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Regulatory Story
Company Alfa Financial Software Hldgs PLC
TIDM ALFA
Headline Half-year Report
Released 07:00 26-Sep-2019
Number 7075N07

RNS Number : 7075N
Alfa Financial Software Hldgs PLC
26 September 2019
 

26 September 2019

Alfa Financial Software Holdings PLC

 

H1 2019 Interim Results

 

 

Alfa Financial Software Holdings PLC ("Alfa" or the "Company"), a leading developer of software for the asset finance industry, today publishes its unaudited results for the six months ended 30 June 2019.

 

Financial highlights:

 

Results

H1 2019

H1 2018

Movement

£million, unless otherwise stated

Unaudited

Unaudited

%

Revenue

30.9

32.9

 (6) %

Operating profit

5.4

8.6

(37) %

Profit for the period

4.0

6.7

 (40) %

Earnings per share - basic (pence)

1.4

2.4

(41) %

 

 


H1 2019

31 Dec 2018

Movement

£million

Unaudited

Audited

%

Cash

53.3

44.9

19 %

 

 

Key measures (1)

H1 2019

H1 2018

Movement

£million, unless otherwise stated

Unaudited

Unaudited

%

Revenue - constant currency

30.9

33.9

(9) %

Operating profit - constant currency

5.4

9.2

(41) %

Earnings per share - diluted (pence)

1.4

2.2

(39) %

Free cash flow conversion

205%

109%

88%

 

(1) See definitions section for further information regarding calculation of measures not defined by IFRS.

 

 

Overview/Summary:

 

•    Revenue and operating profit in line with 16 September 2019 guidance.

•    Revenue decline due to delays in implementation projects and reduced discretionary spend by customers, despite strong implementation delivery across five customer implementations.

•    Strong free cash flow conversion performance.

•    Robust balance sheet position with £53m of cash and no debt.

•    Cost pressures are expected to increase due to competitive market for high-skilled delivery teams.

•    Current macro-economic and political uncertainty leading to changes in customer buying behaviour.

•    Notwithstanding near-term pressures, fundamental market drivers remain strong.

•    Refreshed sales and business development approach growing new business pipeline, but time to convert opportunities is increasing.

•    Sustained investment in Alfa Systems' functionality and expansion of partner ecosystem.

•    Current market conditions expected to continue through 2020.

 

Andrew Denton, Chief Executive Officer

"Results for the period have fallen short of our plans. As we explained in our Trading Update, earlier this month, we have been disappointed that our revenues have fallen back due to delays in anticipated implementation projects, as well as reductions in discretionary spend by customers.

 

Nevertheless, there were some solid achievements in H1 as we increased the number of implementation customers and successfully delivered the initial phase of implementation for a global OEM in Europe.   

 

The medium-term prospects for Alfa remain compelling with a number of pipeline opportunities across existing and new geographies. Those opportunities extend beyond our existing market segments and there is increasing interest in our pre-configured Alfa Start offering for the UK equipment finance market. We remain committed to enhancing the performance and functionality of Alfa Systems to maintain our market-leading position.

 

The exceptional quality of our staff, software and customer base gives me every confidence that we have the fundamentals in place to benefit as market conditions improve."

 

Enquiries

 

Alfa Financial Software Holdings PLC

+44 (0)20 7588 1800

Andrew Denton, Chief Executive Officer

John Miller, Interim Chief Financial Officer

Andrew Page, Executive Chairman

 


Tulchan Communications LLP

+44 (0)20 7353 4200

James Macey White

Matt Low

 

 


Barclays

+44 (0)20 7623 2323

Robert Mayhew

Edward Hill

 


Numis

+44 (0)20 7260 1000

Simon Willis

Jonathan Abbott

Tom Ballard

 


 

Investor and analyst webcast

The Company will host a conference call today at 11:30 a.m. To obtain details for the conference call, please email alfa@tulchangroup.com.

 

Please dial in at least 10 minutes prior to the start time. An archived webcast of the call will be available on the Investors page of the Company's website, https://investors.alfasystems.com/

 

Notes to Editors

Alfa has been delivering systems and consultancy services to the global asset and automotive finance industry since 1990. Our best practice methodologies and specialised knowledge of asset finance facilitates our delivery of large software implementations and complex business change projects. With an excellent delivery history over nearly three decades in the industry, Alfa's experience and performance is unrivalled.

 

Alfa Systems, our class-leading technology platform, is at the heart of some of the world's largest asset finance companies. Key to the business case for each implementation is Alfa Systems' ability to replace multiple customer systems on a single platform. Alfa Systems supports both retail and corporate business for auto, equipment, wholesale and dealer finance on a multijurisdictional basis, including leases/loans, originations and servicing. An end-to-end solution with integrated workflow and automated processing using business rules, Alfa Systems provides compelling solutions to asset finance companies.

 

Alfa Systems is in live operation in 17 countries and Alfa has offices in Europe, Asia-Pacific and North America.  For more information, visit www.alfasystems.com.

 

Forward-looking statements

This report contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Alfa. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Alfa has no obligation to update the forward-looking statements or to correct any inaccuracies therein.



 

BUSINESS REVIEW

 

Overview

 

Key customer demand has been influenced by macro-economic and political uncertainties, which have depressed capital expenditure in our end markets.  In line with our revised expectations, as set out in our Trading Update, issued on 16 September 2019, the Group had total revenues for the six months ended 30 June 2019 of £30.9 million (2018 £32.9 million) and operating profit of £5.4 million (2018 £8.6 million).

 

Revenue has decreased due to delays in the implementation of certain projects and a reduction in customer spend on optional upgrades and non-critical work. Notwithstanding these delays, Alfa has continued delivery across five major implementation projects.

 

Amongst our major projects in the year to date, we have successfully gone live with the initial phase for a global Original Equipment Manufacturer (OEM), in Spain. Additionally, we carried out work under successive letters of engagement, for a new implementation customer in Europe; and pre-implementation, design work for a new customer in sub-Saharan Africa. These works are being performed in advance of the finalisation of the related software licence and maintenance agreements.

 

Following the half year, an additional global OEM successfully went live with an initial phase of their software implementation project in Europe; and we have gone live in Germany for the global OEM referred to in the previous paragraph.

 

During the period under review, the Group has invested in and developed the functionality and digital capability of our technology platform, Alfa Systems. Digital continues to be an important differentiator in the Alfa customer proposition.

