Idox plc

('Idox' or 'the Group' or 'the Company')

Final results for the year ended 31 October 2017

 Idox plc (AIM: IDOX), a leading supplier of specialist information management solutions and services, today announces its final results for the year ended 31 October 2017.

Financial highlights:

·      Revenues up 16% to £88.9m (2016: £76.7m)

·      Adjusted EBITDA* decreased 14% to £18.5m (2016: £21.5m)

·      Adjusted EBITDA* margin 21% (2016: 28%)

·      Adjusted profit before tax** £12.1m (2016: £16.7m)

·      Adjusted EPS** 2.40p (2016: 4.11p)

·      Net debt as at 31 October 2017 stood at £32.1m (31 October 2016 £25.0m; £3.5m net cash outflow on two acquisitions in the financial year and £11.4m bond on 6PM acquisition)

·      Proposed final dividend of 0.655p (2016: 0.650p) making a total of 1.040p (2016: 1.000p), an increase of 4% for the financial year

Operational highlights:

·      Recurring and repeating revenues represented 84% of revenues

·      Strategic focus on, and continued investment in, public sector

·      New digital services platform, enabled by recent acquisitions, underpinning public sector focus and future growth

·      Another strong performance from Public Sector Software (PSS):

o  Represented 46% of Group revenues

o  Strong election year and winning of market share

o  Won 108 new local authority customers - 94% of all local authorities now customers

·      Acquisitions:

o  6PM Group delivers healthcare solutions, principally to the NHS within the UK, using a combination of proprietary software, infrastructure, and professional services that enables healthcare organisations to enhance and optimise efficiency.

o  Halarose develops, markets, sells and supports a range of electoral back office software and services to UK local authorities. It enables its customers to be more efficient both in the production and management of the electoral register and in the running of elections and referenda. The acquisition is in line with Idox's strategic focus..

Statutory Equivalents

The above highlights are based on adjusted results.  Reconciliations between adjusted and statutory results are contained within these financial statements.  The statutory equivalents of the above results are as follows:

·      Profit before tax was £3.5m (2016: £13.0m)

·      Basic EPS was 0.66p (2016: 3.30p)

* Adjusted EBITDA is defined as earnings before amortisation, depreciation, restructuring, acquisition, impairment, corporate finance costs and share option costs

** Adjusted profit before tax and adjusted EPS excludes amortisation on acquired intangibles, restructuring, impairment and acquisition costs

Richard Kellett- Clarke, Interim Chief Executive of Idox said:

'The failure to achieve the year end numbers has been disappointing and is the result of a perfect storm of issues including a recent complex acquisition.

However, in the early months of the new financial year the business has had an encouraging start with new contracts signed on the Bristol transport solution, the e-Count solution for the Government of Malta, and new solutions for the Isle of Man, Western Isles, Croydon and the South Downs National Park and Dorset Councils partnership. 

Overall, the Board is confident that the Group will deliver an improved performance in the current financial year, driven by a combination of new contract momentum, management and organisational changes, savings made since the year end and the full year contributions from the 2017 acquisitions.

I remain confident of Idox's prospects and believe that the Group has good growth opportunities, through its continued focus on digital transformation and channel shift in the public sector, increasing market shares, ensuring existing acquisitions are fully bedded in, cross selling, and geographical expansion.'

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No 596/2014.

Enquiries:

Idox plc                                                                                                  +44 (0) 870 333 7101

Laurence Vaughan, Chairman

Richard Kellett-Clarke, Interim Chief Executive Officer

Jane Mackie, Chief Financial Officer

N+1 Singer (NOMAD and Broker)                                                    +44 (0) 20 7496 3000

Shaun Dobson

Liz Yong

MHP (Financial PR)                                                                            +44 (0) 20 3128 8100

Reg Hoare / Charlie Barker

For more information see www.idoxplc.com 

Chairman's Statement

Introduction

2017 proved to be a year of change and contrasting performance for Idox; after a promising start to the year, it is disappointing to report on a mixed set of results for the year as a whole.

The early part of the year was focused on completion of the acquisition of 6PM, a software and solutions business whose main customer is the UK NHS, which represented a significant expansion in the health and social care market.  We made a further important acquisition in August, of Halarose, an electoral back office software and services business that has significantly enhanced our elections' capabilities.

However, we suffered a setback in the second half of the year due to a combination of factors which overall impacted our reported profits for the year; first, as a result of customer disruption in the wake of the June 2017 UK General Election, sign-off on some contract wins, especially within health and transport, was delayed; secondly, following an internal review by our finance team in preparation for the full year audit, we identified nine contracts where we did not consider revenue should be recognised in these results. 

I am pleased to report that the year-end audit and subsequent review of revenue recognition did not show up any additional material problems around accounting irregularities, nor did it increase the size of the related adjustment materially.

Our finance team are to be congratulated for their diligence and integrity in standing up for the correct treatment and precise year end cut off.  On the downside, we have expended considerable management time on resolving these issues.

There have been more robust discussions and technical analysis of revenue recognition accounting policies, in particular around the complex area of 6PM software licence treatment. As a result, an adjustment was made to management figures relating to 6PM licence revenue.

Board

Richard Kellett-Clarke, who had become a non-executive director of Idox in November 2016 after a successful tenure as our Chief Executive, stepped back in as Interim Chief Executive in December 2017 following the regrettable illness of his original successor Andrew Riley. Andrew remains on extended sick leave. I am pleased to report that Richard has been able to rapidly execute on a plan to get the business back on track as soon as possible and will help out for as long as necessary.

