Netcall : Half-year Report

Half-year Report

Released : 05/03/2019 07:00

RNS Number : 8129R Netcall PLC

05 March 2019

5 March 2019

NETCALL PLC

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

Interim results for the six months ended 31 December 2018

Approaching inflection point as Cloud services growth accelerates

Netcall plc (AIM: NET), the leading provider of Low-code and customer engagement software, today announces its unaudited interim results for the six months ended 31 December 2018.

Financial highlights

• · Revenue up 6% to £11.4m (H1-FY18: £10.7m)

• · Cloud services and product bookings(1) increased by 96% to £5.22m (H1-FY18: £2.67m)

• · Total annual contract value(2) ('ACV') at 31 Dec 2018 up 10% to £15.1m (H1-FY18: £13.7m) - Low-code ACV up 40% year over year

• · Adjusted EBITDA(3) £2.02m (H1-FY18: £2.69m) after approximately £0.75m spend of the growth investment programme

• · Profit before tax increased 49% to £0.42m (H1-FY18: £0.28m)

• · Cash generated from operations of £1.85m (H1-FY18: £0.30m)

Operational highlights

• · Substantial growth in cloud business with a number of notable multi-year contracts

• · Cloud service bookings exceeding product sales for the first time

• · New Low-code customer wins and cross sales

• · High levels of customer renewals

• · Significant new Low-code and Liberty cloud product releases

Henrik Bang, CEO at Netcall, commented:

"We are now approaching a clear inflexion point in our transition from a traditional software business to a high growth digital cloud operation, with our Cloud service bookings exceeding product sales.

"The increase in our total ACV and Low-code ACV provides a clear demonstration of the growing forward visibility of our revenue streams.

"Trading is in line with our expectations for the year so far. We expect revenues for the year to be more weighted toward the second half given the move to a recurring revenue model and the timing of product sales. Our strong sales momentum has continued into the second half with order inflow significantly ahead compared with the same period last year."

(1) Cloud services and product bookings is the total of all new orders received classified as cloud subscription and support, product and first year support contract revenues.

• (2) ACV, as of a given date, is the total of the value of each cloud and support contract divided by the total number of years of the contract.

• (3) Profit before interest, tax, depreciations and amortisation adjusted to exclude the effects of acquisition, impairment, contingent consideration and non-recurring transaction costs. The forecast is based on unaudited management accounts for the 6 months ended 31 December 2018.

Enquiries:

Netcall plc Henrik Bang, CEO

Tel. +44 (0) 330 333 6100

Michael Jackson, Chairman

James Ormondroyd, Group Finance DirectorfinnCap Limited (Nominated Adviser and Broker) Stuart Andrews / James Thompson, Corporate Finance Tim Redfern, Corporate Broking

Tel. +44 (0) 20 7220 0500

Alma PR

Tel. +44 (0) 20 3405 0212

Caroline Forde / Hilary Buchanan / Helena Bogle

About Netcall:

Netcall develops and markets platforms for customer engagement and digital process automation using its market leading Low-code technology. This provides a compelling proposition to improve customer experience as well as deliver operational excellence.

Netcall's Low-code platform uses drag and drop technology that enables organisations to scale and rapidly develop, test and deploy digital enterprise applications. This empowers business users and IT developers to collaboratively develop products and systems that create a leaner, more customer-centric organisation.

The Group is transitioning from a stable traditional software business to become a high growth cloud-led digital operation. Netcall has a growing international presence and is recognised by both Forrester and Gartner as a leading provider of Low-code in its industry.

Netcall's customers span enterprise, healthcare and government sectors. These include two-thirds of the NHS Acute Health Trusts, major telecoms operators such as BT, and leading corporates including Lloyds Banking Group, ITV and Nationwide Building Society.

Netcall is a UK company quoted on the AIM market of the London Stock Exchange.

Prior to publication the information communicated in this announcement was deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No 596/2014 ('MAR') With the publication of this announcement, this information is now considered to be in the public domain.

Strategic overview

The Group is transitioning from a traditional software business to a high growth digital cloud operation, blending its Liberty platform with its recently acquired Low-code cloud operation. The aim is that the cloud business becomes the majority of the Group's revenue by 2021.

The Group is now well positioned to capitalise on the fast growing Low-code market and is accelerating its investment in the business. The cash generative Liberty business, which has a strong position in healthcare and public sector markets, is providing the resource to support substantial new growth opportunities.

The combination of Netcall's products provides organisations with a unique proposition for their customer engagement and digital process automation requirements. It enables significant customer experience improvements and delivery of operational excellence with efficiency savings.

Netcall has seen a notable rise in interest and new customer wins for its solutions, as a growing number of organisations evaluate and adopt these capabilities across their enterprises. The Group has also seen an increase in cross selling of Low-code solutions into existing customers as they digitise and modernise their operations.