 

The Alfa partnership programme is developing well.  We are training our growing network of partners and we have a number of co-bids underway.  At the end of H1 2019, we had three employees of partners working with us on projects to supplement the Alfa team. Additionally, we are in discussions with two implementation partners and anticipate working with them to identify further joint opportunities in the second half of the year.   

 

The broader macro-economic and political uncertainty has resulted in challenging conditions in our operating markets.  In particular, optional spend on upgrades and non-critical work has been deferred and this is reflected in the slowdown of Ongoing Development and Services (ODS) revenues in H1 2019. We anticipate this continuing in the second half of the year and into 2020.

 

Despite the short-term challenges, the long-term fundamentals of the asset finance market remain positive. Alfa's world-class technology platform, market leadership, strong balance sheet and investment capacity ensure it is well placed to capitalise on existing and emerging opportunities.   

 

Implementation and ODS

 

Overall, Alfa had five software implementation projects throughout H1 2019. In addition, during the period, we started pre-implementation design work for a new customer. As this work is still in the design phase, the revenue associated is classified within our ODS segment. We anticipate this project moving into the implementation phase in the final quarter of 2019.

 

Alfa's long-term relationships with its customers arise from our project implementation track record. We are pleased to have successfully gone live with a software implementation project in Spain, in H1, and Germany in H2, with one further country expected to go live later this year. 

 

In addition, early in H2, another large software implementation customer went live on the first phase of their project. This phase was based in the Netherlands and related to a contract management system of a global OEM. We anticipate that this will be the first of several countries where this important customer installs Alfa.    

 

Alongside our implementation work, we have also successfully completed a number of upgrades, during H1 2019, to ensure that our customers are able to benefit from the continued evolution of Alfa Systems. The revenue related to these upgrades is included within our ODS segment.

 

 

Partnerships

 

Our partnership programme is an important part of Alfa's long-term growth strategy. In the period, we made good progress with regards to training and co-bidding for new projects with our current partners.

 

In the first half of the year, we delivered induction training to an initial group of eight partner team members, and have trained a further ten partner staff, in H2. At the half year, the late stage pipeline contained three co-bids with implementation partners, including two bids that were already underway at the end of 2018.  We will continue to build our partner capability as these co-bids progress and as our partnership programme develops.

 

Our total partner ecosystem now includes agreements with three resource augmentation partners (Genpact, Teamwill Consulting and Tellox Finansservice) and we are in discussions with further potential implementation partners.

 

Product development and innovation

Investment in the Alfa platform will always be at the heart of our corporate strategy. During H1, the principal advances were in respect of our digital investment and the performance and scalability of the system.

The company is generating returns on 2018's digital investment, with go-lives in Spain and Germany (the latter in H2) of a React-based point of sale solution for a major multinational OEM. This implementation was also the first deployment of a POSkit based point of sale. POSkit is a toolkit of point of sale software components that allows customised applications to be built quickly and efficiently. This approach has proven to work well, and further POSkit projects are in the planning stages. Alfa's digital capability continues to generate good customer engagement and we expect digitalisation to remain an important factor in customer purchasing decisions.

Continued development has brought about further maturity of Alfa's library of APIs (including exposing them as JSON over HTTP), as well as the development of mobile application functionality to support the full asset finance customer journey, where we have partnered with best-of-breed specialist suppliers for functionality like customer identity verification, e-signing and direct payments.  We believe that this development is an important part of ensuring the Alfa platform maintains its position and is a key differentiator for us.

Alongside these functional improvements, Alfa has invested heavily in the performance and scalability of the system to meet the needs of a large US finance organisation, with 4.5 million active vehicle contracts. The improvements from this project, now in the late stages of implementation, will deliver substantial benefits to all current and future customers.

Beyond these principal developments, a number of additional enhancements to the platform were made including:

·      Measurable improvements to all users' experience;

·      Development of Cash Accounts functionality;

·      Further development of Cloud hosting tooling and automation; and

·      PostgreSQL support.

We have also invested in research in artificial intelligence, with an accompanying thought leadership campaign for H2 2019 and added support for usage-based billing; a key enabler for the industry trend towards servitisation.

Alfa Start ('Business in a box') was released to the US automotive finance sector in 2018. Since then it has improved the efficiency of our US implementation projects and been of significant interest to sales prospects. Building on this, in July 2019 we started small-scale development work to adapt Alfa Start to meet the requirements of the UK equipment finance market. This will give Alfa a ready-to-deploy repeatable solution based on a subscription-licensing model for smaller customers in our home market. We started marketing this in the UK in the second half of this year.



 

Board evolution and governance

 

Alfa's transition from private to public company status has led to challenges as the Company's corporate governance structures were tested by the impact of personnel changes during the period.  The Board is grateful to have received the support and guidance of an experienced team of Non-Executive Directors (NEDs) during that time. The impact of these challenges is described further, below.  The Board has sought to address these matters and work programmes are ongoing to ensure that the Board has the information, time and resources it needs in order to function more effectively.

 

Viv Maclachlan stepped down as CFO on 26 April 2019 and we would like to thank Viv for her contribution.  John Miller has been serving as Interim CFO since 7 May 2019.  A search process has commenced to appoint a permanent CFO to the Board as soon as possible.

 

The Board constitution has changed as Alfa moves towards the next stage of its development.  Having joined Alfa as a NED to support management through the IPO two years ago, Richard Longdon stood down from the Board on 26 April.  The Company has previously announced that Karen Slatford and Robin Taylor will leave the Board at the date of this report.

 

The outgoing NEDs considered it inappropriate to play a substantive role in the recruitment of their successors.  As a result, Andrew Page (as the only other member of the Nominations Committee), supported by Andrew Denton, with input and assistance from the outgoing NEDs, led the NED search process.  An external search consultant, Norman Broadbent Executive Search Limited, was engaged to compile a list of candidates, to which was added a number of other candidates who had been recommended to the Company separately.  Chris Sullivan was appointed, to the Board and then chaired the Nominations Committee, subsequently obtaining Board approval for the appointment of Steve Breach and David Stead.  Chris now assumes the role of Senior Independent Director. In selecting the new Board members, the Company has sought to bring together asset finance and enterprise software sector expertise alongside strong financial management and rigorous corporate governance experience to help us continue our journey as a public company. We are very grateful to Richard, Karen and Robin for their contributions and look forward to working with Chris, Steve and David. 