Peter Lilley, who joined the Board in 2005 will step down from his role at the Company's AGM as Senior non-executive director and chair of the Remuneration Committee after twelve years' service to the Group. We would like to take this opportunity of thanking him for his contribution to the Group over this period.  

Results summary

A summary of our financial key performance indicators is presented below:

*Adjusted EBITDA is defined as earnings before depreciation, amortisation, restructuring, acquisition, impairment, corporate finance and share option costs

**Adjusted EPS excludes amortisation on acquired intangibles, restructuring, impairment and acquisition costs

Idox grew revenues by 16% but organic growth suffered due to the one off issues that occurred during the year, as outlined in the Chief Executive's Statement. As a result, adjusted EBITDA declined by 13.9%. The overall Group margin declined to 21% from 28% in the previous year. This was the result of a change in mix and higher than anticipated one off costs in several parts of the business.

The miss of the originally expected EBITDA target of £27.2m by £8.7m can be summarised as follows:

Management had an expectation that 6pm licences would be able to be recognised at a point in time and had budgeted for revenue in this way.  In practice this was not possible and 6pm licences were recognised over time resulting in a £1m difference between expected revenues and actual revenues recognised.

Net debt (including the 6PM bond) as at 31 October 2017 stood at £32.1m (2016: £25.0m), and has not been impacted by the revenue recognition issues. Bank debt remains within the Group's banking facilities, and the net debt / EBITDA ratio as at 31 October was 1.7 times. Cash conversion has improved to 82% (2016: 63%).

Group Strategy

The Group continued its focus on providing digital solutions and services to the public sector in the United Kingdom and Europe. The key to our success is to ensure we deliver better user results and productivity improvements for customers through focusing on usability, functionality and application of integrated digital technologies and solutions.

The Group has had a setback this year but the Board believes it can bounce back quickly with the steps already taken to rectify the issues identified and reflecting the underlying strengths of the core business, its product offering and talented people. 

Acquisitions

During the financial year two acquisitions were completed, 6PM for £18.5 million and Halarose for £5.0 million, both in line with our strategy, and both of which contributed to this year's financial results. 6PM represented a significant expansion into one of the most important and largest public services - healthcare. Halarose significantly consolidates our position in elections. The Board believes that both will deliver earnings enhancing contributions in future periods.

The 6PM acquisition was funded by means of a placing of new shares which raised gross proceeds of £20.5 million, whilst £3.5m of the Halarose acquisition was financed out of the Group's existing cash resources, with £1.5m settled in shares.

Dividends

The Board proposes, subject to approval at the Company's Annual General Meeting, that a final dividend of 0.655p (2016: 0.650p) be paid bringing the total for the year to 1.04p (2016: 1.00p), an increase of 4%, consistent with our progressive dividend policy. In reaching this decision, the Board has taken into account the disappointing results for the year.

Summary

Following the disappointment at the year-end regarding delayed contracts and revenue recognition, I am pleased that these matters have now been clarified and that we can look forward with confidence to the new financial year.  Idox has an exceptionally strong market position in the public sector, a sound balance sheet, and multiple opportunities for growth. I am therefore confident of the Group's future prospects.

Laurence Vaughan

Chairman

28 February 2018

Market overview

The Group continues to operate successfully and has grown in challenging markets characterised by continued pressure on local government expenditure.   Our diversity of offerings and tight integration of businesses into a single management structure allows us to take advantage of opportunities and respond to challenges in our markets as demonstrated by this year's performance.

We see no change in outlook for our core markets.  Announcements concerning public sector savings over the next three years are in line with our planning and expectations and should drive take-up of our new cost saving solutions.

Our Business Model

Idox is the leading applications provider to UK local government for core functions relating to land, people and property, such as its market leading planning systems and election management software. Over 90% of UK local authorities are now customers for one or more of the Group's products.

 Idox provides:

·      public sector organisations with tools to manage information and knowledge, documents, content, business processes and workflow as well as connecting directly with the citizen via the web and providing elections management solutions

·      decision support content such as grants and planning policy information and corporate compliance services

·      engineering document control, project collaboration and facility management applications to many leading companies in industries such as oil and gas, architecture and construction, mining, utilities, pharmaceuticals and transportation in North America and around the world.

The Group employs 845 staff located in the UK, the USA, Canada, Europe, India and Australia.

Strategy

Our strategy is to become the partner of choice due to our domain expertise, continued innovation, quality of service and guaranteed delivery. Through this focus on quality and delivery we expect to demonstrate to our customers improvements in operational efficiency and return on investment which will result in us increasing our market share, growing both organically and internationally.

Key Performance Indicators

Key financial performance indicators, including the management of profitability, monitored on an ongoing basis by management are set out below.

Composition of the Board

The Board of Directors comprises 29% female staff members.

Overview

It was quite unexpected to be back in this seat some 15 months after stepping down, but I have been pleased by the warmth of the reception from the Idox team, who have knuckled down in what has been a difficult few months. I am particularly grateful to Jane Mackie, our CFO, and her team who in difficult circumstances upheld the Company's standards of honesty and integrity. We are obviously disappointed by the impact these matters have had on the reputation of the business and fully intend to restore it to full health.

The failure to achieve the year end numbers is the result of a perfect storm of issues. Recent complex acquisitions, exacerbated by earn outs, and a time-consuming capital raise created a lot of work in the first half of the year and did not result in the customary tight integration and release of value. This was aggravated by a general election year, which served to push contract activity out towards the end of the financial year, and revenue recognition which was intended to ensure we hit year end targets but proved too aggressive.  

