Ncc Regulatory News (NCC)

2 February 2023

NCC Group plc

Unaudited interim results for the period ended 30 November 2022

Next chapter of NCC Group's strategy with investment for enhanced growth;

robust H1 with market headwinds impacting current trading

NCC Group plc (LSE: NCC, "NCC Group" or "the Group"), a leading independent provider of global cyber security and resilience services, reports its interim results for the 6 months to 30 November 2022 ("the half year", "HY", "H1 2023", "the period").

Strategic highlights

Footnote

1: See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. Further information is also contained within the Financial Review and the Glossary of terms. 

Divisional highlights

Assurance

· Robust revenue growth of +10.8% at constant currency 1 (+17.7% actual rates), building on H2 2022 revenue growth momentum in North America and UK & APAC

· North America grew at +16.1% constant currency 1 (+34.5% actual rates)

· UK and APAC grew +12.0% constant currency 1 (+12.8% actual rates)

· Europe declined -2.8% constant currency 1 (-1.6% actual rates)

· Q1 2023 and Q2 2023 Assurance revenue increased by +5.4% and +15.5% at constant currency 1 respectively driven by North America and UK & APAC

Software Resilience

· Revenue increased +7.5% at constant currency 1 (+17.5% actual rates) before considering the prior period fair value adjustment of £2.7m, giving rise to revenue decline of -1.6% at constant currency 1 (+6.8% actual rates)

· Reorganisation of North American sales team led to a decline in Q1 2023 of -4.5% at constant currency 1, however Q2 2023 increased by +1.2% against the same comparator period (after considering the prior period fair value adjustment of £2.7m)

· IPM sales team now integrated into one North American team, new Managing Director and Finance Director onboarded to drive operational review and contribution to operating profit

· As previously announced, full contribution of annualised £5m cost saving from operational review to come through in FY24 following phased system integration improvements, with net c.£2m identified and being delivered in FY23

Outlook and interim dividend

Current trading

· Since the beginning of H2 2023 we have experienced a lengthening of the sales cycle, which is leading to delays in buying decisions, work commencement and therefore revenue recognition, particularly in North America and the UK

· Given the customer behaviour we are experiencing, 2023 Group revenues are expected to increase YoY by only single-digits (at constant currency 1) and still expecting to grow in H2 2023:

· Assurance revenue increasing YoY by high single-digits

· Software Resilience revenue (allowing for the prior period revenue fair value adjustment) declining YoY by c.1%

· As a result of the current market conditions, we are experiencing a reduction in our utilisation rates and attrition. We are therefore accelerating the implementation of our strategy and reshaping the business, with a proposed reduction in headcount in the near term

· Due to the macro-economic backdrop, and the savings arising from the actions to reshape the business, we expect FY23 Adjusted operating profit to be around £52m, before the investment we are making this year to implement the next chapter of our strategy

Strategic actions

· The Board remains confident in the medium-term prospects for the cyber market and these strategic actions will position the business to capitalise when the market improves

· Accordingly, the Board remains committed to implementing the next chapter of our strategy to enhance future growth through:

· Reshaping our global delivery and operational model, with a proposed c.7% reduction of our global headcount announced today, mostly in the UK and North America. This gives rise to a material one-off implementation cost (c.£4m) in H2 FY23 that is expected to be treated as an individual significant item

· Strategic investments of c.£5m in H2 FY23 to implement the 4 strategic growth pillars including enhancing our global delivery model by implementing an offshore delivery and operations centre in FY24. The strategic initiatives will give rise to underlying net returns on investments from FY24 onwards

· As result, we expect FY23 Adjusted operating profit to be around £47m (after the impact of FY23 strategic investments)

· We expect this investment to deliver our strategy will result in low to mid-teens Cyber Security revenue growth and an improvement in gross margins in FY24 due to the impact of increased utilisation and the new offshoring capability. Our expectations for Adjusted operating profit in FY24 are therefore unchanged

· In the medium term we believe our Cyber Security business can achieve mid-teens revenue growth and mid-teens Adjusted operating profit margins

Dividend

· Unchanged interim dividend of 1.50p (H1 2022: 1.50p) per ordinary share declared, as the Board prioritises investment in the new strategy

Mike Maddison, Chief Executive Officer, commented:

"The Group has delivered solid, double-digit growth in the first half of the year, building on our technical expertise and track record working with the world's leading brands and Government organisations. Despite the very evident global economic headwinds we are confident that the next chapter of our strategy will deliver a business positioned to fully capitalise on increasingly complex cyber challenges, and one that will be resilient in dynamic markets.