 

The Board is mindful of the need to keep under review its procedures to ensure that the Directors have a reasonable basis for making proper judgments on a continuing basis regarding the financial position and prospects of the Group, particularly in light of the significant personnel changes outline above. As part of this review process, the Company has commenced an improvement programme, which is being led by John Miller, supported by additional external capabilities, as appropriate.  Whilst prioritising short-term improvements in the timely provision of financial and operational information to the Board, the Company is also in the process of expanding the functionality of the recently implemented Finance and HR system (Workday) which, in the medium-term, will provide a more robust platform for the provision of management information.

 

The Company's outsourced internal audit partner resigned in August 2019.  The Audit & Risk Committee (ARC) has reviewed the Company's controls and risk management processes, and has concluded that the Company will be best served by engaging a new external provider to deliver an internal audit programme, complementing the work of the Company's Risk Manager. A selection process will be initiated in October 2019, overseen by ARC, and it is intended that a new internal audit partner will be appointed before the end of the financial year.

 

Alongside the new appointments to the Board, a number of senior management changes took place in H1 2019.  A renewed leadership team has now been appointed, and we were delighted to be able to promote a number of experienced Alfa staff to the leadership group, supplemented with selective external recruits.

 

Our management changes included refreshing the structure and leadership of our business development function. We have been encouraged with the early results from these changes. 

 

The extent of changes to senior personnel has created inevitable challenges which the Board is determined to address and we are confident that we now have the right mix of skills and experience to take Alfa forward through the next phase of its development. Our people are a key asset and major contributors to the outstanding work we carry out for our customers.  We would like to thank them for all their efforts over the past six months.

 



 

Outlook 

 

In line with our Trading Update issued on 16 September 2019, the Board anticipates baseline revenue for the full year to be in the region of £63-£65m, based on existing customer agreements and assuming that the challenging market conditions that prevailed in the first half of the year continue.  This range does not include potential revenue upside of up to approximately £4m, partly relating to finalising new licence agreements and partly relating to finalising licence and maintenance settlement arrangements with an existing customer. Each of these is well advanced but the timing and recognition of these items remains uncertain. 

 

Competition for talent is high across our markets and consequently we expect to award remuneration increases for our delivery teams in excess of general inflation rates. Additionally, we expect to incur some one-off legal and professional costs in the second half of 2019. As a result, and as previously announced on 16 September 2019, the Board now expects Alfa's full year profit for 2019 to be significantly below its previous expectations.

 

Whilst Alfa's overall pipeline is healthy across geographic and market segments, we expect the current macro-economic and political uncertainties to continue having an impact on customer buying behaviour in 2020. Additionally, the effects of current year remuneration awards, for our delivery teams, will be fully reflected in next year's financial performance. Consequently, there will be short-term pressure on Alfa's margins. Nonetheless, the Board believes that the fundamentals of the business are strong. The Company has significant cash resources and we are committed to investing in our people and product to ensure the Company is well placed to benefit as market conditions improve.

FINANCIAL REVIEW

 

Introduction

 

Revenues decreased by £2.0 million to £30.9 million in the six months ended 30 June 2019 (H1 2018: £32.9 million) primarily due to a £2.5 million decrease in ODS revenues to £9.2 million in H1 2019 (H1 2018: £11.7 million), and a £0.7 million decrease in maintenance revenues to £7.3 million (H1 2018: £8.0 million). These decreases have been partially offset by a £1.2 million increase in software implementation revenues to £14.4 million in H1 2019 (H1 2018: £13.2 million). The number of ongoing software implementation projects, increased from four ongoing implementations (plus one paused) during H1 2018 to five plus one paused in H1 2019.

 

Operating profit decreased by £3.2 million to £5.4 million (H1 2019: £8.6 million).  Operating profit has been directly impacted by the decrease in revenues, coupled with an increasing cost base in the first six months of the year.

 

Operating Free Cash Flow Conversion (FCF) for the half year increased to 205%, with cash of £53.3 million at 30 June 2019 (31 December 2018: £44.9 million).  The high FCF is a reflection of an increased focus on cash management and settlement during the period of non-recurring receivables of £3.2 million for which the related revenue had been recognised in prior periods.

 

Total contracted value (TCV) -as defined on page 31- at 30 June 2019, excluding the paused software implementation project, is £70.1 million (31 December 2018: £79.0 million), which consisted of £21.0 million of software implementation revenue, £6.4 million of ODS revenues and £42.7 million of maintenance revenues. TCV has decreased due to the delivery of revenue on software implementation projects, decreases in general levels of contracted ODS and the termination of some maintenance contracts.  TCV has also been impacted because our new software implementation customer is in the late stages of negotiation with respect to their software licence and maintenance contracts, but as at 30 June 2019, these had not been finalised.

 

As of 1 January 2019, Alfa updated its accounting policies to adopt IFRS 16 "Leases".  This new standard was in accordance with the transition provisions in the standard and the cumulative effect of the initial application has been recognised at the date of transition. IFRS 16 requires the recognition of a right‑of‑use asset and a lease liability at commencement for all leases, except for short‑term leases and leases of low-value assets.  Alfa is not party to any material leases where it acts as a lessor, but has various lease contracts relating to property and motor vehicles, where it acts as the lessee.  The adoption of IFRS 16 resulted in the recognition of right to use assets of £19.8 million and lease liabilities of £20.2 million as at 1 January 2019.  The full impact of the transition to IFRS 16 has been explained in note 14 to the interim financial statements.

 

Continuing operations

H1 2019

H1 2018

Movement

£'000s

Unaudited

Unaudited

%

Revenue (1)

30,853

32,884

(6) %

Operating expenses - net

(25,445)

(24,290)

5%

Operating profit

5,408

8,594

(37) %

Finance income

57

24

138%

Finance expense

(317)

-

-

Taxation

(1,112)

(1,896)

(41) %

Profit for the period

4,036

6,722

(40) %

(1)   Revenue in H1 2019 includes £nil (2018: £0.1 million) of losses on derivative instruments.

 

Revenue

 

Revenue decreased by £2.0 million, or by 6%, to £30.9 million in H1 2019 (H1 2018: £32.9 million), predominantly due to the decrease in ODS revenue, which reflected lower activity levels, offset by an increase in implementation revenue, with one new software implementation customer. At 30 June 2019, the Group had 25 customers (30 customers at 30 June 2018).



