Slide 1: Full Year Results
Full Year Results for the year ended 31 May 2017 18 July 2017 Executive Chairman – Chris Stone Interim CEO and CFO – Brian Tenner
Slide 2: Agenda
Agenda Overview Strategic Review – Key Findings Financial performance Current trading and outlook Strategic Review Target Operating Model Strategy Appendices NCC Group plc Year ended 31 May 2017 2
Slide 3: Overview
Overview Very challenging year …….. • Significant under-performance vs initial expectations, in line with revised expectations • Major changes to Board and executive team • Cost base increased out of step with revenue growth due to lack of control • Gross and Net Margins fell in most business units
Slide 4: Strategic Review – Key Findings
Strategic Review – Key Findings We have excellent market positions and opportunities ……… • Escrow business remains solid • Cyber markets are positive and continue to grow • Our core segments are growing faster than the market • Customers like us, value our services and would like to buy more from us
Slide 5: Financial performance
Financial performance Year ending 31 May 2017
Slide 6: Financial summary
Financial summary Revenue (£m) 300 244.5 • Core markets remain buoyant 209.1 200 133.7 • Growth from many service lines and geographies 100 • Mix of acquisitions, FX and organic growth 0 2015 2016 2017 Adjusted EBIT (£m) 50 40 39.7 • EBIT suffered from weak control of costs 31.3 27.5 30 • Cost incre
Slide 7: Income Statement
Income Statement 2017 2016 • Revenue growth from acquisitions, FX and (£m) (£m) organic Revenue (inc Domain) 244.5 209.1 • Note: CoS in 2016 reclassification of £21.2m Cost of Sales (160.2) (129.4) of support salaries and travel into G&A Gross Margin 84.3 79.7 • GM% fell in all business units – cost
Slide 8: Revenue bridge – excluding Domain
Revenue bridge – excluding Domain £m 260.0 250.0 3.6 17.8 7.4 240.0 230.0 7.1 220.0 14.0 210.0 9.8 241.9 200.0 190.0 204.2 180.0 2016 FX Fox-IT PSC & VSR Services & Fox High MSS - 2017 Consulting Assurance Products • FX related growth of £9.8m in both Assurance and Escrow ($ and € ~15% stronger) • F
Slide 9: Adjusted EBIT bridge – excluding Domain
Adjusted EBIT bridge – excluding Domain £m 50.0 45.0 2.6 2.5 7.5 40.0 0.6 35.0 7.7 30.0 39.7 2.7 25.0 27.5 20.0 2016 FX Acq'ns Organic GM% G&A D&A 2017 • Organic EBIT estimate based on growth x PY Gross Margin% • Group gross margin down 3.6% (includes Escrow Rev Rec impact £0.9m) • G&A increase in m
Slide 10: Non-GAAP reconciliation
Non-GAAP reconciliation 2017 2016 • Reverting to Adjusted EBIT as primary £m £m profit KPI Adjusted EBITDA 36.2 45.0 • Depreciation increase: Depreciation of tangibles (5.2) (3.7) o Fox - £0.6m o Office fit out costs - £0.4m Amortisation of intangibles (3.5) (1.6) • Intangible amortisation: Adjusted
Slide 11: Individually significant items
Individually significant items Charges / (credits) 2017 2016 • Accumuli and Fox-IT goodwill: (£m) (£m) o Weaker business performance / integration Accumuli goodwill 24.3 - o ‘Full’ prices paid on acquisition Fox-IT goodwill 24.3 - • Web reflects slower growth than expected Web Performance goodwill 5
Slide 12: Tax and dividends
Tax and dividends 40.0% Effective adjusted tax rate (%) • Effective adjusted tax rate 29.3% 30.0% • Below Interims guidance due to lower 20.0% profits than expected in US 10.0% • Prior years all lower due to losses in high tax US based Domain Services 0.0% 2013 2014 2015 2016 2017 pence Cover Divide
Slide 13: Cash flow and net debt
Cash flow and net debt 2017 2016 • CY working capital movement excludes (£m) (£m) acquisitions - paying more creditors on time Adjusted EBITDA 36.2 45.0 • PY were prepaying tax – CY benefit Movement in working capital (2.1) (14.2) Net interest paid (1.9) (2.0) • CY other operating cash flows include