Our strategy, powered by a focus and investment in insights, intelligence and innovation across the organisation, will deliver enhanced growth in the medium term with a client-centric go-to-market model, market-leading capabilities & broader end-to-end offerings, efficiencies through global delivery and differentiated brands.

I look forward to working with my leadership team to deliver enhanced growth and drive greater market visibility of NCC Group in Boardrooms and Governments globally, to deliver on our purpose of creating a more secure digital future."

Analyst presentation briefing and Q & A session

A briefing for analysts will be held today at 9am at the offices of H/Advisers Maitland, 3 Pancras Square, London N1C 4AG. The briefing can be accessed via the following: https://www.investis-live.com/nccgroup/63bd67f8dfe1c21200130aa1/lkjub 

About NCC Group plc

Our purpose and vision following our launch of the next chapter of our strategy is as follows:

Purpose: Creating a more secure digital future

Vision: To be a Global leader in providing cyber security and escrow services recognised for client centricity and the technical depth and breadth of our capability. Famous for our people and a culture that reflects professionalism, teamwork and respect with a relentless focus on quality and our contribution to the development of the industry and our impact on wider society.

NCC Group is trusted by over 14,000 customers worldwide to protect their most critical assets from the ever-changing threat landscape. With the company's knowledge, experience and global footprint, it is best placed to help organisations assess, develop and manage their cyber resilience posture. To support its purpose, NCC Group continually invests in research and innovation, and is passionate about developing the next generation of cyber scientists. With c.2,500 colleagues in 12 countries, NCC Group has a significant market presence in North America, Europe and the UK, and a footprint in Asia Pacific with offices in Australia, Japan and Singapore.

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.

The next chapter of NCC Group's strategy

Our history

NCC Group has a rich heritage and a talented team of people around the world, with the passion and technical ability that enables us to deliver great results for our clients, as we protect and secure their digital assets. This has enabled us to grow continuously in a highly competitive market while continually attracting top talent.

Operating in a dynamic market

NCC Group operates in a dynamic market in the form of increasingly complex ecosystems and regulatory backdrop, constantly evolving cyber threats, and an increasing pace of technological change. All of which means the needs of our buyers are constantly changing, and market demand is forecast to grow.

The next chapter

To that end, today we are announcing the next chapter of our strategy; double down on our core strengths, invest in scaling these strengths to serve more clients in those sectors where we know we can succeed, and expand our service offering to address additional needs of the clients who already know and trust us.

The next chapter of NCC Group's strategy is therefore based on four pillars; our clients, our capabilities, global delivery and differentiated brands all underpinned by Insight, Intelligence and Innovation across our organisation:

Our clients

There is a client need to focus on the fastest growing sectors - specifically those which are highly-regulated and most exposed to cyber risk, including financial services, Technology, Media and Telecoms (TMT), Government and public sector, infrastructure and industrials companies.

For example, we have a greater opportunity if we can continue bringing the knowledge developed in Financial Services (FS) clients in the UK, to the large and growing market in North America. This is a huge market where we have a track record and credibility to win a lot more work. The increasing regulatory requirements on FS companies also provide an opportunity for us to grow further in the UK and Europe.

We are also developing a partnership and alliance ecosystem to expand our routes to market. By investing in our sales efforts and focusing on these sectors we believe we can deliver significant growth based on the increasing awareness of the threat to clients and our track record of addressing their needs.

Our capabilities

To enhance our growth potential, we need to invest in our cyber security capabilities. We will maintain our high quality of Incident Response services to help clients at their critical moments.

We also see a significant opportunity to enhance the suite of managed services we offer to meet the needs of clients and increase our ARR. We have already developed an XDR proposition, which forms the next generation of intrusion detection services, that launched in the UK and is now starting to be rolled out globally.

