Ncc Regulatory News (NCC)

27 September 2023

NCC Group plc

Preliminary unaudited results for the year ended 31 May 2023

NCC Group plc (LSE: NCC, "NCC Group" or "the Group"), a leading independent provider of global cyber security and resilience services, reports its full year results for the 12 months to 31 May 2023 ("the full year", "FY", "2023", "the year").

Highlights

Footnotes: 1: Revenue at constant currency, Adjusted operating profit, Adjusted basic EPS, Net debt excluding lease liabilities and cash conversion are Alternative Performance Measures (APMs) and not IFRS measures. See Note 3 for an explanation of APMs and adjusting items, including a reconciliation to statutory information. 

2: Excludes the impact of the fair value revenue adjustment on 2022 comparator (£4.4m). Following the acquisition of IPM in the prior period, goodwill and intangible assets were recognised amounting to £68.6m and £92.6m respectively. Management was required to recognise all assets and liabilities at fair value, giving rise to a fair value adjustment on the level of deferred revenue acquired of £12.1m. This had resulted in a downward adjustment to the book value of IPM's deferred revenues reflecting the fair value of service still to be delivered. If the fair value adjustment had not applied, revenue would be £4.4m higher for the 12 months ended 31 May 2022. On this basis, management disclose unaudited proforma revenue information to show the consequential impact on the Group and Software Resilience results for the year ended 31 May 2023. See Note 3 for an explanation of unaudited proforma Revenue. Unaudited proforma Revenue is an APM and not a IFRS measure.

n/m: not meaningful

FY23 results

FY24 current trading

Outlook

Strategy

Mike Maddison, Chief Executive Officer, commented:

"While the market conditions we announced in our March Trading Update have impacted our FY23 revenue performance and profitability, we are confident about the medium-term growth drivers for cyber security and that continued progress on strategic actions will position the business to deliver greater growth and profitability in the years ahead.

I am pleased to report that since the launch of our Next Chapter strategy in February 2023, the Group has delivered foundational components of strategic change to create a more agile and resilient business, improve profitability and deliver shareholder value. I am grateful to all my NCC Group colleagues for their unwavering commitment and energy as we execute our plan to capitalise on the enduring opportunities in our markets, particularly given the material cost savings that we are realising in the business.

We have fortified our leadership team in key areas with high-calibre individuals with deep cyber industry expertise, accelerated the diversification of our client base across our fastest growing sectors, launched our new global delivery and operations centre in Manila and will reveal today a new distinct brand for our Software Resilience business, which will give us a clearer, simpler proposition with which to increase our presence in this market".

Analyst presentation briefing and Q&A session:

A briefing for analysts will be held today at 9am via an in-person meeting and a live webcast and conference call.

The in-person briefing will be held at The London Stock Exchange - 10 Paternoster Square, London, EC4M 7LS. For those who wish to attend the in-person briefing please contact NCCGroup-maitland@h-advisors.global

To access the live webcast, please register in advance here: https://www.lsegissuerservices.com/spark/NCCGroup/events/5dee2e8d-129d-4814-9d7e-0f9bf8faa483

To access the conference call, please register to receive unique dial-in details here:

https://services.choruscall.za.com/DiamondPassRegistration/register?confirmationNumber=7338729&linkSecurityString=12f453725d 

A recording of the presentation will be made available later in the day on the Investors section of NCC Group's website at https://www.nccgroupplc.com/investor-relations/results-media/

About NCC Group plc:

NCC Group is a people-powered, tech‑enabled global cyber security and software escrow business.

Driven by a collective purpose to create a more secure digital future, c2,000 colleagues across Europe, North America and Asia Pacific harness their collective insight, intelligence and innovation to deliver cyber resilience for over 14,000 clients across the public and private sector globally.

With decades of experience and a rich heritage, NCC Group is committed to developing sustainable solutions that continue to meet clients' current and future cyber security challenges.

Cautionary note regarding forward-looking statement

This announcement includes statements that are forward-looking in nature. Forward-looking statements involve known and unknown risks, assumptions, uncertainties and other factors which may cause the actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Except as required by the Listing Rules, Disclosure and Transparency Rules and applicable law, the Group undertakes no obligation to update, revise or change any forward-looking statements to reflect events or developments occurring on or after the date such statements are published.

Chief Executive Officer Review

An ever-changing market

There is only one certainty in our industry: change.