The average annual contract value of these initial Low-code cross-sales is three times higher than the average of the Netcall customer base. This gives an early indication of the potential value of Low-code sales into the existing customer base.

Netcall is also developing its partner strategy and activity in this area is growing. Partners using the Group's Low-code platform can gain significant advantages including using the speed and flexibility of its software to disrupt their market place, being able to scale with customer demand and create profitable recurring revenue streams.

Netcall's software is highly operationally geared, scalable and easy to deploy and use for enterprises. The Low-code market is worth morethan an estimated $6 billion and is expected to grow rapidly in the coming years1.

In addition to the Group's focussed organic growth strategy, the Board continues to look for selective acquisitions with complementary proprietary software and/or additional customers in its target markets.

1 Source:https://go.forrester.com/blogs/why-you-need-to-know-about-low-code-even-if-youre-not-responsible-for-software-delivery/

Current trading and outlook

Netcall is now approaching a clear inflexion point with Cloud service bookings exceeding product sales for the first time in a six-month reporting period and the Group's forward visibility of revenue continues to grow strongly.

The Group has traded in line with the Board's expectations for the year to date. As previously stated, Netcall expects revenues for the year to be more weighted toward the second half given the transition to a recurring revenue model and the timing of product sales. The Group experienced strong sales momentum in the first half which has continued into the second half with order inflow significantly ahead of the comparable period last year.

Operational review

Markets and opportunities

Enterprises of all sizes are undertaking digital transition projects as they modernise their legacy customer engagement and business systems. According to Forrester, "Corporate's principal focus on process improvement is on improving customer experience and accelerate digital business transformation."2 However, many enterprises lack resources and capabilities to deliver the projects.

Netcall's offerings empowers businesses to rapidly implement digital transformation projects. The ease of use and flexibility of the platforms is accelerating the speed and widening the range of applications organisations can implement to significantly improve their customer experience while reducing the cost base.

Combining the Low-code capability with the Liberty customer engagement platform enables Netcall to provide compelling solutions. Digital business processes on the Group's Low-code platform can seamlessly drive customer journeys with integrated customer interactions carried out using Liberty capabilities such as chat, SMS, messaging or contact centre. With its rich API capabilities these journeys can integrate with other systems, holding information required to deliver a smooth experience for customers and thereby retrieving or updating data critical for record management and back-end systems.

Netcall is also assisting its customers to build and develop tailored applications using the Low-code technology across their own external communities, such as public sector bodies. At the same time partner firms are using Low-code to develop solutions as part of their consultancy services to provide broader offerings and create new revenue and growth opportunities.

The Group has continued to win business across a range of vertical markets, including:

A minimum four-year agreement worth more than £1.4m with an international business process outsourcer for a Low-code and Liberty solution;

A three-year agreement worth a minimum of £1.5m with an infrastructure business for a Low-code platform to be used for a broad range of applications to modernise their systems; and,

Cross-sales of Low-code solutions into our existing markets including local authorities, government agencies, housing associations and NHS trusts.

In addition, we have seen significant projects go-live including:

Lloyd's Market Association, which provides services to members of the Lloyds of London insurance market, launched a claims expert management hub, Gemini, built on the Group's Low-code platform. The platform helps the Lloyds markets managing agents to contract and manage spend on claims experts exceeding an estimated £500m per year.

Hampshire Trust Bank selected the Low-code platform to enable ''digital innovation, process and customer experience improvements'' and has launched its first solutions to support mortgage applications.

Products

A new version of the Group's Low-code platform has been released addressing the growing demand from IT professionals for Low-code capabilities to help them benefit further from the platform's speed and flexibility. The release included the ability for developers to create custom code and embedded integrations with other applications. The interface has also been updated with new performance reporting giving IT increased control and governance over the applications delivered on the platform.

In January 2019, the Group launched a new Low-code community, where customers can engage with other Low-code users to find, collaborate and contribute to creating better solutions. The launch included an Appshare allowing users to download and share free to use apps, adaptors, plugins, themes and widgets. In addition, the release included a Training Academy for eLearning and a Forum which includes app building advice, suggestions and feedback.

The Group also expanded its customer engagement platform, Liberty, with support for a new cloud based conversational messaging service. Built on Microsoft Azure cloud infrastructure, this new service provides support for channels such as Facebook, Twitter and various SMS providers and it will be used by both Liberty and Low-code solutions to ensure that the Group can rapidly add further messaging channels across its product portfolio. The release of this service is a further example of the continued expansion of the Liberty platform from a premise-based solution to the cloud.

2 Source: Forrester - Q1 2018 Digital Business Automation Survey

Financial Review

Group revenue increased 6% to £11.4m (H1-FY18: £10.7m).

The Group's revenue comprises the following components, reflecting the movement of the business towards primarily a provider of Cloud based software and services:

Cloud services: subscription and usage fees of our cloud-based offerings.

Product support contracts: provision of software updates, system monitoring and technical support services for our products.

Communications services: fees for telephony and messaging services.

