Ncc Regulatory News (NCC)

9 July 2015

NCC Group plc

Strong international organic growth and operating performance drive dividend up 14%

NCC Group plc (LSE: NCC), the international, independent provider of Escrow, Assurance and Domain Services, has reported its full year results for the 12 months to 31 May 2015.

Highlights

§ Group revenue increased by 21% (2014: 12%) to £133.7m (2014: £110.7m) - organic growth18% (2014: 12%)

o Escrow revenue grew by 5% to £32m (2014: 7%)

o Assurance up by 21% to £97m (2014: 13%), organic growth up 18% (2014: 13%)

§ Adjusted Group operating profit* £26.4m (2014: £26.0m)

o Escrow and Assurance - combined operating profit up 11% to £33.1m (2014: £28.1m) including central costs

o Domain Services operating expenditure of £4.9m (2014: £2.1m)

§ Group reported operating profit £22.6m (2014: £24.1m)

§ Group adjusted pre-tax profit* £25.5m (2014: £25.3m)

§ Adjusted fully diluted earnings per share 9.4p (2014: 9.3p)

§ Total dividend up 14% to 3.98p (2014: 3.5p)

§ Accumuli plc acquired 30 April 2015 - substantially strengthens security capabilities

§ Domain Services transformed:

o .trust acquired and launched as a secure gated community

o Compensation received for withdrawal of .secure domain application

o Open Registry acquired in January 2015

o Division now provides an end to end, secure total domain solution

§ Employee numbers increased by 40% to 1,388 worldwide

Outlook for 2015/2016

§ Group's global reach and product range provides a platform for sustained long term growth and value

§ Total of Group's renewal forecasts and order book up 18% to £62.7m (2014: £53.0m)

*Operating profit and margin is adjusted for amortisation of acquired intangibles of £2.2m (2014: £2.1m), exceptional items of £0.6m loss (2014: £1.3m profit) and share-based payment charges of £1.0m (2014: £1.1m). Pre-tax profit is adjusted for these items and the unwinding of the discount on the acquisitions' contingent consideration of £0.3m (2014: £0.1m).

Rob Cotton, Group Chief Executive, comments:

"The Group has achieved yet another record year of strong international growth. We have completed a number of strategic developments and welcomed two very complementary businesses to the Group - Accumuli and Open Registry.

"Our two established businesses - Escrow and Assurance - saw organic revenue growth of 5% and 18% respectively, which together produced an 11% jump in adjusted operating profit before accounting for Domain Services.

"Our emerging business - Domain Services - has been transformed and is well positioned to take advantage of the significant changes across the Internet as thousands of new Top Level Domains become available over the next few years.

"We have increased our total dividend by 14%. Since the Group's flotation in July 2004, the dividend has increased from 0.42p to 3.98p, a compound annual growth rate of 25%.

"Our forward visibility has continued to increase and for the Group as a whole, renewals and order books now stand at £62.7m - we are confident of delivering another year of strong growth."

Enquiries:

About NCC Group

NCC Group is a global information assurance specialist providing organisations worldwide with an unrivalled suite of expert escrow, security and risk consulting, website performance, software testing and domain services.

Through a total information assurance solution we provide organisations with peace of mind that their most important assets are protected and operating as they should be at all times..

As the technology revolution continues to outpace the ability of organisations to cope with the plethora of security, performance and availability issues, NCC Group is best-placed to help address and manage the risk as well as limit the threat.

NCC Group is passionate about changing the shape of the Internet to make it safer. It has the expertise, knowledge and experience as well as a global footprint to provide the capability to achieve this. The organisation is committed to ensuring that clients have access to the right total information assurance solution that works for them.

NCC Group operates three distinct but complementary divisions, NCC Group Escrow, NCC Group Assurance and NCC Group Domain Services, from 30 offices across the UK, continental Europe, North America and Australia. With close to 1,400 employees, it provides comprehensive end-to-end information assurance for more than 15,000 organisations worldwide.

Overview

The Group achieved another year of strong and consistent growth. It was a year of tangible progress - strategically, operationally and financially - and also saw the addition of two very complementary businesses, Open Registry and Accumuli, to the Group.

In the last 12 months organic Group revenues grew by 18% to £129.8m (2014: £110.4m). Adjusted pre-tax profits and adjusted fully diluted earnings per share were up to £25.5m (2014: £25.3m) and 9.4p (2014: 9.3p). Total dividend up 14% to 3.98p (2014: 3.5p).

The Group continues to be highly cash generative with operating cash conversion representing 107% of operating profit (2014: 120%).

