K3 Business Technology : Final Results for the year ended 30th November 2022

AIM: KBT

30 March 2023

K3 BUSINESS TECHNOLOGY GROUP PLC

("K3" or "the Group" or "the Company")

Provider of business-critical software solutions focused on fashion and apparel brands.

Final results for the 12 months to 30 November 2022

Key Points

12 months to 30 Nov 2022	12 months to 30 Nov 2021	Change
Revenue from continuing operations	£47.5m	£45.3m	+5%
Recurring or predictable revenue1	£37.6m	£33.9m	+11%
-	as a percentage of total revenue	79%	76%	+300bps
Gross margin	59.2%	59.3%	-0.1%
Adjusted EBITDA1	£5.1m	£4.4m	+16%
Loss before tax from continuing operations, including exceptionals2	£(3.8)m	£(7.8)m	+£4.0m
Net cash1	£7.1m	£9.0m	-£1.9m
Reported gain / (loss) per share	(9.0)p	8.0p	-17.0p
Adjusted (loss) / earnings per share for continuing operations1	(2.6)p	(13.6)p	+11.0p

• 1 Refer to note 12 for definitions

• 2 Exceptionals include an impairment charge of £1.6m (2021: £1.4m) and reorganisation costs of £0.70m (2021: £1.5m)

Financial

• • Revenue increase driven by strong growth in Third-party Solutions division and higher contribution from strategic products in K3 Products division

• • Recurring and predictable income now accounts for 79% of Group revenue (2021: 76%)

  • o Group Annualised Recurring Contracts ("ARC") at year-end up 11% to £22.9m (2021: £20.7m)

  • o Strategic products ARC at year-end up 32% to £5.7m (2021: £4.3m), with the K3 fashion Enterprise product up 55%

• • Adjusted EBITDA from continuing activities up 16% to £5.1m (2021: £4.4m)

• • Healthy net cash of £7.1m (2021: £9.0m), and Group is expected to generate net cash in FY 2023

Operational

• • K3 Products division - encouraging underlying performance; good progress across our fashion and apparel offering (strategic products) masked by managed run-off of legacy products

  • o Divisional revenue decreased by £1.3m to £13.5m (2021: 14.8m); adjusted EBITDA at £0.7m (2021: £1.1m)

  • o Gross profit margin up to 78.3% (2021: 75.3%)

  • o Managed run-off of legacy products customer base in line with management expectations

  • o Strategic products' ARC up 32% to £5.7m, with new customer wins and existing customers increasing contracted software licences

  • o Viji acquisition is integrating well and has enhanced sustainability offering

• o Largest software licence contract for flagship strategic product (K3 fashion) signed post period.

• • Third-party Solutions division - strong growth and highly cash generative

  • o Divisional revenue up 11% to £34.0m (2021: 30.5m) and adjusted EBITDA up 12% to

    £12.8m (2021: £11.4m)

  • o Gross profit margin constant at 51.6%

  • o Aggregate ARC growth of 8.4%

  • o NexSys software licence and maintenance contract renewals remained high at 98%

    (2021: 98%)

Prospects

• • Encouraging start to trading in FY 2023 with good fashion product ARC growth

• • Board expects continued improvement across both divisions

Marco Vergani, Chief Executive Officer of K3 Business Technology Group plc, said:

"K3 has made very encouraging progress in its first full year of executing its new growth plan. Against a challenging trading backdrop, we have delivered good growth in revenue, recurring income and profitability, and cash generation is on an upward trend.

"Our focus on driving the growth of our strategic fashion products is yielding very encouraging results and we have enhanced our sustainability offering. This is an increasingly important area for the fashion and apparel sector, with legislation also driving the adoption of sustainability solutions. Our Third-party Solutions division grew strongly and continues to generate high cash flows.

"The new financial year has started encouragingly, with our largest ever software licence contract for our flagship fashion product. The Board is confident that this progress will continue and expects the Group to become cash generative this year."

Enquiries:

K3 Business Technology Group plc	Marco Vergani (CEO)
www.k3btg.com	Tom Crawford (Chairman)	T: 0161 876 4498
finnCap Limited	Julian Blunt/ Milesh Hindocha	T: 020 7220 0500
(NOMAD & Broker)	(Corporate Finance)
Richard Chambers, Sunila De Silva
(Corporate Broking)
KTZ Communications	Katie Tzouliadis/ Robert Morton	T: 020 3178 6378
2

CHAIRMAN'S STATEMENT

Overview

In the previous financial year, the Board reviewed market opportunities for the Group and established a new growth plan for the business. This has sharpened our focus on our products for the fashion and apparel sectors. At the same time, we have identified new growth opportunities for our Third-party Solutions business. We also restructured significantly by selling two businesses, reallocated investment and made organisational changes. We therefore started the financial year under review with a strengthened balance sheet, reduced costs and a better focus on our core strengths.

