Tribal Grp. Regulatory News (TRB)

Tribal Group plc

13 August 2014

Half year results for the six months ended 30 June 2014 

Summary

· Strong revenue and profit growth by Systems; the repositioning of Solutions towards technology based revenues is accelerating

· International expansion continuing, with important new software customers in Australia, New Zealand, South Africa and Canada; international revenues up to 32% of total revenues (HY 2013: 24%; FY 2013: 26%)

· Adjusted operating profit1 up by 4% from £5.4m to £5.6m

· Adjusted operating margin1 held at 9%, reflecting investment to drive future revenue growth

· Strong operating cash flow, with cash conversion of 142%, up from 71%

· Interim dividend of 0.60p, 20% up on prior year

· Investment in our international platform and product development ongoing; integration of recent bolt-on acquisitions progressing well

Keith Evans, Chief Executive of Tribal, commented: "Tribal made solid progress in the first half of the year, increasing revenues and adjusted profits while investing in the international infrastructure and products that will drive Tribal's sustainable growth. Recent bolt on acquisitions, which have also enhanced our technology and market reach, are integrating well. With a healthy pipeline of opportunities, our expectations for the full year remain unchanged."

Further Information

A presentation of these results will be made to analysts and investors at 09.30am today at the offices of Weber Shandwick, 2 Waterhouse Square, 140 Holborn, London EC1N 2AE. A copy of the presentation will be available later this morning on the Tribal Group website: www.tribalgroup.com.

This Statement has been prepared for and is addressed only to our shareholders as a whole and should not be relied on by any other party or for any other purpose. Tribal, its directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this Statement is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. This Statement may contain forward-looking statements. Any forward-looking statement has been made by the directors in good faith based on the information available to them up to the time of approval of this Statement and should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking information. To the extent that this Statement contains any statement dealing with any time after the date of its preparation, such statement is merely predictive and speculative as it relates to events and circumstances which are yet to occur and therefore the facts stated and views expressed may change. Tribal undertakes no obligation to update these forward-looking statements.

Chief Executive's Statement

Introduction

Tribal has continued to realise the key elements of its strategic objectives. We remain focused on bringing technology to all that we do, helping our customers to manage and deliver excellent education and training.

Our ambition to build a truly international business is becoming a reality as we grow through new customer relationships, complemented by carefully chosen acquisitions, in our growing number of international markets.

We are also continuing the investment to support our future organic development. Our product development programme is being sustained, and we are increasing the stature of our international infrastructure.

Financial performance

Revenue for the six months ended 30 June 2014 was £63.4m (2013: 62.1m), an increase of 2%. At a divisional level, our Systems revenues grew by 16% to £35.6m (2013: £30.6m), underpinned by another period of strong international expansion. As we continue to focus our activities in those areas where we can most successfully leverage our technology assets, our Solutions revenues decreased to £28.0m (2013: £31.7m).

Adjusted operating profit was £5.6m (2013: £5.4m), an increase of 4%, with adjusted operating margins of 9% (2013: 9%). Consistent with our long term vision, we are investing to ensure we have the right management capacity, skills, resources and business systems to support future revenue growth. Whilst our sustained investment programme affects short-term operating margins we anticipate enhanced growth potential and margin improvement in the medium-term.

Adjusted profit before tax was £4.9m (2013: £4.9m), and adjusted earnings per share were 4.3p (2013: 4.9p), a 12% decrease largely arising as a result of non-recurring tax credits which benefitted the prior year, and the write-off of bank facility fees associated with our refinancing at the start of the year.

Following Ofsted's announcement that it intends to take schools quality assurance activities in-house from September 2015, our assessment of the value of goodwill relating to our Solutions business has required an impairment charge of £9.2m. Additionally, following our acquisition of Sky Software and Human Edge during the period, we have determined that certain software products in our pre-existing portfolio have now been superseded by acquired technology, and a £1.8m impairment charge has accordingly been recognised in the period. As a result, our statutory loss before tax for the period was £8.4m (2013: profit of £4.3m).

Tribal generated excellent operating cash flow in the period. Cash conversion was 142% (2013: 71%), supporting our on-going investment in new software development (£2.4m) and our bolt-on acquisition programme (net cash consideration of £15.2m). Net debt at 30 June 2014 was £13.5m (30 June 2013: £9.3m), an increase arising primarily from these investment activities.

Strategic progress

Our international customer base is developing well. Approximately 32% (HY 2013: 24%; FY 2013: 26%) of our revenues were generated internationally in the period. At the same time, our focus on technology-based activities is reflected by an increasing emphasis on Systems revenues, which now represent 56% of our total revenue (FY 2013: 51%).

