Financial Review

Investors Andrew Fabian Finance Director StatPro

Overview

During 2013, we have continued to invest in transforming StatPro into a pure cloud solution business. We have increased investment in several areas of the business with a focus on sales operations, client services, development and cloud infrastructure. The annualised contracted revenues of cloud-based StatPro Revolution have grown by 114% (at constant currency) to £3.20 million (2012: £1.49 million). The increased expenditure on cloud services (StatPro Revolution) coupled with the reduction in software licence revenues and data overage from our non-cloud activities (StatPro Seven and Data) has resulted in a reduction in adjusted EBITDA to £5.46 million (2012: £6.73 million), as expected. We also increased our StatPro Revolution related recurring revenue (defined as the total recurring revenue from clients whose subscription includes StatPro Revolution) to £9.19 million (2012: £3.92 million), giving us confidence that the transition is progressing well with existing clients.

The underlying adjusted EBITDA (at constant currency) is shown in table 1.

1. Underlying performance
2013
£million
2012
£million
Change
%
EBITDA relating to:
Seven and Data 7.80 9.01 (13%)
Revolution (2.48) (2.28) (9%)
FX impact 0.14
Adjusted EBITDA 5.46 6.73 (19%)
Adjusted EBITDA margin 16.8% 21.0%

Key Performance Indicators

The key performance indicators (KPIs) that are monitored by the Board, and by the Group Executive Board as part of the regular monthly management reporting, are shown in table 2.

The KPIs are discussed in detail below in the relevant sections of this Financial Review.

2. Client related KPIs and financial and operational KPIs

Client related KPIs
2013 2012 Change
%
New sales of recurring licences and data £3.24 million £3.11 million 4%
New sales of consulting £2.07 million £1.99 million 4%
Annualised recurring revenue* £28.72 million £28.47 million 1%
Annualised recurring revenue* – StatPro Revolution £3.20 million £1.49 million 114%
StatPro Revolution related recurring revenue* £9.19 million £3.92 million 134%
StatPro Revolution related recurring revenue – % of software 37% 16%
Contract renewal rates 114% 234%

Financial and operational KPIs
Adjusted operating margin 13.3% 17.3%
Adjusted EBITDA margin 16.8% 21.0%
Adjusted EBITDA £5.46 million £6.73 million (19%)
Net cash £4.00 million £3.67 million 9%
* At constant currency

Revenue

Overall, Group revenue increased by 2% (at constant currency and at actual rates) to £32.49 million (2012: £32.00 million).

Revenue by segment

Revenue increased in the EMEAA region by 2% (at constant currency and at actual rates) to £20.45 million (2012: £20.08 million). In the North American region revenue increased by 1% (2% at constant currency) to £12.04 million (2012: £11.92 million) as shown in table 3.

3. Revenue by sector
2013
£million
2012
£million
Change
%
EMEAA 20.45 20.08 2%
North America 12.04 11.92 1%
Total 32.49 32.00 2%

Revenue by type

StatPro Seven software licence revenue fell by 2% (at constant currency and at actual rates) to £24.02 million (2012: £24.60 million) as we focus our efforts on cloud technology and not proactively selling non-cloud solutions. This was offset by an increase in StatPro Revolution revenue of 204% to £2.19 million (2012: £0.72 million). Data fees fell by 10% (9% at constant currency) for the year to £4.21 million (2012: £4.69 million) as expected due to a lower level of data overage. Professional services revenue increased by 4% to £2.07 million (2012: £1.99 million), as shown in table 4.

4. Revenue for the year by type
2013
£million
2012
£million
Change
%
Revenue
Software licences – StatPro Seven 24.02 24.60 (2%)
Software licences – StatPro Revolution 2.19 0.72 204%
Software licences – Total 26.21 25.32 4%
Data fees 4.21 4.69 (10%)
Total recurring revenue 30.42 30.01 1%
Professional services and other revenue 2.07 1.99 4%
Total revenue 32.49 32.00 2%
Percentage of total that is recurring 94% 95%

Recurring revenue

The Group’s business model of Software as a Service (SaaS) and recurring revenue contracts continues to provide excellent visibility of revenue with the recurring revenue element being a high percentage (94%) of total revenue (2012: 94%). The annualised recurring revenue from software licences and data fees at the end of December 2013 increased by 1% at constant currency to £28.72 million (2012: £28.47 million). The net growth rate for StatPro Revolution was 114% (2012: 234%) and the net cancellation rate for StatPro Seven/ Data was 5% (2012: 0%). New contracts signed in the year were £3.24 million (2012: £3.11 million), as shown in table 5.

