Ncc Regulatory News (NCC)

18 July 2017

NCC Group plc

NCC Group plc (LSE: NCC, "NCC" or "the Group"), the independent global cyber security and risk mitigation expert, has reported its full year results for the 12 months to 31 May 2017 and provides an update on the Strategic Review.

Year end results

· Group revenue up 17% to £244.5m (2016: £209.1m), organic growth 3% excluding impact of FX and acquisitions

· Operating loss £53.4m (2016: profit £11.4m)

· Adjusted* EBIT £27.5m (2016: £39.7m)

· Individually significant charges of £71.0m, including intangible asset write downs of £62.0m

· Adjusted* EBITDA £36.2m (2016: £45.0m), in line with revised expectations

· Adjusted* basic earnings per share 6.7p (2016: 11.8p)

· Basic loss per share 20.4p (2016: earnings 2.5p)

· Net debt reduced to £43.7m from half year level of £48.8m

· Total dividend maintained at 4.65p per share with final dividend of 3.15p per share

· Completed two small US based bolt-ons

· Significant changes to the Board

Strategic Review

· Markets and customer views of NCC services continue to be positive

· NCC scores highly against the most important key customer purchasing criteria

· Escrow remains an attractive business and stabilises the Group

· Assurance focus on cyber security

o Web Performance and Software Testing businesses to be sold

· Business needs better internal organisation - changes to operating model underway

Chris Stone, Executive Chairman, comments:

"Our strategic review has identified the business's unique opportunity - leading positions in growing global markets, customers who value us and our exceptionally skilled workforce. But, we need to change how we organise ourselves and improve our internal business processes.

"The last financial year was very challenging, with the business performance falling well short of original expectations, as well as outgrowing some of our business processes and controls.

"However, and more importantly, it is clear that the business has a number of notable strengths. We still enjoy significant organic growth in our core segments and have a strong balance sheet. Furthermore, in a constantly evolving and complex market, our unique skills and capabilities are recognised by our customers as putting us at the forefront of the market.

"When we have successfully managed our way through this transitional period, improved our organisation and how we go to market, we see significant upside opportunities and material value creation.

"Overall, the Board's expectations for adjusted EBIT in 2018 are unchanged with its confidence in our prospects reflected in the recommendation to maintain the dividend at the current level."

* This is a non-GAAP or Alternative Performance Measure (APM). Adjusted figures exclude the amortisation of acquired intangibles, individually significant items, share-based charges, the unwinding of discount on deferred and contingent consideration, the results of the exited Domain Services business and any associated tax thereon.

Enquiries:

Executive chairman's statement

Overview

NCC has a unique opportunity: we hold leading positions in growing markets around the world, our customer's value us, and our workforce is exceptionally skilled. However, we need to change how we organise ourselves and improve our internal business processes. This will enable us to capture significant additional value.

My first statement to shareholders as Executive Chairman reflects on two strong but contradictory themes. Firstly, the past year has been very challenging, both operationally and financially. Business performance has fallen short of expectations, we have outgrown some of our business processes and controls, and we have experienced significant changes to our Board.

Equally, and more importantly, it is already clear that the years ahead present significant upside opportunities. Strong value creation will result if we effectively implement our new strategy and successfully manage NCC through the transitional period in which we now find ourselves.

Our business is not broken - indeed it has some notable strengths, both financial and operational. We still enjoy significant organic growth in our core markets and have a strong balance sheet. Furthermore, in a constantly evolving and complex market, our unique market leading skills and capabilities are keeping us at the forefront of thought leadership. This is recognised by customers, who reward us with high levels of repeat business. If we improve our organisation and how we go to market, we will also see material value creation.

Business Performance

The financial performance for the year was clearly disappointing though in line with revised expectations. Despite delivering revenue growth of almost £35.4m (up17%), Adjusted* EBIT went backwards to £27.5m from £39.7m in the prior year. Operating profit fell from £11.4m in the prior year to a loss of £53.4m. This outcome reflected a number of historical weaknesses in our operating model.

Strategic Review and Strategic Plan

Following the trading update on 21 February 2017, the Board commissioned a Strategic Review. The Review focused on three key areas. Firstly, to develop a better understanding of our market place, our competitors and our customers. Secondly, to assess the relative strengths and weaknesses of NCC in the market. Thirdly, to assess the value created by the current portfolio of businesses.

The review confirmed that our markets remain attractive, and more importantly, that customers regard NCC as a strong competitor in these markets with a clearly differentiated proposition.

The cyber security theme (or 'golden thread') that runs through the Assurance Division represents a unique set of competencies and capabilities that we can leverage to deliver greater customer value in a highly complex and fragmented market. Our sector and application specific product offerings are leading edge and our solutions capabilities are valued and sought after.

The Review also confirmed the current financial logic of the relationship between Assurance and Escrow. Escrow itself is an attractive business and provides a stabilising influence on the Group.

Finally, the Review identified two of the smaller Assurance businesses that sit outside the cyber golden thread whose future would be better served under alternative ownership. These businesses, Web Performance and Software Testing, will be disposed of in due course.

Subsequently we initiated the development of a new Strategic Plan and revised Target Operating Model in order to underpin our 'go to market' and delivery strategies. In the next 12 to 24 months, we intend to focus more of our efforts on internal self-help measures than has historically been the case.

This should ensure that we reverse the margin compression seen in both trading divisions and most territories in the last two years. The Group will then benefit from further organic growth with foundations built on scalable products and business processes. These new foundations will also enhance our ability to leverage acquisition related growth when the Group returns to being acquisitive. Acquisition activity is therefore likely to be limited during this period to smaller 'bolt-ons'.

Dividends

The Board has reviewed business performance in the current year alongside our historical progressive dividend policy. While mindful of the need for investment over the next few years, the Board is confident in our prospects and hence recommends that the dividend is maintained at the current level.

A final dividend of 3.15p is therefore being recommended by the Board, making a total for the year of 4.65p, equal to the prior year. If approved, the final dividend in respect of the year ended 31 May 2017 will be paid on 29 September 2017 to shareholders on the register as at 1 September 2017 with an ex-dividend date of 31 August 2017.

As a matter of note, an administrative non-compliance issue has been identified with respect to distributable reserves and the payment of historical dividends. At all times the Group had adequate reserves in subsidiary companies to meet these dividends. We expect to remedy the position by means of a shareholder circular and appropriate resolutions at the AGM in September.

Current trading and outlook

All businesses go through transitional phases as they grow and mature. NCC is no exception. Where we are different, and at a significant advantage to many, is that change has not been forced upon us by mounting losses, a stretched balance sheet, technological obsolescence or a sudden shrinkage in our markets.