Asia Pacific

Our business in Asia Pacific has grown substantially since we entered the region in 2010. We have successfully delivered major software programmes for important institutions such as University of Sydney and the Department of Education in New South Wales, whilst also securing a range of new university and college customers for our systems in Australia and New Zealand.

Our regional credentials in colleges and schools have been reinforced through our recent acquisitions of Sky Software and Human Edge. The latter also brings an offshore software development centre in the Philippines, and early stage customer relationships elsewhere in South East Asia.

North America

We are gaining a demonstrable track-record in North America. Our quality assurance solutions have now been deployed in Tennessee, New York State and Massachusetts, and our performance improvement solutions have been used in more than 90 US and Canadian universities.

The scope of our student management system deployment for University of British Columbia (UBC) is expanding, and we are now piloting our system with a further major Canadian university.

Other international regions

Our work in the Middle East is progressing well, and our major £6.3m systems contract with the University of South Africa, the largest university in Africa with over 370,000 students, now takes us into a further English-speaking regional growth market.

United Kingdom

The UK education market is the foundation of our business, with strong market positions held by the majority of our management systems.

We are continuing to see good opportunities for our systems and performance improvement solutions in Higher Education in the UK, offset by lower activity levels in UK further education colleges and training providers.

Tribal's future position in the UK schools market is also now increasingly focussed on the provision of systems and performance improvement solutions to schools managers. Our schools quality assurance work with Ofsted will expire towards the end of 2015, although our work with Ofsted at the "Early Years" level is expected to continue for the foreseeable future. As this area of work reduces over time, our "Synergy" range of children's services and school-level management systems is showing encouraging progress.

Market commentary

Higher education

Governments in our regional markets consider higher education as a route to economic prosperity, but at the same time are facing fiscal challenges. This is leading to flat or reducing public funding for higher education, which is being offset by increasing student fee requirements.

Thus students are becoming more demanding, and the quality of the "student experience" becomes ever more important. Pursuit of international students, and the additional funds which flow from them, is intensifying. As a result of these drivers, we are continuing to see good activity levels as universities seek innovative ways to understand and organise their businesses, and to deliver high quality education.

United Kingdom

Within our established customer base, we are increasingly working with our customers to assist their adoption of best practice in student administration, refreshing their approach to using our software as their business requirements evolve. We are currently engaged on change programmes at St Andrews University, University of Westminster and Anglia Ruskin University in this way.

Institutions are also forming innovative collaborations, creating new opportunities for us. For example, our student management system is now being deployed to a consortium of eight law schools around the UK on a cloud-based Software as a Service model, streamlining administration and enhancing management information across an otherwise dispersed campus structure.

International

In Asia Pacific, our long term major implementation programme with the University of Sydney has successfully reached full golive. We have also recently been appointed as preferred supplier to two significant universities in Asia Pacific.

Elsewhere, our university systems are gaining good momentum. As previously mentioned, we have now entered the South African market with the University of South Africa, and we are expanding our customer base in North America with a pilot programme underway with a second major Canadian university.

Vocational Learning

Skills development is a key issue for all established education systems. Key themes include enhancing the responsiveness of vocational learning to the needs of employers (including blended-environment learning on-the-job and in the classroom), and improving the overall employability of learners.

These trends continue to create demand for our systems and for our performance improvement solutions (particularly our analytics solutions for colleges).

United Kingdom

In the UK, we have secured a £6.1m contract to provide our cloud-based Sky Software student management system to the British Council to support its English language teaching programme across its 100 training centres around the world.

This programme will see our system operating in over 40 languages, and being deployed in 59 countries.

International

In Australia, our work for the SALM programme is advancing well, and the recently acquired Sky Software business is integrating well with the wider Tribal product portfolio.

Schools K-12

Across our regional markets, governments are active on school improvement programmes, typically emphasising delivery of a school education which produces a well-rounded, highly-skilled labour force.

Common themes include the introduction of market-based choice for parents' selection of schools for their children, an increasing use of analytic tools to drive up standards, a more personalised approach to learning and efforts to bring closer linkage between schools and vocational learning systems.

United Kingdom

In the UK, our schools activities will increasingly focus on the delivery of systems and performance improvement tools, particularly to groups of schools under academy chain frameworks.

Our partnership with the Outwood Grange Academy Trust (OGAT) is progressing well, and a number of OGAT's schools are now live on Synergy-in-Schools. Amongst other new customers for this system, we are collaborating with our largest Further Education college customer, Newcastle College Group (NCG), to provide Synergy-in-Schools to support the integration of school academies into NCG's education network.

