LEARNING TECHNOLOGIES GROUP PLC Learning Technologies Group plc
FULL YEAR RESULTS 2018
Increased recurring revenue, excellent margins and strong cash generation
Learning Technologies Group plc ('LTG' or the 'Company'), the leading integrated digital learning and talent management services and technologies provider, is pleased to announce audited results for the year ended 31 December 2018.
Strategic highlights
· Fundamental transition towards software licence model delivering high margin, recurring revenues
· Transformational PeopleFluent acquisition integrated ahead of schedule and expectations
· Acquisition of Watershed brings innovative data analytics capability in-house giving clients compelling insights into learning programs
· 56% of revenue derived from the US; the largest global market for learning and talent solutions
· New strategic goal announced in November 2018, to achieve run-rate revenue of £200 million and run-rate EBIT of at least £55 million by the end of 2021
Financial highlights
· Revenue up 83% to £93.9m, with recurring revenue up to 68% (2017: 38%) primarily driven by PeopleFluent acquisition
· Software & Platforms organic revenue (64% of Group revenue) up 9%, on a like for like basis, reflecting growth across all software businesses
· Content & Services organic revenue (excluding CSL) on a like for like basis, declined 8% against a particularly strong prior year which had delivered 21% organic growth
· Profit ahead of expectations, with EBIT up 104% to £27.2m
· Strong margin progression, with EBIT margins up 300 basis points to 29%
· Adjusted diluted EPS up 68% to 3.232
· Compound annual growth rate of 48% in adjusted diluted EPS in five years since listing on London Stock Exchange
· Proposed full year dividend up 67% to 0.50 pence per share
· Strong balance sheet and debt facility supports pipeline of attractive international acquisition opportunities to consolidate the corporate learning and talent markets· Excellent cash generation, resulting in net debt of £11.5m
· Investment for long-term, organic growth: run-rate R&D spend of c£17.5m represents c19% of Software & Platforms revenue
Current trading and outlook:
· Good start to 2019 with trading in line with management expectations
· Continuing excellent cash generation; net debt at end February 2019 down to c£5.0m
· Improving content projects order book and a high proportion of recurring revenue underpins the Board's confidence for 2019 and beyond
Commenting, Jonathan Satchell, CEO of LTG, said:
'2018 was an important year for LTG. We continued our evolution towards a predominantly software licence model delivering high margin recurring revenue, the majority of which comes from the US. We are delighted with the progress made at PeopleFluent which has extended our offering beyond corporate digital learning, into talent management, and underlined our track record of improving the operating model of businesses we acquire.
We have made a good start to the year, which supports our confidence in further progress during 2019, and achieving our new strategic goal of run-rate revenues of £200m and run-rate EBIT of at least £55m by the end of 2021. This is supported by robust underlying performance, a strong balance sheet, and a healthy pipeline of attractive acquisition opportunities.'
Financial summary:
2018 | 2017 | Change | |
Revenue | £93.9m | £51.4m | +83% |
Recurring Revenue % | 68% | 39% | |
Revenue Outside UK % | 74% | 45% | |
Adjusted EBIT | £27.2m | £13.3m | +104% |
Statutory PBT | £3.4m | (£0.0m) | |
Adj. Diluted EPS | 3.232p | 1.926p | +68% |
Proposed Final Dividend per share | 0.35p | 0.21p | +67% |
Net (Debt)/Cash | (£11.5m) | £1.0m |
Analyst and investor presentation
LTG will host an analyst and investor presentation at 8.30 a.m. today, Tuesday 19 March 2019, at the offices of Numis.
Enquiries:
Learning Technologies Group plc Jonathan Satchell, Chief Executive Neil Elton, Chief Financial Officer | +44 (0)20 7402 1554 |
Numis Securities Limited Stuart Skinner / Michael Wharton (Nominated Adviser) Ben Stoop (Corporate Broker) | +44 (0)20 7260 1000 |
Goldman Sachs International (Joint Corporate Broker) James A Kelly Adam Laikin | +44 (0)20 7774 1000 |
FTI Consulting(Public Relations Adviser) Rob Mindell / Jamie Ricketts / Chris Birt | +44 (0)20 3727 1000 |
About LTG
LTG is a leader in the growing workplace digital learning and talent management market. The Group offers end-to-end learning and talent solutions ranging from strategic consultancy, through a range of content and platform solutions to analytical insights that enable corporate and government clients to meet their performance objectives.
LTG is listed on the London Stock Exchange's Alternative Investment Market (LTG.L) and headquartered in London. The Group has offices in Europe, North America and Asia-Pacific.
Chairman's Statement
The Board is delighted to report a year of increased recurring revenue, strong margins and cash generation for Learning Technologies Group plc ('LTG') in 2018.
The year was notable for the transformational acquisition of PeopleFluent Holdings Corp ('PeopleFluent') in May 2018. The addition of PeopleFluent has given LTG a strong foothold in the adjacent talent software market, complementing the Group's strengths in learning software, content and services, whilst substantially deepening the Group's presence in the US market which accounted for 56% of Group revenues in 2018. PeopleFluent was successfully integrated into the Group ahead of budget and expectations.
In November 2018 LTG also acquired the remaining 73% of Watershed Inc ('Watershed') that it did not already hold. Watershed is a leader in the corporate learning analytics market. Its powerful SaaS platform is used by an increasing number of large corporates and the Board views this as an important strategic capability within LTG's product offering.
Revenues increased by 83% to £93.9 million (2017: £51.4 million) primarily driven by the acquisition of PeopleFluent and a full-year contribution by NetDimensions (acquired in March 2017). LTG delivered strong like-for-like organic revenue growth, on a constant currency basis, of 9% in our Software & Platforms division and saw organic revenues (excluding the large one-off CSL contract) decline by 8% against tough prior year comparatives when we had delivered exceptional 21% organic growth. We are focused on delivering strong organic revenue growth over the medium term, investing substantially in R&D and business development initiatives as well as incentivising staff through annual bonuses, sales commissions and Long-Term Incentive Plans ('LTIPs') linked to revenue as well as profit growth.
Largely as a result of the significant increase in the proportion of Group revenues now derived from software licence and support contract sales, recurring revenues increased from 38% in 2017 to 68% in 2018 and represent more than 70% of Group revenues on an annualised basis. This gives the Group improved visibility over future revenues.
Adjusted EBIT (refer to the Strategic Review section for definition) increased by 104% to £27.2 million (2017: £13.3 million) and adjusted EBIT margins have improved from 26.0% in 2017 to 29.0% in 2018 and we expect sustainable adjusted EBIT margins in the high twenties in future periods. Adjusted diluted EPS increased by 68% to 3.2 pence (2017: 1.9 pence). In the five years since LTG listed on the London Stock Exchange the Group has delivered compound annual growth of 48% in adjusted diluted EPS.
Corporate Governance
During the year Harry Hill, Non-executive Deputy Chairman, retired from the Board. Harry had been on the Board since the formation of LTG, having founded In-Deed Online PLC before its merger with Epic Group Limited. Dale Solomon, Chief Operating Officer, also stepped down from the Board. Dale had been with the business since 2010 and provided invaluable insight and drive in helping to grow and transform the Group, most recently leading the integration of PeopleFluent. The Board thanks Harry and Dale for their respective contributions and wishes them the very best for the future.
Aimie Chapple joined the Board as a Non-executive Director in September 2018, adding deep industry experience in the talent and consulting sectors. Aimie was a senior partner at Accenture and during a 25-year career in consulting led practices in management consulting, human performance and innovation. She has extensive experience of operating in the US and UK markets. Aimie chairs the Remuneration Committee and sits on the Audit Committee.
The Board is actively searching for a fourth Non-executive Director and I look forward to updating shareholders later this year.
With effect from September 2018 LTG adopted the QCA Corporate Governance Code. Further details are provided in the Corporate Governance section of this report.
Dividend and Annual General Meeting
In light of the results for 2018 and to demonstrate our confidence in the prospects for the Group in 2019, the Board is recommending an increased final dividend of 0.35 pence per share (2017: 0.21 pence per share), giving a total dividend for the year of 0.50 pence per share (2017: 0.30 pence per share) representing a 67% annual increase. This final dividend is subject to shareholder approval at the forthcoming Annual General Meeting to be held on 5 June 2019.
If approved, the final dividend will be paid on 28 June 2019 to all shareholders on the register at 7 June 2019.
Current trading and outlook
LTG has made a fundamental transition in 2018 towards a software-led, licence model delivering high margin recurring revenue. The acquisition and successful integration of PeopleFluent has been central to this shift, extending LTG's offering into talent management and significantly growing the Group's US revenues. This could not have been achieved without the dedication and professionalism of all our staff across the globe and on behalf of the Board I would like to thank them for their efforts during the year.
A good start to the current year, with trading in line with management expectations, and an improving content projects order book supports our confidence in further progress in 2019. This is underpinned by a strong balance sheet, excellent cash generation, a high proportion of recurring revenues, and a healthy pipeline of attractive acquisition opportunities.
The Board expects to report enhanced progress during 2019 and considers LTG well placed to achieve our new strategic goal of run-rate revenues of £200m and run-rate EBIT of at least £55m by the end of 2021.
Andrew Brode
Chairman
18 March 2019
Strategic Review for the year ended 31 December 2018
Chief Executive's Review
Market Overview
In an increasingly fast-moving global service-based economy, organisations are becoming more aware of the benefit of improvements in staff performance to their businesses, particularly in efficiency, customer service and profitability. There is increasing corporate demand for digital services to develop staff.
The global corporate training market is estimated to be worth approximately $365 billion and includes many product and service offerings ranging from traditional formats such as classroom training through various types of learning content and delivery platforms. LTG is focused on the outsourced digital learning segment of this market which is disrupting the more traditional methodologies and estimated to be growing at approximately 10% per annum. The industry is highly fragmented, comprising a multitude of small operators with each offering a limited range of services. There are few providers that are able to offer clients truly comprehensive services, which meet their evolving requirements for data-driven solutions, and have the scale and in-depth experience to service large corporations and government organisations.
The complementary talent market is estimated to be worth more than $6 billion and growing at approximately 9% per annum. Talent management software refers to the wide array of integrated applications that companies use for recruitment, performance management, training & development, and compensation management of employees. Talent management software plays a very important role in keeping track of individual employees from the date of hiring to the complete employee lifecycle in the organisation, facilitating employee engagement and retention as well as helping companies align their business strategies with the professional development of their workforce.
Strategic Goals
In November 2018 the Group set out its new strategic financial objectives for the end of 2021. This is the third set of targets LTG has issued since joining the AIM market five years ago. Our first target was run-rate revenues of £50 million and EBITDA margins of 20% by the end of 2018, which we met one year ahead of plan. In October 2017 LTG announced new strategic objectives to the end of 2020, to double run-rate revenues to £100 million and for run-rate EBIT to exceed £25 million, achieved without significant dilution to shareholders. Following the acquisition of PeopleFluent in May 2018, the 2020 goal was achieved more than two years ahead of plan with the acceleration aided by a placing of new shares, equivalent to c15% of issued share capital.