I have worked in this space since the 1990s when "computing security" was a niche specialism. Today, Cyber Security is high on the risk registers of every enterprise and government in the world, and this industry will continue to change as Cyber Security becomes even more fundamental to societies and economies. Our lives are becoming more digitally connected each year, cyber criminals and nation states are constantly innovating and improving their attack capabilities, and AI and quantum computing have the potential to cause paradigm shifts that will reverberate around the globe.

As a business we have to be alive to the pace of this change. If we stand still, we will be left behind.

Our next chapter strategy is designed to address this challenge head on, creating an organisation that gets ahead of its market drivers with foundations that are fit for today and the future. It is relentlessly focused on clients and our ability to address the issues they face.

It sees us become even more globally integrated, while confidently telling our story with an energised, simplified brand. This is why - even against the backdrop of a challenging year - I am so optimistic about where we are heading.

NCC Group exists to make the world safer and more secure. This purpose remains unchanged. But the market has changed around us, so as a business we must adapt.

A client-centric approach

When I joined NCC Group I was immediately struck by the breadth and depth of our technical expertise. It is truly world class. Our insight, innovation and intelligence are respected globally.

This expertise sits at our core. However, we have to unlock its potential by harnessing it to create solutions that are designed around the needs of our clients.

This starts with clarity around the markets we serve. It's why our strategy sees us focus on our fastest growing sectors - specifically those which are highly regulated and most exposed to cyber risk, like financial services, industrials and technology. We will build deeper relationships at the C-level within those businesses to give us the opportunity to move beyond transactional sales and into the position of trusted advisor. We have brilliant individuals in our business who are already working at this level, but we will invest in the right talent to enable scale.

With that in place, we can properly unlock the potential of our expertise and be a true end-to-end Cyber Security services partner that can deliver business outcomes.

In practice, this means rather than simply testing a client's infrastructure annually, we'll also work with them to address the security vulnerabilities we discover. Rather than providing a one-off incident response to a client following a cyber-attack, we'll provide consultancy and remediation after the event to enable greater resilience - and then manage their Cyber Security operations 24/7.

This is why we are making targeted investments into specific capabilities - like building out our consulting team and enhancing our Managed Services offering. It is all driven by our target customers and their needs.

We will have all the constituent parts to continually create these customer journeys. Our strategy sees us knit them together to ensure consistent, consultative client relationships globally - all powered by our unrivalled technical expertise.

True global delivery

As our industry continues to change, the way we deliver work is changing too. A standard penetration test - the evaluation of software or hardware to identify security vulnerabilities - is carried out in a very different way now to how it was 15 years ago. We are now more efficient, there is more automation, and we can test on a much larger scale.

The need for us to continually adapt was underlined during the pandemic. A significant amount of testing that previously took place on site at secure client locations was being delivered remotely. It showed that some low-level testing could be done in a different way, and at a lower cost.

Fast forward to 2023 and the cost cutting across the industry, and layoffs led by North American West Coast tech firms accelerated this move and we felt this acutely. Clients still need this service, but they want it delivered in a more cost-effective way.

This shift has informed our strategic focus on global delivery and flexible resourcing. We can get better at using capabilities in our Dutch business for client work in New York or harnessing our UK expertise for an Australian assignment. Our delivery has been too local and rigid in the past.

It's been a driving factor in our decision to open in September 2023 an offshore delivery and operations centre. Some of the best Cyber Security talent in the world is found in emerging markets - I've seen that first hand throughout my career - and this investment will mean we can harness that talent and complement it with our existing colleagues to be more flexible to our clients' needs.

We are trusted by governments and the most highly regulated organisations to test and manage their security. There will always be demand for in-market talent to work on sensitive, complex programmes of work. Our new delivery and operations centre simply means we can expand our capabilities and provide more value for our clients.

Communicating with impact

We also have an opportunity to better tell our story and explain the value we offer.

We provide counsel to governments around the world on high level Cyber Security issues. We are handpicked by the most significant businesses globally to protect their digital assets. We are trusted by critical national infrastructure providers to secure their systems and keep them running.

This trust has been created through our insight, intelligence and innovation. It has taken years to build. It enables us to act as a convenor of decision makers - on policy, regulation and the macro forces affecting our collective ability to secure our digital future.

This credibility and track record should form the core of our messaging. We have a unique position in the market. As a client, this is what you gain access to when you engage with us. Yet we have been reluctant to talk about it.

