|By Business Wire||
|September 3, 2012 02:00 AM EDT||
Kofax plc (LSE: KFX), a leading provider of Capture Enabled BPM™ (business process management) solutions, today reported its preliminary unaudited financial results for the fourth quarter and fiscal year ended June 30, 2012.
Fourth Quarter and Fiscal Year Financial Highlights:
- Software license revenues for the quarter grew 20.3% or 16.9% in organic constant currency (OCC), and for the year were flat but declined 5.5% in OCC
- Total revenues for the quarter grew 14.8% or 10.0% in OCC, and for the year 7.6% or 1.4% in OCC
- Adjusted income from operations (Adjusted EBITDA) for the quarter increased 72.0% to a 28.2% margin, and for the year 4.8% to an 18.5% margin
- Adjusted diluted EPS for the quarter increased 74.1%, and for the year 5.6%
- Adjusted cash generated from operations for the quarter increased 66.0% to $8.8 million but for the year declined 1.4% to $34.3 million
- Quarter and year end cash was $81.1 million
Fourth Quarter Operating Highlights:
- Started shipping Kofax Mobile Capture, gaining rapid momentum with four global customer wins in the quarter
- Announced a technology alliance and cooperative marketing agreement with Alfresco, a leading provider of open source enterprise content management (ECM) software
Subsequent to the End of the Fourth Quarter and Fiscal Year:
- Launched Kofax TotalAgility™ 6.0, the Company’s BPM and dynamic case management software, available as a Software-as-a-Service (SaaS) subscription offering and under a perpetual license model for on premise deployments
- Harvey Spencer Associates published its 2011 annual report on the capture software and services market, ranking Kofax number one in the overall market with a 14% share based on total revenues, and confirmed that Kofax remained number one in the enterprise segments, which account for 78% of the overall market
- Forrester published its first “Forrester Wave” for Multichannel Capture and ranked Kofax a “Leader” and number one in all categories used for its evaluation: current offering, strategy and market presence
- The Company appointed Howard Dratler as its new Executive Vice President of Field Operations, responsible for all customer facing functions on a global basis
A summary of Kofax’s revenue and adjusted EBITDA for the fourth quarter and fiscal year compared to the prior year periods is as follows:
|Fourth Quarter||Fiscal Year|
|OEM / POS Software||7.6||28.3||%||15.7||%||27.8||11.4||%||-0.6||%|
Adjusted Income from Operations (Adjusted EBITDA)
|Adjusted Diluted EPS||$||0.16||74.1||%||$||0.38||5.6||%|
Commenting on these results, Reynolds C. Bish, Chief Executive Officer, said: “Our fourth quarter produced strong results, with software license revenues, service revenues and revenues in all geographic regions, our core capture business and acquired businesses being equal to or greater than our expectations. This allowed us to meet the guidance we had provided and realize record total revenues and Adjusted EBITDA for the fiscal year. In light of our transition from focusing on EBITA to Adjusted EBITDA and for purposes of clarity, during fiscal year 2012 we achieved an EBITA of $42.0 million compared to $40.2 million in fiscal year 2011.”
Bish continued: “As we look to fiscal year 2013, we’re aware of the unpredictable global macroeconomic conditions and the recessionary environments that have emerged in many Western European countries. As a result, for fiscal year 2013 our guidance is for mid to high single digit total revenue growth on a constant currency basis and an adjusted EBITDA margin of at least that reported in fiscal year 2012. This is based on low to mid single digit revenue growth in our core capture business with significantly greater revenue growth rates in acquired businesses and from our new Kofax Mobile Capture product.”
For a definition of adjusted income from operations and adjusted diluted EPS please refer to Kofax’s most recent Annual Report, which is available on the investor relations section of the Company’s website.
Chief Executive Officer Reynolds C. Bish and Chief Financial Officer Jamie Arnold will present and review the results and conduct a question and answer session in the London offices of FTI Consulting on September 3 at 9:00 a.m. UK time / 4:00 a.m. Eastern Time in the US. The event will be webcast live and can be accessed as follows:
|Live Call||Access Code|
|U.K.||+44 (0) 20 7136 6283||4154023#|
|U.S.||+1646 254 3366||4154023#|
The live webcast can be accessed through the investor relations section of the Company’s website. A replay of the webcast will be available on the investor relations section of the Company’s website by 1:00 p.m. UK time / 8:00 a.m. Eastern Time in the US on September 3. These can be accessed at www.kofax.com/ir/presentations.asp.
Kofax plc (LSE: KFX) is a leading provider of Capture Enabled BPMTM solutions. These award winning solutions capture and streamline the flow of business critical information throughout an organization in a more accurate, timely and cost effective manner, enabling our customers to be more responsive to their constituents and better grow their businesses. Kofax solutions provide a rapid return on investment to more than 20,000 customers in banking, insurance, government, healthcare, business process outsourcing and other markets. Kofax delivers these solutions through its own sales and service organization, and a global network of more than 800 authorized partners in more than 75 countries throughout the Americas, EMEA and Asia Pacific. For more information, visit kofax.com.
© 2012 Kofax, plc. “Kofax”, “Capture Enabled BPM” and “TotalAgility” are trademarks of Kofax, plc.
Chief Executive Officer’s Review
The fiscal year ended June 30, 2012 was challenging for Kofax. Deteriorating macroeconomic conditions in many Western European countries throughout much of the year and poor sales execution during the quarter ended March 31, 2012 led to unpredictable and disappointing quarterly results. We therefore took early action in November 2011 to right size our European sales and service organization in order to protect our profitability, and we also instituted a number of new initiatives to improve our sales execution.
Despite these challenges and as a result of our actions, we were able to meet the guidance we had provided and report record total revenues and adjusted income from operations – also known as Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization or Adjusted EBITDA – for the fiscal year. For a definition of adjusted income from operations please refer to the Chief Financial Officer’s Review that follows.
Total revenues grew 7.6% to $262.5 million (2011: $243.9 million) – primarily as a result of our acquisition of Atalasoft in May 2011 and Singularity in December 2011 – or 1.4% in organic constant currency. This growth, coupled with the benefit of cost saving measures implemented and the on-going prudent management of expenses, yielded an adjusted EBITDA of $48.5 million (2011: $46.3 million) or an 18.5% adjusted EBITDA margin (2011: 19.0%).
We ended the year with total cash balances of $81.1 million (2011: $98.3 million). This was after paying $1.9 million in deferred payments to Atalasoft shareholders and $28.5 million to Singularity shareholders for the acquisitions of those businesses.
Our $40.0 million line of credit with Bank of America Merrill Lynch remains in place to further enhance the strength of our financial position. As result, our balance sheet remains strong and we have the resources needed to continue growing revenues while executing our acquisition strategy.
We recognize that our performance can always be improved but are nonetheless pleased with and encouraged by these results, and remain confident in our business.
During the fiscal year we successfully added over 2,348 new customers (2011: 2,155). We also closed 142 sales greater than $100,000 (2011: 113), 27 sales greater than $0.5m (2011: 23) and 8 greater than $1.0m (2011: 12), not including those arising from our acquisition of Singularity. These once again included one of the largest sales in the history of Kofax for $4.2 million to an agency of the U.S. government for a large scale, nationwide capture project.
Two of the most notable events during this last fiscal year were our acquisition of Singularity, and our entering into an OEM agreement with and investing in ViziApps, previously known as MobiFlex.