LTG's new goal is to achieve run-rate revenues of £200 million and run-rate EBIT of at least £55 million by the end of 2021 again through a combination of organic growth and strategic acquisitions that complement the current business. It is the intention of the Board to finance any acquisitions and research & development that support the outlined revenue and EBIT targets through the use of internally generated operating cash flows and prudent debt financing.
In addition, we will continue to evaluate strategic acquisitions of scale that may require shareholder financing and would be additive to these targets. Strict criteria will continue to be used in assessing all acquisitions including the financial effects, integration risk and prospective returns.
Investment Case
The market opportunity for LTG is attractive, driven by our clients' desire to close the gap between current and future workforce capability.
Our aim is to build a leading end-to-end workplace digital talent and learning solutions provider, to partner global clients through the creation, implementation and maintenance of their integrated talent and learning strategies. Working as a strategic partner to our clients, we deliver unparalleled depth in talent management solutions, learning content and technologies, from enterprise platforms to personalised and immersive learning experiences.
Our intention is to leverage the technical and professional capabilities we have already developed by deepening our presence in specific geographical markets, particularly the US; expanding our offering in highly regulated, high consequence vertical markets such as healthcare, energy and aviation; and broadening and deepening our offering to existing customers.
LTG aims to deliver strong earnings growth over the medium to long term through a combination of top line organic growth, appropriate cost control, investment in innovation, robust operating cash conversion and strategic M&A as well as improving the operating business models and performance of the businesses that we acquire.
Strategy and Approach
LTG aims to create a group of market-leading businesses providing complementary services in the growing learning and talent technologies sectors to form an international business of size and scale that is able to meet the demanding expectations of corporate and government customers. This strategy is being delivered through a mixture of 'best in class' acquisitions that will help us create a comprehensive solution for our customers, strategic partnerships to deliver 'blended' solutions combining digital and more traditional forms of learning, as well as through targeted investment in internally-generated intellectual property and the extension of best working practices to deliver organic growth.
As the pace and progress of technology and innovation increases, corporates and government bodies are realising that to succeed, they must invest in programs and technologies to manage change, develop skills, grow knowledge, and instil desired attitudes and behaviours in their staff and their 'extended enterprises', including suppliers and partners. To do so, their talent strategies are increasingly focusing on learning. By combining PeopleFluent's talent software with LTG's learning platforms and services, the Group offers a compelling suite of industry leading solutions.
We continue to pursue our strategy of helping organisations adopt learning at a strategic level. 'Moving learning to the heart of business strategy' is achieved through our end-to-end service offering which enables us to partner with global clients throughout the creation, implementation and maintenance of their learning strategies. We deliver transformational results through learning innovation and the effective use of learning technology. Our recent acquisition of market-leader Watershed completes an important part of the picture, enabling rich visualisation of client's learning and talent, which in turn enables future people-related investment decisions to be data based.
Each of our Group businesses brings a range of capability or sector specialisms that allow us to build on this strategic vision. The Group's offering comprises two principal divisions: Software & Platforms and Content & Services.
Investment in innovation for long-term growth
Over the past three years LTG has substantially grown its Software & Platforms division. Most of LTG's software solutions are well-established products developed over many years and enjoying high customer retention rates. The Group's policy is to work closely with its customers to understand their requirements in developing LTG's product roadmap and the Group undertakes regular business and market surveys. LTG has also developed some new ground-breaking software products including gomo's authoring and hosting solutions, Watershed's learning analytics platform, and Rustici's Content Controller.
The Group currently invests approximately £17.5 million per year on product development and software engineering which represents approximately 17% of related annualised platform revenues. Of this annual investment approximately £5.8 million (33%) is capitalised as R&D.
Following the integration of PeopleFluent into the Group, management have reviewed and prioritised the Group's product development roadmap in conjunction with feedback from customers. Key developments already in train or planned over the next year include:
· Developing the PeopleFluent 'Productivity Platform' to allow for greater integration across the component elements of the PeopleFluent talent suite and an improved user experience
· Opening up LTG's software platforms through APIs to allow for easier integration with other client business systems allowing them to operate LTG's best of breed point solutions as part of their overall systems architecture
· Integration of gomo and Watershed SaaS platforms into the PeopleFluent talent suite
· Improved functionality and user experience for PeopleFluent Talent Acquisition software
· Launch of a new Learning Experience Platform ('LXP') to complement the Group's offering in the developing LMS market, building on the functionality of gomo learning and gomo video, Rustici's SCORM Engine and Watershed, plus additional features
· Launch of an Affirmity workforce diversity analysis service in EMEA, driven by its US market-leading software platform that will build benchmarks for gender (pay equity) and other key diversity issues
The Group also continues to invest in its Content & Services division offering, whether that be as part of Preloaded's award winning work in VR and AR solutions, or LEO's strategic learning programs, combining 'blended' solutions incorporating products and services from within the Group or alongside strategic partners. For the third year in a row LTG was identified by independent industry analyst Fosway as the industry's strategic leader in digital learning.
Divisional review
Software & Platforms
The Software & Platforms division comprises on-premise and SaaS licenced product solutions as well as hosting, support and maintenance services.
Overview and performance
In 2018 Software & Platforms accounted for £59.8 million or 64% of Group revenues, 70% on an annualised basis, up from £20.9 million (41%) in 2017 aided by strong organic growth of 9% and the acquisitions of PeopleFluent and Watershed. The Software & Platforms division contributes 90% of the Group's recurring revenues. Adjusted EBIT margins decreased from 37% to 33% reflecting the inclusion of PeopleFluent for the 7 months post-acquisition.
The Software & Platforms division has seen a dramatic change during 2018. PeopleFluent's talent software solutions have been merged with NetDimensions' Learning Management System ('LMS') under the PeopleFluent brand. The combined offering delivers a best-of-breed integrated platform solution encompassing talent acquisition (i.e. recruitment and onboarding), talent management (performance, succession, compensation and talent mapping) and a market leading LMS. The PeopleFluent product suite is particularly suited to complex environments where staff and contractors are based across multiple locations, where multiple languages and other localisations are required, and which operate in regulated industries where security, auditability and configurability are important requirements. The combined business enjoys annualised revenues of approximately $85 million and is headquartered in the US. As stated at the time of the acquisition not all of PeopleFluent's products have the same high retention rates that LTG enjoys amongst its other product offerings. Management guided that it had an ambitious goal to arrest the decline during 2019 and build the foundations for net sales growth in 2020. We believe that with our focus on, and substantial investment in product development, and the addition of other LTG products and services we are on track to achieve this. We are already seeing the power of LTG's combined offering resonate with clients through improved retention rates and new client wins.
Rustici, the acknowledged global leader in SCORM related solutions has developed a series of software products that allow LMS providers to manage SCORM effectively and has seen great success with the latest addition to their portfolio, Content Controller. With Rustici being an expert in systems connectivity they are an integral part of the Group's initiatives to bring learning and other business applications together elegantly, enabling clients to use an open systems architecture to benefit from best practice 'point solutions' rather than rely on broad but shallow 'one-size fits all' solutions. Rustici completed the third and final year of its acquisition-related earn-out during which time revenues grew by a CAGR of 27%.
LTG has developed its own cloud-based multi-device authoring tool, gomo, which enables clients to create their own e-learning content and to collaborate and publish rich and compelling learning content to a variety of platforms (including PCs, tablets and smartphones) in real-time. gomo has won a series of significant contracts during 2018 and through its SaaS-based annual licences is achieving retention rates in excess of 80% and grew new sales by 37% during the year. gomo's offering was substantially enhanced during 2018 with the incorporation of KZO (now renamed 'gomo video'), an advanced video content platform acquired as part of PeopleFluent, a software tool that enables users to collaborate, share comments and auto-translate audio into multiple written languages. The market has reacted positively, and the first cross-sells have already been achieved including ComCast, Slaughter & May and Shell.
During the year LTG acquired the remaining 73% of Watershed. Watershed, headquartered in Nashville, is an early stage SaaS business that focuses on developing learning analytics that provide actionable insights to customers who want to adapt their learning strategy, creating more effective learning experiences and ultimately generating verifiable business results. After more than 3 years of product development Watershed now has a robust platform used as part of large scale global deployments by many large corporates including Caterpillar, Verizon and PwC. Retention rates during 2018 were above 90%. Watershed is targeting to break even in 2019.
Affirmity is the renamed workforce compliance and diversity business which previously operated under the PeopleFluent brand. Affirmity is a platform and services business enabling US corporates to monitor their compliance with federal affirmative action plans. The business is the leader in the US market accounting for approximately a quarter of US affirmative action plans produced and, given the increased focus on diversity issues in the workplace such as gender pay gap, LTG is looking to grow this business in the US and internationally.
VectorVMS ('Vector') is the new name for PeopleFluent's vendor management services business, which previously operated under the PeopleFluent brand. Vector's platforms business allows corporates to outsource the recruitment, onboarding and payment of their contractor workforce. We are looking to cross-sell other LTG services through Vector in 2019 and to answer client demand for 'Total Talent' solutions as businesses increasingly move towards a 'gig' economy.
Content & Services
The Content & Services division comprises strategic consulting, content creation, and platform development services and is delivered primarily through the LEO Learning ('LEO'), Eukleia and Preloaded business units.
Overview and performance
LEO provides the Group's strategic consultancy that works with clients to understand their requirements, build strategic roadmaps and then help them implement the delivery of their learning programs. LEO is also one of the world's leading Moodle platform developers and hosting and support partners and has offices in London, Brighton and Sheffield in the UK, New York and Atlanta in the US, and through its Brazilian investment, in Rio de Janeiro and Sao Paulo.
Working across a broad range of industries, LEO has developed sector expertise particularly in areas such as automotive, retail and luxury brands and during 2018 has seen particular growth in the oil and gas sector.
Through its Eukleia business LTG has also acquired a specialist expertise in governance, risk and compliance services particularly in the financial services sector which are delivered from its offices in London and New York.
Preloaded, the Group's BAFTA award-winning agency, is at the forefront of immersive learning content, or more particularly 'play with purpose'. In early 2018 it partnered with the BBC and Google to produce the 'BBC Earth: Life in VR' experience to coincide with the launch of Google's DayDream View headset and in early 2019 it has partnered with the BBC again to develop an educational Augmented Reality ('AR') experience for Magic Leap, a pioneer in spatial computing via an AR headset. Preloaded is also working with other LTG clients to develop immersive learning experiences.
The majority of Content & Services projects are delivered on a non-recurring, fixed-price basis. Through its well-tried systems and processes LTG constantly monitors the delivery of projects to ensure that they are delivered on time, to budget, and that they meet or exceed clients' expectations and as a result achieves consistent and industry leading gross margins.
In 2018 the Content & Services division accounted for £34.0 million or 36% of Group revenues (2017: £30.5 million; 59%) and 30% on an annualised basis. Excluding the acquisitions of PeopleFluent and Watershed, the Civil Service Learning ('CSL') contract, and adjusting revenues as if all businesses that were part of the Group in 2017 reported on a full year basis, organic revenue on a constant currency basis declined by 8% from £25.4 million to £23.5 million. Adjusted EBIT margins increased from 18% to 21%.