We are going to seize this opportunity, with our new Chief Marketing Officer bringing together our global marketing, communications and public affairs team to deliver on this strategy. It starts through the creation of distinct and relevant brands for Cyber Security and Software Resilience, with clearer, simpler propositions. From here we will focus on boosting our profile through marketing programmes designed around the C-suite in our target sectors. We will become more present, more active and bolder in our marketing and communications.

Financial performance summary

It's been a challenging year for the Group with a decline in the rate of revenue growth and overall profitability. Our revenue performance and profitability suffered from the market dynamics within Cyber Security. In particular, the Group experienced buying decision delays and cancellations in the North American tech sector and to a lesser extent in our UK market, effecting our Global Professional Services revenue and overall gross profit performance. These headwinds have further reinforced the need to accelerate the implementation of our next chapter of the Group strategy.

Group revenues increased by +1.5% on a constant currency basis 1 and +6.4% (2022: +16.4%) at actual rates. After considering the prior year Software Resilience fair value revenue adjustment (£4.4m) 2, Group revenues were flat at constant currency 1 (+4.8% at actual rates).

In our Cyber Security business, the Europe and UK and APAC businesses grew on a constant currency basis 1 by +3.9% and +3.0% respectively (+6.6% and +3.3% at actual rates), whereas our North American business declined -4.9% on a constant currency basis 1 (+5.5% at actual rates) following the decline in tech sector spend.

Global Professional Services declined by -3.1% to £199.3m on a constant currency basis 1 (+2.0% at actual rates) with delivered day rates increasing by +7.5% (2022: +2.1%) and direct utilisation decreasing by -10.0% pts. Global Managed Services (GMS) grew by +12.4% to £67.8m (2022: +6.7%) on a constant currency basis 1 (+15.7% at actual rates). New XDR service global sales orders for the forthcoming years increased +72.5% from £11.6m in 2022 to £20.0m in 2023.

In our Software Resilience business, following the completion of the acquisition of IPM in June 2021, we experienced our first full year of IPM contract renewals which contributed to overall growth in the division of +7.5% on a constant currency basis 1 to £64.3m (+14.2% at actual rates). However, considering the prior year Software Resilience fair value revenue adjustment (£4.4m), total Software Resilience revenue (on an unaudited pro forma basis 2) decreased by -0.5% at constant currency 1 (+5.9% at actual rates). Our Escrow-as-a-Service (EaaS), our cloud-based escrow proposition, generated sales orders of £4.8m, an increase of 38% compared to the prior year (2022: £3.4m). It's therefore pleasing to see that our new leadership team (appointed in November 2022) is starting to deliver momentum, consistency in quarterly growth, price rises, and realisation of efficiency contribution targeted at the time of the May 2022 operational review.

Gross profit decreased by -0.5% to £132.0m (2022: £132.6m) with gross margin percentage decreasing to 39.4% (2022: 42.1%). The 2.7% pts gross margin (%) decrease was due to the revenue performance of the Cyber Security business and the consequential impact on direct utilisation decreasing by -10% against a backdrop of lower attrition (15.5%).

Total administrative expenses have increased by 32.9% (£32.2m) to £130.1m (2022: £97.9m). This was mostly due to an increase in Individual Significant Items of £13.8m and an increase in people and training costs arising from inflationary pressures and further investment (including XDR set up) to support the business of c.£6.5m. Other higher costs include an increase in non-client travel and office costs (including the impact of our NCC Conferences) of c.£5m, depreciation and amortisation (including amortisation on acquisition intangibles) of c.£3m, marketing c.£1m and foreign exchange c.£1m.

Footnotes:

1: Revenue at constant currency is an Alternative Performance Measures (APMs) and not IFRS measures. See Note 3 for an explanation of APMs and adjusting items, including a reconciliation to statutory information. 

2: See Note 3 for an explanation of unaudited proforma total Revenue and a revenue adjustment of £4.4m to 2022 Revenue. Unaudited proforma total Revenue is an APM and not a IFRS measure.

Adjusting items to operating profit of £26.9m (2022: £13.4m) consists of amortisation of acquired intangibles (£10.0m), share-based payments (£2.2m) and Individually Significant Items (£14.7m). The Group has recognised an overall operating profit of £1.9m (2022: £34.7m), a decrease of -94.5%. As the Group manages its performance internally at an Adjusted operating profit 1 level, Adjusted operating profit 1 decreased by -40.1% to £28.8m (2022: £48.1m). This information which shows a decline in Cyber Security gross profit and overall profitability and an improvement in Software Resilience gross profit and overall profitability is disclosed below and reconciled to profit after taxation:

Footnotes:1 Adjusted EBITDA, Adjusted operating profit and Adjusted basic EPS are Alternative Performance Measures (APMs) and not IFRS measures. See Note 3 for an explanation of APMs and adjusting items.