In December 2011 we acquired Singularity Limited, a leading provider of business process management (BPM) and dynamic case management software and related services. Its flagship software product – TotalAgilityTM – was recognized as “Visionary” in Gartner’s “Magic Quadrant” and as a “Leader” in Forrester’s “Wave” for Dynamic Case Management. The acquisition allows us to provide a more comprehensive and valuable solution by extending our reach beyond capture to allow our customers to better understand and act upon information before delivering it to their enterprise applications and repositories. Our customers benefit by being able to automate both the capture processes needed to enter information into enterprise applications and repositories as well as the downstream knowledge worker processes needed to effectively utilize that information. This will allow them to invest in a single platform for automating all of their critical business processes and thereby enjoy a lower total cost of ownership and faster return on investment.
The acquisition should allow us to realize a number of strategic benefits, including:
- It has approximately doubled our total addressable market. Harvey Spencer Associates, an industry analyst firm focused on the capture software and services market, recently published its 2011 annual report on that market, which estimated that the market will grow from $2.5 billion in 2011 to $4.0 billion in 2016 at a compound annual growth rate (CAGR) of almost 10%. In April 2011, Gartner published a report stating that it expected the market for BPM software to grow from $2.1 billion in 2010 to $3.7 billion in 2015 at a CAGR of more than 12%. This increase in addressable market, coupled with our much greater direct and indirect sales channels and global reach should significantly expand and accelerate our revenue growth opportunities.
- It will result in a uniquely differentiated product offering with strong competitive advantages in both the capture and BPM markets, and create sustainable competitive advantage. When TotalAgilityTM and Kofax’s capture products are fully integrated into a single product to be launched during 2013, we will be the first company to offer a Capture Enabled BPMTM platform. This should allow us to maintain our leadership position in the capture market and establish a meaningful position in the BPM market.
- The combined Capture Enabled BPMM platform will be fully deployable “on premise” or via private clouds under a perpetual license model and via a public cloud under a Software-as-a-Service (SaaS) subscription model. This will allow us to better serve a broader array of customer buying preferences and over time create more predictable revenue streams.
We acquired all of Singularity’s stock for total consideration of up to $46.6 million in cash, net of cash held by the company on closing. Of this amount, $28.5 million was paid on the closing of the transaction and up to $3.4 million will be paid one year from closing subject to certain indemnification terms and conditions. Additional payments totaling up to $14.7 million may be made one and two years following closing subject to the achievement of specific annual software license revenue growth rates and certain management employment conditions.
Our integration of Singularity was substantially completed by January 2012 and its results to date have exceeded our original expectations.
We also entered into an OEM agreement with and made a $500,000 minority investment in ViziApps™, whose mobile platform enables the cost effective creation, publication and management of native applications for smartphones and tablet computers. The OEM agreement provides us with the basic software tools and infrastructure needed to develop, market and deploy mobile capture applications. This enables our customers to use iPhones, iPads, Android phones and Android tablet computers and cameras in those devices to input information and capture images of documents and photographs. These can then be passed to Kofax workflows used to manage that content into their enterprise applications and repositories.
Our work with VizApps led to us shipping Kofax Mobile Capture during June 2012. The product was developed in response to the needs of Kofax customers wanting to leverage mobile devices to initiate business processes at the “Point of OriginationTM” where customer facing interactions actually occur and add these devices as another gateway to their Kofax solutions.
A November 2011 report entitled “A Study of the Mobile Capture Market in the United States”, published by Harvey Spencer Associates, states that the market for mobile capture software will grow from nascent origins today to more than $1.3 billion by 2015, driven by new applications that use mobile devices to create, capture and consume content.
Potential use cases include:
- Customer on boarding processes at a customer’s home or office where, for example, a lender’s employee could capture the documentation necessary to assemble a complete mortgage application, accelerating approvals and providing a higher level of customer service.
- Insurance adjustors could use Kofax Mobile Capture in the field to capture photographs of damage, images of related documents and the other data required to initiate the claims process, reducing delays and accelerating payments to policy holders.
- Truck drivers and other logistics employees could capture proof of delivery documents at customer locations and immediately submit that evidence to downstream tracking and billing processes.
In each example, process latency is reduced, exceptions are resolved faster and customer service is improved. We’ve gained rapid momentum in this emerging market segment with four global customer wins during the quarter ended June 30, 2012.
Our investments in research and development have also allowed us to successfully launch nine other new software product releases during this last fiscal year, including:
- Kofax Capture 10.0, which provides a refreshed user interface more compatible with Microsoft software products and localization enhancements
- Kofax Front Office Server 3.5, to add important new functionality and expanded Multifunction Product (MFP) support
- Kofax Web Capture 10.1, enterprise versions of the Atalasoft products for both .NET and Java developers that are tightly integrated with Kofax Capture and provide web based capture, viewing and annotation capabilities
- Kofax Express 3.1, a new version of this packaged image capture software that adds multi-user capabilities, the ability to more easily implement custom business rules for data validation purposes and support for Kofax Capture export connectors
- MarkView Financial Suite 7.1, which includes additional capabilities for accounts payable automation projects in Oracle R12 and SAP Console environments
- TotalAgility 5.5, a release of our BPM and dynamic case management software that is tightly integrated with Kofax Capture and provides significant organizational gains through the better management of processes
During the year and subsequent thereto we were pleased to continue receiving widespread recognition for our market position and products. This included:
- Harvey Spencer Associates, an industry analyst firm focused on the capture software and services market, published its 2011 annual report on that market, ranking Kofax number one in the overall market with a 14% share based on total revenues, and confirmed that Kofax remained number one in the enterprise segments, which account for 78% of the overall market, with an 18% share based on total revenues “grossed up” in an attempt to equalize differing routes-to-market
- Forrester, an information technology industry analyst firm, published its first report entitled “The Forrester WaveTM: Multichannel Capture, Q3 2012”, which ranked Kofax a “Leader” and number one in all three categories used for its evaluation: current offering, strategy and market presence
- The Company being recognized as one of the 500 largest software companies on Software Magazine’s 29th annual listing, marking Kofax’s fifth consecutive inclusion on the list
- The Company being named to KMWorld magazine’s “100 Companies that Matter in Knowledge Management” in 2012, marking Kofax’s ninth consecutive appearance on the list
- Kofax Capture being named one of KMWorld magazine’s “Trend Setting Products of 2011”
- Kofax Capture being named “Content Management Software Product of the Year” in the 2011 DM Awards from Document Manager Magazine
- Kofax VRS Elite being named by Buyer’s Laboratory, a leading evaluator of document imaging hardware and software, as a “Summer 2011 Pick for Outstanding Processing Solution”
Corporate Mission & Strategy
Our mission is to deliver superior value to our stakeholders – customers, partners, employees, suppliers & shareholders – by extending our market leading position as the premiere provider of Capture Enabled BPM solutions.
As we’ve extended from our legacy focus on the capture market into the BPM market and added mobile capabilities, our customer value proposition has similarly evolved. Our solutions allow businesses, government agencies and other organizations to design, deploy, and operate comprehensive systems of engagement to optimize interactions with their customers, citizens, vendors, employees and other constituents.