£0.7 million of the year-on-year revenue decline was accounted for by a reduction in professional services revenue generated from the NetDimensions business. This followed an improvement in working practices that dramatically increased the efficiency and profitability of the department, delivering solutions more quickly, and for less cost to customers. Management believes that the more appropriate delivery times, and improved customer service levels are a key contributor to the enhanced customer retention rates seen in the past year.
The balance of the year-on-year revenue decline of £1.2 million was accounted for by the LEO, Eukleia, and Preloaded business units that had generated significant growth in 2017 and therefore faced tough prior year comparatives coming into 2018. Over a 2-year period the Content & Services division has delivered c6% compound annual growth in revenue. Projects in the Content & Services division tend to be sold and delivered on a relatively short sales cycle and we have seen encouraging sales in Q4 2018 and Q1 2019 which will be delivered in 2019.
As anticipated there was also a £3.3 million comparative revenue decline accounted for by the cessation of revenue from the UK Civil Service ('CSL') contract in H1 2018. During 2016 LEO, in partnership with KPMG LLP, completed the roll-out of a new core-curriculum to the entire UK Civil Service. This involved the development of 15 core-curriculum areas ranging from leadership and management to EU practices and including 'blended' course design encompassing face-to-face training and e-learning content. The content was designed, built and launched in less than a year as part of a three-year contract to deliver learning to over 400,000 civil servants. LTG benefited from substantial revenues in 2017 as the courses were launched and adopted faster than management's expectations and as a result of the revenue sharing structure of the partnership and the accelerated revenue generation during the prior year the final revenue share contributions were received in H1 2018. The CSL contract runs until the end of 2019 and may be extended by a further year but the Board does not anticipate any material further contributions over this period.
Cross-Selling and Partnerships
LTG is seeing increased success in delivering to its clients a greater range of LTG's products and services, often as part of a strategic consultancy solution, albeit cross-selling initiatives are at an early stage. Many of these cross-selling opportunities are bi-lateral between LTG's business units but are beginning to become more multi-lateral.
Following the acquisition of PeopleFluent, LTG offers 30 discrete product and service offerings. On average LTG's clients took 1.2 of these services in 2018 compared with an average of 3.2 across LTG's top ten clients, who together represent approximately 15% of Group revenues.
In 2018 the Group was tasked by Fidelity International, one of the world's leading investment management firms, to develop a training program for their staff to deliver retirement planning services to their customers; a highly regulated, high-consequence sector. LTG's LEO business unit developed 'The Retirement Academy' story-driven solution that incorporated micro-learning, video drama and animation to create an engaging learning experience that was hosted off Fidelity's existing collaboration platform and LMS. The technical solution was augmented by creating and hosting the content in LTG's cloud-based authoring tool, gomo, which being xAPI enabled allowed the data to be published to LTG's Watershed analytics platform where the true effectiveness of the learning program could then be determined.
LTG also works with other partners to deliver learning programs, often as part of larger strategic initiatives. In 2018 LTG delivered a comprehensive training project for a Middle Eastern energy company that included a strategy, values and Code of Business Ethics program that was designed, built and delivered to tight deadlines and brought together the expertise of LEO, Eukleia, PeopleFluent and gomo. LTG is also working with another strategic partner to deliver face-to-face training alongside LTG's digital solutions as part of a large scale 'blended' program for a UK based energy organisation.
The Group is seeking to further its cross-selling initiatives in 2019. These encompass introducing a group wide incentivisation program to encourage co-operation between businesses, in-house training programs to inform sales staff and consultants, the appointment of a Group Services Sales Director, and multi-lateral marketing initiatives.
Group Services
The Board believes that by building a comprehensive offering of scale that it can better deliver the services and solutions that companies and governments demand and require. LTG has the scale to deliver large complex projects across numerous geographies, to thousands of people in a myriad of languages and through many delivery platforms.
The Software & Platforms and Content & Services divisions of the Group are supported by 'LTG Central Services' which comprises HR, IT, Finance, Legal, Facilities, Bid, Marketing and Hosting services. Each department has a centre of excellence, supported by additional regional resources where appropriate. The provision of LTG Central Services liberates the MDs of the Group's businesses to pursue their sales and delivery strategies without needing to manage the support functions of their operations, and the economies of scale and expertise in the centralised functions ensures the consistent application of best practice and helps deliver cost efficiencies.
The integration of PeopleFluent into the Group has enabled LTG to base many of its US central service functions on PeopleFluent's existing infrastructure, particularly in its Raleigh office in North Carolina. CRM, finance and payroll systems are in the process of being integrated into the merged PeopleFluent operations. The Group's marketing department has made significant progress in developing the Group business brand offerings and the Legal department has undertaken a comprehensive GDPR compliance program for existing and acquired businesses. Facilities have been rationalised where appropriate including the relocation of LTG's main London operations from Cannon Street to Fetter Lane, to sit alongside PeopleFluent, and the closure of PeopleFluent's New Orleans office.
Acquisitions
A core part of the LTG's strategy is the execution of strategic M&A that enhances the Group's offering. During 2018 the Group completed two acquisitions as follows;
PeopleFluent
On 31 May 2018 LTG completed the acquisition of PeopleFluent, the leading independent provider of cloud based integrated recruiting, talent management, and compensation management solutions. PeopleFluent is headquartered in Waltham, Massachusetts and generates approximately 85% of its revenues in the US. The business is a strong strategic fit with LTG, allowing LTG to offer a full suite of talent and learning products and services to its customers and substantially deepen its presence in the high growth US market.
PeopleFluent was acquired for £107.1 million in cash. The offer was financed by way of a placing of 86.7 million LTG shares issued at 98.0 pence per share and a new debt finance facility, details of which are set out in Note 15. Transaction costs charged to the income statement totalled £2.6 million. Goodwill on acquisition has been calculated at £78.5 million and acquisition-related intangibles of £78.5 million are represented primarily by IP and customer relationships.
There are no deferred consideration obligations. The total consideration and fair value adjustments to the assets and liabilities are set out on in Note 8.
Watershed (acquisition of remaining 73% stake not already owned by LTG)
On 15 November 2018, Rustici Software LLC completed the acquisition of the remaining 73% of the issued share capital in Watershed Systems, Inc. ('Watershed') not already held by the Group. Watershed is a leader in the burgeoning corporate learning analytics market and has a proven ability to harness data about learners to analyse and assess the impact of learning and talent on organisational performance. Over the past 3 years Watershed has successfully developed its SaaS platform and increased the number of recurring customers substantively from a standing start. The company has also worked closely with a number of other LTG businesses selling integrated solutions to customers and has demonstrated the compelling power of Watershed's service for the Group's customers.
The initial consideration comprised a cash payment of £1.9 million to the other shareholders in Watershed. The SPA contains provisions for additional deferred consideration up to a maximum aggregate amount of £5.8 million payable based on stretching incremental revenue targets over the period 2019-2021. In addition, the Company agreed to pay a completion bonus of £0.3 million to certain Watershed staff who held share options in the company and a contingent earn-out bonus equal to approximately 16% of the total deferred consideration payable. The earn-out bonus will be charged to the income statement as it accrues. It has been assumed that £2.3 million in deferred consideration will be payable over the three year earn-out period.
Transaction costs charged to the income statement totalled £50,000. Goodwill on acquisition has been calculated at £2.4 million and acquisition-related intangibles of £3.3 million are represented primarily by IP related to the SaaS platform.
The total consideration and fair value adjustments to the assets and liabilities are set out on in Note 8.
The acquired businesses of PeopleFluent and Watershed have been categorised into 5 separate Cash Generating Units for reporting purposes and further details are provided in Note 9.
On 27 August 2018 LTG agreed along with its joint-venture partner in LEO Brazil, a debt/equity swap that reduced LTG's equity holding from 50% to 38%. The investment in LEO Brazil is held in LTG's books at nil value.
Jonathan Satchell
Chief Executive
18 March 2019
Chief Financial Officer's Review
Financial results
Financial comparatives for prior periods are reported on a restated basis; further details are provided below.
In the year ended 31 December 2018, the Group generated revenue of £93.9 million (2017: £51.4 million), delivering an 83% year-on-year increase. Excluding the acquisitions of PeopleFluent and Watershed and the impact of the Civil Service Learning ('CSL') project, adjusting revenues as if all businesses that were part of the Group in 2017 reported on a full year basis, organic revenue growth on a constant currency basis in 2018 was flat. The Software & Platforms division accounted for 64% of Group revenues and grew by 9%, whilst the Content & Services division accounts for the remainder of revenues at 36% and declined by 8% against tough prior year comparatives. Further details on the divisional performance are provided in the Chief Executive's Review.
Adjusted EBIT increased by 104% to £27.2 million (2017: £13.3 million). The Group measures adjusted EBIT to provide a better understanding of the underlying operating business performance. Adjusted EBIT is defined as the Group profit or loss before tax, excluding share-based payment charges, acquisition-related deferred consideration and earn-outs, finance expenses, the Group's share of profits or losses in associates and joint ventures, integration costs and costs of acquisition and amortisation of acquired intangibles as well as other specific items. Integration, costs of acquisition, amortisation of acquired intangibles and acquisition-related deferred consideration and earn-outs are primarily driven by acquisition activity rather than by the underlying performance of the business, therefore they are excluded from adjusted EBIT to provide a more accurate reflection of the business performance. The share-based payment charge is calculated based on a set of circumstances that existed at the point of issue of the share option. The expense is therefore not seen as a reliable indicator of the underlying performance of the business and is excluded from adjusted EBIT.
Adjusted EBIT margins increased during the year to 29.0% (2017: 26.0%) following the successful integration of PeopleFluent during the summer. As reported at the time of the 2018 Interim results, the integration of PeopleFluent was ahead of expectations and ahead of schedule, resulting in the Board increasing guidance for full-year 2019 EBIT margins for the acquired business from not less than 20% to not less than 25%. This is significantly higher than the approximately 11% pre-acquisition EBIT margins reported at the end of 2017. The Group continues to focus on operational best practice and tight cost control, whilst the increased economies of scale, and a change in the revenue mix of the Group towards higher margin recurring licence sales with a greater opportunity for operational leverage will help underpin our aim of delivering Group margins in the late twenties over the medium to long term.
The amortisation charge for acquisition-related intangible assets was £15.2 million (2017: £7.8 million). A charge of £0.7 million relates to the write-off of the NetDimensions acquired brand intangible following the incorporation of the NetDimensions talent suite into the PeopleFluent offering. Further details are set out in Note 9. The amortisation charge for internally generated development costs was £1.1 million (2017: £0.6 million) and relates to the development of the various PeopleFluent talent and learning platforms; 'gomo', the Group's award-winning multi-device authoring, hosting and video SaaS platform; Watershed, a SaaS analytics platform; various software tools used within the Eukleia business including an internally generated library of governance, risk and compliance ('GRC') materials used to service clients; as well as internally developed software in Rustici including SCORM and xAPI tools.
Acquisition-related deferred consideration and earn-out charges of £3.8 million (2017: £1.9 million) relate primarily to the third and final year of the acquisition-related earn-out of Rustici and reflect the strong incremental revenue growth of the business post-acquisition. The charge also includes £0.6 million payable to key management of PeopleFluent in the six months following acquisition and £0.3 million relating to the Watershed acquisition. A £0.2 million credit has crystallised as a result of the end of the Preloaded earnout. From the beginning of 2019 the only acquisition-related deferred consideration arrangement in place is with Watershed; further details are provided in Note 8.
