“Elecosoft has had a successful financial year, evidenced by increased income, strong growth in dividends and the elimination of its net borrowings, and a strong balance sheet at the year end.”
2017 has been another successful year as we have maintained the trends in financial performance seen in 2016. Revenue and reported operating profit grew by 12 per cent and 48 per cent respectively, driven by the strong underlying performance of the Group, the successful integration of the ICON business and favourable movements in the Group’s core trading currencies. The Group remains in a strong financial position, with a high and increasing proportion of operating profits converted into cash, resulting in the Group moving into a net cash position by the end of the year.
Revenue for the year increased 12 per cent to £20.0m (2016: £17.8m). Underlying revenue growth (excluding the impact of acquisitions and movements in foreign exchange rates) was 4 per cent, driven by growth in new licence sales and in revenue from maintenance and support contracts of 2 per cent and 8 per cent respectively. The acquisition of ICON in October 2016 contributed a further 4 per cent to revenue growth, and the impact of a weaker Sterling against the Swedish Krona, the US Dollar and the Euro adding a further 4 per cent to revenue growth.
The overall revenue profile of the Group remains strong, with the proportion of revenue derived from recurring maintenance and support contracts increasing to 49 per cent (2016: 48 per cent). The level of deferred income at the balance sheet date, which is a measure of future maintenance revenue, increased by 9 per cent to £4.8m (2016: £4.4m).
Revenue growth was driven by direct sales, up 13 per cent to £18.8m (2016: £16.7m) and growth through resellers, up 8 per cent to £1.2m (2016: £1.1m), reflecting the Group’s strategy to accelerate revenue growth with partners.
The Group delivered solid growth in its core mature markets of the UK and Sweden, which together comprise 69 per cent of total revenue, of 3 per cent. The Group’s strategy to penetrate new geographic markets was reflected in strong underlying revenue growth in the USA, which grew 8 per cent to £0.7m, in the Rest of Europe, which grew 25 per cent to £2.2m and the Rest of World, which grew 23 per cent to £0.4m (all growth rates are at constant rates of exchange).
Gross profit is revenue less the direct cost of providing products and services to customers, principally the costs of training and consultancy staff. In 2017, the gross profit margin increased by 1.2 percentage points to 87.9 per cent, reflecting cost control and revenue mix.
Reported operating profit grew 48 per cent to £2.4m (2016: £1.6m), or 28 per cent on an underlying basis (excluding the impact of acquisitions and movements in foreign exchange rates). This was driven by the strong revenue performance described above and reflects the benefit of tight cost control across the Group. 2016 also included costs of £0.3m in relation to the acquisition of ICON and the termination of a former Director. After excluding the impact of these costs, together with the impact of the non-cash amortisation of acquired intangible assets as set out below, adjusted operating profit for the Group increased by 26 per cent, or 18 per cent on an underlying basis. The overall adjusted operating margin improved by 1.5 percentage points to 13.9 per cent (2016: 12.4 per cent).
Overheads included within adjusted operating profit increased by 3 per cent on an underlying basis, reflecting tight cost management across the Group and the receipt of £0.2m from the administrators of a previously owned building company. Including the impact of acquisitions and foreign currency effects, overheads increased by 12 per cent.
|Former Director termination payments||–||109|
|Amortisation of acquired intangible assets||412||292|
|Adjusted operating profit||2,773||2,207|
Software product development expenses amounted to £2.7m for the year (2016: £2.6m), of which £1.1m (2016: £0.6m) was capitalised, demonstrating the commitment to investing increasingly in new product development and substantial product upgrades. The spend capitalised in the year includes investments in Powerproject BIM, Powerproject Vision, Powerproject v15 and other new products scheduled to be launched in 2018. The carrying value of these software assets together with the carrying value of software assets capitalised in previous periods was reviewed for impairment at the balance sheet date and an impairment charge of £0.2m (2016: nil) was recorded in respect of two minor products.
Finance costs in the year, largely in respect of the Group’s term debt, totalled £0.1m (2016: £0.1m), resulting in a profit before tax of £2.3m (2016: £1.5m).
The Group tax charge in the year was £0.4m (2016: £0.3m) and represented 15.8 per cent of profit before tax (2016: 17.4 per cent). The decrease in rate compared with 2016 reflected the reduced rate of corporation tax in the United Kingdom which impacted both tax on current year profits, as well as reducing the overall value of deferred tax liabilities.