We are operating in a rapidly growing international market in which our core skills and competencies allow us to lead rather than follow. Our challenge is to manage the transition from one business model to another, as the growth in scale and complexity has made our early stage model ineffective. We now need to create structures and products that allow us to benefit from our scale and deliver additional value for our customers whilst never losing sight of our core competencies and strengths, most notably represented in our staff, their energy and their commitment.

So while there is a lot of work to do to implement new processes, systems and structures, the outlook for NCC remains very positive. In fast growing international markets, with a range of innovative products and services, the challenge is to execute effectively the planned changes in strategy and operating model.

The Board is confident that the Group can deliver sustainable earnings growth and enhanced shareholder value once it has more robust foundations in place. We are not only 'securing tomorrow, today,' for our customers, but for all of our long term stakeholders.

In terms of trading for the current financial year, the Board expects Escrow to return to low single digit revenue growth and see some margin improvement. The Assurance business is expected to see high single digit revenue growth as we build from the low point of the second half of last year. Assurance gross margins will improve as we implement our new operating model over the course of the new financial year. Set against these gains in gross profit are some cost headwinds arising from higher overheads linked to property costs and the amortisation and depreciation increases that result from capital spend in 2017. Finally, the disposal of the Web and Software Testing businesses will reduce EBIT on a pro rata basis by £2.7m based on 2017 results.

Overall the Group's expectations for adjusted EBIT in 2018 are unchanged.

Governance

During the year, the Board has undertaken a major review of some of the Group's governance structures. In part, this was prompted by a combination of shareholder and employee feedback. In addition, there was also the realisation that rapid growth in recent years had taken the Group beyond the design limits of the previous operating model.

The Board remains committed to high standards of corporate governance. We are working actively to enhance governance as well as our business processes and internal controls to match our ambitions for the Group's future. The results of the Governance Review will are set out in the Annual Report and Accounts

Board composition

There have been a number of changes to the Board during the year. I joined the Board on 6 April 2017 as a Non-Executive Director, becoming Executive Chairman in April when Paul Mitchell stood down as Chairman.

Last year we noted our intention to strengthen the team further with an additional independent Non-Executive Director. As a result, Jonathan Brooks joined the Board as a Non-Executive Director on 13 March 2017. Jonathan brings significant valuable experience of the technology sector.

Brian Tenner was appointed as Chief Financial Officer on 1 February 2017 following a search process prompted by the resignation of, Atul Patel, on 10 August 2016. He became Interim CEO on 1 March 2017, following the decision of Rob Cotton to step down as CEO.

The current model of an Executive Chairman working closely with Brian as Interim CEO and CFO has been a necessary and effective bridge to deliver the Strategic Review and also maintain stability in the management of the business. Recognising that this is not a sustainable long term solution, the Board has commenced a process to identify a permanent CEO using a firm of independent executive search consultants.

Board effectiveness

As Executive Chairman, I am responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its performance. During the year, the Board has reviewed its performance and effectiveness in accordance with the requirements of the Code. We note that the recent and significant changes in membership and new strategic direction represent a transition period for the Board as well as the Group.

The Board will work to enhance oversight of the Group's strategic development, monitoring the delivery of its business objectives and the development of the new Target Operating Model. We will also work hard to ensure that we maintain an effective corporate governance framework that keeps pace with the rate of growth and change inside and outside NCC.

Employees

Our staff are the foundation for the value inherent in NCC. In developing and implementing our new Strategic Plan and Target Operating Model we will work to ensure that we create a working environment that values the individual and allows each one of us to contribute to our full potential. This will include creating organisational values and clearer structures, roles and responsibilities. The coming financial year will also see a greater focus on personal development and training.

I would like to record my own and the Board's sincere thanks to all of the Group's employees who have maintained their focus on delivering excellent service to our customers. This has been achieved against a backdrop of uncertainty caused by the Group's volatile financial and share price performance, particularly in the latter quarters of the year. Our business is entirely reliant on the skills and experience of our staff. We are fortunate to have them choose to build their careers with NCC, and I look forward to working with all of them as we take our business forward.

Strategic Review

The Group began a Strategic Review in February 2017. The objectives of the review fell into three broad categories:

· Assessing our market place and customers buying preferences and criteria

· Customer and market views of NCC and our capabilities, strengths and weaknesses

· Assessing the commercial and portfolio logic of the current business lines within the Group

As findings emerged from the initial scope of work in the Strategic Review, we began a parallel work stream to consider:

· How we currently organise ourselves to address and capture the opportunities presented in our markets by best leveraging our strengths and unique selling propositions

Key Findings from the Strategic Review

The key findings from the Strategic Review are set out in more detail below but can be summarised as follows:

Market place: our markets continue to grow at or around a double digit rate. Companies buying decisions are more about technical expertise and value for money than a simple price basis.

Our customers: NCC scores well on the issues that matter to customers. Technical expertise, value for money and speed of delivery. The quality of customer service does appear to be an issue for the industry generally and NCC is similar in this regard. Our customers want to buy more from us and value our brand and reputation for excellence.

Our portfolio: The two divisions of Escrow and Assurance see little cross over in customer purchasing. However, Escrow is a robust stabilising influence on the Group. Within Assurance, we have identified two service lines that would have a better opportunity to flourish under alternative ownership and these will be sold in due course.

As we digested the emerging outputs from the Strategic Review it became clear that to reach our full potential we would need to re-organise how we go to market and how we do business (in terms of our internal processes and structures). We have therefore started work on developing and implementing a new Target Operating Model (TOM).

The market opportunity

Introduction

Fundamentally, NCC is operating in a dynamic and fast growing market. Or rather, a series of related but separate fast growing markets. These statements apply whether one considers the market place from a product and service perspective, from a geographical perspective, or from an industry vertical perspective. Change is literally the one constant in almost all aspects of the market.

Today, cybercrime is one of the single biggest threats to businesses and individuals around the world. We estimate that the average cost to recover from a DDoS attack is £275,000 and more than 90% of businesses have experienced some form of cyber security threat. On average, it takes almost 120 days for an organisation to find out that it has been compromised.

Furthermore, from our own research into the safety of the Internet, almost two-thirds of consumers believe an online data breach will compromise their financial information within the next year. The fact that some 60% of consumers are more worried than ever before about protecting their personal and financial information online reinforces the threat as the greatest to face business today.

Online security still seems to be behind the curve in failing to keep pace with the numerous types of organisations and individuals that seek to disrupt the internet and organisations use of systems and data.

The threat of being hacked or having valuable data stolen continues to evolve at a seemingly unstoppable pace. Attacks using phishing, fake payment requests and ransomware are now every day events. These attacks often cause significant operational disruption whose economic consequences can vastly outweigh any cost of remediation or prevention.

Our challenge is to ensure that customers understand that a relatively modest upfront investment in advice or other cyber services can ultimately save significant sums in remediation costs and arising from reputational damage.

