Quartix Tech Regulatory News (QTX)

28 July 2020

Quartix Holdings plc

("Quartix", "the Group" or "the Company")

Interim Results

Quartix Holdings plc (AIM:QTX), a leading supplier of vehicle tracking systems and services to the fleet and insurance sectors, is pleased to announce its unaudited results for the half year ended 30 June 2020.

Restatement of comparatives:

All comparative monetary amounts for 2019 have been restated in line with the change in policy in the recognition of commissions costs associated with contracts with customers under IFRS 15: 'Revenue from Contracts with Customers' (see note 1)

Financial highlights:

1 Earnings before interest, tax, depreciation, amortisation and share based payment expense (see note 3)

2 Cash flow from operations after tax and investing activities

3 Cash generated from operations of £3.7m divided by operating profit of £4.3m

Operational highlights

Fleet

Good progress in the main fleet business

1 Annualised data services revenue for the subscription base at the period end, before deferred revenue, including revenue for units waiting to be installed for which subscription payments have started or are committed.

2 Attrition is calculated as the difference between the number of new unit installations and the increase in active subscriptions between 1 July 2019 and 30 June 2020, expressed as a percentage of the mean subscription base between those two points in time: (40,786-22,567)/149,365 = 12.2%

UK (including Ireland)

France

Other European (Germany, Italy, Poland, Spain)

USA

Insurance

Andy Walters, Chief Executive Officer of Quartix, commented:

"We are pleased that, despite the impact of the Coronavirus Pandemic, we have achieved growth of 7% in our fleet subscription base and excellent financial results for the first half. Having started the year 30% ahead of last year in terms of new fleet subscriptions, both fleet and insurance installations were very badly affected in late March and throughout April. Since then our new fleet subscriptions have progressed each month and insurance installations have also increased.

We are grateful to our employees for the way in which they quickly adapted to working from home and are delighted to report that our telephone sales operations returned to growth in new business generation by the end of the period. Provided that the effects of any second wave of infection in our target markets are limited we expect our field and distribution sales to start their recovery during the coming months; we would then expect profit for the full year to be at least in line with market estimates prior to the Pandemic 1 and revenue and free cash flow to be approximately in line with market estimates."

1 The Board believes that consensus market expectations for 2020 (based upon forecasts from finnCap and Shore Capital) prior to the Pandemic, were as follows: Revenue: £26.0m; Adjusted EBITDA £6.7m; Free Cash Flow: £5.3m.

For further information, please contact:

Quartix (www.quartix.com/en-gb) 01686 806 663

Andrew Walters, Chief Executive Officer

Daniel Mendis, Chief Operating and Financial Officer

finnCap (Nominated Adviser and Broker) 020 7200 0500

Matt Goode/Kate Bannatyne (Corporate Finance)

Alice Lane (Corporate Broking)

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

Interim Financial Results Report

The Group's Interim Financial Statements for the 6 months ended 30 June 2020 are available in the "Investors" section of our website at: www.quartix.com/en-gb/company/investors

About Quartix

Founded in 2001, Quartix is a leading supplier of subscription-based vehicle tracking systems, software and services. The Group provides an integrated tracking and telematics data analysis solution for fleets of commercial vehicles and motor insurance providers which improves productivity and safety and which lowers costs by capturing, analysing and reporting vehicle and driver data.

Quartix is based in the UK and is listed on the AIM market of the London Stock Exchange (AIM:QTX).

Chairman's Statement

Summary

It is pleasing to report that new fleet subscriptions have continued to recover through May and June from the low point of 1,500 systems reached in April. Since lockdown measures have been eased, we have achieved consecutive months of growth: new subscriptions in June reached 3,391. Overall, in the first half of the year, there was a 14% decrease in new fleet subscriptions to 19,454 units (6 months 30 June 2019: 22,505 units), although this still represents a substantial increase against 2018 (6 months 30 June 2018: 15,220). The year started strongly, but new subscriptions fell in March and April as a result of the COVID-19 pandemic, before starting their recovery in May.

We ended the period with a committed subscription base of 160,648 vehicles having an annualised value of £21.5m (30 June 2019: 138,081, with value of £20.0m on a constant currency basis), and we added 1,258 customers to the client base, since 31 December 2019, reaching 17,652 in total.

In the 6 years since 30 June 2014 (the Company's year of admission to AIM), Quartix has maintained a CAGR of between 20.0-21.0% in its subscription base (from 53,197 to 160,648 vehicles), of which the annualised value has more than doubled from £10.2m to its current level of £21.5m.