As regulatory cyber security requirements increase, we will invest in building a Consulting Services proposition to help the C-suite address the increasing threat to Operational Technology, such as Internet of Things devices and networks. We are opening our first Client Experience Centre in Cheltenham, UK, bringing to life our proposition within the Golden Valley, which we will launch in the next financial year.

We have a traditional base in Technical Assurance services, and we will continue to invest in innovating these capabilities, including our continuous, always-on testing proposition.

Global delivery

We will transition from an international to a fully global business, building a global delivery organisation with new leadership tasked with developing the best skills with flexible resourcing.

To fully develop and scale-up our capabilities, we will be investing further in our global delivery model, setting up our teams to think and act globally under a new leadership structure. The best resources from across the firm will be brought together into expert teams, irrespective of geographic locations.

Following the recent set up of nearshore hubs in Spain and Portugal, we have identified a shortlist of offshore locations for a delivery and operations centre, with implementation in FY24.

As clients look for a trusted partner with the expertise to help them navigate the fast changing and risk-laden world of cyber security, we will ensure we are well positioned with the range of services and advice they need.

Differentiated brands

In FY24, we will be launching distinct brands for the Group's two businesses, Cyber Security and Software Resilience.

A new CMO was appointed in January 2023 responsible for the delivery of a coordinated Marketing, Communications, Brand and Public Affairs strategy. We will develop differentiated, stand-out brands for Cyber Security and Software Resilience, leverage our insight and build a sustained buyer programme activity to engage C-suite. We will invest in brand and broader marketing activity to increase visibility in our chosen markets and verticals, with target buyers and influencers.

Software Resilience and other portfolio reviews

In addition, to the above we will continue with our ongoing strategic review of Software Resilience business and of other core and non-core assets, as evidenced by our recent disposal of our legacy DDI Assurance business in December 2022 for cash consideration of £5.8m (of which £3.8m is contingent consideration). We are also developing a rationalisation plan for our property estate to ensure the business has the appropriate operational footprint to support our global delivery capability and our net zero journey.

Strategic medium growth targets and cost of investment

We will now aim to enhance our revenue growth by setting medium targets as follows:

· Mid-teens revenue growth in Cyber Security over the medium term following phased implementation of the strategic initiatives over FY23-FY24.

· Sustainable single digit revenue growth for Software Resilience

The implementation of the Group's strategic initiatives is expected to require additional investment in FY23 of c.£5m. The strategic initiatives will give rise to underlying net returns on investments from FY24 onwards. This investment will be complemented by acquisitions in new markets, products and capabilities where it makes sense to do so.

Refinancing of borrowing facilities to support future strategy and growth

In December 2022, we secured a new four-year £162.5m multi-currency revolving credit facility. This replaces 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.

Key terms of the new facility are:

· £162.5m multi-currency revolving credit facility maturing December 2026

· Additional £75m uncommitted accordion option

· Increase to leverage covenant from 2.5x to 3.0x with an additional acquisition spike to 3.5x for the first twelve months of any acquisition

· Weighted average interest rate of the facility is lower and payable on a ratchet mechanism, with a margin payable above SONIA & SOFR in the range of 1.00% to 2.25% depending on the level of the Group's leverage. The current interest rate is 5.35%.

· Existing arrangement fees of £0.6m have been written off in December 2022. New arrangement fees of £1.7m will be amortised over the new four-year term to December 2026.

Business review

Operational review

We ended FY22 with good momentum and a strong pipeline. However, we experienced a slower Q1 FY23 due to the not unusual seasonality, and the direct and indirect impact of hosting our in-person global NCC Conferences in June 2022 for first time since 2019, events that demonstrate their long-term value to the Group. We experienced a stronger Q2 FY23 with underlying growth in North America and UK & APAC. 

Since the beginning of H2 2023 we have experienced a lengthening of the sales cycle, which is leading to delays in buying decisions, work commencement and therefore revenue recognition, particularly in North America and the UK. We are also experiencing lower attrition, resulting in a higher than planned headcount. Given the client behaviour we are experiencing, and our forthcoming strategic initiatives, we are therefore accelerating the reshaping of our global delivery and operational model.

Robust trading performance that benefited from underlying growth in North America and UK & APAC Assurance and the first full year of IPM contract renewals

Group revenues increased by +10.2% (H1 2022: +14.2%) on a constant currency basis 1 and at +17.7% (H1 2022: +10.7%) at actual rates.