The focus since I stepped back into the CEO role, has been on five core changes which are expected to deliver benefits in the current financial year:

1.             The full integration of the last four acquisitions to deliver shareholder value. This will be completed during H1 2018 with a new streamlined organisational structure.

2.             Target £7m of cost savings (10%) through the identification of cost synergies and technological overlaps in the business to aid productivity and efficiency. Introduction of Group policies and procedures to increase, security, accountability, productivity and compliance. This is well advanced with major changes already implemented.

3.             A review of Group pricing and revenue recognition policy with external input from independent accountants to ensure consistency and clarity and improve cash conversion. This will be completed during H1 2018 and implemented by the end of 2018. It is expected to have an initially negative impact on revenues as a result of increased SaaS pricing although this is expected to have a medium-term benefit.

4.             Acceleration of our digital, mobile and web technology strategy in partnership with our customers, and a refocus of our development resources to concentrate on core technologies and reduce capital costs.

5.             Improve processes to reduce administration and improve cash collection

We have made rapid progress as these were all initiatives that were previously proposed, but deferred.

Public Sector Software

Post the year end we have completed a small reorganisation to integrate completely the recent acquisitions and to drive greater efficiency and more focus to our core public sector customer base.

Today our services facing government and the local public sector aimed at improving the usability and quality of services, account for 72% of revenues, an increase of 17% on the previous year.

The business had another strong election year which not only disrupted the business in the middle of the year with the uncertain outcome of the general election in May, but ended the year with the delayed completion of the national election system for Northern Ireland due to uncertainty around potential fresh elections, and the award of the e-Count contract for Malta.

We have continued to enhance our digital services platform and roll out the completed mobile application platform which aims to improve the customer experience and assist our customers in their productivity goals. The total number of customer solutions has now exceeded over 100. Building on this, consultation has begun on the next generation of web based solutions for local government which is scheduled for delivery in incremental stages starting in 2019 through to 2020.

Overall, we have continued to see further market share gains with 108 new local authority customers, 7 new system sales and 11 managed service customers.

Our Transport solutions have delivered and awaiting sign from the two major systems they have been working on for the past two years in Perth, Australia and Manchester. This has led to cost overruns but the resultant ground-breaking innovation in these solutions has resulted in further international interest and the closure of the Bristol Transport contract in Q1 2018.

These solutions offer real time adaptive traffic signaling, dynamic timetabling and printing, alters and monitoring solutions for multi modal journeys, dynamic stand management, performance monitoring of journey times, bus lateness and air quality, as well as "green wave" solutions to control vehicle speed for current and autonomous vehicles. They represent our long-term investment in smart City solutions, which we believe represents an attractive opportunity for the Group.

Facilities management ('FM') had another good year and has now started to work more closely with our health business to deliver FM solutions linked with asset tracking to hospitals.

6PM

Post-acquisition integration of 6PM quickly uncovered a number of issues which resulted in:

1.     The restatement of 6PM's audited accounts due to material errors which were identified in due diligence

2.     Discovery of additional unaccrued costs

3.     Incurring one-off legal, auditing and consulting costs to expedite discipline in the business

4.     Increased management time and resources to achieve the partial integration which detracted attention from the core business

5.     The points above resulted in a reassessment of forecasts and an agreed impairment of £2.7m to the carrying value of goodwill in the accounts

6.     Continued and extended discussions with our auditors over the recognition of revenues in 2017.  The technical discussion was a complex area which focused on recognition of revenue either at a point in time or over time, with the difference in revenue and profits being £1m. Management had an expectation that 6pm licences would be able to be recognised at a point in time.  In practice this was not possible and 6PM licence revenue continued to be recognised over time rather than at a point in time. This has resulted in the £1m revenue and profits which was expected by management to be recognised in 2017 not being recognised in the period and carried forward to future periods.

Now this is all behind us, we are concentrating on reviewing how we sell to the NHS to improve sales performance, time to closure and revenue recognition which may affect revenues in the short term.

Digital

The Digital business had an unexciting year in revenue terms but was very proud to have completed and delivered new designs and approaches for a diverse customer base including the Church of England, as well as several well-known premier league football clubs. It has started to work with both the transport, FM, and local government areas of the business to improve the usability of customer web sites and deliver better customer experiences and more relevant information, which is all part of our strategy to use digital technology to deliver better public services.

Content

The Compliance part of our business has been merged at the end of this year with our Grant's business as they are both content and services businesses. The combined Content business unit has stabilised after a poor performance in the prior year and grew revenues by 15% in 2017. New products this year included new modules to help corporates and local authorities with the education of staff around the European GDPR standard. Content has continued to take market share with strong sales for our Research connect platform.

Engineering Information Management (EIM)

Engineering revenue declined slightly by 8% year on year, the result of a more stringent revenue recognition policy and delayed completion of projects. The business has continued to invest in its SaaS platform which has received good reviews and is expected to be launched in the second half of 2018 as an upgrade to the current system.

Markets

Looking forward we see no material change in all our markets. We saw delays in decision making processes in 2017 as a result of the general election but no discernable impact from Brexit. The oil and gas market has seen a slight uptick as a result of the strengthening price of oil but this is yet to turn into substantial growth. The Content business remains a slower growth, lower margin business in highly competitive markets. Public sector customers continue to look at our digital, mobile and web offerings and we continue to see good growth in the use of these services.