We increased investment in marketing and sales resource for our fleet operations in the period. In line with the Company's accounting policies these costs were all expensed as incurred, amounting to an increase of £0.6m compared to the same period in 2019. This investment will generate strong recurring revenues for the future, and it is pleasing to be able to report a strong set of financial results even with this investment. A more detailed breakdown of investments in customer acquisition is shown in the segmental analysis (note 2). This analysis demonstrates the increased profitability attributable to our fleet customer base and the growth in investment made to accelerate our customer acquisition activities, as detailed above.

The following paragraphs provide a summary of activity and results in each market

UK (including Ireland)

Total sales in the UK were £10.0m (2019: £10.1m). Sales to fleet customers in this market increased by 2% to £7.8m (2019: £7.7m) and the subscription base grew to 109,629 vehicles, representing an increase of 11% over the past 12 months (30 June 2019: 99,055). New subscriptions fell in the period by 25% to 9,994 vehicles (2019: 13,360). We have worked hard to improve the efficiency of the sales teams and, alongside the temporary move to home working, have established a comprehensive set of automated reports giving metrics by which the telephone sales teams are managed. Field sales and distribution sales, both of which rely heavily on face-to-face meetings, are only now starting their recovery from the April low point. We continue to identify opportunities for improvement and will continue to invest in each of our channels (field sales, direct, telesales, price comparison and distribution).

France

The Group continued to make progress in France, where the subscription base rose by 25% over the past year to 28,015 vehicles (30 June 2019: 22,440). Revenue in France in the first half increased by 21% in local currency to €2.1m (2019: €1.7m). New subscriptions fell by 11% to 3,957 (2019: 4,465).

USA

The Group continued to develop its operations successfully in the USA, taking its subscription base to 20,408 vehicles. This is 27% higher than it was 12 months ago (30 June 2019: 16,104). Revenue in the first half increased by 22% to $1.5m (2019: $1.2m). The efficiency of both the direct and price comparison telesales teams has been improved and, as such, new fleet subscriptions of 4,274 were similar to the results for the first half of 2019 (4,365) despite the economic landscape and, encouragingly, were ahead of the result for the second half of 2019 (3,373).

New European territories

Having launched in various European markets during 2019, the Group has developed its operations successfully, taking its subscription base to 2,596 vehicles (30 June 2019: 482). Revenue increased to €0.1m in the 12 months.

Sales results in the Spanish and Italian markets have been very encouraging so far and the Company will increase investment in these, as well as in the German market.

R&D and systems developments

The Group is committed to the continuous enhancement of its core software and telematics services, and we aim to offer a market-leading platform which addresses the most common needs of SME customers in the service sector of each of our target markets.

A dedicated team of systems and software developers is focused exclusively on the enhancement of the Company's internal processes, and a significant number of improvements in process efficiency were achieved in the first half, and more are planned for the rest of the year.

Insurance

We installed 9,915 new insurance tracking systems in the 6 months to 30 June 2020, a decrease of 42% on the prior period. This trend, which we expect to continue, was in keeping with the decision announced in July 2016 to focus on the core fleet market and on only those insurance opportunities which offer satisfactory margins, and which are closely aligned to the fleet business. The profitability of this segment has increased from £0.9m for the six months ended 30 June 2019 to £1.3m for the six months ended 30 June 2020. This was due to the release of £0.7m of deferred revenue (2019: £0.1m), though this was somewhat offset by the unusually low level of units for young drivers as driving tests were postponed during the lockdown period.

In the four years since the decision to focus our efforts on our fleet operations, Fleet revenues have grown to represent 83% of Group revenues (£10.8m) in the six months ended 30 June 2020 from 62% (£7.2m) in the six months ended 30 June 2016. This trend is expected to continue as the Company invests in the development of each of its fleet markets.

Results

Group revenue for the half year was £13.1m (2019: £12.5m). Fleet revenue grew by 7.4% to £10.8m (2019: £10.1m) and insurance revenue decreased to £2.3m (2019: £2.5m). Sales to the insurance sector as a percentage of overall revenue reduced to 17% (2019: 20%). Increased focus on our core fleet business led to the recurring element of subscriptions growing to represent 78% of Group turnover (2019: 75%). We also funded new fleet subscriptions for the period relating to 19,454 units (2019: 22,505 units).