Both the Escrow and Assurance divisions have continued to grow organically and the newly launched Domain Services division now provides a comprehensive range of services to support the Group's aspiration to make the Internet safer for corporates and consumers alike.

The Group's markets continue to evolve quickly and NCC Group remains active in innovating and creating new services to address the numerous emerging opportunities. Innovation, creation and research and development are the key touchstones of the Group's development and growth.

The Escrow business has continued to develop its SaaS service and additionally is now providing Escrow services to more than 45% of all the new domains that have been delegated and registered so far by Internet Corporation for Assigned Names and Numbers (ICANN).

Online security is failing to keep up with the numerous types of individual and indeed organisations that transgress the Internet. The threat of being hacked or having valuable data stolen continues to evolve rapidly and grow at a seemingly unstoppable pace. The Board believes that the world cannot be made truly safe from digital crime.

As the number and range of threats proliferate, being innovative and using the Group's experience and skills to protect individuals and corporates becomes more important than ever. The Group's aim is to deliver a safer and more secure Internet world in which to navigate and transact. It is doing this by providing the best security consultants to world leading clients as well as conducting world beating security research.

In line with the Group's acquisition strategy, Accumuli was acquired to complement the business' geographical and technical presence. Accumuli is one of the UK's leading security consulting and security operations centre providers. Its addition will increase the Group's UK footprint and also enable it to supply a wider range of security related services to customers.

NCC Group is now a comprehensive one-stop security services consultancy that caters for all of an organisation's needs.

As part of the Group's vision to create a safer Internet for all, the business formed and has heavily invested in the Domain Services division over the last few years. After acquiring the new generic TLD .trust, earlier in the financial year, the Group set about helping define and guide the market as to the requirements of an organisation's domain needs.

The domain marketplace has radically altered and the need to bring sanity, order and security is now even more pressing. The Division can now provide this. It is equipped with all the services an organisation should need to operate securely on the Internet, from registering a domain, applying to ICANN for a new Top Level Domain (TLD), complying with ICANN regulations, and enabling the domain to operate securely on the Internet. This can be achieved due to the investment in both .trust, and technologies that support it, alongside the formidable consultancy and back-end operation services which are provided by Open Registry.

The Group believes that organisations need to move quickly to own and manage their own domains and to protect themselves and their customers from attack. A branded domain or being part of the .trust secure community is the best way for a customer to be sure who they are transacting with.

The Group's objective is to help and support customers with their domain strategy and to provide them with a secure gated environment to improve their customers' experiences and reduce the threat of cybercrime.

The rate of change in the Domain Services marketplace makes it an exciting development for the Group and one where the Board anticipates strong returns in future years.

Overall NCC Group's strategy remains fundamentally unchanged. The Group aims to develop its three complementary divisions both organically and by acquisition to deliver excellent service and value for money to customers. This will drive growth across the Group.

Outlook

The whole organisation is totally focused on client risk mitigation and delivering peace of mind, through a complementary range of services offered to an increasing range and number of multinational clients to address their business issues.

Across the Group the current financial year has started well and the market for its services is stronger than ever.

The Group's recurring income is significant and has increased. The start of the current financial year sees Group Escrow renewals at £18.5m up from £18.0m in the year to 31 May 2015 and a verification order book of £2.4m. The Assurance division order books have improved to £32.3m (2014: £25.3m) and have £6.8m (2014: £6.8m) of monitoring renewals forecast for the current financial year. Additionally Accumuli has an order book of £2.7m, with many renewing contracts, which by the next half-year, will be restated in accordance with Group reporting.

The Group's total renewals and order books now stand at £62.7m (2014: £53.0m).

The Domain Services division now covers more than just .trust. It also encompasses our range of managed security services and the domain consultancy and back end operation services provided by Open Registry. The pipeline for .trust customers continues to grow and the prospects for this Division have never looked better.

The Group remains confident that the .trust secure gated community, alongside the provision of a range of secure monitoring services for the branded domains, will start to produce good revenues in this new financial year and become a significant contributor in the coming years.

While the Board expects Domain Services to generate revenues in the financial year ended 31 May 2016, the division is still expected to report a modest loss this year as the Group continues to roll-out and invest in its new capabilities. However, it is expected that the Division will make a positive contribution in the financial year to May 2017 as all the service lines start to contribute fully. 

In summary, the outlook for NCC Group remains very positive. The Group is operating in a number of growing international markets with a range of new and innovative products and services as well as the existing extensive capabilities. The global economic uplift will also help all of the Group's divisions.

As a consequence of all these factors, plus the progress made by Domain Services, alongside the integration of both Open Registry and Accumuli, the Board is confident that the Group can continue to deliver sustainable growth and enhanced shareholder value.

