Chairman's and Chief Executive's Statement

For the six months ended 30 April 2014

Overview

The business has continued to make sound progress across both divisions as demonstrated by the improvement in first half revenues and EBITDA. The expansion of the core business away from being simply a provider of software under the traditional capital purchase and maintenance revenue model to a provider of more complete solutions in our chosen domains has continued and looks to be gathering momentum. This has the added benefit of more predictable and smoother revenue flows which provides us with improving future visibility. Further, our recurring revenue levels have remained stable at around 50% for the Group, which we expect to continue into 2015.

The Company has been rigorous in its approach to improve its working practices following a disappointing 2013. We have shifted the focus of the business towards the generation of revenue, improving margins, increasing market share and providing add-on services to existing customers. The business is now also stronger for its strengthened management team, including the appointment of Jane Mackie as Group CFO and Peter Russell-Smith as Managing Director of our Engineering Division, as well as improved systems and controls, which has led to tighter discipline across all areas of the Company.

The Group is seeing medium-term growth potential in all targeted industries and geographies, with a need to streamline and implement efficiencies in the resources sector, and a greater acceptance of Business Process Outsourcing (BPO) by public sector and corporates alike. Idox is gaining a reputation in its chosen markets for being the domain expert for document control and the benefits of this broader offering are being felt by both the Company and its customers.

Operational Review

The Public Sector Software Division ("PSS") again increased its market share, with wins in Luton, Barnet, Glasgow, Solihull, Blackpool and Kent, as well as completing seven new managed services contracts in the first half of the year, more than was achieved in the whole of 2013. They included Highland, Leeds, South Norfolk, Birmingham, Aylesbury, Gateshead and Trafford.

UK councils continue to look for solutions which deliver better services and cost efficiencies, although some have had small relief through an increase in planning fees caused by an improvement in construction and economic activity.

PSS continued to offer both managed services and hosted solutions and to expand its embryonic BPO solutions. The grants business has shown strong growth in consultancy hours billed and new client wins; the latter will flow through into future revenues. The compliance and content businesses have been stabilised and restructured to drive improvements in margin. All of which will positively impact the second half of the year and into 2015.

The Engineering Information Management Division ("EIM") has been substantially restructured to improve its customer service and account management, in line with the successful public sector approach, and is now focused on three core markets where it has domain expertise: Oil & gas, utilities and infrastructure.

The EIM Division has revised and updated its product suites across its key platforms leading to a better engagement with its key accounts, while improvements in process and quality have already been implemented. EIM is now ready to launch its facilities management ("FM") and SaaS solutions in the US in the second half of the year and further extend its BPO services, having already signed two small contracts in the first half.

The Division has also recently introduced a new service to assist oil & gas corporates in their transfer of assets; a rising trend which offers the Company a solid opportunity to form new long-term relationships. In a market where we are seeing the key players trading assets to balance their capacity and demand, EIM will offer to capture all documentation around an asset to aid in the diligence process, and thereby effect the efficient and seamless handover of the acquired asset in line with the purchasers' own operating procedures and approach, thus de-risking the process, where possible, for both parties.

As reported previously, the restructuring of internal systems and cost base has delivered in excess of the previously announced £1 million of savings and some of this should flow through into H2. In addition, the final stage of the roll out of the Company's new Enterprise Resource Planning (ERP) system has been accelerated to cover all the operations of the business and is delivering further improvements in management systems and control at a lower cost.

The increased focus on financial controls has already delivered improvements, as demonstrated by the strong cash position and improvements in net debt, which is down £11.0m to £8.7m, as at 30 April 2014.

Outlook

The Company will continue with this process of improvement in the second half of the year, with the focus now being turned towards the more creative development of products and services, in order to deliver greater innovation for our customers and thus a greater value added service, thereby reinforcing Idox's leading market position.

The business enters the second half clearly focused on its areas of expertise, and is increasingly recognised as leading the market in the provision of the management of all content, be it traditional documents and data, or broader consulting, hosting and BPO services. All of this provides improved customer journeys, optimal efficiency and compliance.

Chief Financial Officer's Review

For the six months ended 30 April 2014

Financial Review

Group revenues from continuing operations grew by 12% to £29.6m (H1 2013: £26.6m) due to organic growth in both the PSS and EIM divisions and the impact of the Artesys acquisition in 2013.  The Group maintained the geographical split of its revenues with 32% generated outside of the UK (H1 2013: 31%).  Gross profit earned was 13% higher at £26.8m (H1 2013: £23.9m) and the Group saw an increase in gross margin from 90% to 91% as a result of an increased mix of higher margin software business.  Earnings before interest, tax, amortisation, depreciation, restructuring, acquisition and share option costs ("Adjusted EBITDA") increased by 36% to £7.9m (H1 2013: £5.8m) with EBITDA margins of 27% (H1 2013: 22%).

Performance by segment

The PSS division, which accounted for 67% of Group revenues (H1 2013: 69%), delivered revenues of £19.7m (H1 2013: £18.3m). Product and services revenue grew organically by 9% on the previous year driven by further market share gains, seven new managed service contract wins and a focus on add on services to the existing customer base.  Election activity increased on the same period in 2013 due to Individual Electoral Registration projects and the European elections.