 

Revenue - by type

H1 2019

H1 2018

Movement

£'000s

Unaudited

Unaudited

%

Software implementation

14,439

13,196

9%

ODS

9,167

11,726

(22) %

Maintenance

7,247

7,962

(9) %

Total revenue

30,853

32,884

(6) %

 

Software implementation revenues

 

Software implementation revenues increased by £1.2 million, or by 9%, to £14.4 million in H1 2019 (H1 2018: £13.2 million) reflecting four continuing implementation projects and one new implementation customer, for which implementation work commenced in H1 2019. This compares to four continuing implementation customers and one paused implementation project during H1 2018. Average revenue per implementation customer increased to £2.9 million (H1 2018: £2.6 million). Of the five software implementations in the period, three (62% of implementation revenues) are denominated in US dollars (H1 2018: four, or 83% of implementation revenues).

 

The new implementation customer contributed £3.9 million to revenues in H1 2019. This customer was reclassified from our ODS to our software implementation segment in H1 2019 to reflect the nature of the work being performed under specific fixed-term engagement letters. At the date of this report, the licence and maintenance agreements are nearing finalisation. 

 

Revenue from continuing implementation customers contributed £10.7 million in H1 2019, a decrease of £1.6 million from H1 2018.  This was predominantly due to deferral of go-live dates on certain projects, increasing the overall length of the projects, which resulted in write-backs to software licence revenue in the period. Additionally, the reduced revenue reflects lower overall activity levels during the period.  Implementation revenues decreased by £0.2 million following the write-back of the accrued income balance in respect of the implementation customer who put their project on pause in late H1 2018.  This represented a £1.1 million decrease in total implementation revenues compared to H1 2018.

 

Ongoing development and services (ODS) revenues

 

ODS revenues decreased by £2.5 million to £9.2 million in H1 2019 (H1 2018: £11.7 million), reflecting the reduction in discretionary customer spend on optional upgrades and non-critical work, which we identified in our Trading Update, earlier this month. Three new ODS customers contributed £1.7 million of revenues during the first six months of 2019 (H1 2018: £4.7 million). Two of the new ODS customers are in respect of pre-implementation projects which contributed £1.0 million of revenue in H1 2019.

 

New ODS customer revenues were offset by a £3.4 million decline in revenues from continuing ODS customers, as specific ongoing development efforts decreased and fewer customers transitioned from implementation to ODS compared to the previous year. In addition there was a £0.8 million decrease in revenue i relating to former ODS customers.

 

The number of ODS customers generating more than £100,000 of revenue decreased to 12 (H1 2018: 15) with revenue per customer remaining consistent at £0.8 million (H1 2018: £0.8 million). 

 

Maintenance

 

Maintenance revenues decreased by £0.7 million, or by 9%, primarily due to lost revenues of £1.6 million due to a customer who terminated their agreement for maintenance and right to use Alfa in the fourth quarter of 2018, and a customer who paused their maintenance contract at the end of H1 2018.  These declines were partially offset by a £0.8 million increase in maintenance revenues from existing customers, being a 12% increase against H1 2018 on ongoing maintenance contracts, and £0.1 million of new maintenance revenues.

 

During H1 2019, Alfa had 26 maintenance customers, with 22 expected to generate maintenance revenues in the second half of 2019. This compares to 28 customers at 30 June 2018.



 

Operating profit

 

The Group's operating profit decreased by £3.2 million, or 37%, to £5.4 million in H1 2019 (H1 2018: £8.6 million) primarily reflecting the £2.0 million decrease in revenues, as well as an increase in the Group's cost base.  Excluding the impact of unrealised gains or losses on derivatives, operating profit on a constant currency basis decreased by 41%.

 

Expenses - net

H1 2019

H1 2018

Movement

£'000s

Unaudited

Unaudited

%

Implementation and support expenses

8,984

8,884

1%

Research and product development expenses

7,085

9,050

(22)%

Sales, general and administrative expenses

9,598

6,404

50%

Other income

(222)

(48)

362%

Total expenses - net

25,445

24,290

5%

 

Headcount numbers at 30 June 2019 were 304, and our staff retention rate has been 82% over the 12 months to that date.

 

Implementation and Support (I&S) expenses increased by £0.1 million, or by 1%, to £9.0 million (H1 2018: £8.9 million). I&S expenses predominantly comprise personnel costs. In the six months ended 30 June 2019, average software implementation headcount increased by 11, to 111 FTEs (H1 2018: 100 FTEs).

 

Research and product development (R&PD) expenses decreased by £2.0 million, or 22%, to £7.1 million (H1 2018: £9.1 million). 92% of R&PD expenses are personnel costs and the average number of developers decreased in the six months ended 30 June 2019 by 34 to 130 FTEs (H1 2018: 164 FTEs). As in prior periods, our development efforts centred primarily on customer project development.  During H1 2019, amounts relating to the following research and development efforts were capitalised; £0.05 million in relation to Alfa Digital and £0.3 million in relation of enhancements of the Alfa user interface (H1 2018: nil). 

 

Sales, general and administrative (SG&A) expenses increased by £3.2 million, or by 50%, to £9.6 million (H1 2018: £6.4 million) which includes an increase in depreciation and amortisation expenses of £1.0 million during the first six months of 2019.  This increase was primarily in respect of the new HR and finance system, which was capitalised in the prior year, as well as increased computer hardware investment and adoption of IFRS 16 from 1 January 2019. Additionally, share-based payment charges increased in H1 2019 to £0.4 million (H1 2018: £0.1 million) in relation to LTIPs granted in May 2018, legal and professional costs increased by £0.8 million to £0.9 million (H1 2018: £0.1 million) and general office costs increased by £0.6 million, reflecting both increases in office space in the first half of 2018 and inflationary cost pressures during the first half of 2019.

 

Profit for the period

 

Profit after taxation decreased by £2.7 million, or 40%, to £4.0 million in H1 2019 (H1 2018: £6.7 million). The effective tax rate increased to 21.6% in H1 2019 against the effective tax rate for the 2018 year end (FY 2018 19.2%, H1 2018: 22.0%) due to the increasing proportion of the Group's profits being generated by our US subsidiary, which is subject to higher corporate tax rates than the UK. 

 

Earnings per share

 

Basic earnings per share decreased to 1.40 pence in H1 2019 (H1 2018: 2.37 pence). Diluted earnings per share decreased to 1.35 pence (H1 2018: 2.24 pence).