Operational and financial review

Group revenue

For the financial year ended 31 May 2015, the Group increased revenue by 21% to £133.7m (2014: £110.7m) with the revenue split being 47%:53% (2014: 49%:51%) between the first and second halves of the year. Organic revenue growth was 18% (2014: 12%).

On a constant currency basis, the Group revenue growth would have been 19% (2014: 15%) as both the dollar and euro exchange rates against the pound varied considerably during the year. Due to the natural hedging through the intercompany loans, the impact on the Group's operating profits was minimal. The Group does not hedge against currency fluctuations.

In the year 54% (2014: 60%) of revenue, £72.1m (2014: £66.4m) was derived from the UK. Continental Europe contributed £13.5m (2014: £10.5m) with the Rest of the World revenue increasing strongly to £48.1m (2014: £33.8m), some 36% of Group revenue.

Group Escrow now accounts for 24% of the Group's revenue (2014: 28%) as the Assurance business continues to see faster organic growth as well as benefiting from the one month's revenue from the newly acquired Accumuli plc. Domain Services saw revenues from Open Registry, acquired in January 2015, as well as the £3.1m proceeds received from settling the contention for the Group's application for the .secure domain.

The Group's recurring income is significant and has increased. In Escrow UK more than 89% of all contracts renewed (2014: 88%). Assurance saw 83% of its revenues renewed (2014: 76%), this now represents 52% of all customers (2014: 46%). In addition, 91% (2014: 91%) of the performance monitoring revenues renewed and are recurring.

The increasing number of customers that are renewing in Assurance has resulted in renewing Assurance customers' expenditure marginally increasing from £73,225 to £73,752 with total average customer spend increasing to £53,760 from £44,689.

The recurring revenues and average customer order values exclude Accumuli, which is currently being integrated in to the Group's reporting processes and procedures.

The Group continued to have minimal reliance on any one customer or sector. Within Assurance the largest customer represents 9% of Assurance revenue which is 6% of Group revenue. The largest customer in Escrow is 1% of total Escrow revenue. The majority of revenue for Domain Services came from the withdrawal of the application for .secure and so has not been included in the sector analysis.

Escrow Division

The Group's Escrow business, the cornerstone of NCC Group's profitability, produced another very solid year's performance with a substantial margin and very strong cash conversion, as well as a high degree of recurring revenue, due to consistent contract renewal rates of over 88%.

The Escrow division increased revenue by 5% to £32.0m (2014: £30.5m) and profitability grew by 5% to £18.9m (2014: £18.1m).

Group Escrow recurring revenue renewals, grew to £18.5m (2014: £17.9m). Group Verification revenues grew by 11% in the year to £8.3m (2014: £7.5m).

Escrow UK. Escrow UK revenue was £23.7m (2014: £22.5m). This 5% growth in revenue (2014: 8%) was delivered through contract growth and verifications, with only a limited amount coming from the effects of the price increase introduced during the year.

Escrow UK recurring revenues increased to £13.2m (2014: £12.8m) and terminations remain below 11%.

Escrow Europe and Escrow US. Escrow US revenues grew by 11% to £5.2m (2014: £4.7m) and Escrow Europe revenues were £3.2m (2014: £3.3m).

Escrow UK now has 86 employees (2014: 103), Escrow Europe has 14 employees (2014: 17) and the North American Escrow businesses have 32 employees (2014: 38).

Assurance Division

Assurance now accounts for 73% (2014: 72%) of Group revenues with total divisional revenues increasing by 21% to £97.0m (2014: £80.2m), 18% organically. Profitability grew by 21% to £17.0m (2014: £14.0m).

The acquisition of Accumuli had less than a two percentage point impact on organic growth, as it was acquired on 30 April 2015 and so only contributes for one month of the reported period.

Security consulting revenues grew 25% to £72.1m (2014: £57.5m) while also ensuring that utilisation rates remained suitably low to combat any staff retention issues. Web Performance had a recurring revenue rate of 91% (2014: 91%), continuing its strong track record of client retention.

The Assurance division primarily provides security consulting services. In the UK this is delivered under the NCC Group brand. From 1 June 2015 in North America, the security consulting services, which are being sold by iSEC, Intrepidus, Matasano or NGS will be provided under the NCC Group name alone.

Security consulting includes penetration and application security testing, operational response, forensics, social engineering and managed monitoring along with the compliance-based services such as, card and information security standards and security auditing.

From 30 April 2015 the Division benefited from the acquisition of Accumuli, which offers complementary security services and products as well as being a trusted third party which the Group has worked alongside for a number of years.