These solutions automate the labor intensive processes needed to capture and extract information, as well as understand, act upon and deliver the extracted information to enterprise software applications and content repositories. As such, they streamline critical information processing in a more consistent manner while reducing costs, improving internal governance and enhancing regulatory compliance. By pushing capture and BPM to the “Point of Origination” where constituent interactions actually occur – and increasingly on mobile devices – they also now allow our customers to be more responsive to their constituents, provide better service levels, gain competitive advantage and grow their organizations. As a result of these benefits, many of our users realize a return on investment (ROI) within only 12 to 18 months.
We intend to accomplish our mission by:
- Delivering organic revenue growth faster than the markets we serve,
- Augmenting that growth with strategic acquisitions and
- Controlling costs to meet our EBITDA objectives.
We will also make on-going investments in research and development in order to improve and add to our capture and BPM product offerings, and over time prudently reallocate those expenditures to better focus on the important and rapidly growing mobile capture market. This, combined with our acquisition strategy, will continually expand our vision to encompass additional growth opportunities.
We made a great deal of progress in many of these areas during this last fiscal year and created a solid foundation for more aggressively pursuing our mission and strategies during the current and future fiscal years.
The Board regularly reviews our balance sheet and future opportunities, and considers its dividend policy. After careful consideration of these factors throughout fiscal year 2012 and through today, the Board maintained and currently intends to maintain its policy of not paying dividends in order to rather invest in growing our business. As a result, no dividends were declared or paid during the fiscal year ended June 30, 2012.
Board & Management Changes
There were no changes in our Board of Directors during the fiscal year ended June 30, 2012.
We were pleased to welcome Karl Doyle as our Senior Vice President of Corporate Development during December 2011. Karl is responsible for the development and execution of our acquisition strategy and integration of acquired businesses. He has more than 20 years of experience in the ECM and adjacent markets, having held a variety of executive leadership, business development and product management positions at companies such as IBM and FileNet as well as having also worked as an industry analyst and consultant. Karl is therefore ideally suited for this position and driving our acquisition and integration efforts.
Subsequent to the end of fiscal year 2012, we were pleased to welcome Howard Dratler as our new Executive Vice President of Field Operations during July 2012. Howard is responsible for all customer facing functions on a global basis, including sales, pre sales, channel management, business development, sales enablement, professional services, maintenance services and sales operations activities. He is a seasoned technology industry executive with more than 25 years of experience across a wide range of disciplines, including storage, capture, content management, data warehousing and cloud based software products offered under SaaS subscription models, and has worked in early stage companies and much larger, global organizations. The majority of his background, experience and focus has been in developing hybrid go-to-market strategies and building high performance sales teams. He has an impressive track record of successfully achieving goals and objectives while effecting positive change in a number of companies, including Captiva Software Corporation – where he also worked with me as the Executive Vice President of Field Operations. As a result, Howard is a great addition to our executive management team and will be instrumental in driving our revenue growth strategies.
Charles Padgett and Alan Kerr, were previously but are no longer members of our executive management team. There were no other changes in the Company’s executive management team during or subsequent to the end of fiscal year 2012.
As we look to fiscal year 2013, we’re aware of the unpredictable global macroeconomic conditions and the recessionary environments that have emerged in many Western European countries. As a result, for fiscal year 2013 our guidance is for mid to high single digit total revenue growth on a constant currency basis and an adjusted EBITDA margin of at least that reported in fiscal year 2012. This is based on low to mid single digit revenue growth in our core capture business with significantly greater revenue growth rates in acquired businesses and from our new Kofax Mobile Capture product.
Our performance is the direct result of the dedication and hard work of our valued employees, indirect channel partners and suppliers, and the continued support of our customers and shareholders. I would like to once again use this opportunity to sincerely thank all of these stakeholders for their on-going contributions to our success.
Reynolds C. Bish
Chief Executive Officer
September 3, 2012
Chief Financial Officer’s Review
We experienced uneven performance in fiscal 2012, but exited the year with renewed momentum and new products.
At the end of the first quarter of 2012, we took measures to address the continued deterioration of economic conditions in Europe by restructuring and resizing the EMEA sales organization. During the next quarter, sales grew and we closed the acquisition of Singularity, extending our product and market opportunities. Those achievements were followed by disappointing sales execution in the third quarter. Ultimately, we closed out the year by shipping our Kofax Mobile Capture product and posting the largest sales quarter in the Company’s history. This record performance allowed us to meet or exceed the expectations for revenue and earnings we had set with investors.
We enter fiscal 2013 with a strong balance sheet with $81.1 million in cash and an unused line of credit of $39.9 million. The newest members of our executive team bring deep expertise and will contribute energy and enthusiasm toward the promise of Capture Enabled BPM™.
In reviewing fiscal 2012, we are proud of how we reacted to adversity and seized opportunities and we look forward to fiscal 2013.
The Company’s key financial and non-financial performance indicators are total revenue, software license revenue, net income, adjusted income from operations and adjusted cash flow from operations. The table below sets forth selected financial information with respect to Kofax’s operating performance. They are discussed as part of the review below:
|$ in thousands, except per share data||Fiscal Year Ended|
|June 30, 2011||June 30, 2012|
|Cost of software licenses||10,869||11,301|
|Cost of maintenance services||15,891||16,420|
|Cost of professional services||23,279||26,784|
|Research and development||31,950||33,804|
|Sales and marketing||91,666||96,292|
|General and administrative||33,320||39,096|
|Amortization of acquired intangible assets||3,213||5,190|
|Other operating expense, net||1,959||669|
|Operating costs and expenses||216,192||240,343|
|Income from operations||27,750||22,138|
|Finance income (expense), net||(1,737||)||5,294|
|Income from continuing operations, before income taxes||26,013||27,432|
|Income tax expense||(8,741||)||(9,995||)|
|Income from continuing operations, after income taxes||$||17,272||$||17,437|
|Earnings per Share From Continuing Operations:|
|Adjusted Income from Operations||$||46,270||$||48,490|
|Adjusted Income from Operations per share|
|Cash flow from operations||$||35,580||$||18,776|
|Adjusted Cash flow from operations||$||34,756||$||34,279|
The following table presents the revenue for each fiscal year noted, along with the percentage of total revenue.
$ in thousands
Total revenue increased $18.5 million in fiscal 2012. Of this increase, $3.8 million was attributable to organic growth and the remaining increase of $14.7 million was attributable to our acquisitions of Singularity and Atalasoft. Our organic growth comprises an increase in our maintenance services revenue of $9.3 million, an increase in our professional services revenue of $1.0 million, partially offset by a decrease of $6.4 million of software license revenue.
Software license revenue was essentially unchanged in fiscal 2012. Our software license revenue benefited from $6.4 million of revenue attributable to our acquisitions of Singularity and Atalasoft. Our organic software license revenue declined by approximately the same amount, representing a 5.5% decrease. Organic software license revenue declined in the Americas, EMEA and APAC regions by $2.1 million, $2.5 million and $1.8 million, respectively due to a combination of weak global economic conditions and to sales execution issues. Our software license revenue, as a percentage of total revenue, decreased 3.4% in fiscal 2012, due to the expansion of our maintenance services and professional services.