Assurance

In our Assurance business, the North American and UK and APAC Assurance businesses grew on a constant currency basis 1 by +16.1% and +12.0% respectively (+34.5% and +12.8% at actual rates). This growth accelerated during the second quarter, as the Group experienced Q2 2023 Assurance revenue growth of +15.5% at constant currency 1 driven by North America and UK & APAC. However, our EU region decreased -2.8% on a constant currency basis 1 (-1.6% at actual rates) due a decline in our Nordic Region. 

Global Professional Services grew by +10.4% to £111.1m on a constant currency basis 1 (+18.7% at actual rates) with delivered day rates increasing by +5.4% (H1 2022: +1.7%). We experienced a net increase of 61 technical heads (H1 2022: 152) and lower attrition of 14.9% (H1 2022: 21.5%) compared to the level typical of our industry.

Global Managed Services (GMS) grew by +10.7% to £32.2m on a constant currency basis 1 (+13.4% at actual rates).  New XDR service global sales orders for the forthcoming years increased 139% from £3.8m in H1 2022 to £9.1m for H1 2023 (2022: £11.6m).

Software Resilience

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. This contributed to overall growth in the division of +7.5% on a constant currency basis 1 compared to the same comparative six-month period (+17.5% at actual rates). However, considering the prior period fair value revenue adjustment (£2.7m) to these potential contract renewals, total Software Resilience revenue decreased by -1.6% at constant currency 1 (+6.8% actual rates). The prior year fair value adjustment in relation to deferred revenue of £2.7m is no longer relevant to FY23 statutory results, as the adjustment has unwound following the renewal of IPM contracts or completion of verification services.

From a momentum perspective, the reorganisation of North American sales team led to a decline in Q1 2023 of -4.5% at constant currency 1, however Q2 2023 increased by +1.2% against the same comparator period (after considering the prior period fair value adjustment of £2.7m). 

A new Managing Director and Finance Director have now been onboarded to drive the operational review contribution to operating profit. As previously announced, full saving contribution of annualised £5m from operational review is to come through in FY24 following phased system integration improvements, with net c.£2m identified for FY23.

Footnote

1: See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. Further information is also contained within the Financial Review and the Glossary of terms. 

Group profitability

Gross profit increased by +13.5% to £72.3m (H1 2022: £63.7m) with gross margin percentage decreasing to 40.9% (H1 2022: 42.4%. 2022: 42.1%). The -1.5% pts gross margin (%) decrease due to lower utilisation within Assurance.

Operating profit for the period increased by +27.7% to £12.9m (H1 2022: £10.1m) as the above increase in gross profit was partially offset by an increase in overheads, which will support future growth, and a return to normalised levels of non-client travel. Our performance also incurred the cost and trading impact of hosting our in person global NCC Conferences in June 2022 for the first time since 2019 (due to Covid-19), estimated to amount to a total direct and indirect impact of c.£5m year-on-year. These events allow colleague collaboration, which leads to insights and innovation.

Profit before taxation increased by +22.6% after an increase in borrowing costs following the acquisition of IPM in June 2021 and due to the variable rate of interest cost increasing due to the macro-economic environment.

Basic EPS increased +31.6% and adjusted EPS declined -2.3%.

NCC Group and sustainability

For FY23, we selected three areas of focus based on the critical elements of our growth strategy. With the launch of the new strategy, we are preparing to undertake a materiality assessment to validate or improve our approach to Environment, Social and Governance (ESG): 

· Creating an inclusive and diverse workplace

· Reducing our impact on the environment 

· Being an ethical, responsible employer and supply chain partner 

Environment 

We have started preparing to map our Net Zero journey - a significant element being a clear and responsible estates strategy, improved data collection, working with landlords and undertaking supplier surveys to understand our Scope 3 emissions. We are conducting an independent audit of our FY22 Task Force on Climate-Related Financial Disclosures (TCFD) report to understand the gaps that need to be addressed, noting that financial modelling is a specific area of expertise, which we are seeking advice on. 