Objectives for 2018

The Group's strategy remains to focus on the wider public sector (with the addition of Health last year). We intend to accelerate our international ambitions, and having consolidated our position in the UK elections market we are looking to expand this area of the business outside the UK.

The short-term focus has been to rectify the issues which developed in 2017. To that end we have started and will have completed by the end of H1 2018 the full integration of all the business we have bought in the past two years. This will result in some significant cost saving and improvements in quality standards across the Group as well as helping us to leverage our intellectual property.

This year will see the launch of a new Group web site which integrates all our solutions, capabilities and technologies to aid cross selling and to leverage the capability of the business.  The investment strategy will result in an increased focus on our web cloud and smart city solutions.

The Board believes government bodies must invest in digital solutions to improve the quality of their services and continue their drive for improvements in productivity and accessibility. Idox is unique in having an extensive range of capabilities which it can integrate to deliver quick outcomes and is looking forward to building stronger links with its customers to deliver true innovation to the market with their help.

Outlook

In the early months of the new financial year the business has had an encouraging start with the majority of the delayed contracts from last year being signed; the Bristol transport solution, the e-Count solution for the Government of Malta, and new solutions for the Isle of Man, Western Isles, Croydon and the South Downs National Park and Dorset Councils partnership. 

2018 will see a decisive move towards a change in product pricing and a focus on cash conversion; we believe this will deliver stronger future growth and a higher quality earnings, although in the short term it will depress revenue growth in 2018. We expect margins to improve following the cost saving measures being targeted and the completion of integration activity.

Overall, the Board is confident that the Group is well positioned for the current financial year, driven by a combination of new contract momentum, management and organisational changes, savings made since the year end and the full year contributions from the 2017 acquisitions.

I remain confident of Idox's prospects and believe that the Group has good growth opportunities, through its continued focus on digital transformation and channel shift in the public sector, increasing market shares, ensuring existing acquisitions are fully bedded in, cross selling, and geographical expansion.

Richard Kellett-Clarke

Chief Executive Officer

28 February 2018

Financial Review

Group revenues grew by 16% to £88.9m (2016: £76.7m), driven by the impact of two acquisitions; 6PM, providing software and services to the NHS (February 2017) and Halarose supplier of electoral back office software and services to UK local authorities (August 2017). 

74% of Group revenues were generated in the UK (2016: 73%) with the two acquisitions completed in 2017 having the majority of their customers based in the UK.  Gross profit earned increased 11% to £73.7m (2016: £66.6m) and the Group saw a decrease in gross margin from 87% to 83% as a result of lower margin election print revenue related to the May local elections and General Election.  Earnings before interest, tax, amortisation, depreciation, restructuring, acquisition, impairment, corporate finance and share option costs ("Adjusted EBITDA") decreased by 14% to £18.5m (2016: £21.5m) with EBITDA margins decreasing to 21% (2016: 28%).  Group EBITDA margin was impacted by lower margins in the Digital and Health divisions and a change in mix of election revenue in the PSS division.

Performance by segment

Following the acquisition of 6PM a new segment was created with the addition of Health, which reflects the results of 6PM.  Halarose acquired in August 2017 is part of the PSS segment.  Grants and Compliance have been combined in the second half of the year following a reorganisation and now come under the Content division.

The PSS division, which accounted for 46% of Group revenues (2016: 53%), delivered revenues of £41.2m (2016: £41.0m) and included a contribution from Halarose acquired August 2017. Product and services revenue increased by 7% (or organically decreased by 5%) to £20.4m (2016: £19.0m).  Election revenues accounted for £4.7m (2016: £5.6m) of PSS revenues with the division delivering on the May local elections and the General Election.  Election revenue was down on the prior year as 2016 included the EU referendum, May Scottish and local elections and the Scottish Government eCount project.  Recurring revenues within the PSS division from maintenance and hosting were £16.1m (2016: £16.4m).  Recurring revenues represented 39% (2016: 40%) of total PSS revenue.  Divisional Adjusted EBITDA decreased by 6% to £15.4m (2016: £16.3m), delivering a 37% EBITDA margin (2016: 40%).

The Digital division accounted for 17% of Group revenues (2016: 14%) with revenue of £14.7m (2016: £10.9m) and a full year of Rippleffect acquired in August 2016.

The EIM division accounted for 15% of Group revenues (2016: 18%) with revenue of £12.9m (2016: £14.1m).  Recurring revenues within the EIM division from maintenance and SaaS were 60% (2016: 57%).  EIM saw a fall in revenue due to an increased emphasis on SaaS and managed service deals, continued pressure on per-seat licence prices and oil and gas spending still tight on non-key investment.

The Content division in the UK and Europe had revenue growth of 15% to £12.4m (2016: £10.8m).

The Health division contributed nine months trading to the period, since the acquisition of 6PM in February 2017, with revenues of £7.6m.

Profit before tax

Reported profit before tax decreased to £3.5m (2016: £13.0m) as a result of higher amortisation and finance costs following the acquisition of 6PM plus an impairment charge related to 6PM. The impairment arose from a reassessment of the forecasts prompted by the emergence of inherited issues as described above. Amortisation of intangibles increased to £5.2m (2016: £3.8m) due to the acquisition of 6PM.  Amortisation of development costs was £2.3m (2016: £1.3m) and amortisation on software licences was £0.9m (2016: £1.0m).  Development costs are amortised over a 1 to 5 year period on a project by project basis and software licences are amortised over 3 years.  Acquisition costs of £8,000 (2016: £0.4m credit) relate to £0.2m of 6PM and Halarose acquisition costs, offset by a further £0.2m reduction in the earn out payment for Cloud Amber.  Restructuring charges of £0.7m (2016: £0.3m) includes £0.3m for the restructuring of the Digital division following the acquisition of Rippleffect. 