The share-based payment charge increased from £0.7 million in 2017 to £1.3 million in 2018 as result of the increase in option grants following the acquisition of PeopleFluent. The total number of outstanding share options at the end of 2018 was 28.3 million.
Integration costs of £2.4 million (2017: £1.2 million) relate to various restructuring charges including redundancy costs and onerous contract charges resulting from the integration of PeopleFluent. The Group successfully completed this ambitious program between May and August as a result of which annualised cost synergies of more than £15.0 million have been realised.
Statutory profit before tax was £3.4 million compared with a loss before tax of £11,000 in the prior year and unadjusted operating profit was £4.0 million compared to an unadjusted operating profit of £1.9 million in 2017. Statutory profit before tax is stated after costs of acquisitions in 2018 of £2.6 million (2017: £0.9 million), a share of losses in associates of £0.1 million (2017: £0.2 million) being LTG's share of the pre-acquisition losses of Watershed, interest charges on the debt facility of £1.5 million (2017: £0.6 million) and a net foreign exchange gain of £3.6 million (2017: loss of £0.2 million) resulting from the exceptional gain made on the movement in the exchange rate between the conversion of £72.0 million of placing proceeds into USD on 27 April 2018 and completion of the PeopleFluent acquisition on 31 May 2018. Adjusted profit before tax (see Note 6) increased by 102% to £25.6 million in 2018 (2017: £12.7 million).
The income tax credit of £0.7 million in 2018 (2017: £1.1 million) is stated after adjusting for the effect of the release of deferred tax on the amortisation of acquired intangibles and a deferred tax asset related to the anticipated vesting of share options. Further details are provided in Note 5.
Based on the average number of shares in issue, weighted average number of shares outstanding and adjusted operating profit during the year, adjusted diluted EPS increased by 68% to 3.232 pence (2017: 1.926 pence). On a statutory basis, basic earnings per share ('EPS') increased from 0.235 pence in 2017 to 0.655 pence in 2018. Further details are provided in Note 6.
The Group has a strong balance sheet with shareholders' equity at 31 December 2018 of £168.8 million, equivalent to 25.3 pence per share (2017: shareholders' equity of £75.4 million, equivalent to 13.2 pence per share). The acquisition of PeopleFluent during the year, a business which generates the majority of its revenues from recurring software licences which tend to be invoiced annually in advance, has resulted in a significant increase in trade receivables and deferred income balances compared to the prior year.
The gross cash position at 31 December 2018 was £26.8 million (2017: £15.7 million). The Group's net debt at 31 December 2018 was £11.5 million (2017: net cash of £1.0 million). Net debt/cash is defined by gross cash less borrowings.
Net cash generated from operating activities was £19.7 million (2017: £10.8 million) equivalent to an adjusted operating cash flow conversion rate of 83% (2017: 101%). Adjusted operating cashflow conversion is defined by net operating cashflows after adjusting for acquisition-related deferred consideration and earn-out payments, transaction and integration costs, interest and tax paid and the movement of deferred upfront investment outflows relating to the CSL project as a proportion of adjusted EBITDA. Operating cash flows in 2018 include receipts from the CSL project whereas the upfront investment outflows were paid in 2016.
Debtor days increased to 97 days (2017: 76 days) reflecting the inclusion of PeopleFluent, whilst combined debtor, WIP and deferred income days reduced to minus 57 days (2017: +17 days), reflecting the greater proportion of Group revenues generated from recurring software licences where payments are received annually in advance.
Net corporation tax receipts were £0.4 million (2017: £0.7 million payment) reflecting repayments made on account. Cash outflows from investing activities were £111.5 million (2017: £47.5 million) and comprised the acquisition of PeopleFluent for £105.9 million net of cash acquired and Watershed for £1.5 million (2017: £45.7 million net of cash acquired), plus capitalised investment in internally generated IP and property, plant and equipment of £4.1 million (2017: £1.8 million).
Cash inflows from financing activities were £102.4 million (2017: £47.6 million). At the time of the acquisition of PeopleFluent, LTG entered into a new debt facility with Silicon Valley Bank ('SVB') and Barclays Bank for $63 million accounting for £21.3 million of net debt finance receipts during the period. The facility comprises a $42 million term loan repayable in quarterly instalments of $2.1 million, and a $21 million multi-currency revolving credit facility, both available for five years. The new SVB debt facility replaced LTG's previous £20 million debt facility. The facility is subject to various financial covenants and interest is charged at between 160 and 210 basis points above LIBOR based on the covenant results. The Company has drawn down the finance facility in USD and uses this as a partial internal hedge against movements in the exchange rates between Sterling and the USD. The Group is a net generator of USD. Management regularly review the foreign exchange exposure of the Group.
The balance of the cash flows from financing activities include net proceeds from a share placing of £82.8 million (2017: £45.4 million), proceeds from the exercise of employee share options of £0.9 million (2017: £1.7 million), payment of contingent deferred consideration related to the Preloaded acquisition of £0.2 million (2017: £0.1 million), and dividend payments which increased to £2.4 million from £1.3 million in 2017.
Impact of adoption of new accounting policies and alignment of acquisitions with Group policies
With effect from 1 January 2018 the Group has adopted two new accounting standards: IFRS15 - Revenue from Contracts with Customers, and IFRS9 - Financial Instruments. The financial comparatives used for prior periods in this report are restated to reflect the impact on the financial results for the Group as if the new standards had been adopted in the prior year. The impact of adoption of IFRS15 is that revenues and adjusted EBIT were reduced by £0.7 million in 2017. The impact of adoption of IFRS9 is immaterial and no adjustment has been made. Further details are provided in Note 3.
The post-acquisition results for PeopleFluent are reported in line with LTG's accounting policies. The main effect on the reported results for PeopleFluent as previously reported under US GAAP are:
· Restatement of professional services revenue in line with IFRS15; professional fees are recognised as the work is undertaken on a percentage complete basis for fixed-price contracts rather than the accounting policy under US GAAP where they were recognised on completion or delivery of the work to the client, or bundled with the licence subscription and amortised over the licence term. This has resulted in approximately $5.1 million of net revenues being moved to the pre-acquisition period.
· Restatement of sales commissions in line with IFRS15 and IFRS3; under IFRS 15 sales commissions on new client wins are amortised over the period of the anticipated client relationship rather than at the point that the sales commission becomes due. Under IFRS3 the fair value of deferred sales commission at the time of completion is valued at nil.
· Capitalisation of R&D; under US GAAP PeopleFluent did not capitalise R&D. In line with LTG's accounting policy under IAS38, post-acquisition R&D is capitalised as a long-term asset to the extent that such expenditure is expected to generate future economic benefits. As a result, $1.6 million of PeopleFluent R&D was capitalised in 2018 resulting in an amortisation charge of $0.2 million. It is anticipated that run-rate R&D capitalisation for PeopleFluent in 2019 will be approximately $4.6 million with amortisation occurring over a period of approximately 3 years.
The table below summarises the impact of these accounting adjustments on revenues and adjusted EBIT reported by PeopleFluent over various accounting periods. The phasing of future accounting adjustments is an estimate based on current run-rate assumptions.
2018 Pre-Acq and prior | 2018 Post-Acq | 2019 | 2020 | |
£'m | £'m | £'m | £'m | |
Revenue | ||||
IFRS15 | 3.9 | (1.7) | (1.5) | (0.5) |
Total adjustment to Revenue | 3.9 | (1.7) | (1.5) | (0.5) |
EBIT | ||||
Revenue - IFRS15 | 3.9 | (1.7) | (1.5) | (0.5) |
Sales commission - IFRS3 | - | 0.8 | - | - |
Rent expense - IFRS3 | 0.8 | - | (0.3) | (0.1) |
R&D capitalisation | 1.2 | 3.5 | 3.5 | |
R&D amortisation | (0.1) | (0.9) | (2.1) | |
Total adjustment to EBIT | 4.7 | 0.2 | 0.8 | 0.8 |
A new accounting standard, IFRS 16, will be adopted by LTG with effect from 1 January 2019, replacing IAS17. IFRS16 requires lessees to capitalise all leases on the statement of financial position by recognising a 'right of use' asset and corresponding lease liability for the present value of the obligation to make lease payments. There is likely to be significant impact on the accounting treatment of the Group's leases, particularly rented properties, which the Group, as lessee currently accounts for as operating leases.
Key Performance Indicators
The Key Performance Indicators ('KPIs') are sales, profit and cash flow. The sales of the business are tracked through new wins across both divisions and retention rates and upsells in our Software & Platforms division. The profitability of the business, with its relatively low fixed-cost base, is managed primarily via the review of revenues in both divisions with secondary measures of consultant utilisation and monthly project margin reviews for the Content & Services division. Cash flow is reviewed on a Group basis aided by rolling cash flow forecasts and, linked to this KPI, working capital is reviewed by measures of debtor days and combined debtor, WIP and deferred income days.
Neil Elton
Chief Financial Officer
18 March 2019
Consolidated Statement of Comprehensive Income
Year ended 31 December 2018
Year ended 31 Dec | Year ended 31 Dec | |||
2018 | 2017 (restated) | |||
Note | £'000 | £'000 | ||
Revenue | 4 | 93,891 | 51,353 | |
Operating expenses (excluding acquisition-related deferred consideration and earn-outs) | (86,171) | (47,605) | ||
Operating profit (before acquisition-related deferred consideration and earn-outs) | 7,720 | 3,748 | ||
Acquisition-related deferred consideration and earn-outs | (3,761) | (1,853) | ||
Operating profit | 3,959 | 1,895 | ||
Adjusted EBIT | 27,245 | 13,344 | ||
Amortisation of acquired intangibles Acquired intangibles written down | 9 | (15,193) (681) | (7,756) - | |
Share-based payment costs | (1,254) | (675) | ||
Integration costs | (2,397) | (1,165) | ||
Acquisition-related deferred consideration and earn-outs | (3,761) | (1,853) | ||
Operating profit | 3,959 | 1,895 | ||
Fair value movement on contingent consideration | 183 | 52 | ||
Costs of acquisition | 8 | (2,621) | (920) | |
Share of losses on associates/joint ventures | (132) | (201) | ||
Profit/(loss) on disposal of fixed assets | - | (36) | ||
Finance expense: | ||||
Charge on contingent consideration | (54) | (41) | ||
Unwinding onerous lease | - | (11) | ||
Interest on borrowings | (1,512) | (605) | ||
Net foreign exchange difference on financing activities | 3,608 | (151) | ||
Interest receivable | 10 | 7 | ||
Profit/(loss) before taxation | 3,441 | (11) | ||
Income tax credit | 5 | 730 | 1,108 | |
Profit for the year | 4,171 | 1,097 |
Year ended 31 Dec | Year ended 31 Dec | |||
2018 | 2017 (restated) | |||
£'000 | £'000 | |||
Profit attributable to owners of the Parent | 4,171 | 1,247 | ||
Profit/(loss) for the year attributable to non-controlling interests | - | (150) | ||
4,171 | 1,097 | |||
Earnings per share attributable to owners of the parent: | ||||
Basic (pence) | 6 | 0.655 | 0.235 | |
Diluted (pence) | 6 | 0.641 | 0.225 | |
Adjusted earnings per share:
Basic (pence) | 6 | 3.300 | 2.011 | |
Diluted (pence) | 6 | 3.232 | 1.926 |
Profit for the year | 4,171 | 1,097 | |
Other comprehensive income: | |||
Items that may be subsequently reclassified to profit or loss | |||
Exchange differences on translating foreign operations | 6,231 | (3,564) | |
Total comprehensive income/(loss) for the year attributable to owners of the parent Company | 10,402 | (2,467) | |
Attributable to: | |||
The owners of the parent | 10,402 | (2,276) | |
Non-controlling interest | - | (191) | |
10,402 | (2,467) |
Adoption of new and revised International Financial Reporting Standards
The Group has adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers from 1 January 2018.