 



 

Cash flow

 


H1 2019

H1 2018

£'000s

Unaudited

Unaudited

Operating profit

5,408

8,594

Depreciation and amortisation

1,433

440

Share based payment charge

475

53

Loss on disposal of property, plant and equipment

-

2

Interest element on lease payments

(317)

-

Unrealised gain on derivative financial instruments

-

103

Movement in working capital

5,891

756

Cash generated from operations

12,890

9,948

Settlement of derivative financial instruments and margin calls

-

21

Income taxes paid

(2,752)

(4,145)

Net cash generated from operating activities

10,138

5,824

Net cash used in investing activities

(834)

(567)

Net cash used in financing activities

(907)

-

Net increase in cash and cash equivalents

8,397

5,257

Cash and cash equivalents at beginning of the period

44,922

31,267

Effect of exchange rate changes

(64)

(192)

Cash and cash equivalents at end of the period

53,255

36,332

 

Net cash increased by £8.3 million to £53.3 million as at 30 June 2019, from £44.9 million at 31 December 2018. This increase has been driven by cash generated from operations as a result of maintenance payments received in the period; non-recurring settlement or termination payments of £3.2 million received in the period; and an increased focus on cash management by the Group. Taken together, this resulted in the Group's Operating Free Cash Flow Conversion (FCF) rising to 205% for the period ended 30 June 2019, compared to 109% for the period ended 30 June 2018. The increase in operating cash flow was offset by capital expenditure of £0.9 million and tax payments of £2.8 million during the period. The Group has no external bank borrowings.

 

Net cash generated from operating activities increased by £4.3 million to £10.1 million in H1 2019 (H1 2018: £5.8 million). This increase was due to an increase in the cash generated from operations of £2.9 million to £12.9 million (H1 2018: £9.9 million) as described above, coupled with a £1.4 million decrease in taxation paid.

 

The movement in working capital predominantly reflected an increase in contract liabilities, relating to licence and maintenance payments collected in advance, of £6.1 million and an increase in trade and other payables of £0.1 million.  This was slightly offset by an increase in trade and other receivables of £0.3 million.

 

Net cash outflows used in investing activities of £0.8 million in the six months ended 30 June 2019 related to capital expenditure in relation to externally acquired software and computer equipment, as well as payments made in relation to internally developed software.  

 

In the six months ended 30 June 2019, net cash outflows from financing activities related to the principal element of lease payments, resulting from the adoption of IFRS 16.  In addition, the interest element of the lease payments has been included within the reconciliation from Operating Profit to the cash generated from operations in H1 2019.  Prior to the adoption of IFRS 16 on the 1 January 2019, the payments made in respect of operating leases held by Alfa were included within the Operating Profit. The cash generated from operations has therefore increased as a result of the reclassification of cash flows under IFRS 16 with no impact on the overall cash flows. No dividends have been paid or proposed for the six months ended 30 June 2019.

 

Related party transactions

 

CHP Software and Consulting Limited is the immediate and ultimate parent (the "Parent") of the Group and during the period there was no trading between the Parent and the Group.

 

In the six months ended 30 June 2019, there were no transactions (H1 2018: nil) and at 30 June 2019, there were no balances outstanding from, or to, the Parent (30 June 2017: nil).

 

Additionally, an arms-length transaction with Classic Technology Limited, a company in which the Chairman holds an interest, was undertaken for the rental of property. These transactions amount to £0.02 million (H1 2018: £0.02 million) with no outstanding receivable balances at the end of each reporting period.

 

Subsequent events

 

In the period since 30 June 2019, three NEDs have been appointed and two NEDs resigned, as follows:

 

Chris Sullivan (appointed 18 July 2019)

Steve Breach (appointed 9 August 2019)

David Stead (appointed 20 August 2019)

Robin Taylor (resignation effective 26 September 2019)

Karen Slatford (resignation effective 26 September 2019)

 

No other material subsequent events have taken place after the reporting period ended.



 

PRINCIPAL RISKS AND UNCERTAINTIES

 

Principal risks and uncertainties which could have a material impact on the long-term performance of Alfa Financial Software Holdings PLC and its subsidiaries were set out in the Alfa Financial Software Holdings PLC Annual Report for the year ended 31 December 2018, dated 7 March 2019, and remain valid at the date of this report.

 

These risks and uncertainties (in no specific order) are:

 

·      Failure to retain or increase market share in relation to large multinational customers or to retain our existing customer base - we may fail to assess market, technological or industry changes; and Alfa Systems may not develop sufficiently to meet customer requirements;

 

·      High customer concentration - we have significant customer concentration risk due to the size and duration of our software implementation projects and the relatively low revenues generated from maintenance contracts;

 

·      Talent recruitment and retention - our business is dependent on our people and failure to attract and retain high quality staff may impact our ability to deliver our implementations, maintain product quality and deliver on our strategic plan;

 

·      Socio-economic, geo-political - our revenues are derived from providers of asset finance and the underlying finance industry is sensitive to changes in economic and political conditions, some of which cannot be predicted; this could reduce the profitability of our customers and potential customers reducing amounts available to spend on our software;

 

·      Risks to people, skills, location and working environment - our business is dependent on our people, the market for software engineers is highly competitive and a failure to attract and retain high quality staff would have a negative impact on our ability to serve our customers and deliver our strategic plan;

 

·      Failure to deliver on our existing implementation or ODS business - our business depends on our continued delivery success and our implementation projects involve a high degree of complexity and significant time investment, from Alfa and our customers;

 

·      Failure to keep Alfa Systems relevant to the market, or to have competitive development costs - it is imperative that Alfa Systems evolves to meet our customers' and prospective customers' needs, and we need to adapt changing regulatory requirements and demands for now operating models.

 

·      IT security and cyber risks - a targeted attack could adversely affect our customers' or potential customers' perception of Alfa Systems and could impact our ability to operate our business;

 

·      Business interruption or continuity - we are at risk of disruption to our day-to-day operations if there is a disaster incident and this could have a negative reputational impact;

 

In addition to the disclosure in the 2018 Annual Report, the following risks have been identified:

 

·      Brexit - there is uncertainty regarding the timing and impact of Brexit. Beyond economic uncertainties, we might find it difficult to recruit and retain staff from EU countries, and there might be implications for our ability to service customers; and

 

·      Restrictions on movement of employees to new regions - as our customer base becomes geographically more diverse, we might find it difficult to provide staff at customer sites.