Slide 14: Balance sheet
Balance sheet 2017 2016 • Intangibles fall: net impact of FX increases (£m) (£m) and acquisitions less impairments Intangible assets 267.6 297.3 • PPE asset increase reflects fit out costs for Property, plant and equipment 18.3 12.7 new offices Investments 0.4 0.6 • Working capital change drivers £1
Slide 15: Assurance performance
Assurance performance 250 20% Reported revenue (£m) Adjusted EBIT margin 200 15% 150 10% 17.2% 17.0% 17.5% 100 204.7 15.3% 168.9 5% 50 97.0 8.1% 59.8 70.7 0 0% 13 14 15 16 17 13 14 15 16 17 Assurance 2017 2016 • Sales growth in core cyber security portfolio, (£m) (£m) particularly UK and US consulti
Slide 16: Escrow performance
Escrow performance 40 70% Reported revenue (£m) Adjusted EBIT margin 60% 30 50% 40% 20 37.1 35.3 30% 58.7% 59.0% 32.0 58.4% 56.8% 27.9 28.5 51.3% 10 20% 10% 0 0% 13 14 15 16 17 13 14 15 16 17 • Good 8% organic growth in US, Europe all FX Escrow 2017 2016 related, UK flat excluding correction below (
Slide 17: Central and corporate costs
Central and corporate costs US and UK Corporate costs 2017 2016 • Corporate costs are for Central support (£m) (£m) costs (shared IT etc) and Head Office costs Support salaries 8.2 6.8 • Support salaries driven by increase in headcount and wage rises in line with NCC Travel 1.0 0.7 • Additional trav
Slide 18: Current trading and outlook
Current trading and outlook • Early in new financial year, PY exit momentum helped by lower sales pull forward • Markets continue to grow and some early traction from re-focusing of sales teams • Escrow to return to low single digit growth rate following one off revenue recognition issue and partial
Slide 19: Strategic Review
Strategic Review
Slide 20: Strategic Review
Strategic Review 1. Market and competitive landscape • Significant and fragmented addressable market ($38 bn) • Cyber market growing at low double digit rates • NCC service offerings very strong in UK, NL and our US segments 2. Customers’ buying patterns and perceptions • 38 in depth customer interv
Slide 21: Cyber Security Markets
Cyber Security Markets The markets we address are large and growing fast Addressable Market Breakdown, 2016 ($bn,%) Market NCC Offering Total Market 38 Sub-Segment Growth Rates 7 Fully Outsourced CAGR 2016 – 20F (40%) IT Security Limited NCC offering UK 9.5% 11 Managed (60%) Security Monitoring Serv
Slide 22: Level of Differentiation
Product Offering High Assurance Premium products with Differentiated recurring revenues Incident Response Threat Intelligence Level of Differentiation Process & Governance Monitoring Security Testing Products Standardised Escrow Bubble Size Indicates Commoditised products with low NCC FY17 Revenue l
Slide 23: Cyber security portfolio growth in 2017
Cyber security portfolio growth in 2017 Retained portfolio organic growth • Retained Assurance division - organic revenue changes at 2017 constant FX UK Prof Svcs 19% • Listed in business unit size order US Prof Svcs 24% • Impact of Fox in H1 ignored as that was ‘acquisition’ related Fox Other - H2
Slide 24: Employee feedback survey
Employee feedback survey • Staff like working at NCC - 1,173 responses, c64% • Staff feel that clients value the expertise brought by NCC and them personally • Excellent customer focused culture and positive sales culture • But we need to do a better job of training and development I enjoy my job Cl
Slide 25: Portfolio
Portfolio • Assurance and Escrow have few linkages and limited cross selling points: • But no clearly better owner for Escrow • Escrow provides a strong stabilising influence on Group performance • Buying points for Cyber and Web Performance / Software Testing clearly distinct • Web and Software Tes
Slide 26: Strategic Plan