5. Software licences and data feeds
Annualised recurring contract revenue 2012 £million Annualised recurring contract revenue 2011 £million
As at 31 December 2011 29.52 29.41
Net impact of exchange rates (1.05) (0.96)
At 1 January 2012 (at December 2012 rates) 28.47 28.45
New contracted revenue 3.24 3.11
Cancellations/reductions (2.99) (2.04)
Net increase 0.25 1.07
Recurring licence fees as at 31 December 2012 28.72 29.52

Approximately 77% of new recurring contracted revenue arose from existing clients (2012: 71%). The proportion by value of recurring software licences and data clients at the end of 2013 secured to the end of 2014 or beyond amounted to 78% (2012: 81%); the weighted average length of contracts committed was 16 months (2012: 17 months).

StatPro Revolution revenue profile

Recurring revenue relating to StatPro Revolution is now 11% of the Group total and it is growing at a higher rate as the service is developed on a highly scalable technology platform. The total recurring revenue from clients whose subscription includes StatPro Revolution was £9.19 million (2012: £3.92 million) representing 37% (2012: 16%) of our total software recurring revenue, a KPI we are focused on increasing.

The revenue distribution profile for StatPro Revolution is as shown in table 6.

6. Revenue distribution for StatPro Revolution
Annualised revenue
2013
£’000s
Number of clients 2013
Number
Average revenue per client 2013 £’000s Annualised revenue
2012
£’000s
Number of clients 2012
Number
Average revenue per client 2012
£’000s
Annualised revenue bands
<£2k 135 136 1.0 98 108 0.9
£2k – £10k 262 68 3.9 123 30 4.1
£10k – £50k 883 34 26.0 186 9 20.7
£50k – £100k 920 13 70.8 355 5 71.0
>£100k 996 6 166.0 731 4 182.8
Total 3,196 257 12.4 1493 156 9.6

Operating expenses

Operating expenses (before amortisation of intangible assets and exceptional items) increased by 7% (8% at constant currency) to £24.71 million (2012: £23.02 million). The increase in expenditure related to several areas of the business, mainly sales operations, client services, development and cloud infrastructure. The average number of employees was 249 (2012: 253), although we ended the year with 255 employees, up 5% in the year (2012: 242).

Exceptional items

As previously announced, the Board decided to agree an out-of-court settlement in relation to the SiSoft acquisition contingent consideration dispute, and as a result there is an exceptional charge of £0.35 million. There is no tax deduction available as it is a capital item. Further details are provided in note 3. The exceptional item in 2012 of £0.98 million relates to the one-off charge for restructuring in January 2012.

Adjusted operating margin

As a result of increased investment in cloud technology and the growth of our sales and client services teams, the operating profit reduced to £3.39 million (2012: £4.28 million). The adjusted operating profit also reduced by 22% year on year to £4.33 million (2012: £5.53 million) as shown in note 3, with the adjusted operating margin reducing to 13.3% (2012: 17.3%). The adjusted EBITDA (note 3) reduced by 19% to £5.46 million (2012: £6.73 million).

Research and development and capex

The research and development team is now focused solely on cloud-based solutions, StatPro Revolution and StatPro R+ (the cloud upgrade path for StatPro Seven) and research and development expenditure increased overall by 6% to £4.44 million (2012: £4.18 million), equating to 14% of Group revenue (2012: 13%). The total expenditure on StatPro Revolution (and R+) including marketing and other costs was £4.92 million (2012: £3.70 million).

Development costs of £3.40 million were capitalised in the year (2012: £3.21 million) and amortisation on internal development increased to £3.40 million (2012: £3.06 million). Expenditure on other intangible assets was £0.08 million (2012: £0.34 million) and total capital expenditure on property, plant and equipment was £0.93 million (2012: £0.64 million).

Finance income and expense

Net finance expense reduced to £0.27 million (2012: £0.49 million), and is mainly the finance costs of our currently unutilised credit facility.

Profit before tax

Profit before taxation decreased by 18% to £3.11 million (2012: £3.78 million). After adjusting for amortisation of acquired intangible assets, share based payments and exceptional items, the adjusted profit before taxation reduced by 20% to £4.05 million (2012: £5.04 million). The impact of currency movements increased adjusted profit before taxation by £0.29 million (i.e. approximately 9% impact).