 

UNAUDITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 30 JUNE 2019

 

£'000s

Note

H1 2019

Unaudited

H1 2018

Unaudited

Continuing operations




Revenue

3

30,853

32,884

Implementation and support expenses


(8,984)

(8,884) (1) 

Research and product development expenses


(7,085)

(9,050) (1) 

Sales, general and administrative expenses


(9,598)

(6,404) (1) 

Other operating income


222

48

Operating profit

4

5,408

8,594

Finance income


57

24

Finance expense


(317)

-

Profit before taxation


5,148

8,618

Taxation

6

(1,112)

(1,896)

Profit for the period attributable to owners of the Parent


4,036

6,722





Other comprehensive income




Items that may be subsequently reclassified to profit or loss




Currency translation differences


88

156

Total comprehensive income, net of tax


88

156

Total comprehensive income for the period attributable to owners of the Parent


4,124

6,878





Earnings per share (in pence)




Basic

7

1.40

2.37

Diluted

7

1.35

2.24

Weighted average number of shares - basic

7

288,773,893

283,766,785

Weighted average number of shares - diluted

7

300,000,000

300,000,000

 

The consolidated statement of profit or loss and comprehensive income should be read in conjunction with the accompanying notes.

 

(1)  Following a change in financial management software during H2 2018 and an evaluation of the nature of expenses, £0.9 million of H1 2018 "Travel cost" was reallocated to "Personnel expenses" to better reflect the nature of the expense (see note 4). Due to the fact that "Travel cost" and "Personnel expenses" are allocated on different bases to the expense line items disclosed on the face of the income statement, this has led to the reallocation of the H1 2018 expense amounts on the face of the income statement. The following changes have been made to the presentation of the H1 2018 income statement line items: Implementation and support expenses increased by £223k, Research and product development expenses decreased by £130k, Sales, general and administrative expenses decreased by £93k. This was a reallocation of expenditure and the net profit amount was not affected.



 

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019

 

£'000s

Note

30 June
 2019

Unaudited

31 December 2018

Audited

Assets




Non-current assets




Goodwill


24,737

          24,737

Other intangible assets

8

1,559

            1,203

Deferred tax assets


9

8

Right-of-use assets

14

18,898

-

Property, plant and equipment

8

1,265

       1,455

Total non-current assets


46,468

          27,403

Current assets




Trade and other receivables

9

8,853

            4,651

Accrued income

9

5,643

            9,162

Prepayments

9

1,271

            1,452

Other receivables

9

807

      947

Cash and cash equivalents


53,255

          44,922

Total current assets


69,829

          61,134

Total assets


116,297

          88,537

Liabilities and equity




Current liabilities




Trade and other payables

9

5,959

            7,588

Corporation tax

9

815

            2,448

Lease liabilities

14

1,857

-

Contract liabilities - software implementation

9

3,167

            1,662

Contract liabilities - deferred maintenance

9

8,325

            3,772

Total current liabilities


20,123

15,470

Non-current liabilities




Provisions for other liabilities

9

623

152

Lease liabilities

14

19,284

-

Total non-current liabilities


19,907

152

Total liabilities


40,030

          15,622

Capital and reserves




Ordinary shares


300

300

Translation reserve


464

376

Retained earnings


75,503

72,239

Total equity


76,267

72,915

Total liabilities and equity


116,297

          88,537

 

The consolidated statement of financial position should be read in conjunction with the accompanying notes.

 



 

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 JUNE 2019

 

£'000s

Notes

Share
 capital

Translation reserve

Retained
earnings

Equity

attributable

Balance as at 1 January 2018


300

-

53,821

54,121

Profit for the financial period


-

-

6,722

6,722

Other comprehensive income


-

156

-

156

Total comprehensive income for the period


-

156

6,722

6,878

Employee share schemes- value of employee services


-

-

53

53

Balance as at 30 June 2018


300

156

60,596

61,052







Balance as at 1 January 2019


300

376

72,239

72,915

Effect of initial application of IFRS 16

14

-

-

(1,189)

(1,189)

Balance at 1 January 2019 - as restated


300

376

71,050

71,726

Profit for the financial period


-

-

4,036

4,036

Other comprehensive income


-

88

-

88

Total comprehensive income for the period


300

464

75,086

75,850

Employee share schemes- value of employee services

11

-

-

417

417

Balance as at 30 June 2019


300

464

75,503

76,267

 

The consolidated statement of changes in equity should be read in conjunction with the accompanying notes.



 

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE 2019

 

£'000s

Note

H1 2019

Unaudited

H1 2018

Unaudited

Cash flows from operations




Operating profit


5,408

8,594

Adjustments:




Depreciation and amortisation

8, 14

1,433

440

Share based payment charge

11

475

53

Loss on disposal of property, plant and equipment


-

2

Interest element of lease payments

14

(317)

-

Unrealised loss on derivative financial instruments


-

103

Movement in working capital:




Movement in trade and other receivables


(355)

(2,799)

Movement in trade and other payables and provisions (excluding derivative financial instruments and contract liabilities)


132

(2,955)

Movement in contract liabilities


6,114

6,510

Cash generated from operations


12,890

9,948

Settlement of derivative financial instruments and margin calls


-

21

Income taxes paid


(2,752)

(4,145)

Net cash generated from operating activities


10,138

5,824

Cash flows from investing activities




Purchases of property, plant and equipment

8

(112)

(325)

Purchase of computer software

8

(397)

(266)

Payments for internally developed software

8

(382)

-

Interest received


57

24

Net cash (used in) investing activities


(834)

(567)

Cash flows from finance activities




Principal element of lease payments

14

(907)

-

Net cash (used in) finance activities


(907)

-

Net  increase in cash


8,397

5,257

Cash and cash equivalents at the beginning of the period


44,922

31,267

Effect of exchange rate changes


(64)

(192)

Cash and cash equivalents at the end of the period


53,255

36,332

 

The consolidated cash flow statement should be read in conjunction with the accompanying notes.

 



 

 

Notes to the Condensed Consolidated Interim Financial Statements for the six months ended 30 June 2019

1.     General information

Alfa Financial Software Holdings PLC ("Alfa" or the "Company") is a public company limited by shares and is incorporated and domiciled in England. Its registered office is at Moor Place, 1 Fore Street Avenue, London, EC2Y 9DT, United Kingdom. Alfa's registration number is 10713517.

 

The principal activity of the Company and its subsidiaries (the "Group") is to provide software solutions and consultancy services to the asset finance industry in the United Kingdom, United States of America, Europe and Asia Pacific.

 

These unaudited Interim Financial Statements have been approved for issue by the Board of Directors on 26 September 2019. These Interim Financial Statements have been reviewed but not audited.

 

2. Accounting policies

 

2(a) Basis of preparation

The Interim Financial Statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union and the Disclosure and Transparency Rules of the Financial Conduct Authority.