Maintenance services revenue increased $12.6 million in fiscal 2012. Of this increase, $9.3 million was attributable to organic growth, a 9.2% increase from fiscal 2011, and $3.3 million was attributable to our acquisitions of Singularity and Atalasoft. The strength in our organic maintenance services revenue was due to high maintenance contract renewal rates, as well as to the expansion of our user base, including the effect of new sales in both fiscal 2012 and fiscal 2011. Organic maintenance services revenue increased in all geographic regions in fiscal 2012, with revenue for the Americas, EMEA and APAC regions increasing $6.7 million, $0.9 million and $1.7 million, respectively.
Professional services revenue increased $5.9 million in fiscal 2012. Of this increase, $4.9 million was attributable to our acquisition of Singularity supplemented by organic growth of professional services revenue of $1.0 million, or 3.8%. Our fiscal 2012 organic growth was primarily due to strong demand for our professional services in the Americas, resulting in an increase of $3.0 million, offset, in part, by a reduction of organic professional services revenue of $1.8 million in EMEA, and $0.2 million in APAC, due to weak global economic conditions and to sales execution issues.
Revenue by Geography
|($ in thousands)||
Operating Costs and Expenses
Cost of software license revenue increased by $0.4 million or 4.0% in fiscal 2012 due to an increase in sales of royalty bearing products. Royalty rates for products vary, and accordingly, based on the mix of software licenses sold, the cost of software license revenue as a percentage of the software license revenue will vary.
Cost of maintenance services increased $0.5 million or 3.3%, due to $0.8 million of costs associated with our acquisition of Singularity and Atalasoft offset by a $0.3 million decrease in our organic expenses as we better leveraged our existing resources to manage customer support inquiries from our expanding organic customer base.
Cost of professional services increased $3.5 million or 15.1% in fiscal 2012 due to $3.6 million of costs associated with our acquisition of Singularity offset by $0.1 million decrease in cost for our organic professional services as we were able to leverage our existing staff more efficiently, allowing us to keep our organic costs relatively flat.
Research and development expenses increased by $1.9 million or 5.8% in fiscal 2012 primarily due to our acquisitions of Singularity and Atalasoft, which contributed $2.7 million of expenses. Our organic research and development expenses decreased $0.8 million, or 2.5%, despite our having increased the number of our research and development personnel as we continue our strategy of moving the development of certain of our more mature products to offshore sites with lower labor costs. That transition to offshore resources included the expansion of our software development center in St. Petersburg, Russia, which had 33 personnel as of June 30, 2012. Our acquisition of Singularity included a 48 member research and development team in Hyderabad, India as of June 30, 2012, again furthering our strategy of locating certain development in offshore sites with lower labor costs.
Sales and marketing expenses increased $4.6 million or 5% in fiscal 2012 primarily due to our acquisitions of Singularity and Atalasoft, which contributed $4.2 million of expenses, as well as an increase in organic expenses of $0.4 million, or 0.5% generally in line with revenue growth.
General and administrative expenses increased $5.8 million or 17.3% in 2012 of which $1.4 million is attributable to our acquisitions of Singularity and Atalasoft. Organic general and administrative expenses increased $4.4 million. We historically allocated general and administrative expenses between our hardware and software business segments. Following the May 2011 sale of our hardware business, our software business had to absorb substantially all general and administrative expenses which resulted in a $6.1 million increase. This increase was partially offset by a $1.7 million reduction in our organic expenses, primarily due to a savings in compensation costs.
Amortization of acquired intangible assets increased $2.0 million or 61.5% in fiscal 2012 primarily due to $1.6 million of amortization of acquired intangible assets arising from our acquisition of Singularity.
Acquisition-related costs include those costs related to business and other acquisitions and consist of costs directly attributable to our acquisition strategy and the evaluation, the consummation and integration of our acquisitions and earnout and retention compensation costs. Acquisition-related costs increased $5.0 million or 580% in fiscal 2012 due primarily to $3.4 million of transition compensation costs in connection with our acquisition of Singularity, as well as a $1.6 million increase in direct acquisition costs due to the costs of our evaluation and due diligence associated with the business process management software market, which ultimately led to our acquisition of Singularity in December 2011. In fiscal 2011 we incurred $0.9 million in acquisition direct costs primarily in connection with our acquisition of Atalasoft in May 2011.
Restructuring costs increased $1.7 million or 54% in fiscal 2012 due to a charge of $4.9 million for staff redundancy payments associated with headcount reductions of approximately 60 personnel in sales and marketing due to the weak economic environment in EMEA and for future payments for excess unused facility leases.
Other operating expenses, net decreased $1.3 million or 65.8% in fiscal 2012 due to lower professional fees incurred for attorneys, accountants and other advisors.
Finance income (expense), net increased $7.0 million or 404% in fiscal 2012 primarily due to foreign exchange gains and losses on intercompany balances. During fiscal 2012, the U.S. dollar strengthened against each of the euro, British pound and Swiss franc, while in fiscal 2011, the U.S. dollar weakened against each of those three currencies.
Income tax expense increased by $1.3 million or 14% in fiscal 2012 primarily due to a change in the distribution of taxable income. We are subject to tax based on the income earned from sales of our products and services in the country from which we sell our products or in which we provide our services. Many of the jurisdictions other than the United Kingdom have tax rates that exceed the U.K. rate. Income tax expense as a percentage of income from continuing operations in fiscal 2011 and fiscal 2012 was 33.6% and 36.4%, respectively.
Loss from Discontinued Operations, net of tax decreased $8.8 million or 86% in fiscal 2012 as we recorded expense of $1.4 million related to additional transaction and legal fees, asset values, and other administrative and transition costs.
Liquidity and Capital Resources
Historically, we have financed our business primarily through our cash flow from operations. In the two year period ended June 30, 2012, we generated aggregate cash flow from operations of $54.4 million. In addition, we have received proceeds from the issuance of capital stock under our stock option schemes of $7.5 million during the two year period ended June 30, 2012. We had no outstanding debt as of June 30, 2012. We have a revolving credit facility that provides for borrowings of up to $40.0 million and matures on June 30, 2014. As of June 30, 2012, we had $39.9 million available under this revolving credit facility.
We had $81.1 million of cash and cash equivalents at June 30, 2012, compared to $98.3 million at June 30, 2011. The majority of our cash is held in US dollars, euros and to a lesser extent pounds sterling.
Net cash generated by operating activities was $18.8 million in fiscal 2012, compared to $35.6 million in fiscal 2011, a decrease of $16.8 million. That decrease was attributable primarily to a change in income taxes paid or refunded of $14.8 million, as we paid $12.2 million in fiscal 2012 and received a refund of $2.6 million in fiscal 2011. Tax payments were higher in fiscal 2012 because tax losses and credits consumed in fiscal 2011 were not available in fiscal 2012, and the timing of estimated tax payments.
Net cash used in investing activities was $27.6 million in fiscal 2012, primarily related to $28.5 million of net cash related to our acquisition of Singularity. Additionally, in fiscal 2012, we made $1.9 million in contingent payments in connection with our May 2011 acquisition of Atalasoft, and $2.4 million of payments related to property and equipment purchases, net of disposals. These fiscal 2012 uses of cash were partially offset by our having received $5.1 million related to a deferred payment on the May 2011 sale of our hardware business.
Net cash used in financing activities was $2.0 million in fiscal 2012, primarily related to a $2.9 million purchase of our ordinary shares from the open market, for our employee benefit share trust, partially offset by $1.4 million that we received related to share capital issuances as a result of employee exercises of stock options.