The world in which we live cannot be made completely safe from cybercrime. As the number and range of threats proliferate, being innovative and using our experience and skills to protect against attacks becomes more important than ever. NCC is doing this by providing the best security consultants to our clients as well as conducting world-renowned security research.

Market dynamics

The relevant sub-segments that NCC's core cyber offering competes in are shown below:

*OC&C estimates

The addressable market is clearly large at $38.0 bn in total but very fragmented. Management estimate that NCC is one of the largest 'pure play' cyber security companies focussing on services as opposed to products but that we currently have relatively low market shares in most segments and geographies. Once we have developed robust and scalable internal structures and processes, this will represent a significant opportunity to grow the business profitably though bolt-on acquisitions.

Market research as part of the Strategic Review also confirmed that market growth is likely to continue and that customers' propensity to pay more for high quality advice and solutions is growing.

Customers buying behaviours and key purchasing criteria (KPC's)

Customers made clear that their key buying criteria focus more on quality of technical expertise and advice as opposed to price. While value for money (effectively a ratio or a comparison of quality and cost) is very important, that reflects more on the demand for quality than low cost.

Interestingly, customers did not place as high a value on the ability to source internationally. Even in those customers who did buy in multiple territories.

· Technical Expertise

Consistently noted as having top-tier technical talent, Fox-IT seen as most technically advanced player in NL

· Customer Service

UK and US customers often feel NCC too transactional, Fox-IT customers value their trusted partnership

· Value for Money

NCC and Fox-IT generally perceived as good value, customers very willing to pay more for quality

· Speed of Delivery

Seen as "mid-sized" competing with boutique pure-plays, NCC advantages include wider capabilities and flexibility

· Brand / Reputation

Well known by security professionals in the UK and US, Fox-IT highly regarded in NL (Dutch government work)

· Low Price

Seen to be expensive but price rarely the deciding factor, NCC rated highly as good 'value for money'

In summary, on the items that matter most to customers in their buying decisions, NCC score well or very well with the exception of customer service which appears to be an industry wide issue.

Our competitive position

We must continue to drive innovation and thought leadership in our key market segments. The key is to ensure that our thought leadership also leads to practical new solutions to apply to the challenges and issues that our customers face. Finding the right balance of 'blue sky' thinking and ideas that can be rapidly commercialised.

Innovation and creativity are two key foundations for the Group's continued development and growth. Our new Target Operating Model is designed to ensure that these remain a core feature of the business.

The recent well publicised cyber-attacks on a wide range of public and private enterprises around the world are a reminder of the need to constantly innovate.

Our aim is to shift the current range and scale of the services and products offered by NCC in the cyber security market to more repeat business of a highly differentiated nature.

During the Strategic Review we assessed the Group's 'Net Promotor Score' (NPS). This metric is widely used across a range of industries where customer satisfaction is a critical performance indicator. What NPS measures, quite simply, is whether or not a customer, on the basis of its experiences with a service provider, would recommend that service provider to another organisation.

The measurement scale in NPS is itself a challenge - a positive score is counted if it rates a nine or ten out of ten. Conversely, a negative score is recorded for any outcome ranging from zero to six. What this means is that if a company received 100 scores of its service, with 10 ratings in each category, its NPS score would be negative 40.

The results of the NPS survey confirmed NCC with a score of "positive 26". As noted above in the explanation of the methodology, achieving any sort of positive score is difficult and a positive score of plus 26 means the significant majority of ratings by customers had to be above six out of ten and with a high proportion of those scoring the top two marks.

What the survey did show was that NCC scored better than many of its direct competitors in the Big Four or in the pure play cyber services companies. It is clear, when combined with direct feedback from customers that NCC is well regarded for our technical expertise and our ability to help our customers overcome their cyber security challenges.

Target Operating Model

Our current organisational structures and operating model have reached the limits of their design tolerances. In many cases the overlay of our business processes on those organisational design features creates a 'spaghetti wiring diagram' that is complex, creates unclear accountabilities and is inefficient at delivering business processes and services to customers.

The recent addition of some relatively large acquisitions has emphasised further the need for a clear and transparent operating model that delivers a number of key objectives, the principle ones being as set out below.

TOM Objective 1: Align the business to how our customers want to buy

The Strategic Review revealed that even our global customers tend to want to buy local services for delivery in country. This is true even for customers who have a central technology input to sourcing decisions.

This finding drives the conclusion of a TOM that has a primary dimension of geographical business units and P&L accountability.

TOM Objective 2: Leverage NCC's value between business units

The business has historically operated within silos. This has been the case even inside individual business units where our structures have not encouraged service or product line leaders to cross sell or provide fully integrated solutions to our customers.

Our historical Go-To-Market model was identified by customers as being too transactional in many cases. While initiatives to address this issue began during the year, the old operating model barriers to collaboration were not removed.

Our customers value our technical expertise and the wide range of services that we offer. Therefore, in order to leverage value across the geographies and service lines, we concluded that a matrix structure would be appropriate for the TOM.

Therefore, the secondary dimension of the TOM is based around key service and product lines with key leadership and accountability roles identified within each to ensure sharing of best practice. To avoid unnecessary cost increases or duplication of roles, there will be some 'double-hatting' in smaller businesses as they grow.

TOM Objective 3: Deliver an integrated Go-To-Market proposition

Our customers value our expertise and range of services. They would like to buy more from us. But our current Go-To-Market approach can make this difficult. The challenges flow from disparate accountabilities and targets for different teams within the business units.

We are therefore creating aligned sales and delivery teams with single leaders within each geography. Critically, sales leadership for strategic accounts, transactional sales activities, inside sales, bid preparation and management, and supporting marketing activities will report to one person in each territory. This will allow us to join up our offerings at a more strategic purchasing level within customers while also ensuring that our current successful transactional sales generation machine continues to perform.

TOM Objective 4: Create scalable structures that facilitate profitable growth

Our historical ways of working and focus on certain services and products prevent benefits of scale from being realised. Selling more of a particular service would lead to an equal and proportionate increase in our costs and hence no positive operational leverage to drive improving margins.

Our staff management and work allocation processes have been less efficient than we would like. This has led to under-selling of key technical skills in that they are used on activities that attract a lower day rate than they should.

As well as a more accurate matching our staff skills to the value of the work being performed for customers, we also intend to increase our focus on platform based sales such as monitoring services and after sales value added services. In particular, these will be driven from our Security Operations Centres in Delft (Fox) and Leeds (MSS) and will include services such as Threat Intelligence, DetACT, Managed Security Services, and our CTMp platform.

TOM Objective 5: Design and implement effective and efficient business processes that support operating leverage

Over the last few years our support costs have been rising steadily, creating a further erosion of operating leverage or in some cases even leading to negative operating leverage. This reflects the fact that in many cases our business processes and systems have not been upgraded to keep pace with the size and complexity of the group.