These Interim Financial Statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The interim financial report does not include all the notes of the type normally included in an annual financial report.  Accordingly this report should be read in conjunction with the annual report for the year ended 31 December 2018 (the "Annual Financial Statements"), which has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"), and any public announcements made by Alfa during the interim reporting period. The Annual Financial Statements constitute statutory accounts as defined in section 434 of the Companies Act 2006 and a copy these statutory accounts have been delivered to the Registrar of Companies.  The auditor's report on the Annual Financial Statements was not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006."

The accounting policies adopted in preparation of the Interim Financial Statements are consistent with those used to prepare Alfa's consolidated financial statements for the year ended 31 December 2018 and the corresponding interim reporting period, and the adoption of new and amended standard, as set out below.

The preparation of the Interim Financial Statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these Interim Financial Statements, the significant judgements made by management in applying the Group's accounting policies, the key sources of estimation uncertainty were the same as those that applied to the consolidated Annual Financial Statements described above. 

The Interim Financial Statements have been prepared on a going concern basis, under the historical cost convention, as modified to include the fair value of certain financial instruments. The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report, and therefore they continue to adopt the going concern basis of accounting in preparing these Interim Financial Statements.

 

2(b) Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, being a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

 

2(c) Changes in accounting policies

Aside from the adoption of IFRS 16, which is described in note 14, the Group has not adopted any other new accounting standards. Other changes to accounting standards in the year had no material impact.

 

2(d) Seasonality

The Group is not significantly influenced by seasonality or cyclical fluctuation because the Group revenue from maintenance fees, implementation and ODS fees are relatively consistently throughout the year. Instead the Group is influenced by the number and maturity of software implementations during the period. Separately, the Group's cash flows are subject to seasonal fluctuations because (i) the Group invoices a large proportion of its customers for maintenance annually in advance in the first six months of each year, resulting in a higher inflow of cash receipts in the first half of the Group's financial year in respect of maintenance revenues and (ii) cash flows are impacted by the invoicing of up-front licence fees at the commencement of an implementation.

 

2(e) Foreign currency

The average rate for the six month period ended 30 June 2019 for the US Dollar was 1.2940 (H1 2018: 1.3760). The closing rate for the US Dollar used was 1.2676 as of 30 June 2019 (31 December 2018: 1.2736).

The average rate for the six month period ended 30 June 2019 for the Euro was 1.1454 (H1 2018: 1.1366).

The closing rate for the Euro used was 1.1167 as of 30 June 2019 (31 December 2018: 1.1305).

 

 

3(a) Revenue by type

The Group assesses revenue by type of project, being software implementations, ongoing development and services (ODS) and maintenance, as summarised below:

£'000s

H1 2019

Unaudited

H1 2018

Unaudited

Software implementation

14,439

13,196

ODS

9,167

11,726

Maintenance

7,247

7,962

Total revenue (1)

30,853

32,884

 

Timing of revenue - the Group derives revenue from the transfer of goods and services as follows, software implementation and ODS revenue is derived over time based on time and materials, and maintenance revenue is derived over time based on a fixed price.

 

3(b) Revenue geographical information

Revenue attributable to each geographical market based on where the licence is sold, or the service is rendered, is as follows:

 

£'000s

H1 2019

Unaudited

H1 2018

Unaudited

UK

7,982

10,154

US

14,068

14,632

Rest of Europe

7,030

6,596

Rest of the World

1,773

1,502

Total revenue  (1)

30,853

32,884

 

3(c) Revenue by currency

Revenue by contractual currency is as follows:

 

£'000s

H1 2019

Unaudited

H1 2018

Unaudited

GBP

8,981

10,714

USD

14,155

16,116

EUR

5,642

3,058

Other

2,075

2,996

Total revenue (1)

30,853

32,884

 

(1)  Total revenue is presented net of any losses or gains on derivative financial instruments.  During 2018 we settled the final portion of a USD forward hedge, with £0.1 million of losses recorded against revenue in the period ended 30 June 2018.

 

 

3(d) Assets and liabilities from contracts with customers

 

£'000s

H1 2019

Unaudited

FY 2018

Unaudited

Contract liabilities - deferred licence

3,167

1,662

Contract liabilities - deferred maintenance

8,325

3,772


11,492

5,434

 

The following items have been included in arriving at operating profit:

£'000s

H1 2019

Unaudited

H1 2018

Unaudited

Personnel, external consultants, training and recruitment expenses

17,598

17,875(1) 

Other personnel-related expenses

1,046

1,153

Advertising, sponsorship and marketing costs

325

395

Depreciation and amortisation     

1,433

440

Property costs

112

1,189

Travel costs

1,236

1,148(1) 

IT costs

675

600

Insurance

1,763

1,303

Foreign currency differences

46

(197)

Share based compensation

417

53

Other

1,016

379

 

(1)  Following a change in financial management software during H2 2018 and an evaluation of the nature of expenses, £0.9 million of H1 2018 "Travel cost" was reallocated to "Personnel expenses" to better reflect the nature of the expense. Due to the fact that "Travel cost" and "Personnel expenses" are allocated on different bases to the expense line items disclosed on the face of the income statement, this has led to the reallocation of the H1 2018 expense amounts on the face of the income statement. The following changes have been made to the presentation of the H1 2018 income statement line items: Implementation and support expenses increased by £223k, Research and product development expenses decreased by £130k, Sales, general and administrative expenses decreased by £93k. This was a reallocation of expenditure and the net profit amount was not affected.

 

Average monthly number of people employed (including Directors)

H1 2019

Unaudited

H1 2018

Unaudited

UK

233

245

US

60

75

Rest of the World

17

14

Total average monthly number of people employed

310

334

 

Average monthly number of people employed (including Directors)

H1 2019

Unaudited

H1 2018

Unaudited

Software implementation

111

100

Research and product development

130

164

Sales, general and administrative

69

70

Total average monthly number of people employed

310

334

 

At 30 June 2019 the Group had 304 employees (30 June 2018: 337).

 

6.   Income tax expense

Income tax expense is calculated on management's best estimate of the full financial year expected tax rate, which is then adjusted for discrete items occurring in the reporting period. The income tax expense for the six month period ended 30 June 2019 was £1.1 million (H1 2018: £1.9 million), representing an effective tax rate of 21.6% (H1 2018: 22.0%, FY 2018: 19.2%).