The cost of all new fleet tracking systems and installations is absorbed in cost of sales. Gross profit increased by 18% to £9.6m (2019 restated: £8.1m), with insurance deferred revenue contributing £0.7m (2019: £0.1m), and gross margin to 73% (2019 restated: 65%). With the impact of investment in marketing activities, operating profit for the half year increased by 29% to £4.3m (2019 restated: £3.3m). Profit before tax for the half year increased by 29% to £4.3m (2019 restated: £3.4m).

Operating cash conversion was 86% (2019 restated: 104%), resulting in pre-tax cash generated from operations of £3.7m (2019: £3.5m). Free cash flow conversion, being free cash flow as a proportion of profit for the period, was 88% (2019 restated: 112%), resulting in free cash flow from operations after tax and investing activities of £3.2m (2019: £3.2m). The Group had net cash of £10.0m as at 30 June 2020 (£5.1m at 30 June 2019), having not paid a dividend in 2020 (£4.8m in May 2019).

Earnings per share

Basic earnings per share were 7.52p (2019 restated: 5.95p). On a diluted basis earnings per share were 7.48p (2019 restated: 5.95p).

Dividend

The Board has recommended an interim dividend of 2.50p (2019: 2.40p) per share, together with a supplementary dividend of 0.87p (2019: nil), amounting to 3.37p per share or £1,616,070 in aggregate. The aggregate amount is in line with the Group's stated policy on ordinary dividend payment, but higher than last year in recognition of shareholders' support of the Board's recommendation to cancel the final and supplementary dividends for 2019. This was approved by the Board on 27 July 2020. The interim and supplementary dividends will be paid on 11 September 2020 to shareholders on the register as at 14 August 2020.

Dividend Policy

Subject to satisfactory performance and market conditions, the Board will consider a final dividend for the year with the aggregate of the interim and final dividend set at approximately 50% of cash flow from operating activities, which is calculated after taxation paid but before capital expenditure. The Board will also consider distributing the excess of cash balances over £2m by way of supplementary dividends. The surplus cash would be calculated by taking the year end cash balance and deducting the proposed regular dividend. The policy will be subject to review.

Governance and the Board

The Board is comprised of two Non-Executive Directors: myself and Jim Warwick, and three Executive Directors: Andrew Walters, Daniel Mendis and Laura Seffino.

For further details regarding Corporate Governance and the Board, please see the "Investors" section of our website (www.quartix.com/en-gb/company/investors).

Outlook

The Group has made a good start to the second half, in line with management's expectations. The high levels of recurring revenue and opportunities to grow in the UK, USA, France and the rest of Europe in fleet underpin our confidence for the rest of the year and beyond. We will continue to use the financial strength of the business to invest in our core fleet operations.

Paul Boughton

Chairman

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Company registration number: 06395159

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Notes to the Financial Statements (unaudited)

1 Significant accounting policies

Basis of preparation

The financial information has been prepared in accordance with recognition and measurement principles of International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations that had been published by 30 June 2020 as endorsed by the European Union ("EU"). The accounting policies adopted are consistent with those of the financial statements for the year ended 31 December 2019, as described in those financial statements. In preparing these interim financial statements, the Board has not sought to adopt IAS 34 "Interim financial reporting".

The figures for the six-month periods ended 30 June 2020 and 30 June 2019 have not been audited. The monetary amounts for the six-months ended 30 June 2019 have been restated in line with a change in policy in the recognition of commission costs associated with contracts with customers under IFRS 15 'IFRS 15: 'Revenue from Contracts with Customers' (see note 7).

The figures for the year ended 31 December 2019 have been extracted from, but do not constitute, the consolidated financial statements of Quartix Holdings plc for that year. The original financial statements for the year ended 31 December 2018 have been delivered to the Registrar of Companies and included an Auditors' Report, which was unqualified and did not contain a statement under section 498(2) or section 498(3) of the Companies Act 2006.

Going concern

The Directors have reviewed the current financial performance, liquidity and forecasts considering Covid-19, and have assessed that the Group should continue to adopt the going concern basis. The Group enjoys a strong income stream from its fleet subscription base while current liabilities include a substantial provision for deferred income which is a non-cash item.

The impact of the UK leaving the EU is unknown pending the outcome of the final trading arrangements and the impact of the wider economic landscape however, we don't anticipate this would significantly impact the viability of the Group given its financial strength. This financial strength comes from the recurring revenue base and the Directors ability to manage overheads in order to mitigate any significant change in the Group's financial position.

The Directors report that, after assessing the forecasts and liquidity of the business for the next eighteen months and the longer-term strategic plans, they have a reasonable expectation that the Group has adequate resources to continue its operations for the foreseeable future.