Accumuli offers a broader and a natural expansion to the very specialist services being provided by the Group. It brings Security Operations centres, security and big data related third party product sales as well as complementary managed services and some security and risk consultancy.

In due course, the Group as part of the integration process, intends to consolidate appropriate managed service offerings together into Domain Services, as the solutions that are being offered to provide clients with peace of mind around their web estate, are very similar. The technologies already employed within the Group are similar to those being developed to deliver the secure .trust domain and consolidation will further improve the services offered to all clients.

Web performance testing is less than 10% of Assurance revenues and involves continuously monitoring the performance and load capability of organisations' websites. This is a SaaS-based service that relies heavily on a world-class product with the highest levels of customer support. Ultimately it is envisaged that this, along with the security operations centres and software sales parts of the Group, are combined together as they are all focused on the highest levels of customer support and delivery.

The business unit employs 929 employees globally (2014: 590) and uses 158 associates (2014: 122).

Domain Services

In May 2012, the Group established a new wholly owned subsidiary, in California, to develop the critical infrastructure and know-how to create a universal environment for end users to safely operate and navigate the Internet.

In January 2015 the Group acquired Open Registry to provide the technical know-how and software to operate as a secure registry and registrar in order to offer a complete end to end service for all of a client's ICANN related requirements. It also provided the platform to grow the European part of the Division.

Domain Services now accounts for almost 4% (2014: 0%) of Group revenues with revenues coming from the recently acquired Open Registry and the compensation received for the Group's withdrawal of its .secure domain application from the ICANN process.

Since 2012, the Group has invested a total of £16.3m in this division. £8.2m has been expensed including £4.9m in the financial year to 31 May 2015 (2014: £2.1m).

Development costs amounting to £3.1m were written off as they were no longer deemed realisable due to changes in the development process or the product roadmap. At the end of the financial year to May 2015, the Group has capitalised £8.1m which includes the purchase and delegation of the domain .trust which represents £3.0m of the capitalised amount.

Domain Services is now positioned to offer a complete suite of domain and online brand protection services. Through automated tools and managed services it can assist a corporate planning its domain strategy through to the execution of a secure gated eco-system.

In advance of the application process, the Group can provide a unique brand estate review to its corporate clients to determine exactly what is owned and operated by whom. The Group is then in a position to take over the domain management for corporate clients and support their domain strategies having completed this review.

After delegation and the registration of TLDs for a corporate, the adherence with ICANN rules is ensured by the Group's domain abuse tool including its security policies. These include the same seamless continuous monitoring solutions that support the Group's own 'gated community' .trust.

Profitability and margins

NCC Group continues to generate strong margins and adjusted Group operating profit grew to £26.4m (2014: £26.0m), including net operational expenditure of £4.9m (2014: £2.1m) in Domain Services and excluding the amortisation of acquired intangibles, exceptional items and share-based charges, as set out in the table below.

Despite the increased percentage of revenue from the non-escrow businesses and the effects of the Domain Services operational expenditure, overall adjusted operating margins remained strong at 20% (2014: 24%).

Excluding the Group's operational expenditure on the development of Domain Services and including the Group's corporate costs of £4.6m (2014: 4.0m). Group operating profits grew by 11% and operating margins would have been 23%.

The Escrow division's operating margins remained strong at 59% (2014: 59%) whilst the Assurance division improved its underlying operating margins due to close cost control and pricing to 18% (2014: 18%).

Contained within exceptional items in 2015 is the one off, net of legal fees, benefit received in settling the legal claims in relation to the abortive implementation of SAP and fees relating to acquisitions.

Adjusted Group pre-tax profit improved to £25.5m (2014: £25.3m) after an interest charge of £0.9m.

The Group's reported pre-tax profit was £21.4m (2014: £23.2m), after the inclusion of the unwinding of the discount on the acquisitions' contingent consideration, amortisation of acquired intangible assets, share based payment charges and the exceptional items.

Taxation

The Group's effective tax rate is 22% (2014: 22%), which is marginally above the average standard UK rate of 21% (2014: 23%). The effective tax rate remains low due to the continued investment in Domain Services and the US tax treatment of these costs.

Earnings per share

The adjusted basic earnings per share from continuing operations was 9.5p (2014: 9.5p).

The table shows the effect on the Group's basic earnings per share of the amortisation of acquired intangibles, share based payment charges, unwinding of the discount on the contingent consideration for acquisitions and the effect of the exceptional items.

The adjusted fully diluted earnings per share from continuing operations was 9.4p (2014: 9.3p) whilst reported fully diluted earnings per share was 7.8p (2014: 8.6p).