Social 

We launched our global Giving Back programme this year, which has four key components: 

· Colleagues are given one day paid leave per calendar year to dedicate to a local charity/good cause that is of importance to them personally 

· Colleagues can apply for matched giving, up to the value of £500 per annum, for funds they have personally raised for registered charities

· Giving Back colleague resource group is a network of colleagues across the world who organise events locally, sharing and learning from each other in support of their local communities 

· Sponsorship - enables colleagues to get involved in skills-based giving back, as well as partnerships with agencies and organisations, which encourage people with diverse and or disadvantaged backgrounds into cyber. 

The Women's International Network has partnered with Henpicked (menopause workplace experts) and is working towards accreditation as a Menopause Friendly Workplace. The People team, working with our Neurodiversity colleague resource group has signed up to Neurodiversity in Business to further the support we offer current and future colleagues - making NCC Group a place where everyone is welcome and can be successful. 

Governance  We successfully completed our ISO 27001 and 9001 external audits, which covered our operations in Copenhagen and our global functions including Learning & Development, IT Networks and Procurement. Annual compliance training was conducted during September 2022 with 100% of eligible colleagues completing within the timeline. We appointed Planet Mark to undertake UK government's mandatory Energy Savings Opportunity Scheme (ESOS) assessments of our UK properties, which further supports our TCFD requirements, as well as conforming with UK Environment Agency regulations. 

Board composition

Over the past year, we have taken significant strides to improve the diversity around our Board table and completed the successful recruitment of two new independent non-executive directors. On 1 February 2023, Chris Batterham the Chair of the Audit Committee stepped down from his role as Chair and was replaced by Lynn Fordham (who joined us on 1 September 2022). At the same time, Julie Chakraverty (who joined us on 1 January 2022), became the Senior Independent Non-executive Director. Chris will continue to be an independent non-executive Director until our Annual General Meeting in November 2023, at which point he will step down from the Board after eight and a half years of service. 

Outlook and interim dividend

Current trading

· Since the beginning of H2 2023 we have experienced a lengthening of the sales cycle, which is leading to delays in buying decisions, work commencement and therefore revenue recognition, particularly in North America and the UK

· Given the customer behaviour we are experiencing, 2023 Group revenues are expected to increase YoY by only single-digits (at constant currency 1) and still expecting to grow in H2 2023:

· Assurance revenue increasing YoY by high single-digits

· Software Resilience revenue (allowing for the prior period revenue fair value adjustment) declining YoY by c.1%

· As a result of the current market conditions, we are experiencing a reduction in our utilisation rates and attrition. We are therefore accelerating the implementation of our strategy and reshaping the business, with a proposed reduction in headcount in the near term

· Due to the macro-economic backdrop, and the savings arising from the actions to reshape the business, we expect FY23 Adjusted operating profit to be around £52m, before the investment we are making this year to implement the next chapter of our strategy

Strategic actions

· The Board remains confident in the medium-term prospects for the cyber market and these strategic actions will position the business to capitalise when the market improves

· Accordingly, the Board remains committed to implementing the next chapter of our strategy to enhance future growth through:

· Reshaping our global delivery and operational model, with a proposed c.7% reduction of our global headcount announced today, mostly in the UK and North America. This gives rise to a material one-off implementation cost (c.£4m) in H2 FY23 that is expected to be treated as an individual significant item

· Strategic investments of c.£5m in H2 FY23 to implement the 4 strategic growth pillars including enhancing our global delivery model by implementing an offshore delivery and operations centre in FY24. The strategic initiatives will give rise to underlying net returns on investments from FY24 onwards

· As result, we expect FY23 Adjusted operating profit to be around £47m (after the impact of FY23 strategic investments)

· We expect this investment to deliver our strategy will result in low to mid-teens Cyber Security revenue growth and an improvement in gross margins in FY24 due to the impact of increased utilisation and the new offshoring capability. Our expectations for Adjusted operating profit in FY24 are therefore unchanged

· In the medium term we believe our Cyber Security business can achieve mid-teens revenue growth and mid-teens Adjusted operating profit margins

Dividend

· Unchanged interim dividend of 1.50p (H1 2022: 1.50p) per ordinary share declared, as the Board prioritises investment in the new strategy

Financial review

Overview of financial performance

Footnotes:1: See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. Further information is also contained within the Financial Review and the Glossary of terms.

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

We have delivered another period of robust financial results as we manage inflationary pressures and still invest for future growth.