Segmental reporting

The Directors have included segmental financial information for its insurance and fleet operations. These two segments have been identified as they are managed separately, with different marketing approaches for the discrete market sectors and for which the Group has different strategies. Their reported revenue each meet the quantitative thresholds of IFRS 8.

The Group has aggregated fleet operations for all geographical markets in the Fleet Segment. To increase transparency, the Directors have chosen to include an additional voluntary disclosure analysing the Fleet Segment by two sub-categories in order to highlight the different costs structures within the business: Detailed segmental information, including a reconciliation to the financial statements, are included in note 2. .

Incremental costs of obtaining a contract

The Group changed its accounting policy in the 31 December 2019 financial statements in relation to costs in obtaining customers contracts. Previously under IFRS 15 the Group adopted the practical expedient option to expense incremental costs in obtaining customer contracts for contracts with a duration of 12 months or less. The Group no longer applies this expedient. As a consequence of this policy change, the comparative figures for the 6 months ended 30 June 2019 have been restated. Further information on the impact of the change in policy is disclosed in note 7.

2 Segmental analysis

As highlighted in note 1, Significant accounting policies (Segmental reporting), the Group has identified two operating segments (see below) which are monitored by the Group's chief operating decision maker and strategic decisions are made on the basis of adjusted segment operating results. The main sources of revenue for all segments is from the provision of vehicle telematics services.

The information used by the Group's chief operating decision maker with regard to the Group's assets and liabilities is presented on a consolidated Group basis and accordingly no segmental analysis is presented for these.

The Group has two reportable segments: Total Fleet and Insurance. The Total Fleet segment has been sub-divided into two further categories. This has been done to give clarity as to the level of upfront investment the Group is making in acquiring new customers, as well as the associated impact on recurring revenue. The two categories are:

• Customer Acquisition: This is the sales and marketing cost of acquiring new fleet customers and the cost associated with units installed for those customers. Recurring subscription revenue is not recognised in this segment, although upfront receipts are recognised (for example where the Group makes a sale of a unit to a new customer for an upfront fee).

• Fleet Telematics Services: This is the recurring revenue associated with the Group's active subscription base and the cost of servicing that subscription base. The costs in this category include the cost of installing additional units for existing customers, as well as the associated marketing costs.

These two elements, together with central fleet costs, make up the Total Fleet segment.

Estimated allocations of cost have been made between the segments and within the Total Fleet segment, particularly in relation to equipment and installations. These allocations have been performed by reviewing the products sold to each segment, their associated cost of manufacture or installation and whether those products were installed by the customer. These costs are then applied to each segment as appropriate.

During the 6 month period to 30 June 2020, £2.1m or 16% (2019: £2.0m or 16%) of the Group's revenues depended on a single customer in the insurance segment.

Revenues from external customers in the Group's major markets have been identified on the basis of the customer's geographical location and are disclosed below.

3 Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA)

4 Earnings per share

The calculation of the basic earnings per share is based on the profits attributable to the shareholders of Quartix Holdings plc divided by the weighted average number of shares in issue during the period. The earnings per share calculation relates to continuing operations of the Group.

For diluted earnings per share, the weighted average number of ordinary shares is adjusted to assume the conversion of all dilutive potential ordinary shares. Dilutive potential ordinary shares are those share options where the exercise price is less than the average market price of the Company's ordinary shares during the period.

5 Note to the cash flow statement

Cash flow adjustments and changes in working capital:

6 Equity

All shares issued in the period to 30 June 2020 relate to the exercise of share options.

7 Explanation of change in accounting policy relating to IFRS 15

As highlighted in note 1, the Group chose to change its accounting policy for the treatment of incremental costs of obtaining a contract with a duration of 12 months or less, by disapplying the practical expedient in IFRS 15 'Revenue from Contracts with Customers'. The Group now capitalises and amortises incremental commission costs of obtaining a contract regardless of length.

The principal impact of this change relates to the timing of commissions incurred being released into the income statement, with the total commissions incurred at the inception of the customer contract being capitalised and only being recognised in the income statement over the contractual period.

As at 31 December 2018, the restatement of the Group's net assets was an increase of £713,000 to £18,103,000 from the inclusion of a contract cost asset of £872,000 under IFRS 15, being previously recognised as commissions incurred at the inception of the customer contract and now being recognised over the contractual period, net of a deferred tax liability of £159,000.

The impact of capitalising incremental costs as per IFRS 15 on the financial statements:

A Consolidated Statement of Financial Position

B Consolidated Statement of Comprehensive Income

C Consolidated Statement of Cash Flows