IFRS 15 Revenue from Contracts with Customers
The Group has adopted IFRS 15 from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. In accordance with the transition provisions in IFRS 15, the Group has adopted the new rules retrospectively and has restated comparatives for the 2017 financial year. See more detail in Note 3.
IFRS 9 Financial Instruments
IFRS 9 supersedes IAS 39 Financial Instruments: Recognition and Measurement with new requirements for the classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.
IFRS 9 introduces a new forward-looking impairment model based on expected credit losses to replace the incurred loss model in IAS 39. This determines the recognition of impairment provisions as well as interest revenue.
The Group adopted IFRS 9 from 1 January 2018 with retrospective effect in accordance with the transitional provisions.
The Group's principal financial assets are cash and cash equivalents and receivables.
The Group has assessed the impact of IFRS 9 on the impairment of its financial assets, including the trade receivables balance. The Group revised its impairment methodology to the simplified approach of the expected credit loss model and grouped the trade receivables based on shared characteristics, including line of business, and days past due. After identifying the impairment loss under this revised method, management have concluded that the change in the impairment is immaterial, so the prior year financial statements have not been restated.
While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.
A number of new standards and amendments to standards and interpretations have been issued but are not yet effective and, in some cases, have not yet been adopted by the EU.IFRS 16 Leases
IFRS 16 supersedes IAS 17 Leases and introduces a new single lessee accounting model which eliminates the current distinction between operating and finance leases for lessees.
On initial adoption of this standard, there is likely to be a potentially significant impact on the accounting treatment for the Group's leases, particularly rented properties, which the Group, as lessee, currently accounts for as operating leases. On initial adoption of IFRS 16 the Group will be required to capitalise its rented properties at the lease commencement date in the statement of financial position by recognising them as right-of-use assets and their corresponding lease liabilities. The right-of use asset will be depreciated over the term of each lease and a finance charge will be made by reference to the lease liability and discount rate. The liability is initially to be measured at the present value of future minimum lease payments.The discount rate is the rate implicit in the lease, if readily determinable. If not, the Company's incremental borrowing rate is used which the Company has assessed to be 4.3%. Short-term leases and leases of low-value assets can be excluded.
The Group will adopt the standard in the financial year beginning on 1 January 2019.
As at 31 December 2018, the Group had entered into 15 property leases which had commenced prior to the year-end (2017: 7 leases).
The tables below summarise the balance sheet and profit and loss account treatment as at and for the years ended 31 December 2017 and 31 December 2018 for these leases:
As at | As at | ||
31 December 2018 | 31 December 2017 | ||
£'000 | £'000 | ||
Right-of-use asset | 12,555 | 3,445 | |
Lease liability: | |||
- Current liability | 2,281 | 809 | |
- Non-current liability | 11,917 | 2,990 | |
Total lease liability | 14,198 | 3,799 | |
Year ended | Year ended | ||
31 December 2018 | 31 December 2017 | ||
£'000 | £'000 | ||
Rental lease expense in profit and loss | 2,290 | 1,277 | |
Replaced by: | |||
Depreciation of right-of-use asset | 1,644 | 735 | |
Finance charges on lease liability | 412 | 169 | |
Total expense to profit and loss | 2,056 | 904 | |
Net reduction in expense | 234 | 373 | |
Other than IFRS 16, the Directors do not expect that the adoption of new standards will have a material impact on the financial statements of the company in future periods.
(b) Basis of consolidation
A subsidiary is defined as an entity over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
Business combinations other than the share for share acquisition of Epic Group Limited by In-Deed Online plc in 2013 are accounted for under the acquisition method and merger relief has been taken on recognising the shares issued on acquisition, where applicable.
Under the acquisition method, the results of the subsidiaries acquired or disposed of are included from the date of acquisition or up to the date of disposal. At the date of acquisition, the fair values of the subsidiaries' net assets are determined and these values are reflected in the Consolidated Financial Statements. The cost of acquisition is measured at the aggregate of the fair values at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Any excess of the purchase consideration of the business combination over the fair value of the identifiable assets and liabilities acquired is recognised as goodwill. Goodwill, if any, is not amortised but reviewed for impairment at least annually. If the consideration is less than the fair value of assets and liabilities acquired, the difference is recognised directly in the statement of comprehensive income. Acquisition-related costs are expensed as incurred.
Intra-group transactions, balances and unrealised gains on transactions are eliminated. Intragroup losses may indicate an impairment which may require recognition in the consolidated financial statements. Where necessary, adjustments are made to the Financial Statements of subsidiaries to ensure consistency of accounting policies with those of the Group.
3. Changes in accounting policies
As noted above, the Group has adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers from 1 January 2018.
The impact on the prior year financial statements is presented in the table below. Management have assessed that the impact of IFRS 9 was immaterial on the 2017 results so the prior year comparatives have not been restated for this new accounting policy.
Consolidated statement of financial position | 1 Jan 2017 (originally presented) £'000 | IFRS 15 £'000 | 1 Jan 2017 (restated) | 31 Dec 2017 (originally presented) £'000 | IFRS 15 £'000 | 31 Dec 2017 (restated) £'000 |
ASSETS | 638 | |||||
NON-CURRENT ASSETS | ||||||
Property, plant and equipment | 708 | - | 708 | 842 | - | 842 |
Intangible assets | 39,950 | - | 39,950 | 83,409 | - | 83,409 |
Deferred tax assets | 1,717 | 335 | 2,052 | 1,933 | 272 | 2,205 |
Investments accounted for under the equity method | 1,890 | - | 1,890 | 1,689 | - | 1,689 |
Other receivables, deposits and prepayments | 1,293 | - | 1,293 | - | - | - |
45,558 | 335 | 45,893 | 87,873 | 272 | 88,145 | |
CURRENT ASSETS | 14,214 | - | 14,214 | 34,334 | - | 34,334 |
TOTAL ASSETS | 59,772 | 335 | 60,107 | 122,207 | 272 | 122,479 |
CURRENT LIABILITIES | ||||||
Trade and other payables | 9,215 | 703 | 9,918 | 23,756 | 1,050 | 24,806 |
Borrowings | 3,252 | - | 3,252 | 1,849 | - | 1,849 |
Corporation tax | 546 | - | 546 | 50 | - | 50 |
Amounts owing to related parties | 45 | - | 45 | 20 | - | 20 |
13,058 | 703 | 13,761 | 25,675 | 1,050 | 26,725 | |
NON-CURRENT LIABILITIES | ||||||
Deferred tax liabilities | 3,897 | - | 3,897 | 6,477 | - | 6,477 |
Other long-term liabilities | 1,426 | 282 | 1,708 | 192 | 638 | 830 |
Borrowings | 10,582 | - | 10,582 | 12,765 | - | 12,765 |
Provisions | 99 | - | 99 | 257 | - | 257 |
16,004 | 282 | 16,286 | 19,691 | 638 | 20,329 | |
TOTAL LIABILITIES | 29,062 | 985 | 30,047 | 45,366 | 1,688 | 47,054 |
NET ASSETS | 30,710 | (650) | 30,060 | 76,841 | (1,416) | 75,425 |
EQUITY | ||||||
Share capital | 1,580 | - | 1,580 | 2,145 | - | 2,145 |
Share premium account | 17,044 | - | 17,044 | 64,208 | - | 64,208 |
Merger relief reserve | 31,983 | - | 31,983 | 31,983 | - | 31,983 |
Reverse acquisition reserve | (22,933) | - | (22,933) | (22,933) | - | (22,933) |
Share-based payment reserve | 3,245 | - | 3,245 | 1,092 | - | 1,092 |
Foreign exchange translation reserve | 1,233 | - | 1,233 | (2,290) | - | (2,290) |
Accumulated retained earnings/(losses) | (1,442) | (650) | (2,092) | 2,636 | (1,416) | 1,220 |
TOTAL EQUITY | 30,710 | (650) | 30,060 | 76,841 | (1,416) | 75,425 |
There was no change to contract assets on the transition to IFRS 15.
Consolidated statement of comprehensive income | As originally presented | IFRS 15 | Restated | |
Year to 31 Dec 2017 | Year to 31 Dec 2017 | |||
£'000 | £'000 | £'000 | ||
Revenue | 52,056 | (703) | 51,353 | |
Operating expenses (excluding acquisition-related deferred consideration and earn-outs) | (47,605) | - | (47,605) | |
Operating profit (before acquisition-related deferred consideration and earn-outs) | 4,451 | (703) | 3,748 | |
Acquisition-related deferred consideration and earn-outs | (1,853) | - | (1,853) | |
Operating profit | 2,598 | (703) | 1,895 | |
Adjusted EBIT | 14,047 | (703) | 13,344 | |
Amortisation of acquired intangibles | (7,756) | - | (7,756) | |
Acquisition-related deferred consideration and earn-outs | (675) | - | (675) | |
Share based payment costs | (1,165) | - | (1,165) | |
Integration costs | (1,853) | - | (1,853) | |
Operating profit | 2,598 | (703) | 1,895 | |
Fair value movement on contingent consideration | 52 | - | 52 | |
Costs of acquisition | (920) | - | (920) | |
Share of losses of associates/joint ventures | (201) | - | (201) | |
Profit/(loss) on disposal of fixed assets | (36) | - | (36) | |
Finance expenses: | ||||
Charge on contingent consideration | (41) | - | (41) | |
Unwinding onerous lease | (11) | - | (11) | |
Interest on borrowings | (605) | - | (605) | |
Net foreign exchange differences on financing activities | (151) | - | (151) | |
Interest receivable | 7 | - | 7 | |
Profit / (loss) before taxation | 692 | (703) | (11) | |
Income tax credit/(expense) | 1,171 | (63) | 1,108 | |
Profit after taxation | 1,863 | (766) | 1,097 | |
Profit for the period/year attributable to the owners of the parent | 2,013 | (766) | 1,247 | |
(Loss) for the period/year attributable to non-controlling interests | (150) | - | (150) | |
Earnings per share attributable to owners of the parent: | ||||
Basic, (pence) | 0.379 | (0.144) | 0.235 | |
Diluted, (pence) | 0.363 | (0.138) | 0.225 | |
Other comprehensive income: | ||||
Exchange differences on translating foreign operations | (3,564) | - | (3,564) | |
Total comprehensive (loss) for the period | (1,701) | (766) | (2,467) | |
Attributable to: | ||||
The owners of the parent | (1,510) | (766) | (2,276) | |
Non-controlling interests | (191) | - | (191) |
The impact on the Group's retained earnings as at 1 January 2018 and 1 January 2017 is as follows:
2018 | 2017 | ||
Note | £'000 | £'000 | |
Opening retained earnings | 2,636 | (1,442) | |
Adjustment to recognition of initial licence fees | (i) | (1,295) | (985) |
Adjustment to recognition of bundled support and maintenance fees | (ii) | (393) | - |
Deferred tax impact | 272 | 335 | |
Restated opening retained earnings | 1,220 | (2,092) |
Income streams adjusted by the adoption of IFRS15:
(i) Accounting for initial licence fees
The Group's initial licence fees do not meet the definition of a distinct performance obligation, so therefore will be combined with the term licence fee and amortised over the full licence contract. This is a change in policy as under IAS 18 this revenue was recognised in full at contact inception.