Taxation

The tax charge is £1.03 million (2012: £1.10 million). The underlying tax rate (before the impact of exceptional items) is around 30% and the overall effective tax rate is 33% (2012: 29%). This is higher than the prevailing UK rate largely due to unrelieved losses in our development company StatPro International Sarl and also the impact of the non-deductible exceptional increase in SiSoft contingent consideration.

Earnings per share

Basic earnings per share decreased by 28% to 3.1p (2012: 4.3p). Diluted earnings per share decreased to 3.1p (2012: 4.3p) based on 0.07 million (2012: 0.25 million) potentially dilutive shares outstanding. Adjusted earnings per share (note 10) reduced by 24% to 4.5p (2012: 5.9p).

Balance Sheet

The Group’s net assets reduced to £46.91 million (2012: £49.62 million), mainly as a result of a reduction in goodwill due to currency translation movements.

Cash flow and financing

2013 was another year of positive cash generation with cash inflow from operating activities (before exceptional payments) of £9.40 million (2012: £10.18 million). The Group ended the year with net cash of £4.00 million (2012: £3.67 million). The Group nevertheless retains its long-term financing facility which was undrawn at 31 December 2013.

Dividends

The directors are recommending an increased final dividend of 1.95p per share (2012: 1.9p) making a total dividend for 2013 of 2.8p per share (2012: 2.7p). The final dividend will be paid on 21 May 2014 to all shareholders on the register at the close of business on 25 April 2014. Total dividends paid in 2013 amounted to £1.86 million (2012: £1.63 million). The Board intends to maintain a progressive dividend policy reflecting the balance between the investment needs of the business and the growth in underlying earnings per share (eps). When proposing the dividend, the Board satisfies itself that the current and projected level of dividend cover is appropriate. The dividend cover (calculated as adjusted eps: dividends per share) was 1.6 times (2012: 2.2).

Principal financial risks

The principal business risks and uncertainties affecting the Group are described on pages 28 to 31. For each category of risk, the directors have identified means by which the risk can be managed or reduced in a cost effective way, whilst accepting that some risks cannot be completely eliminated. Details of key financial risks are considered below.

Financial risk management

The current and projected financial risks of the Group are managed by the Group finance team. The primary risk relates to financing facilities and this is mitigated by ensuring very tight control of cash and detailed forecasting of business cash flows.

Liquidity risk

The Group’s cash position is closely monitored with weekly updates from all overseas operations and daily updates of cash collected from customers. Any aged debtor balance that is overdue is investigated to ascertain the reason and to resolve the situation promptly. Monitoring procedures for short-term cash projections allow the Group finance team to closely monitor the key liquidity and other financial ratios to ensure that there is sufficient liquidity in the business at all times and sufficient headroom in relation to the banking covenants.

Financing facilities

The Company retains its senior debt facility with The Royal Bank of Scotland plc (RBS), which is committed to May 2016, subject to compliance with agreed covenants. The Company has the option to extend the facility for a further year to May 2017 (subject to RBS Credit Committee approval). At 31 December 2013, the Group had both net cash of £4.00 million and undrawn credit facilities of £8.50 million available to support its business operations and therefore the Board believes that the Group is well positioned to manage the business risks.

Foreign exchange risk management

The Group is exposed to exchange rate fluctuations given that the majority of its revenue is non-sterling based. The Group also has a significant proportion of its costs in the same currencies as its revenues and therefore there is a reasonable degree of natural reduction in overall currency risk.

All material foreign currency transaction exposures (i.e. sales and purchase contracts denominated in a different currency to the local reporting currency) are hedged through use of foreign exchange contracts as soon as the amount and timing of the exposure is identified with reasonable certainty. The Group’s policy is not to hedge profit and loss translation exposures.

As part of our liability management, we have made use of currency swaps with a total principal value of approximately £5.19 million denominated in USD, CAD, and EUR, to create synthetic currency hedges in order to provide a partial hedge against movements in the fair value of investments in overseas subsidiaries. As the Group continues to grow and generates increased profits overseas in foreign currencies this exchange rate exposure is expected to increase.

Interest rate risk management

The Group is exposed to interest rate risk and an increase in interest rates would increase the interest payable on the Group’s banking facility. Given the Group’s current net cash position and the benign outlook for interest rates, the Board has decided not to undertake any interest rate hedging but will review the position from time to time. The risk to rising interest rates (should the Group return to a net debt position) would be partly mitigated by an increase in interest income from surplus cash and deposits, where the policy is to seek to maximise interest return without exposure to inappropriate liquidity or counterparty risk.


Andrew Fabian
Finance Director
14 March 2014