Chief Executive Officer
This has been a pivotal year in NCC Group's transformation as we lay the foundations to enable us to compete and win globally, delivering on our mission to make the world safer and more secure.

Adam Palser

Chief Executive Officer

A year of progress in results and transformation

Over the past 12 months, NCC Group has grown revenue, profit and cash flow while making significant progress through its transformation programme. Revenue on a continuing basis was up 7.6% and adjusted operating profit² increased by 9.4%, while the Group also delivered improved cash flow with cash conversion² of 109.6% compared to 90.2%¹ in FY18. On a statutory basis, operating profit increased by 44.4% to £19.5m (2018: £13.5m¹) and profit before taxation increased 52.1% to £17.8m giving rise to a basic adjusted EPS² and statutory EPS from continuing operations of 9.2p (2018: 8.2p¹) and 4.9p (2018: 4.4p¹) respectively.

These results have been achieved alongside significant transformation activity (described below), which is building a strong platform for future scalable growth and margin improvement.

I am particularly pleased with the progress made in the second half in two critical areas for NCC Group. First, the improvement in our cash management processes, which has led to a sustainable reduction in our working capital and a year-end net debt² position of £20.2m (compared to £27.8m at the end of FY18 and £45.1m at the end of H1 FY19). Second, after a first half in which we were unable to resource all of our opportunities because of skill shortages, we have rebuilt the capacity of our technical cyber teams within the Assurance division.

Headcount in our Assurance technical delivery teams increased by 102 people across the world to 1,047, which means that we are well positioned to deliver further growth. Given the scarcity and demand for cyber skills, our ability to attract sufficient specialists is a pleasing endorsement of our progress towards being the employer of choice for cyber talent.

Our Assurance business continues to operate in a growing and dynamic market

Demand for cyber services continues to grow globally, driven by:

  1. The increasing number of connected devices and services;
  2. The growing dependence of individuals, businesses and society on this connected environment;
  3. The proliferation of threats and threat actors; and
  4. The relentless increase in regulation and consequent costs of compliance failure.

Thanks to this growing global demand, the cyber market continues to attract massive investment from system integrators, defence companies, consulting firms and private equity or venture capital technology and/or security firms. In this intensely competitive market, NCC Group continues to demonstrate sustainable, profitable growth and this is in no small part due to our world-leading and cost-effective approach to research.

Our talented employees continue to discover key vulnerabilities in existing and new technologies – from printers to blockchain – which allow us to educate and protect our clients thereby monetising our knowledge.

Across different geographies we observed variability in demand growth: NCC Group grew 23.4% in North America, 12.9% across continental Europe and Asia-Pacific but only 3.1% in the UK (after taking into account a reduction of £3.6m in UK product sales, which is a consequence of our deliberate move away from low-margin re-selling).

We attribute the strong growth in North America partly to growing demand from a thriving ecosystem of 'technology producers' for whom privacy and security are of existential importance, and partly to the work we have done over the last 12 months to build a powerful and empowered North American business.

Cross-region delivery in our technical security consulting teams increased by 31% in support of sales growth around the world, which evidences our maturing ability to deploy resources globally.

We intend to return all parts of our Assurance business to double-digit growth in the year ahead, and a key success factor for achieving this goal is attracting and retaining sufficient talent.

I am consequently pleased to report that attrition in our Technical Security Consulting teams dropped from 24.9% in FY18 to 17.9% in FY19. Overall, attrition in our Assurance business was 19.8% (FY18: 23.2%), driven in particular by attrition of 28.6% in our sales teams, which was largely the consequence of more vigorous performance management as we seek to upgrade our sales capabilities.

While our current focus is on strengthening and growing our organic operations we will take advantage of acquisition opportunities that fit our target profile as and when they present themselves.

Escrow a year of transition

Revenue in our Escrow business declined 2.8% over the course of the financial year with a 6.5% decline in the UK outweighing an encouraging 10.7% increase in North America.

Although our current Escrow business is dominated by on-premise software solutions – and it is true to acknowledge that on-premise software is declining as a proportion of the software market – we observed that the renewal rates for our agreements remained constant at 89.6%. During Q4 FY19, we secured our largest ever on-premise contract win (£800k) with a major international bank, which, coupled with our strong North American growth, leads us to believe that Escrow continues to be a good business for NCC Group.