In fiscal 2012, we entered into a three-year $40 million revolving line of credit with Bank of America Merrill Lynch that is secured by certain assets of the Company. The credit facility is available for general corporate purposes, including acquisitions, and subject to certain conditions can be denominated in multiple currencies, is available to be drawn in multiple countries and can be increased by $10 million. As of June 30, 2012 we had $39.9 million available.
The Company has significant overseas subsidiaries, which operate principally in their local currencies. Where appropriate, intra group borrowings are arranged in local currencies to provide a natural hedge against exchange rate movement risks.
The Company hedges certain net foreign currency cash and cash flows relating to transactions in accordance with policies set by the Board. Assessment of the credit risk profile of the Company’s key customers and resellers is another key area of attention.
Reconciliation of non-IFRS measures
Management uses several financial measures, both IFRS and non-IFRS, in analyzing and assessing the overall performance of the business and for making operational decisions. We believe that these non-IFRS measures are also useful to investors and other users of our financial statements in evaluating our performance because these non-IFRS financial measures may be used as additional tools to compare business performance across peer companies and periods and financial markets.
While we use non-IFRS measures as a tool to enhance our understanding of certain aspects of our financial performance, we do not believe that these non-IFRS measures are a substitute for, or are superior to, the information provided by IFRS results. As such, the presentation of non-IFRS measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with IFRS. The primary limitations associated with the use of non-IFRS measures as compared to IFRS results are that non-IFRS measures may not be comparable to similarly titled measures used by other companies in our industry and that non-IFRS measures may exclude financial information that some investors may consider important in evaluating our performance. We compensate for these limitations by providing disclosure of the differences between non-IFRS measures and IFRS results, including providing a reconciliation of each non-IFRS measure to IFRS results, in order to enable investors to perform their own analysis of our operating results.
Adjusted Income from Operations - We define adjusted income from operations, as reported under IFRS, as income from operations excluding the effect of share-based payment expense, depreciation expense, amortization of acquired intangible assets, acquisition-related costs, restructuring costs and other operating expense, net. Share-based payment expense, depreciation expense & amortization of licenses and similar rights and amortization of acquired intangible assets in our adjusted income from operations reconciliation represent non-cash charges which are not considered by management in evaluating our operating performance. Acquisition-related costs consist of: (i) costs directly attributable to our acquisition strategy and the evaluation, consummation and integration of our acquisitions (composed substantially of professional services fees including legal, accounting and other consultants and to a lesser degree to our personnel whose responsibilities are devoted to acquisition activities), and (ii) transition compensation costs (composed substantially of contingent payments for shares that are treated as compensation expense and retention payments that are anticipated to become payable to employees, as well as severance payments to employees whose positions were made redundant). These acquisition-related costs are not considered to be related to the organic operations of the acquired businesses. Restructuring costs are not considered in assessing our performance as we have not historically incurred such costs for our on-going operations. Other operating expense, net represents items that are not necessarily related to our recurring operations and which therefore are not, under IFRS, included in other expense lines. Accordingly, we exclude those amounts when assessing adjusted income from operations. At times when we are communicating with our shareholders, analysts and other parties we refer to adjusted income from operations as Adjusted EBITDA or EBITDA.
We assess adjusted income from operations as a percentage of total revenue and by doing so, we are able to evaluate our relative performance of our revenue growth compared to the expense growth for those items included in adjusted income from operations. This measure allows management and our Board of Directors to compare our performance against that of other companies in our industry that may be of different sizes. The table below provides a reconciliation of IFRS income from operations to adjusted income from operations and presents adjusted income from operations as a percentage of total revenue:
|Fiscal Year Ended|
|June 30, 2011||June 30, 2012|
(in thousands, except percentages)
|Income from operations||$||27,750||$||22,138|
|Share-based payment expense||3,733||3,905|
|Depreciation expense & amortization of licenses and similar rights||5,705||5,913|
|Amortization of acquired intangible assets||3,213||5,190|
|Acquisition-related costs, excluding share-based payment expense||728||5,758|
|Other operating expense, net||1,959||669|
|Adjusted income from operations||$||46,270||$||48,490|
|Adjusted income from operations as a percentage of total revenue||19.0||%||18.5||%|
Adjusted Cash Flows from Operations - We define adjusted cash flows from operations as cash flows from operations, as reported under IFRS, adjusted for income taxes paid or received and payments under restructurings. Income tax payments (refunded) / paid is included in this reconciliation as the timing of cash payments and receipts can vary significantly from year-to-year based on a number of factors, including the influence of acquisitions on our consolidated tax attributes. Payments for restructurings relate to a specific activity that is not part of ongoing operations. The table below provides a reconciliation of IFRS cash flows from operations to adjusted cash flows from operations:
|Fiscal Year Ended|
|June 30, 2011||June 30, 2012|
|Cash flows from operations||$||35,580||$||18,776|
|Income tax payments (refunded) / paid||(2,616||)||12,172|
|Payments under restructurings||1,792||3,331|
|Adjusted cash flows from operations||$||34,756||$||34,279|
Business Risks and Uncertainties
Under current European Union reporting requirements, the Board is required to comment on risk factors facing the business. As with any business, various risks may affect the Company, its results and management’s ability to execute. The board has implemented systems to identify risks, to assess them and to ensure that reasonable mitigation and action plans are in place. The Board is paying particular attention to the operational risks and uncertainties surrounding economic conditions in many of the Company’s markets. Furthermore the following general risk categories have been identified by the Company:
Identification of Key Employees and Retention Program
Recruiting and retaining highly skilled personnel is a risk to our ongoing success. While we’ve made a number of important additions to our staff during the past financial year and now have an even more professional employee base in place, if we lose the services of our key employees or are unable to attract and retain other qualified personnel, we may be unable to operate our business effectively.
Rapidly Changing Technology
As a technology based company, we are subject to rapid changes in the marketplace in which we compete. We seek out strategic acquisitions as well as make significant investments in research and development to ensure that we remain competitive in the markets we serve. Our failure to successfully develop, market or sell new products or adopt new technology platforms could materially adversely affect our results of operations and financial conditions.
Go to Market Model
During the year we have continued our “hybrid go-to-market” model to expand our market reach by selling direct to end users in addition to relying on indirect channel partner sales through value added resellers, system integrators, distributors and OEMs. If we are not successful in achieving this balanced approach we may not be able to maintain and grow our revenues.
One of the principal financial risks facing the Company relates to the movements in exchange rates. The Company derives its revenues from a variety of currencies including the U.S. dollar, euro and pounds sterling. Expenses are denominated principally in U.S. dollars, euro and Swiss francs. Fluctuations in exchange rates between these currencies relative to the dollar may cause fluctuations in financial results of the Company as the results of overseas operations are translated into dollars for consolidation. The Company does not hedge the foreign exchange exposure arising on net investments in or assets and liabilities of overseas subsidiaries. The Company does hedge certain net foreign currency cash and cash flows relating to transactions in accordance with policies set by the Board. Assessment of the credit risk profile of the Company’s key customers and resellers is another key area of attention.
As part of the Company’s strategy, we may acquire additional enterprises or technology. We may not be able to continue to grow through such acquisitions or successfully integrate those acquisitions which could lead to our revenue not growing at an acceptable rate and may in turn harm our business. We may need to raise additional capital to finance future acquisitions, and such financing may not be available on acceptable terms, or at all, and may be on terms that are dilutive to our shareholders.