2 Administrative expenses excludes depreciation and amortisation, amortisation of acquired intangibles, Share-based payments and individual significant items.

3 Depreciation and amortisation excludes amortisation of acquired intangibles.

Individually Significant items (ISIs) incurred during the year amounted to £14.7m. These items are represented mainly by an impairment in Goodwill of £9.8m for the North American Assurance business following the recent reduction in spend by technology clients and £4.2m in relation to fundamental reorganisation costs as we reshaped the Group to implement the next chapter of the Group's strategy. The impairment of North American Goodwill has been recognised based on the annual assessment of circumstances as at 31 May 2023. ISIs also include costs associated with the strategic review of our Software Resilience business (£3.0m) and an impairment of Goodwill (£3m) relating to our Danish business following its reorganisation. These were partially offset by a profit on disposal of our DDI business (£4.7m).

Profit before taxation decreased -113.9% to a loss of £4.3m (2022: profit of £31.0m) following the above revenue and gross profit performance, increased ISIs (mainly the impairment of North American Assurance Goodwill) and increased borrowing costs. Consequently, profit after taxation decreased -120.0% to a loss of £4.6m (2022: profit of £23.0m) giving rise to a basic EPS of (1.5p) (2022: 7.4p); Adjusted basic EPS 1 amounts to 6.1p (2022: 10.8p).

At 31 May 2023, our cash conversion 1 was 102.9% (2022: 101.9%). Net debt 1 amounts to £79.6m (2022: £85.0m). Net debt excluding lease liabilities 1 amounts to £49.6m (2022: £52.4m). Total borrowings (including lease liabilities) offset by cash and cash equivalents amounts to £79.6m (2022: £85.0m).

A global leader

We have faced a number of challenges this year. We've had to make some difficult decisions to ensure we are set up to achieve our purpose - to create a more secure digital future.

The reaction of our colleagues during this period has been remarkable and I am very grateful. The resilience and commitment they have shown in the circumstances has been inspiring. And it's this resilience which provides the foundations for us to execute our strategy and make NCC Group the global leader in Cyber Security and Escrow services.

We will emerge as a more confident and sustainable business built around the needs of our clients - one that is set up to adapt to our ever-changing industry.

This confidence is already starting to emerge as our strategic roadmap (Clients, Our capabilities, Global Delivery and Differentiated brands) begins to yield tangible results. Our relentless focus on being a global, agile and client focused business led by my new leadership team with recognised deep cyber industry experience, is resonating with our stakeholders. I'm particularly proud of the efforts of a multi-disciplinary team, who have enabled our new global operations and delivery centre in Manila to launched in September 2023. Not only do we have a fully staffed business ready to go, led by Saira Acuna, who previously ran our sales and client experience team in the APAC region, but we've also won work that we wouldn't previously have won as a result.

This is just one example of the progress being made across the strategy and if we continue to execute on what we said we would do - the future is bright.

FY24 current trading

Outlook

In Cyber Security:

In Software Resilience:

Strategy

Financial review

Overview of financial performance

Footnotes:1 Adjusted EBITDA, Adjusted operating profit and Adjusted basic EPS are Alternative Performance Measures (APMs) and not IFRS measures. See Note 3 for an explanation of APMs and adjusting items.

2 Administrative expenses excludes depreciation and amortisation, amortisation of acquired intangibles, Share-based payments and individual significant items.

3 Depreciation and amortisation excludes amortisation of acquired intangibles.

2023 has been a challenging year for the Group, as our expected Revenue performance and consequently our gross profit and overall profitability suffered from market volatility within Cyber Security in H2 2023 after a strong H1 2023. In particular, the Group experienced buying decision delays and cancellations in the North American tech sector and to lesser extent our UK market for Global Professional Services.

Encouragingly, no material clients have been lost, however this sharp market correction had a direct impact on our revenue, direct utilisation, gross profit and ultimately our profitability due to the level of employee costs in the business and recognition of Individually Significant items that mainly relate to the impairment of North American Assurance Goodwill. These headwinds have further reinforced the need to implement the next chapter of our Group strategy and identify cost efficiencies across Cyber Security and corporate functions, achieving FY24 savings and full annualised contribution from FY25 onwards.