The Group has been slow in rolling out its preferred core systems and this has caused undue delays, cost increases and inefficiency in how we work. These issues extend from finance and reporting systems to CRM systems to work and staff planning and management processes and beyond.

A key part of implementing the TOM is to embed effective and efficient business processes and systems within it. Over the next two years, we will therefore be focussing on designing and implementing standardised business processes and making sure they and the underpinning systems are rolled out across all of our business units. These systems and processes will often be designed and monitored centrally to ensure shared disciplines and effective control of the business.

Underpinning all of the objectives for the TOM will be a series of direct and specific key performance indicators and other metrics that drive the desired behaviours and outcomes. For example, we will be focussing on realisation for our consultants' time as opposed to the more simple but less informative utilisation measure.

Realisation will focus on a combination of hours worked but also, critically, on the amount of work that is actually billed and the rate at which it is billed. These are currently areas where we believe there is value leakage from the Group and plugging these leaks will help to generate improved margins in future.

Our strategy

Our new Strategic Plan is designed to deliver more sustainable revenue growth at improved margins, increases in shareholder value, and an improved service and product offering to customers.

We are developing a new set of KPIs that align more closely to our strategic priorities. Some of these are still under development as noted below. We will report on each one as we implement our strategy.

Interim chief executive's review

Group revenue

For the financial year ended 31 May 2017, the Group increased reported revenue by 17% to £244.5m (2016: £209.1m). Excluding Domain Services business that was exited during the year, the growth was £37.7m or 18%.

The table below shows the elements of growth that were organic (net sales growth in businesses that were owned for equivalent periods in the current and prior year), acquisitions growth (includes the full year impact of prior year acquisitions), and growth resulting from the impact of FX rates. Growth from changes in FX rates is calculated by re-stating the prior year revenue figures at current year weighted average rates.

The Group's current information systems do not report the impact of foreign exchange movements as a matter of course. The figures above are therefore calculated at year end using assumed weighted average exchange rates for each relevant currency for each year in question. This is being addressed in the Group's new consolidation system which is being implemented in the first quarter of the new financial year.

The FX growth above is driven by increases in the weighted average exchange rates of both the US$ and €uro against £GBP, both of which strengthened by around 15%.

The geographical breakdown of revenue by the location of the delivering business for the current and past year is as follows (Domain excluded):

Note: some businesses sell a modest amount of services in other countries and report that revenue as being within their own geography.

The amount of Group revenue earned outside the UK increased by £35.0m and reflects the impact of the Fox-IT acquisition in the Netherlands half way through the last financial year and also strong growth in our US Assurance business.

Both of these factors occurred within the Assurance division where the share of Group revenue has now risen to 85% (2016: 83%).

Underlying organic revenue growth in the first half of the financial year was 19% but in the second half fell by 5% compared to the prior year periods. The second half of the current year actually saw revenue fall compared to the first half, contrary to the historical trends the business has delivered.

Weakness in the second half compared to the prior year and the first half of the current year was particularly focussed in MSS third party product sales which were £6.5m down in the second half compared to the first half.

Fox High Assurance product sales were also down £1.2m in the second half. Between them these reductions accounted for 85% of the fall in sales between the first and second halves.

A more detailed breakdown of the revenue performance in each of the Operating Segments is shown in the Assurance and Escrow divisional reports.

The Group is currently reviewing the basis on which revenue analysis is further reported. This review will include concepts such as recurring revenues, contracted revenues and repeat business. The Group may need to implement systems changes to accurately capture this analysis across all business units. Some further analysis is set out in the Divisional reviews.

The Group continued to have minimal reliance on any one customer or sector. Within Assurance the largest customer represents approximately 4% of Assurance revenue. The largest customer in Escrow is just over 1% of total Escrow revenue.

Group profitability and margins

The Board and Executive management use a number of non-GAAP measures in their day to day management of the business. The Group's primary financial profitability measure will be Adjusted EBIT. Last year the Group used Adjusted EBITDA for this purpose. It is management's view that Adjusted EBIT is more closely aligned to the underlying performance of the business. The majority of our peers and stakeholders use this metric, and hence it is therefore a more appropriate KPI for use in the business and in our external communications.

The table below sets out the reconciliation between reported statutory measures and the non-GAAP measures of Adjusted EBIT and Adjusted EBITDA.

During the year, despite delivering growth in most of our business units, each business unit and the Group as a whole has seen a contraction in our margins. The main cause relates to cost increasing both before and at a faster rate than the growth in our revenues in each business unit.

Margins contracted due to increases in both direct and indirect costs. Salary related costs represent approximately 70% of the Group's cost base. Cost increases were largely driven by a significant increase in headcount (16%) combined with average salary increases of 6-7% to give total salary based cost increases of approximately 23% or around 16% of sales.

This compares with total organic and acquisition based revenue growth of 15% and led to consequent reduction in utilisation and realisation from our professional service delivery staff.

We also made investments in new sales structures that have not yet born fruit in proportionately increased revenues. Other indirect cost increases reflect £3.4m of additional depreciation and amortization of tangible and intangible assets linked to a number of systems having entered service and hence have started amortizing. In addition there was a £1.3m of acquisition impact on these costs.

Premises costs increased by £1.4m partly to accommodate extra staff and also in upgrading facilities. Marketing spend rose £1.3m as the Group sought to raise its profile in a number of areas.

As a result, Adjusted EBIT in the year fell from £39.7m to £27.5m despite the benefit of a positive foreign exchange impact of £0.6m. At the same time, our Adjusted EBIT margin fell from 19.4% to 11.4%.

The Group's overall EBIT result included £0.2m of losses from the now closed Domain Services operating segment (2016: operating losses £1.4m). The current year charge was then offset by a £1.2m profit on disposal of Open Registry (also treated as an adjusting item).

The Group's reported pre-tax loss was £55.3m (2016: profit £9.4m).

Assurance Division - Business Performance Review

Assurance revenue

Assurance now accounts for 85% of Group revenue and the impact of foreign exchange rate changes contributed £8.0m to the growth in the division.

In addition, Assurance benefitted from the full year effect of the prior year acquisition of Fox-IT (impact in 2017: £14.0m) and acquisitions in the year just completed (PSC £5.9m and VSR £1.1m).

Net organic growth was £6.8m which represented year on year growth of 5.0% with the balance due to changes in foreign exchange rates (£8.0m impact).

The table below shows the revenue split between Security Consulting and a combined Web Performance and Software Testing.

Revenues in our Web Performance and Software Testing businesses fell by £0.5m (5%) and £2.9m (14%) respectively. In Web Performance, we felt the impact of a slower take up than expected for a new service line an have taken an impairment charge on this business.

In Software Testing the loss of a project that was already underway at the start of the year, following a strategic decision to cancel a divestment by the customer, had a negative impact on both revenue and costs as utilisation rates for permanent staff fell.