The trading backdrop continued to be challenging, nonetheless I am pleased to report that the Group has made encouraging progress over the year, strategically, financially, and operationally. Revenue from continuing operations is up by 5% to £47.5m (2021: £45.3m), with recurring and predictable revenue up 9% to £37.6m (2021: £34.5m). Adjusted EBITDA from continuing activities has increased by 16% to £5.1m (2021: £4.3m). The Group's net cash position at the year-end stood at £7.1m (2021: £9.0m), after making strategic investments. Underlying cash generation improved and this trend is expected to continue.

The Third-party Solutions division continues to generate high levels of recurring and predictable revenue, as well as strong levels of cash, from its large customer base. This includes IKEA Concept franchisees globally and UK manufacturers and distributors. Software licence and support and maintenance contract renewals generated by our UK manufacturing customer base, which drive the division's significant cash generation, remained very high at 98% (2021: 98%). The division's gross margin was steady at 51.6% (2021: 51.5%).

The K3 Products division, which includes both our strategic and legacy products, continues to focus on building recurring cash flows. Recurring contracted revenue from our strategic products, which serve the fashion and apparel markets, grew strongly, with the annualised contract value up by 32% to £5.7m year-on-year. This reflected increased uptake of software licences by existing customers and new customer wins. We expect strategic products to continue to grow strongly in the new financial year. At the same time, the division is managing the ongoing decline in the legacy product customer base. This managed run-off mainly accounted for the reduction in the division's revenue, though gross margin increased significantly to 78.5% (2021: 75.3%). The improvement in gross margin reflected increased income from strategic products, price increases and cost reduction. The division's EBITDA continued to improve, moving to £(0.7)m (2021: £(1.7)m) with significantly less cash spend on capitalised development. The acquisition in January 2022 of Viji, a software developer with proven sustainability software solutions for fashion retailers, has added valuable new IP in an important area for us. This new IP now operates alongside our fashion products and will be more deeply integrated in 2023.

Financial Results

Total revenue from continuing operations for the 12 months ended 30 November 2022 increased by 5% to £47.5m (2021: £45.3m). On a constant currency basis, revenue was up by 6%. Recurring and predictable revenue rose by 9% to £37.6m (2021: £34.5m), and accounted for 79% of Group revenue (2021: 76%). Third-party Products continued to generate a significant proportion of recurring and predictable revenue at £28.0m (2021: £25.4m). Recurring and predictable income from strategic products (in the K3 Products division) is growing fast, with annualised recurring contracts ("ARC") up 32% to £5.7m.

The Group generated a gross profit for the financial year of £28.1m (2021: £26.8m), and Group gross margin was constant at 59.2% (2021: 59.3%). This reflected the balance of contributions from lower-margin Third-party Products and higher-margin K3 products.

Support/administrative expenses rose to £23.0m (2021: £22.3m), with a further of £1.7m of capitalised development costs, reduced by £1.1m as a result of streamlining operations. Adjusted EBITDA1 from continuing activities rose by 16% to £5.1m (2021: £4.3m), with the main driver being Third-party Solutions gross profit. The loss before tax from continuing activities reduced by £4.0m to £3.8m, (2021:loss of £7.8m) and adjusted loss per share from continuing operations reduced by 10.8p per share to 2.6p (2021: loss of 13.6p).

Net cash at 30 November 2022 stood at £7.1m (2021: £9.0m). This is after Viji acquisition costs and software and systems investment. Operating cashflow from continuing operations normalised for Government coronavirus support and capital expenditures was £(0.5)m (2021: £(0.7)m).

Growth Strategy

Third-party Solutions contributes significantly to the Group's recurring income and cash flows. The division has a well-established track record in SYSPRO ERP solutions for manufacturers and distributors in the UK, and our objective is to secure higher-value projects and to address adjacent verticals. The Global Accounts business remains a critical partner in the support and ongoing international expansion of the Inter IKEA Concept via its franchisees.