 Dividends

The Board is recommending a final dividend of 2.68p per ordinary share, making a total for the year of 3.98p up 14%. This represents cover of 2.4 times (2014: 2.7 times) based on basic adjusted earnings per share from continuing operations.

Since the Group's flotation in July 2004, the dividend has increased from 0.42p to 3.98p, a compound annual growth rate of 25%.

If approved at the Annual General Meeting, the dividend will be paid on 25 September 2015 to shareholders on the register at the close of business on 25 August 2014. The ex-dividend date will be 28 August 2015.

Cash

The Group continues to be highly cash generative with an operating cash flow before interest and tax of £24.3m (2014: £28.9m), which gives a cash conversion ratio of 107% of operating profit before interest and tax (2014: 120%).

It is expected as the mix of business continues to change due to the increase in Assurance revenues, the percentage will be between 100% and 110%.

After accounting for net cash outflows of £19.8m for acquisitions and contingent acquisition payments, the Group ended the year, as expected, with net debt of £50.6m (2014: £23.6m).

In the financial year to May 2015, during the development of Domain Services, the refurbishment and opening of new offices and the roll-out of the new IT solution, the Group spent some £13.0m (2014: £10.8m) on capital expenditure. However, the Group also benefited from resolving the contention for the application for the domain it had applied for in January 2015 for £3.1m and for settling the on-going litigation with a former supplier for £2.0m in April 2015.

In the current financial year to May 2016, the capital investment programme is expected to drop to some £10.0m.

The Group's banking facility with the Royal Bank of Scotland, which provides a £78m revolving credit facility and a £2m overdraft, runs until July 2016. Interest on the facility is charged between 1.5% and 2.25% over LIBOR based on the Group's net debt/EBITDA ratio.

The facility provides the Group with the necessary capacity to meet its current acquisition objectives, although this is regularly reviewed to ensure that unnecessary fees are not incurred due to non-utilisation. The Group was utilising 64% of the facility at the year end.

Group strategy - delivering sustained growth based on innovation and stability

NCC Group is a global information assurance specialist providing organisations worldwide with expert escrow and verification, security consulting, web performance, software testing and domain services.

The Group set about building its future around the software escrow business while looking for new areas of growth in the then uncharted territory of information and cyber security. Since then, through carefully constructed, controlled and sustainable organic growth along with a carefully planned and well-executed strategic acquisitions programme, the Group has developed into a leading multinational provider in both areas.

The Group operates in three distinct but complementary divisions; Escrow, Assurance and Domain Services. These businesses do not actively cross-sell but do share information, intelligence and relationships to ensure that the appropriate products across our portfolio are made available to all our clients.

All divisions are tasked with and measured on, providing the best client service, allied to offering appropriate services to help mitigate risk. The Group is cautiously, but actively looking for acquisition opportunities and will continue to look for complementary businesses that either further strengthen our market position, geographic presence or appropriately extend our service offering.

Each division has a common objective, to innovate and develop further its product sets, to ensure that it remains at the forefront of thought leadership and delivery, as well as to expand geographically where appropriate.

Escrow Division

The Escrow Division remains the foundation of the Group and is the platform from which the organisation has been built. The fundamentals of the Group are fully encapsulated in the product, which is based around the very highest standards of customer care and equitable treatment to both customers in the contractual relationship.

Escrow offers a high value product for a low, in comparison, investment. Due to its importance to clients, it provides the Group with good recurring revenues along with good margins and cash generation. Escrow can be provided both in the traditional software market as well as in all iterations of the outsourced model, as the basic underpinnings are the same, protection from an event that disrupts the relationship between the owner and licensee of a software product.

Escrow is also an ICANN requirement for all registrars and registries of domains. To date, the Group has been successful in providing registry data escrow services, where the IP address of each domain registered within a TLD is safely secured. The Group expects to make inroads into the Registrar Data Escrow marketplace, particularly to support European customers.

The cash flow and profitability of Escrow are reinvested to produce not only better Escrow products and services, but also other areas of complementary services to help clients mitigate their information and cyber security risks across the Group's two other divisions.

Assurance Division

The strategic direction and cultural philosophy of the Assurance Division is about evolution and so research is key to being successful in the market place. Information and cyber security are constantly and rapidly changing with new areas of concern and vulnerabilities frequently and regularly being discovered.

To stay ahead in what has become a cyber-arms race, the Group's global corporate culture is aligned with this rapid and constant change. NCC Group has created boutique ways of working with cultural values that encourage individuals to fulfil their full creative potential.