Adjusted profit before tax and adjusted earnings per share are alternative performance measures, considered by the Board to be a better reflection of true business performance than looking at the Group's results on a statutory basis only. These measures are widely used by research analysts covering the Group.

Adjusted EBITDA decreased 14% to £18.5m (2016: £21.5m) impacted by lower margin election revenue in PSS, lower revenue in EIM, lower margin in pay per click revenue in Digital and a maiden loss contribution from Health.   Cost of sales increased 49% with 37% of the increase due to acquisitions in the period.  Several issues have arisen in the Health division since acquisition.  Although full financial due diligence was carried out by Grant Thornton on 6pm and identified material errors, the accounting issues which have come to light have been greater than expected. 

We have inherited issues with incomplete accounting records, revenue recognition and inconsistent contractual paperwork.  These issues have taken up an exceptional amount of finance resources to resolve.  The Health division was fully integrated into the Idox accounting function in July 2017 following the acquisition at the end of February.  As a result, the issues inherited are not expected to be repeated going forward.

Administrative expenses increased by 31% to £68.6m (2016: £52.3m) or excluding acquisitions by 4%.  Staff costs increased by 19% to £42.3m (2016: £35.5m) or excluding acquisitions decreased by 1%. 

Finance costs have increased to £2.0m (2016: £1.4m) due to the 6PM bond interest payable (£0.8m).  The Maltese Stock Exchange bond was issued in 2015 prior to Idox acquiring 6PM at a nominal value of €13m, is repayable in 2025 and has a coupon rate of 5.1%.

The Group continues to invest in developing innovative technology solutions and has incurred capitalised development costs of £4.8m (2016: £2.8m). Research and Development costs expensed in the period were £3.8m (2016: £4.0m).

Taxation

The effective tax rate ('ETR') for the period was 24.21% (2016: 9.06%).

Significant tax repayments were processed in 2017, not previously provided for, in respect of historic R&D claims covering the Reading Room Group and Idox Health Ltd, resulting in downward pressure on the ETR for the year.

However, certain other factors contributed to increasing the ETR, primarily impairment of the 6PM acquisition and costs associated with this acquisition, both of which are non-deductible expenses for tax purposes. Another factor which increased ETR was the non-recognition of losses incurred in Malta, owing to uncertainty over their future utilisation. These losses will be recognised where their likelihood of utilisation increases, with any future recognition resulting in a decrease to ETR.

Unrelieved trading losses of £1.1m, across the US and the UK, remain available to offset against future taxable trading profits. This number excludes substantial carried-forward losses not recognised for deferred tax purposes to date, owing to adoption of a prudent loss recognition position. The gross value of these losses not recognised to date totals £12.1m, split across Malta (£8.7m), the UK (£2.1m) and Germany (£1.3m).  The Board is hopeful that the Group will benefit from these derecognised tax losses in future, and will be recognised at the point where utilisation becomes more certain.

Earnings per share and dividends

Adjusted earnings per share fell to 2.40p (2016: 4.11p).   Adjusted diluted earnings per share fell to 2.34p (2016: 3.96p).  Adjusted earnings per share was impacted in the period by increased finance costs following the acquisition of 6PM.

Basic earnings per share fell to 0.66p (2016: 3.30p).  Diluted earnings per share fell to 0.64p (2016: 3.18p).  Basic earnings per share fell due to the impact of the 6PM acquisition on increased finance costs, increased amortisation on acquired intangibles, increased acquisition costs and impairment.  

The Board proposes a final dividend of 0.655p an increase of 0.8% on the previous final dividend, giving a total dividend for the year of 1.04p and 4% growth for the full year.  This is in line with our progressive dividend policy for dividend growth.  Subject to shareholder approval at the forthcoming Annual General Meeting, the final dividend is expected to be paid on the 20 April 2018 to shareholders on the register at 3 April 2018.

Balance sheet and cashflows

The Group's balance sheet continued to strengthen during the period and at 31 October 2017 net assets were £91.3m compared to £65.2m at 31 October 2016. The increase in net assets includes £35m relating to goodwill on acquisition and other intangibles of 6PM.

Cash generated from operating activities before tax as a percentage of Adjusted EBITDA was 82% (2016: 63%).  Cash conversion has historically been impacted by deferred payment deals over 3 to 5 years which have been offered to local authorities.  The cash conversion trend continues to improve as payment from customers are more aligned with when services are provided. 

The Group ended the period with net debt of £32.1m (2016: £25.0m), after utilising the facility for the acquisition of Halarose (£3.5m) and taking on the 6PM bond of £11.4m which existed in 6PM pre-acquisition.  The 6PM bond sits outside the Group's signed debt facilities.

The Group's total signed debt facilities at 31 October 2017 stood at £36.5m, a combination of a £9.5m term loan, £4m overdraft and £23m revolving credit facility, split £22.8m with the Royal Bank of Scotland and £13.7m with Silicon Valley Bank.  In addition to the signed debt facilities the 6PM bond is a Maltese Stock Exchange bond issued in 2015 pre-acquisition at a nominal value of €13m, it is repayable in 2025 and has a coupon rate of 5.1%.