Product revenues: predominantly software license sales with supporting hardware.

Professional services: consultancy, implementation and training services.

The Board has, for a number of years, measured financial performance using the following KPIs: revenue, EBITDA, and operating cash flow. In addition, the Group will now also report Cloud and product bookings and ACV. These metrics measure sales momentum and give a lead indicator on future revenue.

Cloud and product bookings (the total of all new orders received classified as cloud subscription and support, product and first year support contract revenues) in the period increased by 96% year over year to £5.2m, of which Low-code rose seven-fold to £3.9m.

As a result, revenue from Cloud services, which are a key strategic focus, have grown strongly and increased by 48% to £3.01m (H1-FY18: £2.04m).

Total Low-code ACV as at 31 December 2018 increased by 40% year over year to £4.2m (H1-FY18: £3.0m). In the seventeen months of acquisition of the Low-code platform the Group has increased the Low-code ACV by 48%.

Total ACV increased by 10% year over year to £15.1m (H1-FY18: £13.7m). ACV, as of a given date, is the total of the value of each cloud and support contract divided by the total number of years of the contract.

Product support contract revenue increased by 5% to £4.63m (H1-FY18: £4.42m) reflecting very high contract retention combined with the contribution of new product sales and price rises.

Communications services revenue was £0.94m (H1-FY18: £1.11m) due to lower usage of call-back services in the period by a partner.

Product revenue was disappointing at £0.98m (H1-FY18: £1.81m) as a higher proportion of the sales pipeline was carried forward into the second half than normal, due to purchasing delays by some public sector organisations. As set out above the weaker performance in this area in the first half along with the transition to recurring revenues has led to an expectation that revenue will be more weighted to the second half than historically and will require a higher level of conversion of the existing pipeline than in the first half.

Professional services revenues increased 36% to £1.80m (H1-FY18: £1.32m) due to implementation services increasing in line with new sales of cloud solutions.

Gross profit margin was maintained at 90% (H1-FY18: 90%).

Administrative expenses, before depreciation, amortisation, impairment, share-based payments and acquisition related items increased to £8.23m (H1-FY18: £6.98m) which is in line with expectations following the previously announced investment programme. Investments have mainly been made in expanding sales and marketing, professional services teams to deliver implementation services for the growing cloud solutions and our own digital business operation to support a larger and growing organisation.

Consequently, the Group adjusted EBITDA was £2.02m (H1-FY18: £2.68m), a margin of 18% of revenue (H1-FY18: 25%).

Profit before tax increased 49% to £0.42m (H1-FY18: £0.28m) after taking into account acquisition related items and interest on borrowings taken out to fund the acquisition of MatsSoft in August 2017.

The Group tax charge of £0.12m (H1 FY18: £0.10m) represents an underlying effective rate of tax of 14% (H1 FY18: 5%) on adjusted profit before tax. The underlying effective rate of tax benefited from additional deductions for R&D expenditure and utilisation of previously unrecognised losses brought forward.

Diluted earnings per share increased by 67% to 0.20 pence (H1-FY18: 0.12 pence) and was 0.60 pence on an adjusted basis (H1-FY18: 1.03 pence).

Cash generated from operations before non-recurring transaction cost payments was £1.85m (H1-FY18: £0.30m), as previously announced returning to a normal level of conversion of 92% (H1-FY18: 11%) of adjusted EBITDA following last year's one-off impact from the MatsSoft acquisition.

Spending on research and development, including capitalised software development, was maintained at £1.45m (H1-FY18: £1.45m) of which capitalised software expenditure was £0.71m (H1-FY18: £0.83m).

Total capital expenditure was £1.07m (H1-FY18: £1.01m); the balance after capitalised development, being £0.36m (H1-FY18: £0.18m) relating to IT equipment, software and office fit out.

The Company acquired MatsSoft Limited in August 2017. The purchase agreement provided for potential further cash and share to be paid dependent on achieving specified performance targets over various periods from completion of the acquisition. During the period the Company paid £0.46m in cash under this arrangement. At 31 December 2018 the fair value of the remaining contingent consideration was re-estimated at a lower amount of £2.42m resulting in £0.12m being credited to the income statement as a change in estimate.

To support the acquisition, the Company issued a £7m Loan Note (see note 7). Loan Note interest payments in the period totalled £0.30m (H1-FY18: £0.20m).

As a result of these factors, net debt was £0.77m at 31 December 2018 (31 December 2017: £0.81m).

Unaudited consolidated income statement for the six months to 31 December 2018

All activities of the Group in the current and prior periods are classed as continuing. All of the profit for the period is attributable to the shareholders of Netcall plc.

Statement of comprehensive income for the six months to 31 December 2018

£'000

Profit for the period

Other comprehensive income

Items that may be reclassified to profit or loss

Exchange differences on translation of foreign operations

Total comprehensive income for the period

Six months to 31 December 2018

291

(19)

272