While combatting the threat of cybercrime is a clearly stated objective, so is finding a safer way for the world to navigate, communicate and transact on the Internet.

Accordingly, the Division's strategy is to constantly demand the generation of new ideas and initiatives to fulfil this. However, while not all ideas make it to product development or design, each is critically, technically and commercially appraised before any financial commitment is made.

To allow this creativity to flow there is a requirement that the organisation is committed to remaining independent and listening to its clients' requirements as well as looking to complement what the Group does with services that are currently not supplied.

To that end, new product or service lines are looked at from a make or buy standpoint. Acquisitions are carefully analysed and decisions to acquire Assurance businesses are based upon culture, fit and service but never on the basis of profit enhancement by cost reduction or the ability to turnaround an ailing business.

The Group has to date been product agnostic and avoided being a reseller of third parties' products, software or services, but this can in certain situations compromise the Group's ability to deliver client solutions. The acquisition of Accumuli required the Group to ensure that the channel and product model employed did not blur the product independence line, nor its independent service capabilities.

Following a very detailed due diligence process, the Group was satisfied that its clients are being supplied the right set of products from a controlled process of recommendation even if the product is not sold by NCC Group.

The Group does not provide white label solutions for third parties to resell, nor does it enter into any strategic alliances that could in any way appear to compromise the Group's objectivity or independence. The Group's scale now, with one of the worlds' largest security consulting teams, means that it is capable of leading all bids rather than having to look for support from larger third parties.

Integrity and credibility, alongside technical capability, are the leading cultural values of the Group and the fundamental underpinning of our strategy to innovate, create and make safe. This will ensure the Group remains an independent, unbiased organisation and maintains its place as the trusted provider of choice in the security services marketplace.

As much of the work carried out by the Group is research based, the decision was taken to be equitable and ethical in its disclosure policies. Research paid for by third parties and customers will not be disclosed unless requested by the paying organisation.

Self-funded research by the Group will always be provided to the organisation that it affects in full, free of charge and without disclosure, until such time as the vulnerability has been resolved, provided that it is done so in a reasonable timeframe. However, this does not preclude the Group making a full public disclosure if there is a threat to life or to the general public's online security, and the third party is unwilling to remediate the issue.

Domain Services

The strategic objective of the Division is to create a safer Internet for all. The Internet will only survive as a usable vehicle for commerce and industry if there are radical changes to operator and user behaviour.

The Domain Services division was created in 2012 as a result of the Assurance Division fulfilling its strategic objective of innovating a service that will provide a safer Internet. Utilising the changes in the domain world, the concept of creating a secure gated community from within which its occupants will be able to offer its users the missing vital Internet component, trust, was born.

Over the past 12 months, the divisional strategic objective has been developed and expanded to help those with their own branded domain and wish to create their own secure communities to offer their customers peace of mind on their web estate. In reality this means NCC Group providing a trust service to its client base on the Internet alongside the Group's own secure community, .trust.

NCC Group now offers a full suite of services, so that in advance of the ICANN application process reopening (expected in 2017), organisations can establish their own brand and domain estate strategy alongside the processes to launch and execute the service.

Currently there are only 600 branded TLD's and it is widely expected that many times this number will be applied for in the next round of applications. The proliferation of branded domains will occur because the Internet is becoming totally unsafe due to the uncontrolled expansion of open generic TLDs that allow anybody to register any domain, regardless of their rights to ownership or intention.

It is clear that the open generic domains and city codes have not been taken up as well as expected in the first round of new TLD introductions. Almost all of these fell well short of their initial registration targets. However, even at these reduced levels of uptake, this does not help the safe traversing of the Internet, as there are still large numbers of domains available for unscrupulous operators to use as a basis to defraud.

The mass volume generic domain model is no longer a valid or appropriate tool for businesses to manage their web estates as organisations are now faced with huge and increasing uncertainty as to which of the domains they should register. With hundreds of generics to choose from and to register to, along with the multitude of iterations of an organisation's name, the ability for nefarious third parties to pretend successfully to be an organisation now has limitless opportunities.

Organisations could potentially try and register every algorithmic iteration within every generic top-level domain, but that is administratively daunting, very difficult and hugely costly. Further, the increasing mistrust of users of the Internet has seen a much lower than expected take up of generic domain registrations.

The vast majority of domains are being given away for free in the hope that they will be renewed annually. This model is not sustainable and as the market evolves and some of the open generic domains fail financially, others will become dominated by corrupt powers using them for criminal purposes.

Ultimately it is expected that a number of generic domains and operators will fail which will create further issues for ICANN and organisations alike, as confusion spreads into the marketplace.