Turning back in detail to our FY23 performance, Group revenues increased by +1.5% (2022: +17.9%) on a constant currency basis 1 and at +6.4% (2022: +16.4%) at actual rates. After considering the prior year Software Resilience fair value revenue adjustment (£4.4m), Group revenues were flat at constant currency 1 (+5.1% at actual rates).

In our Cyber Security business, the Europe, and UK and APAC Cyber Security businesses grew on a constant currency basis 1 by +3.9% and +3.0% respectively (+6.6% and +3.3% at actual rates). Whereas our North American business declined -4.9% on a constant currency basis 1 (+5.5% at actual rates) following the decline in tech sector spend.

Global Professional Services declined by -3.1% to £199.3m on a constant currency basis 1 (+2.0% at actual rates) with delivered day rates increasing by +7.5% (2022: +2.1%) and direct utilisation decreasing by -10.0% pts. Global Managed Services (GMS) grew by +12.4% to £67.8m (2022: +6.7%) on a constant currency basis 1 (+15.7% at actual rates). We experienced a net decrease of -107 technical heads (2022: +271) and lower attrition of 15.5% (2022: 20.9%) compared to the level typical of our industry.

Global Managed Services (GMS) grew by +12.4% to £67.8m (2022: +6.7%) on a constant currency basis 1 (+15.7% at actual rates). New XDR service global sales orders for the forthcoming years increased +72.5% from £11.6m in 2022 to £20.0m in 2023.

In our Software Resilience division, following the completion of the acquisition of IPM in June 2021, we experienced our first full year of IPM contract renewals, which contributed to overall growth in the division of +7.5% on a constant currency basis 1 to £64.3m (+14.2% at actual rates). However, considering the prior year Software Resilience fair value revenue adjustment (£4.4m) to these potential contract renewals, total Software Resilience revenue decreased by -0.5% at constant currency 1 (+5.9% actual rates). Escrow-as-a-Service (EaaS), our cloud escrow proposition, generated sale orders of £4.7m, an increase of 38% compared to the prior year (2022: +£3.4m).

Gross profit decreased by -0.5% to £132.0m (2022: £132.6m) with gross margin percentage decreasing to 39.4% (2022: 42.1%). The 2.7% pts gross margin (%) decrease was due to the revenue performance of the Cyber Security business and lower direct utilisation (61.6%).

Total administrative expenses have increased by 32.9% (£32.2m) to £130.1m (2022: £97.9m). This was mostly due to an increase in Individual Significant Items of £13.8m and an increase in people and training costs arising from inflationary pressures and further investment (including XDR set up) to support the business of c.£6.5m. Other higher costs include an increase in non-client travel and office costs (including the impact of our NCC Conferences) of c.£5m, depreciation and amortisation (including amortisation on acquisition intangibles) of c.£3m, marketing c.£1m and foreign exchange c.£1m.

Operating profit for the year has decreased by 94.5% to £1.9m (2022: £34.7m) following the above decrease in gross profit (£0.6m) and the increase in overheads noted above. Our performance also incurred the indirect trading cost hosting our in person global NCC Conferences in June 2022 for the first time since 2019, estimated to amount to a total direct and indirect impact of c.£5m year-on-year, of which c.£2.3m related directly to the conferences (non-client travel costs).

Individually Significant Items incurred during the year amounted to £14.7m. These items are represented mainly by an impairment in Goodwill of £9.8m for the North American Assurance business following the recent reduction in spend by North American technology clients and £4.2m in relation to fundamental reorganisation costs as we reshape the Group to implement the next chapter of the Group's strategy. The impairment of North American Assurance Goodwill has been recognised based on the annual assessment of circumstances as at 31 May 2023. ISIs also include costs associated with the strategic review of our Software Resilience business (£3.0m) and an impairment of Goodwill (£3.0m) relating to our Danish business following its reorganisation. These were partially offset by a profit on disposal of our DDI business (£4.7m).

Profit before taxation decreased by 113.9% to a loss of £4.3m (2022: profit of £31.0m) following the above revenue and gross profit performance, recognition of ISIs and after an increase in borrowing costs following the acquisition of IPM in June 2021. The variable rate of interest cost increased due to the macro-economic environment and the write off of existing arrangement fees (£0.6m) following the scheduled refinance in December 2022.