The net profit attributable to ordinary shareholders increased by 53 per cent to £1.9m (2016: £1.2m). The underlying increase, excluding the impact of acquisitions and currency effects, was 25 per cent.
After adjusting for the post-tax effect of non-operating items and amortisation of acquired intangible assets, adjusted net profit attributable to ordinary shareholders increased by 23 per cent to £2.2m (2016: £1.8m).
|Former Director termination payments||–||87|
|Amortisation of acquired intangible assets||291||234|
|Adjusted net profit||2,188||1,776|
Cash generated from operations increased to £4.2m (2016: £2.4m), the increase reflecting the strong trading performance of the Group and continued focus on management of working capital. Overall working capital movements were favourable, contributing a net cash inflow of £0.5m (2016: £0.1m). Capital expenditure on intangible assets, principally comprising the capitalisation of software product development costs, was £1.2m (2016: 0.8m), reflecting the increased focus on the development of new products and major product upgrades. Capital expenditure on property, plant and equipment was £0.2m (2016: £0.4m).
After deducting capital expenditure, adjusted operating cash flow, as set out below, was £2.8m (2016: £1.5m), meaning that 102 per cent of adjusted operating profit (2016: 70 per cent) was converted into cash. This reflects the strength of the overall business model, where 49 per cent of the Group’s revenue is recurring and typically invoiced annually in advance, and the close focus on management of working capital.
|Cash generated in operations||4,167||2,422|
|Purchase of intangible assets||(1,154)||(754)|
|Purchase of property, plant and equipment||(180)||(449)|
|Former Director termination payments||–||109|
|Adjusted operating cash flow||2,883||2,207|
Free cash flow before dividends and acquisitions, more than doubled in the year to £2.6m (2016: £1.2m). Cash dividends paid to shareholders amounted to £0.2m (2016: £0.1m).
|Adjusted operating cash flow||2,883||1,540|
|Net interest paid||(98)||(82)|
|Proceeds from disposals of property, plant & equipment||161||100|
|Former Director termination payments||–||(109)|
|Adjusted operating cash flow||2,645||2,207|
The strong cash generation enabled the Group to end the year with net cash of £1.0m (2016: net borrowings of £1.3m), as set out in the table below.
|Net debt at 1 January||(1,304)||(803)|
|Free cash flow||2,645||1,220|
|Inception of finance leases||(169)||(170)|
|Net cash/(debt) at 31 December||2,883||(1,304)|
The Group’s net cash position comprises cash at hand of £4.7m (2016: £2.6m), offset in part by gross borrowings of £3.4m (2016: £3.5m) and obligations under finance leases of £0.3m (2016: £0.4m). Gross
borrowings comprise a fully drawn overdraft facility of £1.0m and term debt of £2.4m. The term debt is repayable in quarterly instalments over the next three years, with £0.8m repayable in 2018, £0.8m repayable in 2019 and £0.8m repayable in 2020. Both the overdraft and term debt carry an interest rate of 2.75 per cent over the Bank of England base rate.
Security provided to the bank for the provision of these facilities is a cross guarantee and debenture between the Parent Company and certain UK subsidiary companies and a commitment of the shares of the operating companies.
Covenants have been made to the bank in respect of three elements: EBITA to gross financing costs, net borrowings to EBITDA and cash flow to debt service. These covenants are tested quarterly.
Basic earnings per share increased 49 per cent to 2.5 pence (2016: 1.7 pence). After adjusting for the post-tax impact of non-operating items and amortisation of acquired intangible assets, adjusted earnings per share increased 20 per cent to 2.9 pence per share (2016: 2.4 pence per share). The Board has recommended the payment of a final scrip dividend in respect of the year ended 31 December 2017 of 0.40 pence per share (2016 final dividend: 0.25 pence), with a cash alternative to be made available. This gives total dividends in respect of the financial year of 0.60 pence per share (2016: 0.40 pence), an increase of 50 per cent over 2016.
Group Finance Director
26 March 2018
Download the 2017 annual report
The Elecosoft annual accounts for the period ended 31st December 2017 are now available to download.
Shareholders can elect to receive hard copy shareholder documents at any time by informing Link Asset Services at The Registry, 34 Beckenham Rd, Kent, BR3 4TU.