Towards the end of the financial year, both Web Performance and Software Testing businesses saw a pick up in sales pipeline opportunities and also in some longer term contract wins.

The table above can act as a guide to the impact on revenue of the proposed disposals of the Web Performance and Software Testing businesses during the course of the new financial year ending 31 May 2018. Neither business is particularly seasonal and therefore any reduction to the Group total turnover following the disposals is likely to be pro rated to the point in the new year when the businesses are sold.

The Assurance division saw very mixed revenue results during the year. While the headline growth rate for the Security Consulting activities is very attractive, some business lines saw better performance than others.

The underlying performance of the Security Consulting business lines is much easier to understand using constant currency and also by splitting performance between organic and acquisition based growth.

Assurance revenue is broken down into more detail in the table below in terms of the impact of changes in foreign exchange rate, the impact of acquisitions in both the prior year and the year under review, and the organic performance of a number of operating units within Security Consulting:

The table above highlights the number and variety of moving parts in explaining this year's revenue performance. The impact of changes in FX rates and acquisitions is shown in the top half of the table.

For the purposes of this analysis, given that Fox-IT was acquired at the end of November 2015, the whole of the first half of the current financial year's revenue has been attributed to the impact of the acquisition.

Growth in UK and US consulting revenues were very healthy, representing growth of 19% and 24% respectively on a constant currency basis. This was driven by a combination of market growth and our ability to capture share due to our scale. In addition, we have been bringing new products to market and continuing to expand our focus areas beyond transactional activity.

Within Fox-IT we saw two strong opposing forces. As previously announced, a key customer for Fox High Assurance products (Fox-HA) significantly slowed down its purchases from the business following the change in ownership of the company.

It is clear that we should have engaged with this customer in a transparent way ahead of the acquisition to allay some of their concerns. However, we have since been working hard and collaboratively to allay the concerns of the customer and we are starting to see some new orders coming in for Fox-HA products from this critical customer.

If momentum is maintained we should see some growth in this service line in the new financial year compared to the year ending 31 May 2017.

In sharp contrast, to Fox-HA, the other Fox service lines saw organic growth of 17% in the second half of the year compared to the same period of ownership in the prior year. In particular, our CTMp platform and Threat Intelligence made promising progress.

This is particularly pleasing in that both of these are key service lines that we aim to expand within the Netherlands and then to leverage in other NCC locations.

The scalability of the CTMp platform will also support margin recovery. It is for this reason and the emerging recovery in Fox-HA, that while the execution challenges for the business are reflected in the impairment of around 30% of the goodwill associated with the acquisition, we remain confident about the prospects for the Fox-IT business and its capability to support a broader platform of scalable high value add services across the NCC.

In MSS we also saw two conflicting but slightly different themes from those in Fox IT. The negative force there has been in the re-sale of third party products which fell by £7.4m compared to the prior year, equating to a fall of 48% and a fall in 2017 second half sales of products of almost 90% to £0.7m.

The fall partly reflects the end of an earn-out period that had been put in place when the business was acquired by the previous owners and subsequently extended by NCC. In addition, we are trying to change our focus to higher value add activities and the building of long term relationships with our customers.

We have not pursued these sorts of sales as strongly as in previous years. Instead, where we continue to sell third party products, we will aim to link those purchases to implementation consulting advice and after sales services such as monitoring in our Leeds based Security Operations Centre (SOC).

While the revenue would have helped the year's results, we are not overly concerned as we seek to deliberately re-balance the business away from single transaction re-selling of third party products.

Similarly to Fox-IT, the areas of the business where we do see longer term value and growth potential, the service lines grew by 17% year on year.

The summary of the Assurance revenue is:

· good growth was delivered in those areas where we want to place our future focus as this is where scalable margin recovery can be created

· Fox-HA will start to recover in the coming year

· Re-selling third party products in MSS in the medium term will be continued if we can create linkages to our own value added after sales services

· Acquisitions and FX also played strong supporting roles in the revenue growth story.

The table below is an estimated split of our Assurance revenue streams based on currently available information. We will be improving the quality and granularity as well as the relevance of our internal management information systems over the coming years. The data therefore gives a broad indication of the split of our revenue streams.

Product sales are a mix of third party products and our own. Currently we are not able to perform the same analysis at a gross margin or profitability level.

Assurance profitability analysis

While revenue grew in total by £35.8m (21%), the absolute level of adjusted operating profit fell year on year by £9.2m (35%). The fall in operating profit is all the more stark because it is after the positive impact of foreign exchange gains of £0.4m and the benefit of acquisitions. The acquisition benefits were from a full year of ownership of the Fox-IT (£0.5m) and part year ownership of PSC and VSR (£1.7m).

Adjusted EBIT margins fell to 8.2% (2016: 15.3%). The more significant driver for this was the increase in overall salary costs.

Our consulting businesses in the UK and US both saw a fall in absolute profitability as a lack of control over the cost base meant that it grew faster than our revenue streams. In particular this reflected a strategy to build sales and delivery teams ahead of equivalent revenue growth and that led to margins being compressed in both businesses at a Gross Margin and EBIT margin level.

At the same time, the Group was starting to develop its strategic sales capability to allow us to move further up our customers internal purchasing decision chains to become less transactional and more strategic in approach. That investment has been slower than anticipated to bear fruit.

The Assurance business will typically see one or two major unplanned contract wins in any particular year. These can be related to the reaction to a major event at a customer or a specific proactive project such as corporate activity.

In the year to May 2017, the division did not have a material benefit from any such contracts and actually suffered from the loss of some. In one specific case, a large scale Software Testing project (reference above) was already underway with staff deployed on the ground. When the customer discontinued the contract the revenue stream stopped very quickly in the first half whereas it had been expected to run for most of the year.

A second large scale project was cancelled before it began. In the third, which had not become a contracted order but had been a firm prospect as NCC were the preferred supplier for that type of work, the customer decided not to proceed with the work.

The estimated potential revenue from the three contracts was around £14-17m and £6-7m of gross margin (based on a gross margin assumption of 40%). Approximately £7-10m of this revenue had been included in the Group's operating plan at the start of the year.

The most challenged part of the Assurance division was MSS which saw a fall in revenue of £4.6m (14%). As noted earlier, while much of the revenue fall related to less attractive sales of third party products, the gross margin delivered would still have been a helpful contribution towards the overhead base.

Similarly to the consulting businesses, in MSS the Group set about re-balancing the sales efforts and teams towards strategic and higher value added sales of customer solutions comprising product, professional services and managed services. While we are confident that this is the correct approach in the medium term, the short term impact was to increase our cost base at a time when revenues were falling.

There was also the impact of ongoing integration challenges for the MSS service lines (acquired under the Accumuli plc transaction).