International

In Australia, our schools student management system activities are now substantial. The SALM programme expects to deliver our systems to around 2,200 schools in New South Wales, and our recently acquired Human Edge business is supporting approximately 1,900 additional schools and education management organisations throughout Australia and South East Asia. We are already seeing good synergies developing between Human Edge and our existing schools system portfolio.

Divisional Performance

Systems

Our Systems business' revenue grew by 16% to £35.6m (2013: £30.6m). International revenues represented 44% (2013: 39%) of total income. Divisional adjusted operating profit was £7.5m (2013: £5.8m) including £1.9m from the recently acquired Sky Software business, supported by Tribal's international delivery capacity. The adjusted operating margin was 21% (2013: 19%).

We have seen good overall trading conditions in the UK in our Systems business during the period. Domestic revenues grew to £19.9m (2013: £18.7m), an increase of 6%. Additionally, we have continued to experience strong international growth. International revenues were £15.7m (2013: £11.9m), an increase of 32% driven through the contribution of acquired businesses in the period, new customer wins and the continued delivery of large projects such as the SALM programme.

Licence revenues and development fees increased significantly once again. Delivery of software for new customers such the University of South Africa and British Council, supplemented by extension of existing large customer programmes such as those with University of British Columbia and University of Kent, has driven strong licence revenue growth. Complementing our new software sales, our development work on the SALM programme has continued during the period. This phase of activity is now approaching completion, having commenced in mid-2012. Licence and development revenues from the SALM programme were £3.3m (2013: £3.6m).

Implementation revenues increased significantly on the back of the SALM programme in 2013, and this stream of activity has remained strong in the period. SALM implementation revenues were £2.9m (2013: £4.9m). Outside the SALM programme, we have seen a number of our university customers extend timelines on their systems implementation programmes, resulting in deferral of some of our activities. As we move forward, we expect to see activity levels increasing in our major implementation projects.

Our annuity maintenance income base has continued to grow alongside our increasing installed customer base, with maintenance fees in the period of £11.1m (2013: £9.0m), an increase of 23%. Maintenance fees on the SALM programme were £1.6m (2013: £0.3m).

Adjusted operating margins increased to 21% (2013: 19%). As previously explained, our investment in our international management, business development and delivery capacity is progressing strongly, and is intentionally running ahead of anticipated revenue growth. Operating margin growth will continue to be constrained as we make this investment.

Our investment in new product development remains strong although having undertaken a phase of significant investment to build platforms which will resonate in international markets our product investment levels are likely to now represent a smaller percentage of revenue over the coming years.

Solutions

Our Solutions business' revenue in the period was £28.0m (2013: £31.7m), a reduction of 12%. International revenues represented 15% (2013: 9%) of total income. Divisional adjusted operating profit was £1.0m (2013: £1.9m), and adjusted operating margins were 4% (2013: 6%).

The re-shaping of our Solutions business towards our long term vision of technology-based revenues across international markets is accelerating. Those aspects of our Solutions activities which fit less well with these key characteristics will progressively become a smaller part of our business over time.

Performance improvement solutions

Our benchmarking and analytics work is showing good underlying progress, although key customer programmes are expected to show an increased weighting towards the second half of the year.

Tribal's professional development and training support programmes will evolve over the course of the coming year. At the present time, our work includes the provision of careers advice solutions in the offender management market. We will be withdrawing from this market over the remainder of 2014, but will maintain our focus on the development of our software-based training support programmes such as those with the National Centre for Excellence in the Teaching of Mathematics.

Our learning and assessment solutions experienced slow market conditions in the first half of 2014. At the start of the year, Further Education colleges experienced difficulties securing clarity of Government funding commitments due to challenges with a new funding information system provided by the Skills and Funding Agency. At that time, many colleges adopted a cautious stance, and slowed their spending commitments. Following resolution of these problems, we have seen colleges' activity levels returning to normal levels in recent months.

Quality assurance solutions

Alongside our work for Ofsted in the UK, we have been diversifying and growing our customer base for our quality assurance solutions. Our future approach seeks to deliver our quality assurance activities through increasing use of technology; using this approach, our software and methodologies are now active in the Middle East in Abu Dhabi, Qatar, Bahrain and Saudi Arabia, and our work in the US is progressing well across New York State and Massachusetts.

People

We are fortunate at Tribal in employing talented staff who are motivated by working with our customers to deliver systems and solutions which support the delivery of education, learning and training. As an increasingly international business, our development creates new opportunities and challenges for our people. We are very grateful for the continued support of our staff across Tribal, and their commitment to realising our strategic goals.