Consequently, the profit for the year decreased by -120.0% to a loss of £4.6m (2022: profit of £23.0m) resulting in a material decrease in the basic EPS to (1.5p) and diluted EPS to (1.5p) (2022: basic and diluted 7.4p). Adjusted basic EPS 1 amounted to 6.1p (2022: 10.8p).

On 31 May 2023, our cash conversion 1 was 102.9% (2022: 101.9%). Net debt excluding lease liabilities 1 amount to £49.6m (2022: £52.4m).  Total borrowings (including lease liabilities) offset by cash and cash equivalents amounts to £79.6m (2022: £85.0m).

Our Balance Sheet and facility headroom remains strong, during December 2022 we secured a new four-year £162.5m multi-currency revolving credit facility. This replaced our existing £100m multi-currency revolving credit facility and the remaining $46.7m of the original $70m term loan that was maturing in June 2024. The new facility now matures in December 2026 and includes a £75m uncommitted accordion option. In addition, we also secured an increase to our leverage covenant from 2.5x to 3.0x with an additional acquisition spike to 3.5x for the first twelve months of any acquisition. The weighted average margin of the facility also decreased and is payable on a ratchet mechanism above SONIA & SOFR in the range of 1.00% to 2.25% depending on the level of the Group's leverage. The average interest rate for the year was 4.54% and is currently 6.27% following recent changes to base interest rates.

The Board is declaring an unchanged final dividend of 3.15p per ordinary share (2022: 3.15p). This represents a dividend equal to that paid in the prior year as the Board is conscious of the need to invest in new strategy and manage its net debt accordingly following the challenging year.

Alternative Performance Measures (APMs)

Throughout this Financial Review, certain APMs are presented. These APMs used by the Group are not defined terms under IFRS and may therefore not be comparable with similarly titled measures reported by other companies. They are not intended to be a substitute for, or superior to, Generally Accepted Accounting Practice (GAAP) measures. All APMs relate to the current year results and comparative periods where provided.

This presentation is also consistent with the way that financial performance is measured by management and reported to the Board, and the basis of financial measures for senior management's compensation schemes and provides supplementary information that assists the user in understanding the financial performance, position and trends of the Group. At all times, the Group aims to ensure that the Annual Report and Accounts give a fair, balanced and understandable view of the Group's performance, cash flows and financial position. IAS 1 'Presentation of Financial Statements' requires the separate presentation of items that are material in nature or scale in order to allow the user of the accounts to understand underlying business performance.

We believe these APMs provide readers with important additional information on our business and this information is relevant for use by investors, securities analysts and other interested parties as supplemental measures of future potential performance. However, since statutory measures can differ significantly from the APMs and may be assessed differently by the reader we encourage you to consider these figures together with statutory reporting measures noted. Specifically, we would note that APMs may not be comparable across different companies and that certain profit related APMs may exclude recurring business transactions (e.g. acquisition related costs and certain share-based payment charges) that impact financial performance and cash flows.

As the Group manages internally its performance at an Adjusted operating profit level (before Individually Significant Items, amortisation of acquired intangibles and share-based payments), which management believes represents the underlying trading of the business; this information is still disclosed as an APM within this Annual Report. This APM is reconciled to statutory operating profit, together with the consequently Adjusted basic EPS (before amortisation of acquisition intangibles, share-based payments and Individually Significant Items and tax effect thereon) to statutory basic EPS.

The Group has the following APMs/non-statutory measures:

· Adjusted EBITDA (reconciled in Note 3)

· Adjusted operating profit (reconciled in Note 3)

· Adjusted basic EPS (pence) (reconciled in Note 11)

· Net debt excluding lease liabilities (reconciled in Note 3)

· Net debt (reconciled in Note 3)

· Cash conversion which includes Adjusted EBITDA (reconciled in Note 3)

· Constant currency revenue (reconciled in Note 3)

The above APMs are consistent with those reported for the year ended 31 May 2022, except for the removal of Group revenue and Software Resilience revenue excluding IPM acquisition which have been removed now that the Group has comparable data following the acquisition in June 2021.

The Group also reports certain geographic regions on a constant currency basis to reflect the underlying performance considering constant foreign exchange rates period on period. This involves translating comparative numbers to current period rates for comparability to enable a growth factor to be calculated. As these measures are not statutory revenue numbers, management considers these to be APMs.

Further detail is included within the Glossary of terms to the Financial Statements that provides supplementary information that assists the user in understanding these APMs/non-statutory measures.

Financial summary

Summary Income Statement:

Footnotes:1 Adjusted operating profit and Adjusted basic EPS are Alternative Performance Measures (APMs) and not IFRS measures. See Note 3 for an explanation of APMs and adjusting items.