We did, however, find the UK market challenging for Escrow this year but, in line with our strategic priority to return the Escrow division to growth, we increased our UK sales team to 44 people in the second half of the year.

Beyond our existing on-premise software escrow solutions, we believe that the need for business resilience is just as relevant – if not more so – in the growing world of cloud services. Towards the end of the financial year, we launched our Escrow-as-a-Service cloud-resilience proposition and are encouraged by initial demand and feedback from the market. Over the course of the coming year, our intention is to prove that our EaaS product is a scalable high-margin offering, which has the potential to match the market penetration of our on-premise solutions.

Investment in the EaaS market launch may dilute margin temporarily.

Overall, we continue to view the extensive client list and recurring revenue streams of our Escrow division as important assets for the Group and intend to return this business to growth through:

  1. Better sales operations, particularly in the UK;
  2. International expansion in North America (in particular) and continental Europe; and
  3. Developing new offerings that we can sell to our existing client base – of which EaaS is the first.
  1. See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
  2. See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.

Escrow-as-a-Service offers organisations the option to either access or replicate their unique cloud environment, applications and data providing assurance against software supplier failure.

Highlights across our five transformation workstreams to date include:

Develop our People

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Lead the Market

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Win Business

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Deliver Excellence

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Support Growth

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Highlights across our
five transformation
workstreams to date
include:
Develop our People: Consistent global approaches to induction, performance management and leadership have been defined and are ready for FY20 launch. We undertook a Global Employee Engagement survey with Best Companies that led us to identify a number of activities including mentoring and management programmes (currently in pilot) and 'NCC Cares', our global wellness initiative. During the year we have also strengthened our leadership with the arrival of Tim Kowalski, Chief Financial Officer, Ian Thomas as Managing Director of Assurance (UK and APAC) and Colin Watt as Chief People Officer.
Lead the Market: Days invested in research increased globally by 15% resulting in high-impact output across fields including Enterprise Internet of Things (IoT), AI/Machine Learning, Smart Cities and Connected Health.
Win Business: We launched Salesforce in our Assurance division across Europe (including the UK) in June 2019 in conjunction with our Gated Business Lifecycle (GBL). The GBL has harmonised the way we go to market across the world, which prepares us further for greater co-operation across geographies. We shall complete the global roll-out in the first half of the next calendar year.
Deliver Excellence: Performance was supported by increased cross-region global resourcing as our scale allows us to capture market share when others face more pressing delivery resource constraints.
Support Growth: Seven out of nine of our future core systems are now operational in at least one major region, with the remainder due to roll out progressively over the next financial year. Our Workday installation, which is the largest component, remains on track and has delivered an additional benefit of bringing teams across the world together to define a common way of working across the Group.

Our transformation programme: Securing Growth Together (SGT) and the next version of NCC Group

May 2019 saw the first anniversary of our three-year transformation programme, Securing Growth Together (SGT).

SGT is the vehicle through which we are executing our strategy and delivering on our priorities. We are making good progress and have successfully achieved our year one milestones. Our SGT programme will result in us having the information we need to run the firm in an assertive and agile way globally and will provide a stable platform for future growth and margin improvement.

Summary, operational priorities and outlook

In summary:

  • Robust revenue growth during first year of operational transformation
  • Adjusted operating profit margin² improved to 13.4% (2018: 13.2%¹) with strong cash conversion² and net debt² reduced to £20.2m (2018: £27.8m). On a statutory basis operating profit margin increased to 7.8% (2018: 5.8%)

Our operational priorities for FY20 include:

  • Assurance: continued double-digit growth and margin improvement
  • Escrow:
    • Stabilise revenue this year and growth thereafter
    • Accelerating the adoption of our new cloud-resilience (EaaS) proposition
  • People: increasing our sales capability and effectiveness, particularly in the UK (where we are rebuilding our sales team) and North America (to support further growth)

Outlook:

  • Regulatory pressure and high-profile breaches continue to increase the strategic importance and value of cyber security in our target markets
  • Three-year transformation, SGT, progressing on time and within budget to create the next version of NCC Group
  • We look forward with confidence to a dynamic year and expect full year trading to be in line with our expectations

Adam Palser

Chief Executive Officer

24 July 2019

  1. See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
  2. See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.