Escrow Division Business Performance Review

Revenue performance

The Escrow division now accounts for 15% of Group revenues (2016: 17%). Escrow revenue for the year grew by £1.8m (5%) to £37.1m (2016: £35.3m). Excluding the impact of FX, at constant currency rates underlying growth was £0.1m (0.3%).

Escrow UK

Escrow UK revenue was £25.4m (2016: £25.7m).

During the second half of the year we identified that some invoices had been recognised as revenue ahead of the related service delivery. The correction of this issue reduced reported revenue in the year by £1.0m with an almost equivalent EBIT impact.

The issue had built up over three years and no individual year required a material adjustment and hence the full impact was recognised as a one off, non-recurring, non-cash item in the current year. While there was never any question of not delivering the service and in many cases payment was received in advance, this revised approach is deemed to be a more appropriate application of the Group's unchanged policy on revenue recognition.

The reported 1% reduction in revenue (2016: 8% growth) would have been growth of 3% if not for the one-off adjustment.

Escrow UK recurring revenues increased to £14.1m (2016: £13.7m) and terminations remain around 11% with nearly 90% of all contracts renewed (2016: 90%).

We expect UK growth to remain modest given the relative market maturity and our market share.

Escrow USA

Escrow US revenues grew by 27% to £7.9m (2016: £6.2m) with recurring revenues of £4.5m. Approximately half of this related to the impact of changes in FX rates with the balance all being organic growth.

In the fourth quarter we re-structured our senior management and sales team in Escrow USA to build further on the significant opportunity we have in that country.

Escrow Europe

Escrow Europe revenues grew by 13% to £3.9m (2016: £3.4m) with recurring revenues of £2.1m. However, all of this and more was the result of changes in FX rates. On an underlying organic basis the business actually shrank by 3%.

This reflects significant management change in our European Escrow team that are being addressed in the first half of the new financial year.

Escrow Rest of the World

The division has recently established an office in Dubai to take advantage of the Group's reputation and expertise in a region that has good demand potential for Escrow services and in which we have a number of existing clients, allowing us to build a larger footprint in anticipation of Expo 2020.

Our short term goals for the Escrow division as a whole are:

· to maintain our market leading position in the UK, delivering modest annual organic growth

· to continue to develop evolving solutions for customers in a SaaS and Cloud based world

· to build on our scalable capability in the US

· to stabilise our relatively small footholds in a number of European territories (the Netherlands, Germany, and Switzerland).

· to begin to build out from our new positions in our 'Rest of the World' offices in Dubai and Singapore.

Escrow UK now has 111 employees (2016: 107), Escrow Europe has12 employees (2016: 15) and the North American Escrow businesses have 41 employees (2016: 59).

Escrow revenues and growth can be further analysed as follows:

Escrow profitability analysis

The table below shows the split of EBIT by Escrow region. For reporting purposes, RoW EBIT is included within the UK.

The £1.0m impact on profitability of the revenue recognition issue has been noted above. Because the revised approach was adopted in the second half of the financial year but applied to the year as a whole, it has had a disproportionate impact on the reported results in the second half. Excluding this adjustment, EBIT for Escrow would have been flat year on year.

The division experienced some of the same increases in the cost base as seen in the Assurance division but to a lesser degree. As a result, EBIT margins in the division fell by 5.6% to 51.3% (2016: 56.9%) with revenue recognition being a one off 2.6% reduction.

The revised operating model that is already in place for the Escrow teams around the world mean that the division should deliver an improvement in margins in the new financial year ending May 2018.

Individually significant items

The carrying value of all of our goodwill and intangible assets were assessed as part of our normal year end process. As a result, there have been a number of impairments recognised in respect of good will and other intangible assets.

The Fox and former Accumuli businesses (the latter now known as MSS) have underperformed in the year compared to our original acquisition forecasts. They have also encountered integration challenges that have slowed the pace of commercial leverage of the different new service and product lines across the rest of the Group.

In MSS we are also shifting focus away from one part of the business that previously concentrated on simply re-selling third party products often without value added after sales services.

The net result of these factors is to recognise an impairment of the goodwill that arose on the acquisition of Accumuli plc by £24.3m. This equates to around 50% of the goodwill attributable to what is now known as MSS. It is worth noting that one part of the Accumuli business has been successfully and fully integrated with our UK Security Consulting business and its share of goodwill (£14.3m) is now considered as part of that Cash Generating Unit (CGU).

In Fox we have recognised an impairment of £24.3m of goodwill, representing around 30% of the goodwill that arose on acquisition.

While we are confident that the Fox IT business and service lines and the MSS business re-focused on value added managed services and advisory services are attractive business in the medium to long term, there is much to be done to realise this potential. The length of time needed to realise this potential and the execution risks involved over that period mean that it is appropriate to recognise the impairment of these assets.

In our Web Performance business we have reviewed the carrying value of both internally generated intangible assets and the goodwill associated with the acquisition of that business. While we do see longer term value in this business, some of the revenue generating intangible assets have been slower than originally anticipated to generate revenues and a retained customer base.

The slower ramp up in revenue has therefore led to the recognition of impairments over two assets amounting to £3.2m and over goodwill of £5.7m.

In the prior year it was announced that the Group was withdrawing from the Domain Services operating segment. At that time two assets were retained with carrying values of £2.5m and £2.0m in respect of the .trust TLD and a software application for use in Domain and potentially in other retained parts of the Group.

Given the inherent uncertainties in realising any value from the .trust TLD, it has been decided to write that asset off in full. The Group will seek to maximise any value from the asset. It has now been identified that the retained Domain software system does not have a role in the business going forward and it too has been fully impaired.

Other individually significant items in the year are set out in the notes below. They include:

· Adjustments to deferred and contingent consideration due to changes in FX rates £2.9m;

· Holiday pay accrual relating to previous financial periods of £1.8m;

· Restructuring costs of £1.3m relate to professional fees for the Strategic Review, the Target Operating Model project, exit payments to the former CEO, and retention bonuses paid to former employees of Accumuli plc;

· Double running and exit costs of £1.3m for empty properties;

· Impairment of property plant and equipment (£0.9m) on the planned re-location of the Group's Manchester Head Office in September 2017; and

· Acquisition costs £0.8m.

Prior year individually significant items are set out in Note 3

Taxation

The Group's adjusted effective tax rate is 29.3% (2016: 22%), which is above the average standard UK rate of 20% (2016: 21%). The higher effective rate reflects the higher tax rates incurred in the overseas businesses. It had been reported in January 2017 that the tax rate for the year would rise to around 31%.

This was based on an estimated position at the time of the Interim Results in January 2017 and included certain assumptions about the level and geographical origin of pre-tax profits.

The actual results were lower than those estimates and a significant part of the reduction was the level of profit arising in higher tax territories. The Group expects to maintain the effective P&L tax rate at around 30% for the next few years, assuming a similar geographic split of profitability compared to the current year.