2 Depreciation and amortisation excludes acquired intangible amortisation.

3 Administrative expenses excludes depreciation and amortisation, amortisation of acquired intangibles, Share-based payments and individual significant items.

Revenue summary:

After considering the prior year Software Resilience fair value revenue adjustment (£4.4m), Software Resilience revenue decreased by -0.5% at constant currency 1 (+5.9% actual rates). This gives rise to total revenue increasing by +0.1% at constant currency 1 (+5.1% actual rates).

Divisional performance

Cyber Security

The Cyber Security division accounts for 80.8% of Group revenue (2022: 82.1%) and 65.2% of Group gross profit (2022: 69.6%).

Cyber Security revenue analysis - by originating country:

Cyber Security revenue increased by +0.1% on a constant currency basis 1 and at +4.8% at actual rates. UK & APAC increased by +3.0% on a constancy currency basis 1 (+3.3% at actual rates). North America declined by -4.9% on a constant currency basis 1 (increased +5.5% at actual rates) due to buying decision delays and cancellations in the North American tech sector, while Europe experienced an increase of +3.9% on a constant currency basis 1 (+6.6% at actual rates).

Turning to the performance between each half of the financial year, the following revenue analysis by originating country demonstrates the growth in H1 2023 compared to a decline in H2 2023 following buying decision delays and cancellations in the North American tech sector and the UK Market within Global Professional Services.

Cyber Security revenue analysed by type of service/product line:

* Restated to present revenue by category to be consistent with amounts reported to management. Revenue of £6.4m has been re-presented within GMS rather than product sales.

Global Professional Services declined by -3.1% to £199.3m on a constant currency basis 1 (+2.0% at actual rates) with delivered day rates increasing by +7.5% and direct utilisation decreasing by -10.0% pts. The decline was mainly due to buying decision delays and cancellations in the North American tech sector and our UK market.

Global Managed Services (GMS) grew by +12.4% to £67.8m on a constant currency basis 1 (+15.7% at actual rates) with new XDR service global sales orders for the forthcoming years increasing 72.5% YoY.

Turning to the performance between each half of the financial year, the following revenue analysis by type of service/product line demonstrates the growth in H1 2023 compared to a decline in H2 2023 following buying decision delays and cancellations in the North American tech sector and the UK Market with Global Professional Services.

Cyber Security gross profit is analysed as follows:

Gross margins declined -3.9% pts following investment in technical capacity, inflationary pressures, lower utilisation combined with lower technical attrition.

Turning to the performance between each half of the financial year, the following gross profit analysis by originating country further demonstrates the performance between H1 2023 and H2 2023 compared to the corresponding periods in the prior year.

Gross margins in Europe increased by 8.0% pts due to the recognition of historic project cost compensation of £1.5m. Excluding this one-off item, the margin would have increased 3.8%.

Software Resilience

The Software Resilience division accounts for 19.2% of Group revenues (2022: 17.9%) and 34.8% of Group gross profit (2022: 30.4%).

Software Resilience revenue analysis - by originating country:

After considering the prior year Software Resilience fair value revenue adjustment (£4.4m) 2, Software Resilience revenue decreased by -0.5% at constant currency 1 (+5.9% actual rates).

Turning again to the performance between each half of the financial year, the following revenue analysis by originating country further demonstrates the performance between H1 2023 and H2 2023 compared to the corresponding periods in the prior year.

Software Resilience revenues analysed by service line:

After considering the prior year Software Resilience fair value revenue adjustment 2 (£4.4m), Software Resilience contracts revenue on a like for like basis decreased by -4.9% at constant currency 1 (+1.2% actual rates). Verification services increased by +9.7% at constant currency 1 (+16.8% actual rates). The prior year fair value adjustment in relation to deferred revenue of £4.4m is no longer relevant to FY23 statutory results, as the adjustment has unwound following the renewal of IPM contracts or completion of verification services.

Gross margin is analysed as follows:

After considering the prior year Software Resilience fair value revenue adjustment (£4.4m) 2, Software Resilience gross profit decreased by -2.2% pts due to continued investment to enable Software Resilience to achieve sustainable revenue growth and profitability.

Turning again to the performance between each half of the financial year, the following gross profit analysis by originating country further demonstrates the performance between H1 2023 and H2 2023 compared to the corresponding periods in the prior year.