Our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed if we fail to maintain proper and effective internal controls. To build out and maintain an internal audit function we may need to hire additional accounting and financial staff with appropriate experience. If we do not maintain proper and effective internal controls or remediate deficiencies in our internal control, the market price of our common shares could decline and we could be subject to sanctions or investigations.
General Economic Risks
The economic and trading environment has been challenging throughout the last two fiscal years. The Company has an extended geographic presence, necessitating a number of local banking relationships, and local cash holdings. While the Company operates a cash pooling system, and has adopted treasury policy designed to ensure that it is not over-exposed to any particular bank failure, the risk remains that such a failure could adversely impact the Company’s assets. Recessionary trading environments have had a significant impact on many previously financially stable businesses. While the Company seeks to minimize the risk of being adversely affected by the failure of a supplier, a reseller or a customer, the volatility of trading and its impact on our trading partners represents a potential risk to the business.
J. R. “Jamie” Arnold, Jr.
Chief Financial Officer
September 3, 2012
Unaudited Consolidated Income Statements
|Cost of software licenses||11,301||10,869|
|Cost of maintenance services||16,420||15,891|
|Cost of professional services||26,784||23,279|
|Research and development||33,804||31,950|
|Sales and marketing||96,292||91,666|
|General and administrative||39,096||33,320|
|Amortization of acquired intangible assets||5,190||3,213|
|Other operating expenses, net||669||1,959|
|Operating costs and expenses||240,343||216,192|
|Income from operations||22,138||27,750|
|Income from continuing operations, before income taxes||27,432||26,013|
|Income tax expense||9,995||8,741|
|Income from continuing operations, after income taxes||17,437||17,272|
|Loss from discontinued operations, after income taxes||1,413||10,188|
|Income for the year attributable to Equity holders of the Parent||16,024||7,084|
|Earnings per share|
|Earnings per share from continuing operations|
Unaudited Consolidated Statements of Comprehensive Income
|Profit for the year||16,024||7,084|
|Other comprehensive income/(loss)|
|Exchange gains/(losses) arising on translation of foreign operations||(13,897||)||12,082|
|Actuarial gains on defined benefit pension plans||393||822|
|Income tax effects on components of other comprehensive income||1,606||(409||)|
|Other comprehensive income/(loss) for the period, net of tax||(11,898||)||11,999|
|Total comprehensive income for the period, net of tax, attributable to Equity holders of the Parent||4,126||19,083|
Unaudited Consolidated Statements of Financial Position
|Property, plant and equipment||5,571||6,900|
|Deferred tax assets||10,363||13,372|
|Other non-current assets||5,285||7,881|
|Total non-current assets||200,577||186,304|
|Trade receivables, net||59,521||52,323|
|Other current assets||10,151||15,400|
|Current tax assets||4,864||4,888|
|Cash and cash equivalents||81,122||98,274|
|Total current assets||157,200||173,018|
|Trade and other payables||33,820||45,560|
|Deferred income - current||58,508||55,806|
|Current tax liabilities||12,255||13,547|
|Provisions – current||9,609||5,691|
|Total current liabilities||114,192||120,604|
|Deferred income – non-current||5,078||3,496|
|Deferred tax liabilities||14,112||14,911|
|Provisions – non-current||4,196||3,394|
|Total non-current liabilities||25,645||25,038|
|Capital and reserves|
|Share premium account||12,921||11,538|
|ESOP/ EBT shares||(17,386||)||(14,518||)|
|Currency translation adjustment||14,701||27,586|
Unaudited Consolidated Statements of Changes in Equity
|Group at July 1, 2010||4,152||5,519||(14,518||)||(15,980||)||2,835||181,891||16,409||180,308|
|Profit for the period||-||-||-||-||-||7,084||-||7,084|
|Other comprehensive income, net of tax||-||-||-||-||-||822||11,177||11,999|
|Total comprehensive income for the period||-||-||-||-||-||7,906||11,177||19,083|
|Tax on equity awards||-||-||-||-||-||4,427||-||4,427|
|Share-based payment expense||-||-||-||-||-||3,755||-||3,755|
|New share capital issued||88||6,019||-||-||-||-||-||6,107|
|Group at June 30, 2011||4,240||11,538||(14,518||)||(15,980||)||2,835||197,979||27,586||213,680|
|Group at July 1, 2011||4,240||11,538||(14,518||)||(15,980||)||2,835||197,979||27,586||213,680|
|Profit for the period||-||-||-||-||-||16,024||-||16,024|
|Other comprehensive income, net of tax||-||-||-||-||-||987||(12,885||)||(11,898||)|
|Total comprehensive income for the period||-||-||-||-||-||17,011||(12,885||)||4,126|
|Tax on equity awards||-||-||-||-||-||(2,278||)||-||(2,278||)|
|Share-based payment expense||-||-||-||-||-||3,873||-||3,873|
|Changes in ESOP/ EBT shares||-||-||(2,868||)||-||-||-||-||(2,868||)|
|New share capital issued||24||1,383||-||-||-||-||-||1,407|
|Group at June 30, 2012||4,264||12,921||(17,386||)||(15,980||)||2,835||216,585||14,701||217,940|
Unaudited Consolidated Statements of Cash Flows
|Cash flows from operating activities|
|Income from continuing operations before income taxes||27,432||26,013|
|Loss from discontinued operations before income taxes||(1,488||)||(10,428||)|
|Depreciation and amortization||11,103||9,682|
|Impairment related to disposal||-||603|
|Share-based payment expense||3,905||3,837|
|Movement in provisions||6,396||2,297|
|Loss on disposal of discontinued operations||-||9,108|
|Gain on disposal of property, plant, and equipment||(153||)||-|
|Movement in working capital||(7,622||)||(8,093||)|
|Payments under restructuring – personnel||(3,331||)||(1,792||)|
|Income taxes (paid)/ refunded||(12,172||)||2,616|
|Net cash inflow from operating activities||18,776||35,580|
|Cash flows from investing activities|
|Purchase of property, plant and equipment, licenses and similar rights||(3,207||)||(3,185||)|
|Disposal of property, plant and equipment, licenses and similar rights||820||59|
|Acquisition of subsidiaries, net of cash acquired*||(30,341||)||(4,608||)|
|Purchase of financial instrument||(500||)||-|
|Net inflow from sale of discontinued operations||5,074||8,853|
|Net cash (outflow)/ inflow from investing activities||(27,642||)||1,258|
|Cash flows from financing activities|
|Issue of share capital||1,407||6,107|
|Decrease in long term borrowings||(103||)||(8,721||)|
|Share buy back||(2,868||)||-|
|Net cash outflow from financing activities||(1,992||)||(2,906||)|
|Net (decrease)/ increase in cash and cash equivalents in the period||(10,858||)||33,932|
|Cash and cash equivalents at start of the period||98,271||55,018|
|Exchange rate effects||(6,294||)||9,321|
|Cash and cash equivalents at the end of the period||81,119||98,271|
|Cash and cash equivalents consists of:|
|Cash and cash equivalents||81,122||98,274|
* The Group cash outflow from acquisitions of $30.3 million is net of $12.5 million cash acquired from Singularity, and also includes payments of contingent consideration related to the Atalasoft Inc. acquisition of $1.9 million.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PREPARATION
The preliminary financial information set out in this announcement does not constitute statutory financial statements as defined by s435 of the Companies Act 2006 and are unaudited. The 2011 results are extracted from the audited accounts of Kofax plc, on which the auditors have issued an unqualified opinion which did not contain a statement under s498(2) or (3) Companies Act 2006.