The K3 Products division offers significantly higher-margin growth potential. This reflects the fact that its solutions are based on K3 intellectual property ("IP"). We believe that there are substantial growth prospects for the Group's core strategic fashion products, which offer a powerful set of solutions for fashion and apparel brands. We have further enhanced these products with the introduction of Viji IP for supply chain traceability, which supports customers' sustainability objectives. Sustainability and environmental considerations have become greater priorities for customers, and EU and national legislation is also driving this trend. However, the area remains underserved, and we believe there is a significant opportunity for us to assist brands in addressing their sustainability issues.

Legacy solutions, which are also part of the K3 Products division, are mostly point-of-sale ("POS") products. Our focus is on providing key accounts with a migration pathway to other K3 products, while managing the ongoing decrease in revenue from these POS solutions.

People

Jonathan Manley, Non-Executive Director, retired from the Group at the AGM in May 2022, and we take this opportunity to thank him again for his contribution to K3 during his six years on the Board. In July 2022, we were delighted to appoint Pernille Fabricius, ACA, as Jonathan's successor. She also now heads the Company's Audit Committee. Pernille has extensive board and senior-level financial and commercial experience across a number of sectors, including IT services. She is currently Chief Financial Officer and Executive Vice President of NNIT A/S, one of Denmark's leading IT and consulting services providers, and Non-executive director of Gabriel Holding A/S, the fabrics manufacturer, and of Brødrene Hartmann A/S, the packaging manufacturer.

Summary and Outlook

We have made encouraging progress under the new growth plan. Contracted revenue from strategic fashion products is growing strongly and contributing to the overall increase in recurring or predictable income. The new financial year has started well with strategic fashion products significantly expanding software licence income, which further increases ARC growth. Third-party Solutions has a solid order book from existing clients and is focused on margin improvement for new projects and upgrades.

The Group had net cash balances of £7.1m at the financial year-end and the first quarter of the new financial year shows a further material improvement in cash generation. We expects the business to generate net cash in the current financial year.

The Board remains confident that the Group will make further progress over the current financial year and beyond.

T Crawford, Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Introduction

Last year's review of Group strategy and addressable markets identified growth opportunities across all core activities. Our Third-party Solutions division is an important engine of recurring income and generates high levels of cash, and we are now focusing on enhancing margins. However, there is even greater scope to drive the quality of the Group's income by leveraging the growth of K3 Products. The opportunities for K3's high-margin products in fashion and apparel brands are extremely attractive, and their growth will drive recurring revenues, profitability and cash flows.

We have made very encouraging progress with our strategy and growth plans although the financial benefits are not yet fully apparent in these results. At the same time, over the course of the financial year, we continued to streamline operations and to invest in our central systems and software products.

Strategic Direction

K3 Products - Focus on Fashion & Apparel

K3 has a well-established track record in the delivery of Enterprise Resource Planning ("ERP") and Point of Sales ("POS") solutions for retail businesses. Our expertise extends across all the core "concept-to-consumer" processes. This includes product design, product manufacturing, and product supply and returns. We also understand the challenges that our customers are contending with, including new regulations, changing consumer behaviour and technological innovation. The adoption of digital technology is driving the need for solutions that support strong supply chain collaboration and smarter, more integrated sales engagement with customers. New products are data-led and cloud-based Software-as-a-Service ("SaaS") solutions.

Our focus is now on capitalising on our existing position and reputation in the fashion and apparel and related large retail markets, which includes brands that are developing their direct-to-consumer routes to market.

'Transforming retail for good' summarises the direction we are taking; that is to provide solutions that support innovation and transformation of core business processes, including in relation to environmental and ethical priorities. The growth areas we are focusing on are:

• • Sustainability - in particular supply chain traceability, which is now subject to new legislation;

• • Omni-channel and 'unified commerce' - which encompasses managing effectively both B2B and B2C channels, supporting a unified view of inventory across all channels, as well as creating a seamless shopping experience for consumers as they engage digitally and physically with brands, from the discovery stage to checkout and returns; and

• • Business Insight - enabling brands to gather actionable intelligence from data collected via our products to optimise inventory, maximise profitability, reduce wastage and inefficiencies, and engage with consumers in a more personalised way.

The addition of Viji, the sustainability-focused software developer, has extended our existing sustainability offering with products that address supply chain transparency. This is a growth area, which is now subject to increasing regulation and consumer awareness.

Third-party Solutions

NexSys (previously called SYSPRO)

Customers in manufacturing and distribution are embracing digital transformation, smart manufacturing and direct machine integration, and moving away from first-generation, monolithic ERPs or legacy applications, which are often not integrated. This shift provides us with significant growth opportunities, and we are targeting larger-scale projects for customers in growth sectors.