(ii) Accounting for bundled support and maintenance fees
The Group has concluded that the support and maintenance service included within on-premise licence contracts constitutes a separate performance obligation which should be recognised over time. This is a change in policy as under IAS 18 this revenue was included within the on-premise licence revenue which is recognised on delivery of the software licence to the customer.
4. Segment analysis
IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Groupthat are regularly reviewed by the chief operating decision maker (which takes the form of the Board of Directors of the Company), in order to allocate resources to the segment and to assess its performance.
The Directors of the Company consider there to be three reportable segments, being the Software & Platforms division, the Content & Services division, and an Other segment which includes rental income. A majority of sales were generated by the operations in the United States in the year ended 31 December 2018 and the United Kingdom in the year ended 31 December 2017.
Income and expenses relating to the Group's administrative functions have been apportioned to the operating segments identified.
Geographical information
The Group's revenue from external customers and non-current assets by geographical location are detailed below.
UK | Mainland Europe | United States | Canada | Asia Pacific | Rest of the world | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
31 Dec 2018 | |||||||
Revenue | 24,859 | 7,263 | 52,912 | 3,766 | 2,253 | 2,838 | 93,891 |
Non-current assets | 28,412 | - | 197,969 | 68 | 18,735 | - | 245,184 |
31 Dec 2017 | |||||||
Revenue | 27,928 | 4,704 | 15,372 | 1,367 | 1,574 | 408 | 51,353 |
Non-current assets | 31,244 | - | 34,507 | - | 20,189 | - | 85,940 |
Revenue by nature
The Group's revenue by nature is analysed as follows:
Software & Platforms | Content & Services | Other | ||||||||||||
On-premise Software Licences | Hosting & SaaS | Support & Mainte-nance | Total | Content | Platform Develop-ment | Consulting & Other | Total | Rental Income | Total | |||||
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||||||
31 December 2018 | ||||||||||||||
Recurring | 12,572 | 41,328 | 4,088 | 57,988 | - | 1,071 | 4,963 | 6,034 | 58 | 64,080 | ||||
Non-Recurring | 1,166 | 4 | 676 | 1,846 | 19,262 | 5,765 | 2,938 | 27,965 | - | 29,811 | ||||
13,738 | 41,332 | 4,764 | 59,834 | 19,262 | 6,836 | 7,901 | 33,999 | 58 | 93,891 | |||||
Depreciation & amortisation | (1,746) | (362) | - | (2,108) | ||||||||||
EBIT | 19,914 | 7,273 | 58 | 27,245 | ||||||||||
Amortisation of acquired intangibles | (11,873) | (3,320) | - | (15,193) | ||||||||||
Share of losses of associates | (132) | - | - | (132) | ||||||||||
Profit / (Loss) before tax | (274) | 3,657 | 58 | 3,441 | ||||||||||
Additions to intangible assets | 162,071 | 3,972 | - | 166,043 | ||||||||||
Total Assets | 279,928 | 36,859 | - | 316,787 | ||||||||||
31 December 2017 | ||||||||||||||
Recurring | 9,067 | 10,173 | 441 | 19,681 | - | - | - | - | - | 19,681 | ||||
Non-Recurring | 696 | 8 | 510 | 1,214 | 23,403 | 3,703 | 3,352 | 30,458 | - | 31,672 | ||||
9,763 | 10,181 | 951 | 20,895 | 23,403 | 3,703 | 3,352 | 30,458 | - | 51,353 | |||||
Depreciation & amortisation | (821) | (250) | - | (1,071) | ||||||||||
EBIT | 7,798 | 5,546 | - | 13,344 | ||||||||||
Amortisation of acquired intangibles | (6,314) | (1,442) | - | (7,756) | ||||||||||
Share of losses of associates | (201) | - | - | (201) | ||||||||||
Profit / (Loss) before tax | (4,310) | 4,299 | - | (11) | ||||||||||
Investments accounted for under the equity method | 1,689 | - | - | 1,689 | ||||||||||
Additions to intangible assets | 47,055 | 10,556 | - | 57,611 | ||||||||||
Total Assets | 78,460 | 44,019 | - | 122,479 | ||||||||||
Information about major customers
In the year ended 31 December 2018, no customer accounted for more than 10 per cent of reported revenues. For the year ended 31 December 2017, one customer accounted for 13.5 per cent of reported revenues.
5. Income tax
31 Dec | 31 Dec | |
2018 | 2017 (restated) | |
£'000 | £'000 | |
Current tax expense: | ||
- UK Current Tax on profits for the year | 1,179 | 1,498 |
- Adjustments in respect to prior years | (416) | (253) |
- Foreign Current Tax on profits for the year | 1,682 | 421 |
Total current tax | 2,445 | 1,666 |
Deferred tax (Note12): | ||
- Origination and reversal of temporary differences | (2,395) | (1,969) |
- Adjustments in respect to prior years | (780) | - |
Change in deferred tax rate | - | (805) |
Total deferred tax | (3,175) | (2,774) |
Income tax (credit)/expense | (730) | (1,108) |
The change in deferred tax rate of £805,000 credited to the income statement in the year ended 31 December 2017 relates wholly to the US corporation tax reform where the expected future federal tax rate has changed from 35% to 21%.
A reconciliation of income tax expense applicable to the loss before taxation at the statutory tax rate to the income tax expense at the effective tax rate of the Groupis as follows:
31 Dec | 31 Dec | ||
2018 | 2017 (restated) | ||
£'000 | £'000 | ||
Profit / (loss) before taxation | 3,441 | (11) | |
Tax calculated at the domestic tax rate of 19% (2017: 19.25%): | 654 | (2) | |
Tax effects of: - | |||
Income not subject to tax | (184) | (288) | |
Expenses not deductible for tax purposes | 1,325 | 521 | |
Joint venture/associate results reported net of tax | 25 | 39 | |
Tax deductions not recognised as an expense | (232) | (350) | |
Utilisation of previously unrecognised or acquired tax losses | (1,475) | (486) | |
Tax losses in the year for which no deferred tax is recognised | 125 | 496 | |
Difference between deferred and current tax rate | - | (978) | |
Adjustments in respect to prior years | (1,196) | (252) | |
Effect of different international tax rates | 228 | 192 | |
(730) | (1,108) |
The aggregate current and deferred tax directly credited to equity amounted to £425,000 (2017: £1,331,000).
6. Earnings per share
31 Dec | 31 Dec | |||
2018 | 2017 (restated) | |||
Pence | Pence | |||
Basic profit/loss per share | 0.655 | 0.235 | ||
Diluted profit/loss per share | 0.641 | 0.225 | ||
Adjusted basic earnings per share | 3.300 | 2.011 | ||
Adjusted diluted earnings per share | 3.232 | 1.926 | ||
Basic earnings per share is calculated by dividing the profit/loss after tax attributable to the equity holders of the Group by the weighted average number of shares in issue during the year.
Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all potential dilutive shares, namely share options or deferred consideration payable in shares where the contingent conditions have been met.
In order to give a better understanding of the underlying operating performance of the Group, an adjusted earnings per share comparative has been included. Adjusted earnings per share is stated after adjusting the profit/(loss) after tax attributable to equity holders of the Group for certain charges as set out in the table below. Adjusted diluted earnings per share has been calculated to also include the contingent shares payable as deferred consideration on acquisitions where the future conditions have not yet been met, as shown below.
The calculation of earnings per share is based on the following earnings and number of shares.
2018 | 2017 | |||||
Profit after tax | Weighted average number of shares | Pence per share | Profit after tax (restated) | Weighted average number of shares | Pence per share | |
£'000 | '000 | £'000 | '000 | |||
Basic earnings per ordinary share attributable to the owners of the parent | 4,171 | 637,326 | 0.655 | 1,247 | 530,444 | 0.235 |
Effect of adjustments: | ||||||
Amortisation of acquired intangibles | 15,193 | 7,756 | ||||
Acquired intangibles written down | 681 | |||||
Share-based payment costs | 1,254 | 675 | ||||
Integration costs | 2,397 | 1,165 | ||||
Cost of acquisitions | 2,621 | 920 | ||||
Fair value movement on contingent consideration | (183) | (52) | ||||
Deferred consideration and earn-outs from acquisitions | 3,761 | 1,853 | ||||
Net foreign exchange differences on financing activities | (3,608) | 151 | ||||
Interest receivable | (10) | (7) | ||||
Finance expense | 54 | 52 | ||||
Income tax expense | (730) | (1,108) | ||||
Effect of adjustments | 21,430 | - | 3.362 | 11,405 | - | 2.137 |
Adjusted profit before tax | 25,601 | - | - | 12,652 | - | - |
Tax impact after adjustments | (4,572) | - | (0.717) | (1,984) | - | (0.361) |
Adjusted basic earnings per ordinary share | 21,029 | 637,326 | 3.300 | 10,668 | 530,444 | 2.011 |
Effect of dilutive potential ordinary shares: | ||||||
Share options | - | 13,267 | (0.068) | - | 21,789 | (0.079) |
Deferred consideration payable (conditions met) | - | - | - | - | 888 | (0.003) |
Deferred consideration payable (contingent) | - | - | - | - | 818 | (0.003) |
Adjusted diluted earnings per ordinary share | 21,029 | 650,593 | 3.232 | 10,668 | 553,939 | 1.926 |
Diluted earnings per ordinary share attributable to the owners of the parent | 4,171 | 650,593 | 0.641 | 1,247 | 553,939 | 0.225 |
7. Property, plant and equipment
Computer equipment | Fixtures and fittings | Motor vehicles | Leasehold im-provements | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | |
Cost | |||||
At 1 January 2017 | 1,526 | 555 | - | 240 | 2,321 |
Additions on acquisitions | 104 | 18 | 10 | 66 | 198 |
Additions | 392 | 57 | - | - | 449 |
Foreign exchange differences | (19) | (13) | (1) | (5) | (38) |
Disposals | (6) | (6) | (1) | (40) | (53) |
At 31 December 2017 | 1,997 | 611 | 8 | 261 | 2,877 |
Additions on acquisitions | 1,417 | 74 | - | 59 | 1,550 |
Additions | 216 | 384 | - | 178 | 778 |
Foreign exchange differences | 51 | 25 | - | 4 | 80 |
Disposals | (129) | (116) | (8) | (136) | (389) |
At 31 December 2018 | 3,552 | 978 | - | 366 | 4,896 |
Accumulated Depreciation | |||||
At 1 January 2017 | 1,123 | 343 | - | 147 | 1,613 |
Charge for the year | 236 | 117 | 8 | 61 | 422 |
At 31 December 2017 | 1,359 | 460 | 8 | 208 | 2,035 |
Charge for the year | 844 | 99 | - | 57 | 1,000 |
Disposals | (58) | (81) | (8) | (136) | (283) |
At 31 December 2018 | 2,145 | 478 | - | 129 | 2,752 |
Net book value | |||||
At 31 December 2017 | 638 | 151 | - | 53 | 842 |
At 31 December 2018 | 1,407 | 500 | - | 237 | 2,144 |
8. Acquisitions
PeopleFluent Holdings Corp
On 24 April 2018, LTG announced that the Company had entered into a conditional agreement to acquire the entire issued and outstanding shares of capital stock of PeopleFluent Holdings Corp. ('PeopleFluent') for cash consideration of $143 million, (on a cash free, debt free basis), plus transaction costs. The acquisition triggered a contractual bonus to be paid to key employees of approximately $0.7 million. This was dependent on the continued employment for a period of 6 months post-acquisition so has been recognised as a remuneration expense in the Statement of Comprehensive Income.