The emergence of the branded and closed domains will be seen as the way forward. Being a closed domain ensures that no spoofing can take place as the registration to that domain is restricted to and controlled by the owner, most likely a brand owner, or NCC Group in the case of .trust.

Most importantly only the rightful owner of a domain can sell or use a domain or any iteration of it, the opportunity for criminals to use it to cyber spoof or cyber squat is eradicated. This is the underlying principle of .trust.

As expected, a number of the branded domains are starting to declare their strategy and to use their domain as a safe haven for client and customer transactions and communications. As the consumer starts to understand and acknowledge that a branded domain is safe, particularly for financial and retail transactions, those without a domain of their own will start to become concerned about losing their competitive advantage online.

As the second round of applications begins, more brands and large organisations will therefore apply for their own domains. Not only does a closed domain offer some security benefits, it also enhances the retail and communication experience, it gives organisations the opportunity to be able offer a controlled and potentially safe eco-system within the Internet.

For a gated community to work fully, it also requires the operator to maintain a high bar of security within their web estate. The .trust community operates in exactly that way as its foundation was first based upon creating internationally accepted policies. These procedures set security standards at the highest level achievable for organisations, as well as creating a mechanism that allows continuous monitoring against those standards to ensure that the clients' environments offer that level of security. This is unique and the tools that monitor compliance are best in class.

Additionally, these closed generics will also top the natural search engine ranking, making them more visible to their target markets. Ultimately, however, for this to work they will need to add a high bar of security and permanent monitoring to their environment to offer their customers the peace of mind they demand and should expect.

As this happens, customer confidence will return to the domain landscape where today 87% of independently surveyed consumers have declared a genuine unease.

Domain Services is ideally placed to help organisations provide their online customers with confidence. The Division provides: the know-how to navigate the complex application process; how to delegate and operate a domain; control over registrations both for the closed domain and for the portfolio of registered domains, while ensuring the service is in full compliance with ICANN's rules and regulations; and most importantly a monitored and controlled secure environment set against the highest appropriate security policies. Domain Services is a complete one-stop, safe Internet service.

It is against this backdrop that the Group is offering this service through its domain .trust to a select number of global organisations as well as helping organisations define what their domain strategy is, and in many instances, how to use the branded domain that they have applied for and now own.

The business model is based around expected high renewal rates, good margins and the highest standard of customer service. The take on of new customers will be slow and cautious ensuring that the transition to .trust or using their own secure domain is successful.

The long term strategy is that Domain Services and Assurance will develop a symbiotic relationship as the opportunities to cross-sell Assurance services increases as the .trust and branded domain communities develop further.

Business performance measures

The Group manages the business using the Key Performance Indicators shown in the table below. Reporting is daily, weekly and monthly and has different levels of granularity according to each manager's responsibility. The provision of accurate and quickly produced management information has always been integral to the Group.

Consolidated income statement

For the year ended 31 May 2015

Consolidated Statement of comprehensive income

for the year ended 31 May 2015

Consolidated statement of financial position

at 31 May 2015

These financial statements were approved by the Board of Directors on 8 July 2015 and were signed on its behalf by:

Rob Cotton

Chief Executive, NCC Group plc

4627044

8 July 2015

Consolidated statement of cash flows

for the year ended 31 May 2015

Statements of changes of equity

for the year ended 31 May 2015

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 financial statements have been approved for issue by the Board of Directors on 8 July 2015.

The financial information set out herein does not constitute the company's statutory accounts for the years ended 31 May 2015 or 31 May 2014, but is derived from those accounts. Statutory accounts for 2014 have been delivered to the registrar of companies, and those for 2015 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. 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 its Group.

The Group financial statements are prepared by the Directors in accordance with International Financial Reporting Standards as adopted by the EU ("Adopted IFRS").

The financial statements have been prepared on the basis of the accounting policies set out in the Group's last Annual Report and Accounts except for the application of relevant new standards. A number of new standards and amendments to existing standards were effective for the financial year ended 31 May 2015. 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 be significant.

Going concern

The Group funds its strategic acquisitions and meets its day to day working capital requirements via a revolving credit facility of £78m and an overdraft of £2m. This facility was agreed in March 2015 and is due for renewal on 31 July 2016.

The Group's forecast and projections taking into account reasonably possible changes in trading performance show that the Group is able to operate within the level of this facility and as a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.

The Directors acknowledge the forthcoming need to renew the facility and fully expect to be able to secure sufficient facilities to enable the group to continue to operate.

After making enquiries, the Directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for the foreseeable future.

Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

2 Segmental information

The Group is organised into three operating segments (2014: three) Escrow, Assurance and Domain Services 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 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.

All revenue is in relation to services provided.

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

3 Exceptional items

The Group identifies separately items as "exceptional". These are items which in management's judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information. Subsequent revisions of estimates for items initially recognised as exceptional provisions are recorded as exceptional items in the year that the revision is made.

During the year, the Group received a settlement of £2,000,000 in respect of a claim to recover costs incurred on an IT system termination in May 2012. Associated legal costs amounting to £201,000 were incurred in the financial year (2014: £334,000).

Acquisition related costs of £2,387,000 (2014: £292,000) consist of professional fees incurred in relation to the acquisitions made during the current and previous years (see note 15).

In the prior year, the Directors re-assessed the fair value of contingent consideration held in respect of business acquisitions and this resulted in a £1,894,000 release of provisions held.

The unwinding of the discount on contingent consideration in 2015 relates to the acquisitions of FortConsult A/S and Open Registry Group.

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

4 Expenses and auditors' remuneration

5 Staff numbers and costs

Total aggregate emoluments of the directors in respect of 2015 were £1,633k (2014: £1,718k). Employer contributions to pensions for executive directors for qualifying periods were £68k (2014:63k). The aggregate net value of share awards granted to the directors in the period was £679k (2014: £630k). The net value has been calculated by reference to the closing mid-market price of the Company's shares on the day before the date of grant. During the year 279,561 share options were exercised by directors (2014: 354,430).

Group

The average monthly number of persons employed by the Group during the year, including Directors is analysed by category as follows:

The aggregate payroll costs of these persons were as follows:

6 Net financing costs

Contingent consideration related to the acquisition of subsidiary undertakings has been discounted to its present value. The unwinding of the discount on contingent consideration, relating to FortConsult A/S, Matasano Security LLC and Open Registry Group, has been treated as a finance expense and is analysed in the table below:

The risk adjusted discount rate used was 7% (2014: 7%). The total net present value of the contingent consideration as at 31 May is shown in the following table:

Current liabilities includes £nil (2014: £2,940,000) in respect of contingent considerations (see note 17).

7 Taxation

Recognised in the income statement

Reconciliation of effective tax rate

Current and deferred tax recognised directly in equity was a charge of £47,000 (2014: charge of £443,000).

A reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2014. This will reduce the Company's future current tax charge. The deferred tax liability at 31 May 2015 has been calculated based on the rate of 20% substantively enacted at the balance sheet date.

8 Dividends

9 Earnings per share

The calculation of earnings per share is based on the following:

The average market value of the Company's shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.

10 Profit attributable to members of the parent company

The profit for the year dealt with in the accounts of the parent company was £7,506,000 (2014: £12,709,000).

11 Intangible assets - Group

Management have used business forecasts in determining the recoverability of the asset value of software and development costs relating to the creation of new products and services. The remaining useful economic life of customer contracts and relationships is between 2 and 11 years.

The internal development cost additions of £3.1m represent £6.2m of capitalised costs and a write off of £3.1m relating to developments that were no longer deemed realisable due to changes in the development process or the product roadmap.

The Group has made two acquisitions in the year, details of which are included in note 15. The Company has no intangible assets.

For the purpose of impairment testing, goodwill has been allocated to the Group's three operating divisions, which are also operating segments, as these represent the lowest level at which goodwill is monitored for internal management purposes.

Goodwill considered significant in comparison to the Group's total carrying amount of such assets has been allocated to cash generating units for the purposes of impairment testing as follows:

When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market discount rate.

Cash flow projections are based on the Group's current annual operating plan with year two assumptions for expected revenue growth and gross margins based on past experience. Beyond the two year plan the projections are extrapolated using an estimated long-term growth rate of 2.5% (2014: 2.5%). The growth rates represent management's best estimate of a long term annual growth rate in EBITDA. A different set of assumptions may be more appropriate in future years dependent on changes to the macro-economic environment.

The discount rates used are based on management's calculation of the weighted average cost of capital using the capital asset pricing model to calculate the cost of equity. A range of alpha factors were used to reflect the risk of the cash generating units.

The discount rate has been calculated to reflect the latest market assumptions for the risk-free rate, the Equity Risk Premium and the net cost of debt. Pre-tax market discount rates of 10.1%-12.7% (2014: 10.5%-15.8%) have been used in discounting the projected cash flows.

The Directors do not believe that a reasonably possible change of assumptions would cause the recoverable amounts to fall below book value for any of the cash generating units due to the significant levels of headroom.

12 Plant and equipment - Group