The financial statements for the year ended 30 June 2012 have yet to be signed by the auditors. The audited financial statements for the year ended June 30, 2011 have been delivered to the Registrar of Companies. The Annual Report for the year ended June 30, 2012 will be mailed to shareholders in October 2012 and will be delivered to the Registrar of Companies following the Annual General Meeting which will be held on November 6, 2012 at the offices of Dechert LLP located at 160 Queen Victoria Street, London, EC4V 4QQ. Copies will be available to the public from the Company's registered office at 1 Cedarwood, Chineham Business Park, Basingstoke, Hampshire RG24 8WD, United Kingdom.
The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). The accounting policies have been consistently applied to all periods presented.
The presentation of the Consolidated Income Statement has been amended to better reflect the performance of the continuing operations of the Group. Comparative information has been reported on a consistent basis.
NOTE 2 ACQUISITIONS
Acquisition of Singularity
On December 5, 2011, Kofax acquired 100% of the shares of Singularity Limited (Singularity), a company incorporated in Northern Ireland, which is a provider of business process management (BPM) software and dynamic case management solutions. Singularity has historically conducted the majority of its operations in the United Kingdom, and has subsidiaries that include a substantial operating presence in India. The acquisition agreements and all related amounts payable are denominated in pounds sterling, and the disclosures that follow are based on the exchange rate to U.S. dollars at the date of acquisition; future payments, as expressed in U.S. dollars, may vary depending on the movement of foreign exchange rates.
The preliminary fair value of the identifiable assets and liabilities of Singularity and its subsidiaries, at the acquisition date, are as follows:
|Technology – intangible||13,195|
|Customer relationship – intangibles||2,162|
|Trade name – intangible||660|
|Property, plant & equipment||325|
|Total non-current assets||16,342|
|Other current assets||716|
|Cash and cash equivalents||12,527|
|Total current assets||16,261|
|Trade and other payables||1,599|
|Deferred income – current||603|
|Total current liabilities||2,202|
|Deferred income - non-current||40|
|Deferred tax liabilities - non-current||4,356|
|Total non-current liabilities||4,396|
|Net assets acquired||26,005|
|Consideration paid in cash at the time of closing||40,981|
|Contingent consideration, at net present value||3,219|
|Goodwill arising from acquisition||18,195|
The fair value of the trade receivables was $3.0 million and the full contractual amounts expect to be collected as of June 30, 2012.
The goodwill of $18.2 million comprises the value of expected synergies arising from the acquisition and workforce, which is not separately recognized. None of the goodwill is expected to be deductible for tax purposes.
From the date of acquisition to June 30, 2012, Singularity has contributed $10.3 million of revenue and a net loss of $3.0 million. If the combination had taken place at the beginning of the year ended June 30, 2012, revenue from Singularity’s continuing operations for year ended June 30, 2012 would have been approximately $16.6 million and the contribution to the Group’s net income would have been a loss of $2.5 million, which would have resulted in Group total revenue of $268.8 million and net income of $16.5 million.
The consideration payable relating to the shares includes contingent payments that are based on two factors. Contingent payments are contractually denominated in British pounds, those estimated amounts discussed below are based on the exchange rate in between British pounds and US dollars as of June°30, 2012. First, $3.4 million of the purchase price was withheld as deferred consideration relating to representations and warranties made by the sellers, including those related to the level of cash and certain other net assets acquired. To the extent it is determined to be payable, the deferred consideration will be paid on the one year anniversary of the closing. The Group estimates that the remaining $2.9 million of the $3.4 million will be paid, and the discounted fair value of the $2.9 million is classified as a component of Provisions – current in the accompanying Consolidated Statement of Financial Position as of June 30, 2012.
Additionally, the payment for the shares acquired includes contingent consideration payments based on the continuing employment of certain continuing employees of Singularity and its subsidiaries and license revenue arising from Singularity‘s BPM products during calendar year 2012 and 2013. The range of these payments is between zero and $14.7 million. Management has assessed a number of scenarios and based on those scenarios estimated for financial accounting purposes that $9.0 million of the contingent consideration will be paid to the shareholders. Under the provisions of IFRS 3, “Business Combinations,” management has determined that $8.4 million of the contingent consideration should be treated as compensation expense for financial accounting purposes, and that $0.6 million was included as a component of the purchase price consideration at the time of the acquisition. The $8.4 million is being charged to acquisition-related costs ratably from the date of acquisition through December 31, 2013, and during the period from the acquisition date to June 30, 2012, $2.3 million of the $8.4 million was amortized to acquisition-related costs. Payment of the contingent consideration will be made shortly after the end of calendar years 2012 and 2013. Based on the current estimates, $4.3 million and $4.7 million will be payable after the end of calendar 2012 and 2013, respectively. The discounted fair value of the $2.9 million accrued as of June 30, 2012, is included in Provisions as of June 30, 2012, allocated to current and long-term based on the proportion of the anticipated payments.
In addition to the contingent consideration described above, a retention and incentive bonus arrangement has been implemented for certain continuing employees of Singularity. Under the retention and incentive bonus structure, total payments ranging from zero to $4.7 million may be paid. The incentive bonus has been structured to mirror the contingent consideration payments described above. Based on current estimates of BPM license revenue, it is estimated for financial accounting purposes that $2.9 million of the incentive bonus will become payable. During the period from the acquisition date to June 30, 2012, $0.9 million of the $2.9 million was expensed to acquisition-related costs. Payment of the retention and incentive bonus will be made shortly after the end of calendar years 2012 and 2013. Based on the current estimates, $1.3 million and $1.6 million will be payable after the end of calendar year 2012 and 2013, respectively. The discounted fair value of the $0.9 million accrued as of June 30, 2012, is included in Provisions as of June 30, 2012, allocated to current and long-term based on the proportion of the anticipated payments.
As actual BPM license revenue for calendar year 2012 and 2013 is recognized, and as revised estimates of BPM license revenue through December 31, 2013 are made, the total amount payable will be reassessed. Any resulting adjustments to the contingent consideration payable will be charged to acquisition-related costs.
Analysis of cash flows on acquisition:
|Consideration paid in cash at the time of closing||40,981|
|Less: cash acquired||(12,527||)|
|Net outflow of cash relating to the acquisition||28,454|
NOTE 3 OPERATING SEGMENTS
Following the disposal of the hardware business, the Group operates one business segment, the software business. All products and services are considered one solution to customers and are operated and analyzed under one Income Statement provided to and evaluated by the chief operating decision maker (CODM). The CODM manages the business based on the key measures for resource allocation, based on a single set of financial data that encompasses our entire operations for purposes of making operating decisions and assessing financial performance. The Group’s CODM is our Chief Executive Officer.
There are no reportable assets that meet the criteria under IFRS 8 to be reported under the single operating segment.