Group revenues increased by +10.2% (H1 2022: +14.2%) on a constant currency basis 1 and at 17.7% (H1 2022: 10.7%) at actual rates.

In our Assurance business, the North American and UK and APAC Assurance businesses grew on a constant currency basis 1 by +16.1% and +12.0% respectively (+34.5% and +12.8% at actual rates). This growth accelerated during the second quarter, as the Group experienced Q2 2023 Assurance revenue growth of +15.5% at constant currency 1 driven by North America and UK & APAC. However, our EU region decreased -2.8% on a constant currency basis 1 (-1.6% at actual rates) due a decline in our Nordic Region. 

Global Professional Services grew by +10.4% to £111.1m on a constant currency basis 1 (+18.7% at actual rates) with delivered day rates increasing by +5.4% (H1 2022: +1.7%). We experienced a net increase of 61 technical heads (H1 2022: 152) and lower attrition of 14.9% (H1 2022: 21.5%) compared to the level typical of our industry.

Global Managed Services (GMS) grew by +10.4% to £32.2m on a constant currency basis 1 (+13.4% at actual rates).  New XDR service global sales orders for the forthcoming years increased 139% from £3.8m in H1 2022 to £9.1m for H1 2023 (2022: £11.6m).

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 compared to the same comparative six-month period (17.5% at actual rates). However, considering the prior period Software Resilience fair value revenue adjustment (£2.7m) to these potential contract renewals, total Software Resilience revenue decreased by -1.6% at constantcurrency 1 (+6.8% actual rates).

Gross profit increased by 13.5% to £72.3m (H1 2022: £63.7m) with gross margin percentage decreasing to 40.9% (H1 2022: 42.4%. 2022: 42.1%). The 1.5% pts gross margin (%) decrease due to lower utilisation within Assurance.

Total administrative expenses have increased by 10.8% to £59.4m (H1 2022 £53.6m). This was mostly due to an increase in people and training costs arising from inflationary pressures and further investment (including XDR set up) to support the business of £4.5m. Other higher costs include non-client travel and office costs (including the impact of our NCC Conferences) of £2.6m, marketing £0.5m, offset by a reduction in depreciation and amortisation (including amortisation on acquisition intangibles) of £1.5m and individual significant items of £0.9m.

Operating profit for the period has increased by 27.7% (H1 2022: £10.1m) following the above increase in gross profit offset by an 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.

Profit before taxation increased by 22.6% after an increase in borrowing costs following the acquisition of IPM in June 2021 and the variable rate of interest cost increasing due to the macro-economic environment.

Profit for the period increased by 31.0% to £7.6m resulting in an 31.6% increase in the basic EPS to 2.5p and diluted EPS to 2.4p (H1 2022: basic and diluted 1.9p). Adjusted basic EPS 1 amounted to 4.3p (H1 2022: 4.4p).

On 30 November 2022, our cash conversion 1 was 91.0% (H1 2022: 74.7%). Net debt excluding lease liabilities 1 amount to £54.8m (H1 2022: £74.2m). 

Our Balance Sheet remains strong, we have continued to demonstrate effective cash management and have recently secured a new four-year £162.5m multi-currency revolving credit facility replacing our existing £100m multi-currency revolving credit facility and $70m term loan, which was maturing in June 2024. The new facility now matures in December 2026 and includes an additional £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 current interest rate is 5.35%.

The Board is declaring an unchanged interim dividend of 1.50p per ordinary share (H1 2022: 1.50p). This represents a dividend equal to that paid in the prior period as the Board is conscious of the need to invest in new strategy.

Alternative Performance Measures (APMs)

Throughout this Financial Review, certain APMs are presented. The 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, IFRS measures. 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 scheme and provides supplementary information that assists the user in understanding the financial performance, position and trends of the Group.

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 on an adjusted earnings basis (before Individually Significant Items, amortisation of acquired intangibles and share-based payments), which management believes represents the underlying trading of the business; adjusted EPS is disclosed as an APM. This APM is reconciled to statutory earnings and 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 8)

· 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 (both excluding IPM acquisition) which have been removed now that the Group has comparable data following the acquisition in June 2021. One further APM to those reported for the period ended 30 November 2021 (cash conversion excluding the IPM acquisition) has also been removed 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; see Note 3 for further details and certain reconciliations to statutory measures.