Deferred income, representing invoiced maintenance and SaaS contracts yet to be recognised in revenue stood at £19.8m (2016: £15.9m).  An increase of £4.9m is due to acquisitions in the period.  Accrued income, representing future cash flows, increased to £23.0m (2016: £18.8m).  The increase in prior year includes £1.2m due to acquisitions. 

£15.1m of accrued income relates to licences and services that have been delivered to local authorities and revenue recognised but the customer is paying for the licence and services over a period of typically 3 to 5 years.  This will be future cash inflows for the Group.  The balance of accrued income is service revenue where work has been completed but the project has not yet reached an invoicing milestone and will convert to cash in the short term.

Jane Mackie

Chief Financial Officer

28 February 2018

Principal Risks and Uncertainties

Risk identification and management continues to be a key role for the Board. Risk management strategy is led by the Board; thereafter management of risk is judiciously managed through dedicated expert professionals in the business.  

Risk management processes and internal control procedures are established within business practices across all levels of the organisation. Risk identification, assessment and mitigation are performed across Idox with a more detailed assessment at operational level, and through Board led assessment of strategic and market risk.

Board: The Board has overall responsibility for Idox's risk management, processes and reporting.  Risk management processes and internal control procedures are the ultimate responsibility of the Board.

Audit Committee: The Audit Committee has responsibility for assessing and challenging the robustness of the internal control environment. It directs and reviews local management, internal audit and Group finance reports on internal control and risk management throughout the year, and reports the principal risks to the Board.

Risk Committee: The Risk Committee meets quarterly and discusses the Group's strategy, identifies the principal risks to the strategy and agrees mitigating actions.

Internal Audit: The Group's internal audit function performs regular audits in country offices to assess culture, financial controls in accordance with local regulatory requirements and Group controls.

Local Management: Annual comprehensive risk reviews are performed by local management teams and reported to the Risk Committee.

Risk management and internal controls provide reasonable but not absolute protection against risk. Risk appetite is not static and is regularly assessed by the Board to ensure it continues to be aligned with the Group's goals and strategy.

Risk Profile

New and existing risks were identified and assessed during 2017. Executive management, the Risk Committee and the Board performed further analysis to prioritise these risks, with a focus on those principal risks posing the highest current risk to the achievement of the Group's objectives. All risks facing Idox were consolidated onto a risk heat map.

Risks included on the heat map are monitored more closely by executive management, the Risk Committee and the Board. Whilst these principal key risks represent a significant portion of the Group's overall risk profile, the executive management and the Risk Committee continue to monitor the universe of risks to identify new or emerging risks as well as any changes in risk exposure. The risk profile continued to change throughout the year, in part as a result of the acquisition of the 6PM Holdings plc group of companies and Halarose Holdings Limited.  We now have operations in Malta, Macedonia and have more exposure to the health sector and increased exposure in the elections space.

Embedding the Risk Culture

Throughout the Group, risk management is an evolving process. This is recognised by ongoing training and advice by divisional and business unit risk representatives, supported by the central risk and assurance team, best practice sharing, gap analysis and internal benchmarking. Successful training and communication help build a culture and ability to further embed processes and procedures throughout the organisation. A more deeply embedded risk management culture supports long-term value creation for all stakeholders.

The principal risks involved in delivering the Group's strategy are actively managed and monitored against our risk appetite as follows:

Signed on behalf of the Board by:

Richard Kellett-Clarke

Chief Executive Officer

28 February 2018

Directors Report

The Directors are pleased to submit their report and audited financial statements for the year ended 31 October 2017.

Results and Dividends

The Group's audited financial statements for the year ended 31 October 2017 are set out on pages 44 to 84.  The Group's profit for the year after tax amounted to £2.6m (2016: £11.8m).  The Directors paid a dividend of 0.650 pence per share in the first half of the 2017 financial year, in respect of the year ended 31 October 2017.  The Directors will propose, at the forthcoming AGM, a final dividend of 0.655 pence per share in respect of the year ended 31 October 2017.

Details of future developments and research and development activities are outlined in the Strategic Report.

Post balance sheet events

On 6 February 2018, the Group acquired the entire share capital of Atlas Adviesgroep Twente B.V. ("Atlas") for a total consideration of €270,000 (£237,000). Atlas is a small grants consultancy business based in the Netherlands, working predominantly with local and regional government bodies, and will complement the Group's existing grants business in the Netherlands.

Directors and their Interests

The Directors who served during the year and their beneficial interests (including those of their immediate families) in the Company's 1p ordinary share capital were as follows:

* 232,250 (2016: 200,000) of these shares are held through a Self-Invested Pension Plan.

** 2,761,667 (2016: 2,761,667) of these shares are held through Self-Invested Pension Plans and 11,400,001 (2016: 9,762,900) shares are held through certain members of his family and a family trust.

*** 111,300 (2016: 111,300) of these shares are held through a Self-Invested Pension Plan and 59,250 (2016: 59,250) shares are held through certain members of his family.

In addition to the shareholdings listed above, certain Directors have been granted options over ordinary shares.  Full details of these options are given in the Report on Remuneration on pages 23 to 24.

Details of the Directors' service contracts can be found in the Report on Remuneration on pages 23 to 24.

Insurance for Directors and Officers

The Company has purchased and maintains appropriate insurance cover against legal action brought against Directors and Officers.