PeopleFluent is a leading independent provider of cloud-based integrated recruiting, talent management, and compensation management solutions.
On 24 April 2018, LTG also undertook a Placing of 86,734,694 new ordinary shares to part-fund the acquisition.
On 31 May 2018, LTG announced that all conditions relating to the acquisition of PeopleFluent were satisfied and so the transaction completed on the same date.
None of the goodwill recognised is expected to be deductible for income tax purposes.
The following table summarises the consideration paid for PeopleFluent, the fair value of assets acquired and liabilities assumed at the acquisition date.
Fair value | |
Consideration | £'000 |
Cash paid to PeopleFluent shareholders | 107,062 |
Total consideration | 107,062 |
Recognised amounts of identifiable assets acquired and liabilities assumed | |
Cash and cash equivalents | 1,202 |
Restricted cash, receivables and payables | 596 |
Property, plant and equipment | 1,505 |
Trade and other receivables | 13,238 |
Trade and other payables | (46,099) |
Deferred tax liabilities on acquisition | (20,407) |
Intangible assets identified on acquisition | 78,488 |
Total identifiable net assets | 28,523 |
Goodwill | 78,539 |
Total | 107,062 |
The goodwill arising is attributable to the acquired workforce, anticipated future profit from expansion opportunities and synergies of the business. The goodwill arising from the acquisition has been allocated between the PeopleFluent, Affirmity, VectorVMS and gomo CGUs. Fair value adjustments have been recognised for acquisition-related intangible assets and related deferred tax as well as future liabilities which are in alignment with accounting policies.
Acquisition-related intangible assets of £43.3 million relate to the valuation of the customer relationships which are amortised over a period of eight years, £1.7 million relates to the value of the PeopleFluent brand which is amortised over ten years, and £33.5 million relates to the value of the acquired intellectual property and software development which is amortised over periods between two and ten years.
Acquisition costs of £2.6 million have been charged to the statement of comprehensive income in the year relating to the acquisition of PeopleFluent.
A deferred tax liability of £20.4 million in respect of the acquisition-related intangible assets was established on acquisition (refer to Note12).
PeopleFluent contributed £41.8 million of revenue for the period between the date of acquisition and the balance sheet date and £11.4 million of statutory profit before tax. This excludes the effect on the Group profit before tax of increased amortisation of acquired intangibles. If the acquisition of PeopleFluent had been completed on the first day of the financial year, Group revenues would have been £33.1 million higher and Group profit attributable to equity holders of the parent would have been £2.8 million lower including adjustments to include a full year of amortisation on acquired intangibles.
Watershed Systems, Inc.
On 15 November 2018, Rustici Software LLC completed the acquisition of the remaining 72.73% of the issued share capital In Watershed Systems, Inc. ('Watershed') not already held by the Group.
The Initial Consideration comprised a cash payment of £1.9 million ($2.5 million). The SPA contains provisions for additional deferred contingent consideration up to a maximum aggregate amount $7,527,273 (approximately £5.8 million) based on ambitious monthly recurring revenue targets in each of the years ending 31 December 2019, 31 December 2020 and 31 December 2021. This deferred contingent consideration is payable to the sellers who have no ongoing obligations to the company. Financial forecasts have been used to determine the fair value of these payments included within total consideration. In addition, the Company agreed to pay completion bonuses of $400,000 to certain Watershed staff and Earn Out Bonuses equal to 15.94% of the total deferred consideration payable over the three years to 31 December 2021. These are both being recognised as a remuneration expense within the Statement of Comprehensive Income over the service period.
Watershed is the global market leader in corporate learning analytics and has a proven ability to harness data about learners to analyse and assess the impact of learning on organisational performance.
None of the goodwill recognised is expected to be deductible for income tax purposes.
The following table summarises the consideration paid for Watershed, the fair value of assets acquired and liabilities assumed at the acquisition date.
Fair value | |
Consideration | £'000 |
Cash paid to Watershed shareholders | 1,932 |
Additional deferred contingent consideration | 2,296 |
Fair value of previously held interest | 1,557 |
Total consideration | 5,785 |
Recognised amounts of identifiable assets acquired and liabilities assumed | |
Cash and cash equivalents | 356 |
Property, plant and equipment | 45 |
Trade and other receivables | 1,371 |
Trade and other payables | (855) |
Deferred tax liabilities on acquisition | (844) |
Intangible assets identified on acquisition | 3,283 |
Total identifiable net assets | 3,356 |
Goodwill | 2,429 |
Total | 5,785 |
The goodwill arising is attributable to the acquired workforce, anticipated future profit from expansion opportunities and synergies of the business. The goodwill arising from the acquisition has been allocated to the Watershed CGU. Fair value adjustments have been recognised for acquisition-related intangible assets and related deferred tax as well as future liabilities which are in alignment with accounting policies.
Acquisition-related intangible assets of £1.4 million relate to the valuation of the customer relationships which are amortised over a period of five years and £1.9 million which relates to the value of the acquired intellectual property and software development which is amortised over 3 years.
Acquisition costs of £0.05 million have been charged to the statement of comprehensive income in the year relating to the acquisition of Watershed.
A deferred tax liability of £0.8 million in respect of the acquisition-related intangible assets was established on acquisition (refer to Note 12).
Watershed contributed £0.2 million of revenue for the period between the date of acquisition and the balance sheet date and £0.1 million of loss before tax. If the acquisition of Watershed had been completed on the first day of the financial year, Group revenues would have been £1.4 million higher and Group profit attributable to equity holders of the parent would have been £0.5 million lower.
Details regarding the strategic decisions to acquire PeopleFluent and Watershed can be found in the Chairman's statement and Strategic review.
9. Intangible assets
Goodwill | Customer contracts and relationships | Branding | Acquired IP | Internal Software Development | Total | ||
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
Cost | |||||||
At 1 January 2017 | 26,608 | 16,192 | 809 | - | 2,241 | 45,850 | |
Additions on acquisitions | 21,915 | 31,811 | 1,069 | 1,432 | - | 56,227 | |
Additions | - | - | - | - | 1,384 | 1,384 | |
Foreign exchange differences | (2,473) | (2,983) | (90) | 13 | (215) | (5,748) | |
At 31 December 2017 | 46,050 | 45,020 | 1,788 | 1,445 | 3,410 | 97,713 | |
Additions on acquisition | 80,968 | 44,635 | 1,723 | 35,413 | - | 162,739 | |
Additions | - | - | - | - | 3,304 | 3,304 | |
Disposals/impairment | - | - | (1,048) | - | (178) | (1,226) | |
Foreign exchange differences | 5,240 | 3,084 | 114 | 1,574 | 153 | 10,165 | |
At 31 December 2018 | 132,258 | 92,739 | 2,577 | 38,432 | 6,689 | 272,695 | |
Accumulated amortisation | |||||||
At 1 January 2017 | - | 4,669 | 304 | - | 927 | 5,900 | |
Amortisation charged in year | - | 7,144 | 286 | 464 | 510 | 8,404 | |
At 31 December 2017 | - | 11,813 | 590 | 464 | 1,437 | 14,304 | |
Amortisation charged in year | - | 11,956 | 447 | 2,790 | 1,107 | 16,300 | |
Disposals/impairment | - | - | (367) | - | - | (367) | |
At 31 December 2018 | - | 23,769 | 670 | 3,254 | 2,544 | 30,237 | |
Carrying amount | |||||||
At 31 December 2017 | 46,050 | 33,207 | 1,198 | 981 | 1,973 | 83,409 | |
At 31 December 2018 | 132,258 | 68,970 | 1,907 | 35,178 | 4,143 | 242,458 |
Following the incorporation of the NetDimensions product suite into the PeopleFluent suite, the NetDimensions brand has been impaired and is shown as a disposal in the table above.
Goodwill and acquisition-related intangible assets recognised have arisen from acquisitions. Refer to Note 8for further details of acquisitions undertaken during the year. Internal software development reflects the recognition of development work undertaken in-house.
The amortisation charge for the year of £16.3 million includes £15.2 million relating to acquired intangibles. Amortisation is included within operating expenses in the Statement of Comprehensive Income.
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units ('CGUs') that are expected to benefit from that business combination. The Group has nine CGUs. Following the acquisition of LINE and its merger with Epic in July 2014, to form LEO, management have determined that LEO represents one CGU. The acquisition of PeopleFluent in 2018 gave rise to 4 separate CGU's, PeopleFluent, Affirmity, VectorVMS and gomo; the latter being where a part of the acquired PeopleFluent business was merged with LTG's existing gomo business. The acquisition of Watershed gave rise to 1 new CGU. The carrying amount of goodwill has been allocated as follows:
CGU | Goodwill | Growth rate | Pre-tax discount rate | |||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |
£'000 | £'000 | % | % | % | % | |
LEO | 7,435 | 7,435 | 4% | 8% | 11.0% | 11.0% |
Preloaded | 2,180 | 2,180 | 4% | 9% | 12.5% | 12.5% |
Eukleia | 2,764 | 2,764 | 4% | 9% | 12.5% | 12.5% |
Rustici | 13,726 | 12,911 | 9% | 9% | 12.5% | 12.5% |
NetDimensions | -* | 20,760 | - | 9% | - | 12.5% |
PeopleFluent | 43,875 | - | 7% | - | 11.5% | - |
Affirmity | 19,496 | - | 4% | - | 11.0% | - |
VectorVMS | 38,552 | - | 4% | - | 10.0% | - |
gomo | 1,746 | - | 7% | - | 14.0% | - |
Watershed | 2,484 | - | - | - | - | - |
132,258 | 46,050 | |||||
*The NetDimensions business was combined with that of PeopleFluent and they now operate as one CGU, hence the goodwill has been combined in the table above.