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 1:

Revenue summary:

After considering the prior year Software Resilience fair value revenue adjustment (£2.7m), Software Resilience revenue decreased by -1.6% at constant currency 1 (+6.8% actual rates). This gives rise to total revenue increasing by +8.3% at constant currency 1 (+15.6% actual rates).

Divisional performance

Assurance

The Assurance division accounts for 82.1% of Group revenue (H1 2022: 82.1%) and 68.0% of Group gross profit (H1 2022: 69.7%).

Assurance revenue analysis - by originating country:

Assurance revenue increased by +10.8% on a constant currency basis 1 and at +17.7% at actual rates. UK & APAC increased by +12.0% on a constancy currency basis 1 (+12.8% at actual rates) supported by growth in professional services. North America grew by +16.1% on a constant currency basis 1 (+34.5% at actual rates), whilst Europe experienced a decline of -2.8% on a constant currency basis 1 (-1.6% at actual rates) due to a decline in the Nordic region.

Q1 2023 and Q2 2023 Assurance revenue increased by +5.4% and +15.5% at constant currency 1 respectively driven by North America and UK & APAC.

Assurance revenue analysed by type of service/product line:

* H1 2022 has been restated to present assurance revenue by type of service/product line to be consistent with amounts reported to management. Revenue of £2.7m has been re-presented within GPS rather than Product Sales.

Global Professional Services grew by +10.4% to £111.1m on a constant currency basis 1 (+18.7% at actual rates) with delivered day rates increasing by +5.4%.

Global Managed Services (GMS) grew by +10.7% to £32.2m on a constant currency basis 1 (+13.4% at actual rates). 

Assurance gross profit is analysed as follows:

Gross margins declined -3.8% pts in UK & APAC following investment in technical capacity, inflationary pressures, lower utilisation combined with lower technical attrition. In Europe, the margin 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 17.9% of Group revenues (H1 2022: 17.9%) and 32.0% of Group gross profit (H1 2022: 30.3%).

Software Resilience revenue analysis - by originating country:

After considering the prior year Software Resilience fair value revenue adjustment (£2.7m), total Software Resilience revenue on a like for like basis decreased by -1.6% at constant currency 1 (+6.8% actual rates). 

Software Resilience revenues analysed by service line:

After considering the prior year Software Resilience fair value revenue adjustment (£2.7m), Software Resilience contracts revenue on a like for like basis decreased by -7.8% at constant currency 1 (+0.5% actual rates). Verification services increased by +14.4% at constant currency 1 (+22.6% actual rates) mainly due to an increase in North America verification services. The prior year fair value adjustment in relation to deferred revenue of £2.7m 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 (£2.7m), Software Resilience gross profit decreased by -1.2% pts with North America decreasing by -0.5% pts due to continued investment to enable Software Resilience to achieve sustainable revenue growth. 

Individually Significant Items

During the period, the Group has incurred no Individually Significant Items (ISIs) (H1 2022: £0.9m). These prior period items relate to the acquisition of the IPM business. Certain near-term strategic actions may give rise to material one-off implementation costs in H2 2023/FY24.

Finance costs

Finance costs for the period were £2.6m compared to £1.7m in H1 2022 due to an increase in borrowing costs following the IPM acquisition. Finance costs include lease financing costs from IFRS 16 of £0.5m (H1 2022: £0.6m). Finance costs for H2 2023 are expected to increase to c.£4.5m due to base rate increases and the write off of existing arrangement fees (£0.6m). 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.

Taxation The Group's effective statutory tax rate is 26.2% (H1 2022: 31.0%, 2022: 25.8%). The reduction in the tax rate from H1 2022 to H1 2023 is due to the derecognition of a deferred tax asset on tax losses in certain overseas territories in H1 2022. The Group's adjusted tax rate is 25.7% (H1 2022: 27.0%, 2022: 24.5%).

The effective rate remains above the UK standard rate of corporation tax, reflecting the origin of a reasonable proportion of Group profits in overseas territories with higher tax rates than the UK.

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

Net (debt)/cash 1 can be reconciled as follows:

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

1: See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. Further information is also contained within the Financial Review and the Glossary of terms.

