, is provisional pending receipt of the final valuations for those assets and liabilities.

Trade and other payables acquired on acquisition included a £1,826,000 (USD2.6 million) transaction bonus liability due to employees of Rustici, payable on completion. Of this amount USD2.0 million was paid in cash and USD0.6 million in new LTG shares.

Rustici contributed £2.6 million of revenue for the period between the date of acquisition and the balance sheet date and £1.4 million of profit before tax. Had the acquisition of Rustici had been completed on the first day of the financial year Group revenues would have been £0.5 million higher and group profit attributable to equity holders of the parent would have been £0.2 million higher.

Glossary of Terms