The following revenue information is based on the location of the customer:
|Year to June 30, 2012|
Non-current assets for this purpose consist of property, plant and equipment, intangible assets, and other non-current assets – excluding security deposits and deferred tax assets.
|Year to June 30, 2011|
NOTE 4 PROFIT ON OPERATING ACTIVITIES BEFORE TAXATION
Operating costs and expenses include of the following key elements:
|Profit on ordinary activities before taxation is stated after charging:|
|Depreciation of property, plant and equipment||3,060||3,016|
|Amortization of intangible assets – technology and contractual relationships||5,190||3,213|
|Amortization of intangible assets – licenses and similar rights||2,852||2,689|
|(Gain)/ loss on disposal of property, plant and equipment||(153||)||2|
|Remuneration for principal auditors|
|- audit of the financial statements||1,961||999|
|- local statutory audits||760||181|
|- tax compliance & advisory services||885||1,463|
|- other non-audit services||157||625|
|Operating lease expense – minimum lease payments||7,575||7,548|
Cost of sales is comprised of the following:
|Cost of software licenses||11,301||10,869|
|Cost of maintenance services||16,420||15,891|
|Cost of professional services||26,784||23,279|
|Amortization of acquired intangible technology||3,619||2,239|
|Total cost of sales||58,124||52,278|
Amortization of acquired intangible technology includes technology acquired in business combinations and is considered a part of cost of sales. The remaining amortization of intangible assets included in the Consolidated Income Statement relates to contractual relationships and trade names acquired in business combinations.
NOTE 5 INCOME TAX EXPENSE
The components of income tax expense related to current income tax expense and deferred income tax expense were as follows:
|Current income tax expense|
|Income tax on profits for the year||11,836||8,329|
|Adjustment for over/ (under) provision in prior periods||618||(660||)|
|Deferred income tax expense|
|Origination/ (reversal) of temporary differences||(53||)||81|
|Adjustment for under/ (over) provision in prior periods||(2,481||)||751|
|Total income tax expense||9,920||8,501|
Total income tax expense in the income statement is disclosed as follows:
|Income tax expense on continuing operations||9,995||8,741|
|Income tax (credited) on discontinued operations||(75||)||(240||)|
Income tax relating to items charged or credited to other comprehensive income:
|Tax on net loss/ (gain) on foreign exchange adjustment||1,009||(409||)|
|Tax impact on actuarial losses||597||-|
|Tax credit/(charge) in the statement of comprehensive income||1,606||(409||)|
The reasons for the difference between the actual tax charge and the rate of corporation tax in the UK applied are as follows:
|Continuing business profit before tax||27,432||26,013|
|Discontinued operations profit before tax||(1,488||)||(10,428||)|
|Total profit before tax||25,944||15,585|
|Expected tax expense based on the standard rate in the UK of 25.5% (2011: 27.5%)||6,616||
|Tax losses not recognized in current period||1,591||2,251|
|Utilization of previously unrecognized tax losses||(1,356||)||(1,485||)|
|Adjustments for provision in prior periods||(1,863||)||92|
|Expenses not deductible for tax purposes and income not subject to tax||1,041||
|Different tax rates applied in overseas jurisdictions||4,068||1,342|
|Changes of tax rate on timing differences||(111||)||-|
|Recognition of previously unrecognized amounts||(66||)||-|
|Total tax expense on operations||9,920||8,501|
NOTE 6 EARNINGS PER SHARE
Basic earnings per share (EPS) of $0.21 (2011: $0.21) for the year to June 30, 2012 for the continuing business have been calculated based on Income from continuing operations after income taxes of $17.4 million (2011: $17.3 million) using the weighted average number of ordinary shares in issue totalling 83.9 million (2011: 82.5 million) during the period.
Diluted earnings per share of $0.20 (2011: $0.20) for the year to June 30, 2012 for the continuing business have been calculated based on Income from continuing operations after income taxes of $17.4 million (2011: $17.3 million) using 88.5 million (2011: 87.7 million) ordinary shares, the difference to the basic calculation representing the additional shares that would be issued on the conversion of all the dilutive potential ordinary shares.
Adjusted earnings per share of $0.40 (2011: $0.39) for the year to June 30, 2012 for the continuing business have been calculated based on Adjusted income from continuing operations after income taxes of $34.0 million (2011: $31.9 million) using the weighted average number of ordinary shares in issue totaling 83.9 million (2011: 82.5 million) during the period.
|Reconciliation of adjusted income from operations||
|EPS in $||$‘000||EPS in $||$‘000|
|Income from continuing operations, after income taxes||0.21||17,437||0.21||17,272|
|Share-based payment expense||0.05||3,905||0.05||3,733|
|Amortization of intangible assets||0.06||5,190||0.04||3,213|
|Net finance income and expense and other income and expenses||(0.06||)||(4,625||)||0.04||3,695|
|Tax effect of above||(0.06||)||(4,532||)||(0.07||)||(5,671||)|
|Adjusted income from operations||0.40||33,963||0.39||31,857|
Adjusted diluted earnings per share of $0.38 (2011 $0.36) for the year to June 30, 2012 for the continuing business have been calculated based on Adjusted income from continuing operations after income taxes of $34.0 million (2011: $31.9 million) using 88.5 million (2011: 87.7 million) ordinary shares.
A reconciliation of the number of shares included in EPS follows:
|Millions of shares||Group||Group|
|Basic weighted average number of ordinary shares (excluding ESOP/EBT and Treasury shares)||83.9||82.5|
|Dilutive impact of share options||2.1||3.2|
|Dilutive impact on LTIPs||2.5||2.0|
|Diluted weighted average number of shares||88.5||87.7|
NOTE 7 PROVISIONS
|At July 1, 2010||2,270||620||150||251||3,291|
|Arising during the year||980||2,375||4,698||260||8,313|
|Reversed against income statement||
|At June 30, 2011||1,749||2,139||4,744||453||9,085|
|Arising during the year||3,586||1,243||6,832||1,386||13,047|
|Reversed against income statement||(394||)||(656||)||-||(78||)||(1,128||)|
|At June 30, 2012||1,394||1,317||9,570||1,524||13,805|
The other provisions comprise different various insignificant amounts. See discussion in Note 2 relative to contingent consideration. The contingent consideration in the table above of $6.8 million arising during the current year is not included in the movement in provisions in the cash flow statement as it is a non-cash item.
Included in the amounts arising during the year in the contingent consideration provision is $0.3 million (2011: zero) related to the unwinding of the discounts initially recorded upon acquisitions.
The Group’s restructuring in the current year involved the reorganization of various management and operational functions, and a second phase of the shared service center in EMEA. The restructuring in 2011 involved the reorganization of the operational structure mainly relating to hardware sales management layers, and the first phase of the shared service center, which resulted in a provision that was largely utilized in 2012. A total restructuring charge of $4.9 million (2011: $3.2 million) has been recognized in the Consolidated Income Statement for the year ended June 30, 2012.
As part of the restructuring announced in the year ended June 30, 2011, a number of the properties under operating lease became onerous. The year-end provision represents the Group’s estimate of the net cost expected to arise across the remaining life of the lease on these underutilized properties, which is between one and three years.
NOTE 8 ANALYSIS OF NET FUNDS
|Cash in hand, at bank||79,881||96,337|
|Current asset investments||1,241||1,937|
|Total cash and cash equivalents||81,122||98,274|
|Debt due within 1 year||-||(158||)|
|Debt due after 1 year||-||(103||)|
Total cash and cash equivalents of $81.1 million (2011: $98.3 million) are shown on the Statement of Financial Position.
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