Substantial Shareholdings

As at 31 October 2017, the Company was aware of the following interests in 3% or more of its issued share capital:

Shareholder                                                             Number of shares       % Holding

Liontrust Asset Management                                            56,482,819           13.68%                                 

Investec Wealth & Investment                                           38,233,418           9.26%

Kestrel Partners                                                                  35,344,301           8.56%

Hargreave Hale Investment Managers                           30,490,187           7.38%

Herald investment Management                                      29,909,483           7.24%

Hargreave Hale Stockbrokers                                          21,008,808           5.09%

Charles Stanley                                                                   18,801,074           4.55%

Highclere International Investors                                     17,715,623           4.29%

Living Bridge EP LLP                                                          17,543,409           4.25%

Richard Kellett-Clarke                                                        14,161,668           3.43%

Transaction in own shares

During the year, the Group did not purchase any of its own ordinary shares of 1p to be held as treasury shares in order to satisfy future employee share option exercises.

During the year three share option exercises were satisfied using treasury shares. These exercises combined used a total of 64,000 treasury shares.

The maximum number of shares held in treasury at any time during the year was 3,055,219, which had a cost value of £1,270,634. The current number of shares held in treasury is 1,491,219.

Health, Safety and Environmental Policies

The Group recognises and accepts its responsibilities for health, safety and the environment (H,S&E) and has a dedicated team, which provides advice and support in this area.  The team members regularly attend external H,S&E courses and internal reviews are performed on a regular basis to ensure compliance with best practice and all relevant legislation.   In the current year, Idox has focused on achieving ISO 45001: 'Health and Safety Management' Standard.

Disabled Employees

Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes and abilities of the applicant concerned. 

In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged.  It is the policy of the Group that the training, career development and promotion of disabled employees should, as far as possible, be identical with that of other employees. 

Employee Consultation

The Group consults employees through the National Company Council (NCC).  The NCC sits regularly during the year and is made up of representatives voted on the Council by employees.  An employee consultation policy is also in place.  Employees are encouraged to present their views and suggestions in respect of the Group's performance and policies.  In addition, the Group has an intranet, which facilitates faster and more effective communication.

An Employee Share Investment Trust is in place to provide employees with a tax efficient way of investing in the Company. The Company purchases matching shares, which become the property of the employee after a three year vesting period.

Financial Risk Management Objectives and Policies

The Group uses various financial instruments which include cash, equity investments, bank loans and items such as trade debtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group's operations.

The main risks arising from the Group's financial instruments are credit risk, liquidity risk, exchange rate risk and interest rate risk. The Directors review these risks on an ongoing basis. This policy has remained unchanged from previous years.  Further information on financial risk management is disclosed in note 22 of the Group accounts.

Credit Risk

The Group's principal financial assets are cash and trade receivables. The credit risk associated with cash is limited as the counterparties have high credit ratings assigned by international credit-rating agencies. The principal credit risk arises therefore from its trade receivables.

In order to manage credit risk, the management review the debt ageing on an ongoing basis, together with the collection history and third-party credit references where appropriate.

Liquidity Risk

The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.

Exchange Rate Risk

The Group monitors its exposure to exchange rate risk on an ongoing basis.  The Group has minimal exposure to foreign exchange risk as a result of natural hedges arising between sales and cost transactions.

Interest Rate Risk

The Group's bank borrowings bear interest at rates linked to LIBOR.  On a quarterly basis, the Board reviews the LIBOR rate and discuss whether it is considered necessary to set up hedges to protect against interest rate movements.

Going Concern

The Directors, having made suitable enquiries and analysis of the accounts, consider that the Group has adequate resources to continue in business for the foreseeable future. Whilst the Consolidated Balance Sheet shows net current liabilities, £19.8m of current liabilities relates to deferred income which does not convert to cash payable.   For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. In making this assessment, the Directors have considered the Group's budget, cash flow forecasts, available banking facility and levels of recurring revenue.

The Board highlighted to the lenders that due to a limitation of scope in relation to the 6PM sub-group the audit would result in a qualified audit opinion.  It was explained to the lenders that due to poor record keeping in the early months of the period within 6PM there is a limitation of scope on 6PM revenue and deferred revenue and the books and records of the three immaterial subsidiaries, particularly relating to the period up to July 2017 when 6PM was integrated into Idox finance and the record keeping has been improved.  Following discussions with the Board the bank was satisfied that, whilst this is technically a default, they have given an advance waiver to cover the period of signing the statutory accounts.

Auditor

A resolution to reappoint an Auditor and to authorise the Directors to agree their remuneration will be placed before the forthcoming Annual General Meeting of the Company.

By order of the Board                                         

Jane Mackie                                                       

Chief Financial Officer                       

28 February 2018                                                                               

Independent Auditor's Report to the Members of Idox plc

Qualified opinion

Our opinion on the group financial statements is modified

We have audited the group financial statements of Idox Plc for the year ended 31 October 2017, which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

In our opinion, except for the possible effects of the matters described in the Basis for qualified opinion section of our report, the financial statements:

·      give a true and fair view of the state of the group's affairs as at 31 October 2017 and of its profit for the year then ended;

·      have been properly prepared in accordance with IFRSs as adopted by the European Union; and

have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for qualified opinion

With respect to revenue and deferred income within the sub-group headed by 6PM Holdings plc, having balances of £7.6 million and £4.3 million respectively, the audit evidence available to us was limited because 6PM Holdings plc's group, which was acquired in February 2017, had a history of poor record keeping until it was fully integrated into the Idox plc Group in July 2017 and the record keeping issues addressed. Owing to the nature of the company's records, we were unable to obtain sufficient appropriate audit evidence regarding these elements of revenue and deferred income by using other audit procedures. In addition, with respect to consolidated revenues of £0.4 million and consolidated net liabilities of £0.2 million in three of 6PM Holdings plc's subsidiaries, the audit evidence available to us was also limited because the accounting records of these three subsidiaries was poor. Owing to the nature of the company's records, we were unable to obtain sufficient appropriate audit evidence regarding these matters by using other audit procedures. As a result of the poor record keeping and poor accounting records, we were unable to determine whether any adjustments might have been found necessary in respect of these two matters.