Recurring revenues within the PSS division were 57% (H1 2013: 58%) excluding election revenue.  Divisional Adjusted EBITDA increased by 25% to £5.6m (H1 2013: £4.5m), delivering a 29% margin, a 4% increase on 2013 due to a focus on higher margin product sales.

The EIM division accounted for 33% of Group revenues (H1 2013: 31%) and achieved revenue growth of 20% to £9.9m (H1 2013: £8.2m).  Revenue grew organically by 13% and there was a full six months contribution from Artesys acquired on 9 April 2013. Revenue growth has been driven by improved levels of service in the core market sectors of oil and gas, infrastructure and utilities and a focus on account management. 

Adjusted EBITDA for the EIM business increased to £2.2m (H1 2013: £1.3m), 29% of the Group total.  Margins increased to 23% (H1 2013: 16%) reflecting a stronger performance in licence sales compared to the same period in 2013.

Profit before tax

Within the income statement, we present both profit before tax and adjusted profit before tax which is a performance measure that is not defined by GAAP but which the directors believe provides a reliable and consistent measure of the Group's underlying financial performance.  Adjusted profit before tax and adjusted EPS excludes amortisation, restructuring, acquisition, share option costs and impairment costs.

Adjusted profit before tax increased 40% to £6.9m (H1 2013: £5.0m).  Administrative expenses increased 5% to £19.0m (H1 2013: £18.1m) with 4% of this increase due to a full six months contribution in the period of Artesys. Staff costs increased by 2% on a like for like basis and other overheads remained stable on the prior period.

Financing costs remained stable at £0.6m and includes interest payable of £0.4m (H1 2013: £0.4m) and amortisation of the loan facility fees of £0.07m (H1 2013: £0.09m). 

Reported profit before tax increased 33% to £3.4m (H1 2013: £2.6m).  Amortisation of intangibles increased from £2.7m to £2.8m as a result of a full year of Artesys.  Restructuring charges of £0.2m (H1 2013: £0.09m) relate to the internal reorganisation of the EIM division and streamlining of corporate functions between London and Newbury into the combined Theale office which will result in cost savings going forward.  There was a one off benefit of £0.8m included in acquisition costs in H1 2013 related to the release of earn-out obligations on the Opt2Vote acquisition which did not become payable.  Excluding this £0.8m benefit acquisition costs reduced to £0.01m (H1 2013: £0.08m). 

The Group continues to invest in developing innovative technology solutions and has incurred capitalised Research and Development costs of £0.52m (H1 2013: £0.56m).  Research and Development costs expensed in the period were £2.8m (H1 2013: £2.5m).

Taxation

The Group's effective tax rate for the period was 23% compared to -13% for 2013. The rate of 23% is the estimated annualised rate, representing the Group's longer term effective rate of tax, taking into account the effects of rate changes and share scheme deductions in the period. The increase in the effective rate of tax is also the result of recognition of a deferred tax asset in the prior year in relation to previously unrecognised losses within the EIM business and recognition of a deferred tax asset in respect of share options. Unrelieved trading losses of £1.0m in the UK and £2.6m overseas remain available to offset against future taxable trading profits.  The Board believes the Group will benefit from these tax losses in the future.

Earnings per share and dividends

Adjusted earnings per share improved by 48% to 1.51p (H1 2013: 1.02p).   Diluted adjusted earnings per share increased 52% to 1.47p (H1 2013: 0.97p). 

Basic earnings per share improved by 34% to 0.75p (H1 2013: 0.56p).  Diluted earnings per share increased by 35% to 0.73p (H1 2013: 0.54p). 

The Board proposes an interim dividend of 0.325p, an increase of 8% on the 2013 interim dividend. The interim dividend will be paid on 15 October 2014 to shareholders on the register at 3 October 2014.

Balance sheet and cashflows

Idox's balance sheet continued to strengthen during the period and at 30 April 2014 net assets were £47.4m compared to £39.3m at 30 April 2013.

Cash generated from operating activities before tax as a percentage of Adjusted EBITDA was 185%, up from 176% in the previous year.  The high percentage in both periods reflects the seasonality of maintenance cash flows within the Public Sector Software division. 

The Group ended the period with net debt of £8.7m (H1 2013: £17.7m) after total dividends of £2.4m.  The Group's total signed debt facilities at 30 April 2014 stood at £30.4m, a combination of a term loan and flexible working capital and acquisition revolving credit facilities. The working capital facility of £8m and acquisition facility of £15m are due to expire during the next 12 months, however this is expected to be renegotiated with the bank on similar terms. The Board has considered the headroom in the bank facilities and are comfortable that unless there was a substantial deterioration in trading, Group budgets do not indicate any covenant breaches on the bank facilities currently in place.

Deferred income, representing invoiced maintenance and SaaS contracts yet to be recognised in revenue stood at £21.4m at 30 April 2014 (H1 2013: £21.7m), giving good visibility of revenue in the new financial year.  Accrued income, representing future cash flows from managed service contracts was £7.6m (H1 2013: £4.1m).

Consolidated Interim Statement of Comprehensive Income

For the six months ended 30 April 2014

The accompanying notes form an integral part of these financial statements. 

Consolidated Interim Balance Sheet

At 30 April 2014

The accompanying notes form an integral part of these financial statements.