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use. The key assumptions for the value in use calculations are those regarding the discount rates (being the companies cost of capital), growth rates (based on past experience and pipeline in place) and future EBIT margins (which are based on past experience). The Group monitors its pre-tax Weighted Average Cost of Capital and those of its competitors using market data. In considering the discount rates applying to CGUs, the Directors have considered the relative sizes, risks and the inter-dependencies of its CGUs. The impairment reviews use a discount rate adjusted for pre-tax cash flows. The Group prepares cash flow forecasts derived from the most recent financial plan approved by the Board and extrapolates revenues, net margins and cash flows for the following four years based on forecast growth rates of the CGUs. Cash flows beyond this five-year period are also considered in assessing the need for any impairment provisions. The growth rates are based on internal growth forecasts of between 4% and 9% for the first five years. The terminal rate used for the value in use calculation thereafter is 2.5%.
If the growth rate or the discount rate used increased or decreased by 10%, with all other factors being equal, there would be no impact on the goodwill impairment assessment.
Formal impairment testing of the Watershed CGU was not undertaken at year-end as completion was so near to the year-end and there were no indicators of impairment.
Customer contracts, relationships, branding and Acquired IP
These intangible assets include the Group's aggregate amounts spent on the acquisition of industry-specific knowledge, software technology, branding and customer relationships. These assets arose from acquisition as part of business combinations.
The fair value of these assets is determined by discounting estimated future net cash flows generated by the asset where no active market for the assets exists.
The cost of these intangible assets is amortised over the estimated useful life of each separate asset of between two and ten years.
Internal software development
Internal software development costs principally comprise expenditure incurred on major software development projects and the production of generic e-learning content where it is reasonably anticipated that the costs will be recovered through future commercial activity.
Capitalised development costs are amortised over the estimated useful life of between two and ten years.
10. Trade receivables
31 Dec | 31 Dec | ||
2018 | 2017 | ||
£'000 | £'000 | ||
Trade receivables | 35,646 | 12,253 | |
Allowance for impairment losses | (1,332) | (186) | |
34,314 | 12,067 |
Impairment losses:
At 1 January | 186 | 57 | |
Additions on acquisition | 570 | 111 | |
Additions | 545 | 18 | |
Foreign exchange | 31 | - | |
At 31 December | 1,332 | 186 |
The Group's normal trade credit term is 30 days. Other credit terms are assessed and approved on a case-by-case basis.
On the acquisition of PeopleFluent the Group acquired £9.72 million of gross trade receivables with a provision for doubtful debts of £0.57 million. The net fair value of £9.15 million is included in the acquired balance sheet disclosed in Note 8.
The fair value of trade receivables approximates their carrying amount, as the impact of discounting is not significant. No interest has been charged to date on overdue receivables.
11. Other receivables, deposits and prepayments
Current assets | |||
31 Dec | 31 Dec | ||
2018 | 2017 | ||
£'000 | £'000 | ||
Sundry receivables | 1,118 | 577 | |
Prepayments | 2,779 | 1,786 | |
3,897 | 2,363 | ||
Non-current assets | |||
31 Dec | 31 Dec | ||
2018 | 2017 | ||
£'000 | £'000 | ||
Sundry receivables | 161 | - | |
161 | - |
Sundry receivables includes rent deposits and other sundry receivables.
12. Deferred tax assets/(liabilities)
Short-term | |||||
Share options | Tax losses | timing differences | Total | ||
Deferred tax assets | £'000 | £'000 | £'000 | £'000 | |
At 1 January 2017 | 1,715 | - | 337 | 2,052 | |
Acquisition of subsidiaries | - | - | - | - | |
Deferred tax charge directly to the income statement | (143) | 521 | (57) | 321 | |
Deferred tax charged directly to equity | 1,331 | - | - | 1,331 | |
Exercise of share options | (1,499) | - | - | (1,499) | |
At 31 December 2017 | 1,404 | 521 | 280 | 2,205 | |
Acquisition of subsidiaries | - | 778 | - | 778 | |
Deferred tax charged/(credited) directly to the income statement | (15) | 337 | 61 | 383 | |
Deferred tax charged directly to equity | 425 | - | - | 425 | |
Exercise of share options | (1,084) | - | - | (1,084) | |
Exchange rate differences | - | 67 | 84 | 151 | |
At 31 December 2018 | 730 | 1,703 | 425 | 2,858 |
Accelerated tax | Short-term timing | ||||
Intangibles | depreciation | differences | Total | ||
Deferred tax liabilities | £'000 | £'000 | £'000 | £'000 | |
At 1 January 2017 | (3,677) | (220) | - | (3,897) | |
Deferred tax on acquired intangibles and via acquisition | (5,733) | - | - | (5,733) | |
Deferred tax charge directly to the income statement | 2,443 | 16 | - | 2,459 | |
Exchange rate differences | 694 | - | - | 694 | |
At 31 December 2017 | (6,273) | (204) | - | (6,477) | |
Deferred tax on acquired intangibles and via acquisition | (21,251) | (124) | (236) | (21,611) | |
Deferred tax charge directly to the income statement | 3,250 | (694) | 236 | 2,792 | |
Exchange rate differences | (1,177) | 174 | - | (1,003) | |
At 31 December 2018 | (25,451) | (848) | - | (26,299) |
The deferred tax balances relate to temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Statements. Deferred tax assets are recognised to the extent that it is probable that the future taxable profits will allow the deferred tax assets to be recovered. Deferred tax assets of £266,000 (2017: £664,000) relating to carried forward tax losses have not been recognised as it is not probable that future taxable profits will allow these deferred tax assets to be recovered.
13. Trade and other payables
31 Dec | 31 Dec | |
2018 | 2017 (restated) | |
£'000 | £'000 | |
Trade payables | 924 | 946 |
Deferred income | 56,417 | 14,980 |
Tax and social security | 2,109 | 1,673 |
Contingent consideration | 8 | 168 |
Acquisition-related deferred consideration and earn-outs | 3,205 | 2,641 |
Accruals | 9,807 | 4,398 |
72,470 | 24,806 |
The contingent consideration at 31 December 2018 relates wholly to the acquisition of Preloaded Limited and is repayable in 2019, a financial instrument held at fair value within the scope of IFRS 9. In 2017, the contingent consideration also related to the acquisition of Preloaded Limited.
The acquisition-related deferred consideration and earn-outs balance in 2018 relates partly to the acquisition of Rustici Software LLC and partly to the acquisition of Watershed Systems Inc. The balance in 2017 relates wholly to the acquisition of Rustici Software LLC. This is treated as post-combination remuneration and is accrued over the service period.
The deferred income balance relates mainly to the Group's right to access licences, support and maintenance and hosting contracts which are recognised over the contract term as the customer receives and consumes the benefits of the service. All of the current liability deferred income balance at 31 December 2017 was recognised as revenue in 2018 and the currently liability deferred income balance at 31 December 2018 is expected to be recognised as revenue in 2019.
14. Other long-term liabilities
31 Dec | 31 Dec | |
2018 | 2017 | |
£'000 | £'000 | |
Acquisition-related deferred consideration and earn-outs | 20 | - |
Contingent consideration | 2,378 | 192 |
Deferred income | 6,603 | 638 |
Other long-term liabilities | 7 | - |
9,008 | 830 |
The contingent consideration relates wholly to the acquisition of Watershed Systems Inc and is a financial instrument held at fair value within the scope of IFRS 9 repayable during 2020, 2021 and 2022.
The acquisition-related deferred consideration and earn-outs balance in 2018 relates wholly to the acquisition of Watershed Systems Inc. This is treated as post-combination remuneration and is accrued over the service period.
The deferred income balance relates mainly to the Group's right to access licences, support and maintenance and hosting contracts which are recognised over the contract term as the customer receives and consumes the benefits of the service. The non-current deferred income balance at 31 December 2018 is expected to be recognised during 2020 and 2021.
15. Borrowings
On the acquisition of PeopleFluent Holdings Corp. (see Note 8) the existing debt facility with Silicon Valley Bank was repaid and a new debt facility with Silicon Valley Bank was entered into for a total of $63 million.
This is made up of a $42 million term loan and a $21 million multicurrency revolving credit facility, both available to the Group for 5 years. The facility attracts variable interest based on LIBOR for the currency of the loan plus a margin of between 1.6% and 2.1%, based on the Group's leverage.
The term loan is repayable with quarterly instalments of $2.1 million with the balance repayable on the expiry of the loan in April 2023.
The bank loan is secured by a fixed and floating charge over the assets of the Group and is subject to various financial covenants.
31 Dec | 31 Dec | |
2018 | 2017 | |
£'000 | £'000 | |
Current interest-bearing loans and borrowings | 6,602 | 1,849 |
Non-current interest-bearing loans and borrowings | 31,657 | 12,765 |
38,259 | 14,614 |
16. Provisions
31 Dec | 31 Dec | |
2018 | 2017 | |
£'000 | £'000 | |
Property costs | ||
At 1 January - brought forward | 257 | 99 |
Paid in the year | - | - |
Addition | 44 | 158 |
301 | 257 |
17. Share capital
Shares were issued during the year as follows:
Number of shares | Share capital | Share premium | Merger reserve | Total | |
£'000 | £'000 | £'000 | £'000 | ||
At 1 January 2018 | 572,000,505 | 2,145 | 64,208 | 31,983 | 98,336 |
Placing of shares on payment of PeopleFluent consideration | 86,734,694 | 325 | 84,675 | - | 85,000 |
Cost of issuing shares | - | - | (2,169) | - | (2,169) |
Shares issued on the exercise of options | 8,157,150 | 31 | 846 | - | 877 |
At 31 December 2018 | 666,892,349 | 2,501 | 147,560 | 31,983 | 182,044 |
The par value of all shares is £0.00375. All shares in issue were allotted, called up and fully paid.
On 3 March 2015 the Group incorporated Learning Technologies Group (Trustee) Limited, a wholly owned subsidiary of the Company. The purpose of the company is to act as an Employee Benefit Trust ('EBT') for the benefit of current and previous employees of the Group. At 31 December 2018 the EBT holds 404,340 ordinary shares in the Company. These shares are held in treasury.
On 24 April 2018, the Company announced that it had entered into a conditional agreement to acquire the entire issued and outstanding shares of capital stock of PeopleFluent Holdings Corp. ('PeopleFluent') for cash consideration of $143 million, (on a cash free, debt free basis), plus transaction costs. On the same date, the Company also undertook a Placing of 86,734,694 new ordinary shares at 98 pence per share for a total consideration of £85 million to part-fund the acquisition.
A total of 8,157,150 ordinary shares were issued during the course of the year as a result of the exercise of employee share options.18. Dividends paid
31 Dec | 31 Dec | |
2018 | 2017 | |
£'000 | £'000 | |
Final dividend paid Interim dividend paid | 1,396 999 | 766 513 |
2,395 | 1,279 |
On 2 November 2018, the Company paid an interim dividend of 0.15 pence per share (2017: 0.09 pence per share). The Directors propose to pay a final dividend of 0.35 pence per share for the year ended 31 December 2018 (totalling £2.34 million based on the issued share capital of the Company at the date of this report), equating to a total pay-out in respect of the year of 0.50 pence per share (2017: 0.30 pence per share). The final dividend paid in 2018 relates to the year ending 31 December 2017.
19. Events since the reporting date
There have been no notifiable events between the 31 December 2018 and the date of this Annual Report.
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Learning Technologies Group plc published this content on 19 March 2019 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 19 March 2019 07:39:02 UTC