The Group has recently hired a tax and treasury manager whose role will include developing a longer term strategy for tax and treasury matters. In both of these areas the Board has a low risk appetite to purse aggressive tax strategies and the new strategies will operate inside that.

Earnings per share

The adjusted basic earnings per share from operations was 6.7p (2016: 11.8p).

The table below reconciles basic EPS to Adjusted EPS on the Group's definitions of adjusting items including their tax impact.

The adjusted fully diluted earnings per share from continuing operations was 6.7p (2016: 11.2p) whilst reported fully diluted loss per share was 20.4p (2016: earnings 2.4p).

Dividends

The Board is recommending a final dividend of 3.15p per ordinary share, making a total for the year of 4.65p. This represents a dividend equal to that paid in the prior year.

While dividend cover is negative (2016: 2.4 times based on basic adjusted earnings per share from continuing operations), the Board is confident that the Group's new Strategic Plan will be a source of long term sustainable growth in earnings, cash flow and shareholder value.

An administrative non-compliance issue has been identified with respect to distributable reserves and the payment of previous dividends. We expect to remedy the position by means of a shareholder circular and appropriate resolutions at the AGM in September 2017.

Cash

We will transparently disclose the key moving parts in our cash flows. As part of this, we are adopting a new definition and calculation of Free Cash Flow and Cash Conversion ratio that is more closely aligned to market practice.

The table below summarises the Group's cash flow for the year.

The Group generated a net £28.0m of cash from operating activities. This is before deducting £3.7m of internally capitalised development costs.

Working capital saw a reduction in accrued income as our billing processes became more effective and timely in the fourth quarter. While the natural consequence of this is then an increase in trade debtors, the net impact is to shorten the working capital lifecycle and accelerate cash conversion. The net working capital cash outflow was the result of deliberate management action to improve supplier relations by improving the profile of creditor payments compared to prior years.

Significant opportunities to improve working capital remain. For example, unbilled accrued income over 60 days old amounts to £2.7m and £9.7m of similarly aged trade debtors represent an opportunity to improve.

Interest and tax cash costs remained modest and the latter reflects in part the lower profitability of our overseas higher tax rate territories.

Net capital expenditure of £11.0m was a mix of discretionary and maintenance capex. No breakdown of discretionary versus maintenance capex is available as yet. However, maintenance spend includes costs of new hardware and software for use in the business. Discretionary spend includes a number of new office locations that have either been acquired or moved into in the year ending 31 May 2017.

The largest one off 'discretionary' capex spend in 2017 was the £3.8m cost of Category A and B fit out costs of the Group's new headquarters building in Manchester that will be occupied in the summer of 2017.

The move was occasioned by the end of the existing lease and the need for more space to accommodate business growth. The fit out costs in the year were almost fully funded by a landlord contribution of £3.7m. The estimate to complete the project is £4.4m and the final cash costs will be paid in the 2018 financial year.

We expect property, plant and equipment capex to be at a similar level in the 2018 financial year. The expected reduction from one-off property costs incurred in 2017 will be compensated by the remaining costs of the Manchester head office capex. In 2019, after the property projects have been completed, we expect capex to reduce by £3-4m.

Conversely, we expect our annual premises costs which include depreciation, rent, and rates to increase in the new financial year by £1.9m which will be an annualised £2.2m in the following year.

The calculation of the cash conversion ratio for the last two years is set out below and referenced to the various notes in the Annual Report.

One of the main drivers for the difference between operating cash flow and EBITDA are the capitalised development cash costs in the year of £3.7m which if charged against EBITDA will give a cash conversion ratio of 86% in 2017.

Financing facilities

In November 2016, the Group increased its banking facilities to £110m (May 2016: £78m) with a new five year multi bank facility, comprising a £80m (May 2016: £78m) revolving credit facility and a £30m (May 2016: nil) five-year term loan. The term loan amortises at £2.5m every six months until maturity and at the end of the year the term facility stood at £25.0m.

The Group's primary banking covenants are:

· Leverage limit of 2.5 times and this is calculated as Adjusted EBITDA / Net Debt. For the purposes of the covenant test, net debt includes deferred consideration on acquisitions (but not contingent consideration)

· As at 31 May 2017 leverage for banking purposes stood at 1.50 times, comfortably below the Group's maximum 2.5x covenant limit.

· Net Interest cover which is calculated as Adjusted EBITDA / net interest payments and has a limit of 3.5 times.

· As at 31 May 2017 net interest cover was 25.9 times, again comfortably above the minimum level.

At the year end outstanding contingent payments relate to PSC of £2.8m and VSR of £1.3m. The payments to the former owners of PSC and VSR are due in two equal instalments and are measured in December 2017 and December 2018 by reference to profit targets set at the time of the acquisitions.

Also outstanding is non-contingent deferred consideration in respect of the acquisition of Fox IT comprising of €10m in cash and €2.5m shares due to be paid in November 2017. The Group has the option to make the share based payment in cash instead.

Principal risks and uncertainties

The Group operates in a dynamic and evolving market place. As new events occur or the business transitions into new activities or phases of its development, the risk register is updated accordingly.

For example, reflecting the changing nature of the business, during 2016-17, we had to complete the integration of two new and sizable acquisitions into our risk management processes. As a result of these acquisitions, the Group now has a larger proportion of its revenue coming from hardware or other product sales and also from key strategic customers, with the consequence of there being less predictable sales cycles and in some cases larger but less frequent and less predictable sales.

During the year, we saw a slowing in purchase activity by a key strategic customer in the Netherlands. We also incurred customer losses, while professionalising the contracts management activities in one of the businesses we recently acquired, as well as having to bear increased costs.

Furthermore, as a result of these recent large acquisitions, the scale and complexity of the Group increased and enhanced controls and processes needed to be put in place. In order to address this, the Board approved the appointment of a Director of Risk and Assurance, and a Group Tax and Treasury Manager.

Detailed descriptions of the current principal risks and uncertainties faced by the Group, their potential impact and mitigating processes and controls are set out below. The tables also highlight whether the risk is assessed as increasing or decreasing with a similar assessment for the position last year. This includes identifying new principal risks and uncertainties.

On behalf of the Board

Brian TennerInterim Chief Executive18 July 2017

Consolidated statement of financial position

at 31 May 2017

These financial statements were approved by the Board of Directors on 18 July 2017 and were signed on its behalf by:

Brian Tenner

Interim Chief Executive

NCC Group plc

4627044

Consolidated statement of cash flows

for the year ended 31 May 2017

Statements of changes of equity

for the year ended 31 May 2017

Group

Notes

(forming part of the financial statements)

1 Accounting policies

Basis of preparation

NCC Group plc ("the Company") is a company incorporated in the UK. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group"). The parent company financial statements present information about the Company as a separate entity and not about the Group.

These financial statements have been approved for issue by the Board of Directors on 18 July 2017.