Strategic Plan
Slide 27: Strategic objectives
Strategic objectives 1. Grow - at a managed pace and in areas of core strength 2. Implement - our new Target Operating Model (see over) 3. Improve - business processes and systems 4. Lead - technical thinking and product development in a rapidly evolving and dynamic market sector 5. Develop - our pe
Slide 28: TOM: objectives
TOM: objectives Objective 1: Align the business to how our customers want to buy • Customers want local service delivery and sales channel Objective 2: Leverage NCC value between business units • Matrix structure to join up service lines Objective 3: Deliver an integrated Go-To-Market proposition •
Slide 29: Target Operating Model
Target Operating Model CEO Assurance Escrow Head of North Head of UK Head of Head of NL Head of DK America (& ROW) Escrow Marketing Sales & Sales Sales Sales Sales RMG RMG RMG RMG Operations Sales Consulting Head of TSC TSC TSC TSC Assurance Software UK Sales verification Delivery IR/CDO IR/CDO IR/C
Slide 30: Strategy – timeline and targets
Strategy – timeline and targets • Self-help: implement TOM, design and implement new business processes, training and development plans for staff to deliver improvement in margins • White space: expand the service offering in current locations to meet customer demand for local delivery to deliver pr
Slide 31: Next steps
Next steps • Recruit a new CEO – process underway • Start implementation of the Target Operating Model (TOM) • Design and implement better business processes and systems focussing on: • Utilisation and realisation – main driver of gross margin • Order to cash cycle to improve working capital managem
Slide 32: Thankyou Q&A
Thankyou Q&A
Slide 33: Appendices
Appendices
Slide 34: Assurance performance – further analysis
Assurance performance – further analysis Retained Assurance Growth Income Types 12% 12% 180.0 *Estimates 170.0 160.0 76% Products Consulting MSS 150.0 • Revenue growth data at constant FX 140.0 • Web performance and Software Testing are excluded 130.0 • Fox HA issues are well known and 120.0 explain
Slide 35: Escrow performance – further analysis
Escrow performance – further analysis Service line growth Revenue 2.5 11% share 2.0 1.5 21% 1.0 68% 0.5 UK 0.0 US Renewals New Verification Other Rev Rec Total Escrow Europe Revenue growth by region • Data is at constant FX rates Europe • UK remains the largest contributor to Escrow revenue and prof
Slide 36: Depreciation and amortisation charges
Depreciation and amortisation charges 2017 2016 (£m) (£m) Adjusted EBIT 27.5 39.7 Amortization of capitalized development costs 1.5 - Amortisaton of software used in the business 2.0 1.6 Depreciation of PPE 5.2 3.7 Adjusted EBITDA 36.2 45.0 Amortisation of acquired intangibles 10.3 6.8 Total D&A 19.
Slide 37: Foreign exchange rates
Foreign exchange rates FX rates 1.50 1.45 Columns show WAER 1.40 at each year end 1.35 1.30 1.25 1.20 1.15 1.10 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 USD EUR • Both US$ and €uro spot rates appreciated by around 15% over the course of the year. WAER had s
Slide 38: Free cash flow and cash conversion ratio
Free cash flow and cash conversion ratio 2017 2016 £m £m Net cash from operating activities 28.0 13.8 Net capital expenditure (10.6) (11.6) Capitalised development costs (3.7) (1.9) Free cash flow 13.7 0.3 • NCC systems do not currently capture ‘discretionary’ vs ‘maintenance’ capex • However, there
Slide 39: Working capital
Working capital Sales WC assets 2017 2016 (£m) (£m) Accrued income 17.7 19.8 Trade debtors 40.9 39.4 ‘Sales’ working capital 58.6 59.2 Annualised* Q4 sales 247.2 249.2 Sales WC % 23.7% 23.8% * Annualised calculated using reported Q4 sales • Accrued income fell as a result of selling Open Registry (£