Risks and uncertainties

Our risk management policies and key risks are documented on pages 34-39 of the Group's report and accounts for the year ended 31 December 2013, which can be found at www.tribalgroup.com/investors. Our key risks remain materially unchanged since that report.

In summary, the key risk areas faced by the Group, and examples of the consequences of risks crystallising in these areas, are:

· Resource allocation - which may cause substandard delivery of key contracts, reputational damage, and excessive resource and management stretch;

· People - which may lead to inability to attract and retain staff, destabilise morale and create shortfalls in operational capabilities;

· Geographic distribution - which may cause over-stretch of management control, resource capacity challenges, foreign exchange currency risk and damage from unforeseen local market conditions;

· Competitive positioning - which may result in aggressive commercial action by competitors or inappropriate pricing strategies in new markets;

· Innovation and technology - which may render existing software products and solutions obsolete;

· Reputation - which may cause loss of key contracts, or loss of customer confidence and trust;

· Governance and controls - which may cause poor control particularly of international expansion;

· Customer demands - which may change unpredictably as a result of political, economic or policy change. Changing customer demands may impact existing contracted activity, and can create uncertainty in the timing of new business wins; and

· Intellectual property - which may result in loss of control over or infringement of key elements of our intellectual property.

Going concern

The Group has sufficient financial resources for its foreseeable requirements. Tribal maintains sizeable cash balances, and has a revolving credit facility of £40m which is committed until June 2018. A further £10m is available on a non-committed basis under an accordion arrangement.

The Group's software products benefit from a significant installed customer base, whilst its other activities are underpinned by a portfolio of long-term contracts. Collectively, the Group has a range of customers across different geographic areas, good levels of committed income and a strong pipeline of new opportunities. The Group's forecasts and projections, which allow for reasonably possible changes in trading performance, show that the Group will be cash generative across the forecast period. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully.

The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus the directors continue to adopt the going concern basis in preparing the financial statements.

Foreign exchange

As Tribal grows in international markets, we are increasingly doing business in foreign currencies. Whilst we seek to hedge against foreign exchange risk where appropriate, fluctuations in foreign currencies affect our reported profits.

Our operating profit for the six months ended 30 June 2014 would have been approximately £0.7m higher if foreign currency denominated transactions in the period had been recorded at exchange rates consistent with these pertaining in the first half of 2013.

Taxation

Our increasing international revenues mean that our operations are becoming subject to jurisdictions in which corporate tax rates are above those in the UK. As a result our effective tax rate for ongoing activities is expected to rise progressively in the medium-term, although the majority of our profits will continue to be taxed in the UK.

Dividend

The Board has declared a dividend of 0.60p in respect of the six months ended 30 June 2014 (2013: 0.50p). This will be paid on 17 October 2014 to shareholders on the register on 19 September 2014. The ex-dividend date will be 17 September 2014.

Related parties

Transactions with related parties during the period are set out in note 22.

Outlook

Tribal made solid progress in the first half, increasing revenues and adjusted profits while investing in the international infrastructure and products that will drive sustainable growth. Recent bolt-on acquisitions, which have also enhanced our technology and market reach, are integrating well. With a healthy pipeline of opportunities, our expectations for the full year remain unchanged.

Looking forward into 2015 and beyond, our work with Ofsted will reduce and we will accelerate the repositioning of our Solutions business towards technology-based revenue streams. Whilst this may reduce short-term headline revenue growth rates in our Solutions business, we anticipate stronger medium-term revenue growth and margin improvement.

12 August 2014

Condensed consolidated income statement

Notes to the condensed consolidated financial information

for the six months to 30 June 2014

1. General information

The condensed consolidated financial information for the six months ended 30 June 2014 was approved by the Board of Directors on 12 August 2014.

The information for the year ended 31 December 2013 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor reported on those accounts: its report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

2. Accounting policies

The annual financial statements of Tribal Group plc are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

In the current financial year, the Group has applied for the first time IFRS 10 'Consolidated Financial Statements', IFRS 11 'Joint Arrangements', IFRS 12 'Disclosure of Interests in Other Entities', IAS 27 (revised 2011) 'Separate Financial Statements', IAS 28 (2011) 'Investments in Associates and Joint Ventures' including the amendments to the transitional guidance and the amendments to IFRS10, IFRS 12 and IAS 27 'Investment Entities'. The adoption of these standards has had no material impact. Otherwise, the same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements.

3. Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

4. Segmental analysis

In accordance with IFRS 8 'Operating Segments' information on segment assets is not shown as this is not provided to the Chief Operating decision-maker. Inter-segment sales are charged at prevailing market prices.

The principal activities are as follows:

Systems: a range of proprietary software products and related services to support the business needs of education, learning and training providers.

Solutions: a range of services to support the improvement of education, learning and training delivery by our customers.

The accounting policies of the reportable segments are the same as the Group's accounting policies. Segment profit represents the profit earned by each segment, without the allocation of central administration costs, including Directors' salaries, finance costs and income tax expense. This is the measure reported to the Group's Chief Executive for the purpose of resource allocation and assessment of segment performance.

Of the total Group revenues, approximately 20% (December 2013: 21%) have arisen within our Solutions division from the Group's largest customer and revenues of approximately 13% (December 2013: 15%) have arisen within our Systems division from the Group's second largest customer.

Of the total "Amortisation of IFRS 3 intangibles", £0.8m arose in relation to the Systems segment and £0.1m in relation to the Solutions segment. Impairment of goodwill arises entirely in relation to the Solutions segment. Of the total "Other costs", £2.1m arose in relation to the Systems segment and £0.7m in relation to the Solutions segment.

5. Other items (including closed businesses and exceptional costs)

Property related costs in 2014 relate primarily to the relocation of the Group's Head Office. An onerous lease charge arises on the exit of our previous property. The new property benefits from a significant lease incentive with the effect that the overall relocation programme is cash neutral.

8. Tax

In addition to the amount charged to the income statement, a deferred tax credit of £73,000 (2013: £272,000) has been taken directly to equity.

The Group continues to hold an appropriate corporation tax provision in relation to the Group relief claimed from Care UK for the year ended 31 March 2007.

9. Discontinued operations

Discontinued operations include the Health & Government, Resourcing and Communications businesses which were disposed of during 2010 and 2011. The Resourcing and Communications sales were trade and assets deals and so there continue to be transactions, for example as leases associated with those businesses wind down.

The results of the discontinued operations which have been included in the consolidated income statement were as follows:

10. Earnings per share

Earnings per share and diluted earnings per share are calculated by reference to a weighted average number of ordinary shares calculated as follows:

Diluted earnings per share only reflects the dilutive effect of share options for which performance criteria have been met at the reporting date. The maximum number of potentially dilutive shares, based on options that have been granted but have not yet met vesting criteria is 4,046,135 (December 2013: 3,521,109).

The adjusted earnings per share figures shown on the condensed consolidated income statement are included as the directors believe that they provide a better understanding of the underlying trading performance of the Group. A reconciliation of how these figures are calculated is set out below.

The Board has declared an interim dividend of 0.60 pence per share (2013: 0.50 pence per share), which will result in a cash outflow of £0.6m (2012: £0.5m).

The interim dividend was approved by the Board on 12 August 2014 and has not been included as a liability as at 30 June 2014.

The dividend is payable on 17 October 2014 to ordinary shareholders who are on the register on 19 September 2014. The shares will be quoted ex-dividend on 17 September 2014.

The Group tests annually for impairment or more frequently if there are indications that goodwill might be impaired. During the period, Ofsted announced its intention to in-source one of the two inspections contracts held by the Group at the end of the current contract term in August 2015. As a result we have reassessed the goodwill relating to the Solutions business, which holds these contracts, for potential impairment. The recoverable amount of the Solutions CGU group was determined from a value in use calculation. The key assumptions for this are those regarding discount rates, short to medium term trading performance, longer term growth rates and expected changes to selling prices, sales volumes and direct costs during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Changes in selling prices, sales volumes and direct costs are based on past practices and expectations of future changes in the market.

The Group prepares cash flow forecasts derived from the most recent financial projections approved by the Board up to the end of 2015 and has extrapolated cash flows in perpetuity based on an estimated growth rate of 2%. This rate does not exceed the average long-term growth rate for the relevant markets and reflects the ongoing caution in the market. The discount rate applied was 14% (2013: 14%) which is based on the WACC for the business with an appropriate risk adjustment.

This assessment indicates that based on our current projections for that business, an impairment of £9.2m is required. If the profitability over the forecast period were to fall below expectations there would be a requirement for a further impairment of goodwill. For example if profitability were 10% below expectations across the forecast period, a further impairment of £3.1m would be required. We will continue to conduct regular reviews to monitor this.

The additions to goodwill in the period arise entirely in relation to the Systems segment (£5.9m in relation to the acquisition of Sky Software and £4.3m in relation to the acquisition of Human Edge). The impairment arises entirely in relation to the Solutions segment.