The financial information set out herein does not constitute the Company's statutory financial statements for the year ended 31 May 2017 or the year ended 31 May 2016 but is derived from those financial statements. Statutory financial statements for 2016 have been delivered to the Registrar of Companies, and those for 2017 will be delivered in due course. The auditors have reported on those statutory financial statements; their report was (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain statements under sections 498(2) or 498(3) of the Companies Act 2006.

In accordance with EU law (IAS Regulation EC 1606/2002), the group financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') adopted for use in the EU as at 31 May 2017 ('adopted IFRS'), International Financial Reporting Interpretations Committee ('IFRIC') interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The preliminary results consolidate those of the Company and its subsidiaries.

The Group financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use within the European Union and in accordance with the accounting policies included in the Annual Report for the year ended 31 May 2016. A number of new standards and amendments to existing standards were effective for the financial year ended 31 May 2017. None of these have had a material impact. A number of standards, amendments and interpretations have been issued and endorsed by the EU, but which are not yet effective and accordingly the Group has not yet adopted. The cumulative impact of the adoption of these standards is not expected to significant.

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for consideration payable on acquisitions that is measured at fair value.

Functional and presentation currency

The Group and Company financial statements are presented in millions of Pounds Sterling (£m) and all values are rounded to one decimal place except when otherwise indicated.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Business and Financial.

The Group funds its strategic acquisitions and meets its day to day working capital requirements via a multi-currency revolving credit facility of £80.0m, a £25.0m multi-currency term loan that amortises by £2.5m every six months and an overdraft of £5m. At 31 May 2017, the amount drawn down under the facilities was £56.0m. This facility was agreed in November 2015 and is due for renewal in November 2020.

The Directors have reviewed the trading and cash flow forecasts of the Group as part of their going concern assessment and have taken into account reasonable downside sensitivities which reflect uncertainties in the current operating environment. The possible changes in trading performance show that the Group is able to operate within the level of the banking facilities and as a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for a period of at least twelve months. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

2 Segmental information

The Group is organised into the following two reporting segments (2016: three) Escrow and Assurance each of which is separately reported. While revenue and profitability are monitored by individual business units within these operational segments it is only at the operating segment level that resource allocation decisions are made. Performance is measured based on segment profit, which comprises segment operating profit excluding amortisation of intangible assets, share based payment charges and exceptional items. Interest and tax are not allocated to business segments and there are no intra-segment sales.

Segmental analysis 2017

*Adjustments includes the results of Domain Services, individually significant items and other adjustments (Note 3).

Segmental analysis 2016

The revenue classified as adjustments relates to Domain services (Note 6).

There are no customer contracts which account for more than 10% of segment revenue.

3 Individually significant items

Individually significant items and other adjustments have been presented in a separate column in the consolidated income statement to provide users of the accounts with a reconciliation to the Group's separately reported non-GAAP results.

The Group separately identifies items as "individually significant items". As permitted by IAS1 'Presentation of financial statements', an item is disclosed separately if it is considered unusual by its nature or scale, and is of such significance that separate disclosure is required to fairly present the financial performance of the Group.

The revenue, cost of sales and general and administrative expenses in the current and prior year relate to Domain services. The prior year treatment of the Domain trading loss has been amended to be consistent with the current year treatment as an adjusting item in calculating non-GAAP measures. The profit on sale of subsidiary companies relates to the disposal of the Open Registry Group in January 2017 for a net profit £1.2m (Note 5).

Acquisition related costs of £0.8m (2016: £2.3m) consist of fees incurred in relation to the acquisitions of Payment Software Company Inc on 28 September 2016 and Virtual Security Research LLC on 11 November 2016 (note 12). In the prior period, the costs relate to fees incurred in relation to the acquisition of Fox-IT Holdings BV.

The adjustment to consideration of a £2.9m charge relates to foreign exchange revaluation differences on the carrying value of consideration in the prior year of £4.7m income relate to the net gains related to the re-assessment of the Open Registry contingent consideration and an adjustment to the consideration payable for a previous Accumuli plc acquisition.

A goodwill impairment of £54.3m (2016: £11.9m) has been recognised in respect of the CGU's for Fox-IT Holdings BV, Accumuli plc and Web Performance (Note 9). The underlying drivers for these impairments are discussed in more detail in the performance review sections of the Strategic Report.

The directors have assessed the carrying value of intangible assets and concluded that the carrying values of certain capitalised development and software costs are impaired (Note 11). Accordingly, a write down of £5.7m (2016: £6.8m) has been recognised in respect of capitalised development costs (£3.2m) and in respect of the .trust domain name (£2.5m). In addition, residual Domain Services software with a book value of £2.0m has been written off in full. In the prior year, the intangible asset write down of £6.8m relates to the impairment of capitalised costs for redundant technology.

The group has incurred restructuring costs of £1.3m (2016: £2.6m) relating to the exit payments to the former Chief Executive (as shown in the Remuneration Report) and other members of senior management. In addition, professional fees in relation to the Strategic Review and retention bonuses paid to former employees of Accumuli plc were also incurred. As previously reported NCC became responsible for paying these bonuses on acquisition of the Accumuli group. In the year to 31 May 2016, restructuring costs included Accumuli plc retention bonuses, severance costs and other costs associated with the wind down of the Domain Services division.

The onerous property lease charge of £1.3m (2016: £nil) is in respect of double running costs of empty properties. The £1.8m charge for vacation pay relates to previous financial periods and this is described in more detail in the Audit Committee Report. Of the total charge, £0.5m relates to the prior year with the balance relating to prior years up to 31 May 2015 with no significant charge in any one year. The £0.9m (2016: £nil) impairment of fixtures and fittings relates to items in the current head office which will be obsolete after the relocation later this year.

The tax effect in the income statement relating to the individually significant items recognised is:

4 Expenses and auditors' remuneration

*Included within individually significant items, Note 3.

The reclassification of costs relates to administrative salaries and travel costs that were reported within cost of sales in the prior year but have been reclassified to general and administrative expenses in this years' consolidated income statement.

5 Domain services

In June 2016, the Board took the decision to close down the activities of the Domain Services operating segment. During the prior year, the development activities of Domain Services were severely curtailed and the assets and business activities were either shut down or sold in the current financial year. This included the sale of the Open Registry group of companies comprising Open Registry SA, ClearingHouse for Intellectual Property SA, Nexperteam CVBA and Sensirius CVBA to external buyers for a combined total consideration of €3.75m in January 2017, €2.0m receivable in immediate cash and €1.75m as deferred consideration, receivable in July 2018 at a fixed interest rate of 4%. A profit on disposal of £1.2m is recognised in the consolidated income statement within individually significant items (note 3).

The tables below provide an analysis of Domain Services activities for revenue, EBITDA and profit before tax as these are considered to be the most relevant to understanding underlying business performance.