Individually Significant Items

During the year, the Group has incurred £14.7m in individually Significant Items (ISIs) (2022: £0.9m) as follows:

Individually Significant Items incurred during the year amounted to £14.7m represented mainly by an impairment in Goodwill of £9.8m for the NA Assurance business following the recent reduction in spend by North American technology clients and £4.2m in relation to fundamental reorganisation costs as we reshaped the Group to implement the next chapter of the Group's strategy. Costs associated with the strategic review of our Software Resilience business (£3.0m) and an impairment of Goodwill (£3.0m) relating to our Danish business following its reorganisation were partially offset by a profit on disposal of our DDI business (£4.7m).

Finance costs

Finance costs for the period were £6.2m compared to £3.7m in 2022 due to an increase in borrowing following the IPM acquisition and an increase in base interest rates. Finance costs include lease financing costs from IFRS 16 of £1.1m (2022: £1.2m). Borrowing costs also include the write off of existing arrangement fees (£0.6m) following the refinance in December 2022 to a new facility. The new facility entered in December 2022 incurred arrangements fees of £1.7m that will be amortised over the new facility maturing in December 2026. The average interest rate for the year was 4.54% and is currently 6.27% following recent changes to base interest rates. Average borrowings during the year amounted to £87.1m.

Taxation The Group's effective statutory tax rate is (7.0%) (2022: 25.8%). The decrease in tax rate from 2022 to 2023 is due to a number of factors including the non-deductibility impact of goodwill impairment. See note 6 for further details. The Group's adjusted tax rate is 16.4% (2022: 24.5%). The decrease in the adjusted tax rate from 2022 to 2023 is mainly due to a combination of a provision release against the benefit of US R&D tax claims and a prior year credit in relation to the tax treatment of the IPM acquisition.

Cash flow and net debt 1The table below summarises the Group's cash flow and net debt 1:

Net debt 1 can be reconciled as follows:

The calculation of the cash conversion ratio 1 is set out below:

1 Net debt excluding lease liabilities, net debt and cash conversion and Adjusted EBITDA are Alternative Performance Measures (APMs) and not IFRS measures. See Note 3 for an explanation of APMs and adjusting items.

The increase in tax paid is mainly due to the historic Spanish tax payments (£2.0m) and the phasing of US tax payments.

Net cash capital expenditure during the period was £7.3m (2022: £8.2m) which includes tangible asset expenditure of £3.9m (2022: £5.2m) and capitalised software and development costs of £3.4m (2022: £3.0m).

Acquisition of trade and assets as part of a business combination of £1.0m relates to the further consideration payable in relation to the Adelard acquisition that occurred on 20 April 2022 following novation of contracts in H1 2023.

On 31 December 2022, the Group disposed of its DDI business for consideration of £5.8m, of which £2.0m was satisfied in cash and the remaining £3.8m is contingent on novation of certain customer contracts. £2m has been received post year end and it is expected that the remaining proceeds will be received in FY24.

Borrowings During December 2022 we secured a new four-year £162.5m multi-currency revolving credit facility. This replaced our existing £100m multi-currency revolving credit facility and the remaining $46.7m of the original $70m term loan that was maturing in June 2024. The new facility now matures in December 2026 and includes an £75m uncommitted accordion option. In addition, we also secured an increase to our leverage covenant from 2.5x to 3.0x with an additional acquisition spike to 3.5x for the first twelve months of any acquisition. The weighted average margin of the facility also decreased and is payable on a ratchet mechanism above SONIA & SOFR in the range of 1.00% to 2.25% depending on the level of the Group's leverage. As noted above, the average interest rate for the year was 4.54% and is currently 6.27% following recent changes to base interest rates. 

Dividends Total dividends of £14.5m were paid in the year (2022: £14.4m), which represented the final dividend for FY22 of 3.15p and the interim dividend of 1.50 per ordinary share for FY23 (2022: 1.50p). The Board is declaring an unchanged final dividend of 3.15p per ordinary share (2022: 3.15p).

This represents a dividend equal to that paid in the prior year as the Board is conscious of the need to invest in new strategy and manage its net debt accordingly following the challenging year.

The final dividend of approximately £10m will be paid on 8 December 2023, to shareholders on the register at the close of business on 10 November 2023. The ex-dividend date is 9 November 2023.

Consolidated income statement

for the year ended 31 May 2023

Consolidated statement of comprehensive income/(loss)

for the year ended 31 May 2023

Consolidated balance sheet

at 31 May 2023