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the 'Auditor's responsibilities for the audit of the group financial statements' section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.

Who we are reporting to

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

·      the directors' use of the going concern basis of accounting in the preparation of the group financial statements is not appropriate; or

·      the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

Overview of our audit approach

·      Overall materiality: £646,000, which represents approximately 3.5% of the group's earnings before interest, tax, depreciation and amortisation (EBITDA)

·      Key audit matters were identified as revenue recognition, carrying value of goodwill, business combinations - acquisitions, valuation of capitalised development expenditure, deferred income completeness, trade receivable existence and accrued income existence

We performed full scope audit procedures on the financial statements of Idox plc and on the financial information of Idox Software Limited, McLaren Software Limited, McLaren Software Inc and 6pPM Holdings plc.  This covered 85% of revenue and 91% of EBITDA for the year. 

Key audit matters

The graph below depicts the audit risks identified and their relative significance based on the extent of the financial statement impact and the extent of management judgement.

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the group financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the group financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Our application of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in evaluating the results of that work.

We determined materiality for the audit of the group financial statements as a whole to be £786,000 at the planning stage, which was 3.5% of the group's EBITDA. This benchmark is considered the most appropriate because it is the key performance measure applied by users of the financial statements.

Following the reductions in EBITDA notified to the market, we revised our materiality for the audit of the group financial statements as a whole to £646,000 to reflect the adjustments in EBITDA as a result of the adjustments identified by management

Materiality for the current year is lower than the level that we determined for the year ended 31 October 2016 to reflect the reduction in EBITDA performance despite the strategic acquisitions.

We use a different level of materiality, performance materiality, to drive the extent of our testing and this was set at 75% of financial statement materiality for the audit of the group financial statements at the planning stage.  Following the issues identified by management relating to revenue recognition, we revised our performance materiality level for revenue recognition, accrued income existence, trade receivable existence and valuation of capitalised development expenditure testing to 40% to reflect the revised risk profile around these balances.

The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential uncorrected misstatements for those items for which we used the reduced 40% performance materiality level.

We also determine a lower level of specific materiality for directors' remuneration, related party transactions and auditor's remuneration.  

We determined the threshold at which we will communicate misstatements to the audit committee to be £32,300. In addition, we communicate misstatements below that threshold that, in our view, warrant reporting on qualitative grounds.

An overview of the scope of our audit

Our audit approach was a risk-based approach founded on a thorough understanding of the group's business, its environment and risk profile and in particular included:

·      evaluation by the group audit team of identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality. We considered each component's significance as a percentage of the group's total assets, revenues and EBITDA or significance based on qualitative factors, such as concerns over specific components;

·      interim visit, evaluation the group's internal controls environment including its IT systems and controls;

·      components were identified as significant based on a detailed consideration of each component, quantitative financial considerations,  risks identified at the component level and other qualitative factors; 

·      there were initially no significant changes in scope from the prior year audit beyond the additional procedures required relating to the acquisition of 6PM Holdings plc as noted above.  Due to matters identified by management relating to revenue recognition, we reduced our performance materiality during the audit process;

·      analytical procedures were performed over remaining non-significant components;

·      in line with the central Idox plc finance function, all procedures were performed by the group engagement team, and therefore no group instructions or component visits were deemed necessary; and

·      the graphs below set out the total percentage coverage of full-scope audit procedures of revenue, accrued income, capitalised development expenditure and trade receivable existence below. We gained 100% full scope coverage over the carrying value of goodwill and business combinations - acquisitions key audit matters.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the group financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the group financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement of the group financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Our opinion on other matters prescribed by the Companies Act 2006 is unmodified

In our opinion, based on the work undertaken in the course of the audit:

·      the information given in the strategic report and the directors' report for the financial year for which the group financial statements are prepared is consistent with the group financial statements; and

the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report under the Companies Act 2006

In the light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.

Matters on which we are required to report by exception

In respect solely of the limitation on our work relating to revenue and deferred income, and poor record keeping, described above:

·        we have not obtained all the information and explanations that we considered necessary for the purpose of our audit. 

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

·        certain disclosures of directors' remuneration specified by law are not made.

Responsibilities of directors for the financial statements

As explained more fully in the directors' responsibilities statement set out on page 28, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of group financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the group financial statements, the directors are responsible for assessing the

group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the group financial statements

Our objectives are to obtain reasonable assurance about whether the group financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these group financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Other matter

We have reported separately on the parent company financial statements of Idox plc for the year ended 31 October 2017. That report includes details of the parent company key audit matters; how we applied the concept of materiality in planning and performing our audit; and an overview of the scope of our audit.

Simon Bevan

Senior Statutory Auditor

for and on behalf of Grant Thornton UK LLP

Statutory Auditor, Chartered Accountants

London

28 February 2018

Consolidated Statement of Comprehensive Income for the year ended 31 October 2017

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

Consolidated Balance Sheet at 31 October 2017