The increase in tax paid is mainly due to the historic Spanish tax payments and the phasing of US tax payments.

Net cash capital expenditure during the period was £3.7m (H1 2022: £3.7m 2) which includes tangible asset expenditure of £1.6m (H1 2022: £2.4m) and capitalised software and development costs of £2.1m (H1 2022: £1.3m). 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.

Dividends Total dividends of £9.8m were paid in the period (H1 2022: £9.8m), which represented the final dividend for FY22 of 3.15p. The Board is declaring an unchanged interim dividend of 1.50p per ordinary share (H1 2022: 1.50p).

This represents a dividend equal to that paid in the prior period as the Board is conscious of the need to invest in new strategy.

The interim dividend of approximately £4.7m will be paid on 17 March 2023, to shareholders on the register at the close of business on 17 February 2023. The ex-dividend date is 16 February 2023.

Principal risks and uncertainties

The Board has reconsidered the principal risks and uncertainties published at the full year 2022. The following risks and uncertainties are those that the Directors believe could have the most significant impact on the Group's business and remain unchanged from the year end:

· Business strategy - a poor strategy or ineffective execution of a strategy could have a material negative impact on the Group's financial performance and value. It would potentially weaken the Group compared to its competitors and risk the Group's established position in the marketplace.

· Management of strategic change - poor change management could lead to ineffective implementation of projects that then cost more to deliver, take longer to deliver and result in fewer benefits being realised (or all three). Poor delivery of change could ultimately impair business performance.

· Global pandemic - Covid-19 - the potential impact of a pandemic globally is closed offices, people who are unwell and unable to work for periods of time and a slow-down in business from our clients.

· Availability of critical information systems - if the Group's critical systems failed, this could affect the Group's ability to provide services to our customers.

· Attracting and retaining appropriate colleague capacity and capability - loss of key colleagues or significant colleague turnover could result in a lack of necessary expertise or continuity to execute the Group's strategy. An inability to attract and retain sufficient high calibre colleagues could become a barrier to the continued success and growth of NCC Group.

· Information security risk (including cyber risk) - failure to maintain control over customer, colleague, commercial and/or operational data could lead to a range of impacts, including reputational damage. The misuse of personal data, for example without the customer's consent, or retaining data for longer than is necessary, may also result in reputational harm, regulatory investigations and potential fines.

· Quality of Management Information Systems (MIS) and internal business processes - suboptimal business decision making, and performance as key financial performance data is not available or trusted.

· Quality and Security Management Systems - the risk of the Group failing to retain a core standard, e.g., 9001, 27001 or PCI, with a consequential loss of key customer accounts or ability to operate.

· International trade (formerly post-Brexit) - there remains some uncertainty around the detail of EU regulatory changes as these are finalised and specifically the finalisation of trade negotiations and the wider world, which may impact some of the services delivered by the Group, which fall under export control regulations.

· Sustainability - non-compliance with the Group's frameworks related to ESG will impact on our ability to display robust working practices, grounded in good working practice, which take account of our environment, people and communities. This in turn could impact on our ability to develop and maintain business relationships and may lead to the loss of key customer accounts and shareholder investment.

· Climate change - inability to deliver TCFD reporting requirements resulting in loss of investor confidence.

Directors' responsibility statement

The responsibility statement below has been prepared in connection with the Group's condensed interim financial statements for the period ended 30 November 2022. We confirm that to the best of our knowledge:

· The condensed set of consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK.

· The interim management report includes a fair review of the information required by:

· DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

· DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

The Half Year Report is approved and authorised for issue on behalf of the Board on 2 February 2023 by:

Consolidated income statement 1

For the period ended 30 November 2022

Consolidated statement of comprehensive income

For the period ended 30 November 2022

Footnotes for condensed interim Financial Statements

1: See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items, including a reconciliation to statutory information. Further information is also contained within the Glossary of terms.

Consolidated balance sheet

For the period ended 30 November 2022

These financial statements were approved and authorised for issue by the Board of Directors on 2 February 2023 and were signed on its behalf by:

Consolidated cash flow statement

For the period ended 30 November 2022

Reconciliation of net change in cash and cash equivalents to movement in net (debt)/cash 1

Consolidated statement of changes in equity

For the period ended 30 November 2022