7.   Earnings per share


H1 2019

Unaudited

H1 2018

Unaudited

Profit attributable to equity holders of Alfa (£'000s)

4,036

6,722

Weighted average number of shares outstanding during the period

288,773,893

283,766,785

Basic earnings per share (pence per share)

1.40

2.37

Weighted average number of shares outstanding including potentially dilutive shares

300,000,000

300,000,000

Diluted earnings per share (pence per share)

1.35

2.24

 

On the 3rd of June 2019, the second tranche of the 2014 and 2015 employee share options vested, with a total number of shares of 4,206,093 being released.  The weighted average number of shares for the six months ended 30 June 2019 has increased to 288,733,893.

 

Diluted EPS - For the periods presented, the ordinary shares which are held in an employee trust on behalf of employees are treated as having a potentially dilutive effect, because these shares have service conditions attached to them. Should the service conditions not be met, the shares will be forfeited. The shares have no right to voting or to dividends whilst held in trust.

 

 

8 Non- financial assets and liabilities

8 (a) Property, plant and equipment

 

£'000s

Fixtures and fittings

IT equipment

Motor vehicles

Total

Cost





At 1 January 2018

1,041

2,511

40

3,592

Additions

95

527

-

622

Disposals

(1)

(254)

-

(255)

Foreign exchange

12

75

-

87

At 31 December 2018

1,147

2,859

40

4,046

Depreciation





At 1 January 2018

389

1,709

31

2,129

Charge for the year

121

494

8

 623

Disposals

(1)

(252)

-

(253)

Foreign exchange

13

79

-

92

At 31 December 2018

522

2,030

39

2,591

Net book value





At 31 December 2018

625

829

1

1455

Cost





At 1 January 2019

1,147

2,859

40

4,046

Additions

-

112

-

  112

At 30 June 2019

1,147

2,971

40

4,158

Depreciation





At 1 January 2019

522

2,030

39

2,591

Charge for the period

135

166

1

302

At 30 June 2019

657

2,196

40

2,893

Net book value





At 30 June 2019

490

775

-

1,265

 



 

8 (b) Other intangible assets

£'000s

Computer software

Internally generated software

Total

Cost




At 1 January 2018

-

-

-

Additions

1,049

407

1,456

At 31 December 2018

1,049

407

1,456

Depreciation




At 1 January 2018

-

-

-

Charge for the year

253

-

253

At 31 December 2018

253

-

253

Net book value




At 31 December 2018

796

407

1,203

Cost




At 1 January 2019

1,049

407

1,456

Additions

177

382

559

At 30 June 2019

1,226

789

2,015

Depreciation




At 1 January 2019

253

-

253

Charge for the period

135

68

203

At 30 June 2019

388

68

456

Net book value




At 30 June 2019

838

721

1,559

 

9 Financial assets and liabilities

The Group holds the following financial assets and liabilities:

 

 

£'000s

Notes

H1  2019

Unaudited

FY 2018

Audited

Financial assets at amortised cost




Trade receivables

9(a)

8,853

        4,651

Other financial assets at amortised cost

9(b)

7,721

      11,561

Cash and cash equivalents


53,255

        44,922

Total financial assets


69,829

61,134

Financial liabilities at amortised cost




Trade and other payables

9(c)

5,959

7,588

Total financial liabilities


5,959

7,588

 

9 (a) Trade and other receivables

£'000s

H1  2019

Unaudited

FY 2018

Audited

Trade receivables

8,853

4,651

Provision for impairment

-

-

Trade receivables - net

8,853

4,651

 

Trade receivables ageing

Ageing of net trade receivables £'000s

H1  2019

Unaudited

FY 2018

Audited

Less than 30 days

4,990

3,976

Past due 31-90 days

3,863

643

Past due 91+ days

-

32

Trade receivables - net

8,853

4,651

 

The Group believes that the unimpaired amounts that are past due are fully recoverable as there are no indicators of future delinquency or potential litigation.  At the date of this report, 90% of trade receivables have been collected.

 

9 (b) Other receivables held at amortised cost

 

£'000s

H1  2019

Unaudited

FY 2018

Audited

Accrued income

5,643

            9,162

Prepayments

1,271

            1,452

Other receivables

807

               946

Total other receivables held at amortised cost

7,721

          11,560

 

Accrued income represents fees earned, but not invoiced, at the reporting date, which have no right of offset with contract liabilities - deferred licence amounts.  Accrued income decreased by £4.2 million, being £3.2 million of settlement and termination amounts that had been recognised as revenue in prior periods but invoiced and collected during the first half of  2019, as well as a reflection of decreased ODS activity.

 

In relation to customers that had accrued income balances at 30 June 2019, £4.7 million had been invoiced and £3.2 million had been collected as at 26 September 2019.

 

9 (c) Trade and other payables

£'000s

H1  2019

Unaudited

FY 2018

Audited

Trade payables

5,959

7,588

Corporation tax

815

2,448

Contract liabilities - software implementation

3,167

1,662

Contract liabilities - deferred maintenance

8,325

3,772

Provisions for other liabilities

623

152

Total trade and other payables

18,889

15,622

Less: non-current portion

(623)

(152)

Total current trade and other payables

18,266

15,470

 

During the six months ended 30 June 2019, no licence fees (H1 2018: £4.0 million) and £12.5 million of maintenance fees were invoiced (H1 2018: £11.5 million).

 

The Group's activities expose it to a variety of financial risks: market risk (including currency risk and price risk), credit risk and liquidity risk. The Interim Financial Statements do not include all financial risk management information and disclosures required in the Annual Financial Statements; they should be read in conjunction with the Annual Financial Statements. The responsibility for risk management has remained with the Board and there has been no changes to risk management policies since year end. Compared to year end, there was no material change in the contractual undiscounted cash outflows for financial liabilities.

 

The Group has nil foreign currency financial instruments assets outstanding at 30 June 2019 (2018: £0.1 million assets). The Group used Level 2 inputs for determining and disclosing the fair value of financial instruments.

 

11  Share-based compensation

Under the 2018 Long Term Incentive Plan (LTIP), awards in the form of nil cost options over ordinary shares in Alfa were granted on 31 May 2018 to selected employees, in accordance with the Group's Long-Term Incentive Plan, approved by shareholders at the annual general meeting on 24 April 2018. Shares in the Company are transferred to participants at the end of a three-year service period if they continue to be employed by the Group throughout the period. There are no other performance conditions pertaining to the options.  The Group has no legal or constructive obligation to repurchase or settle the options and therefore these awards are treated as equity settled.  None of the outstanding options has an exercise price and the weighted average contractual life is 3 years (2018: 3 years).

 

The fair value of the 2018 LTIP plan has been calculated using the grant date share price as a proxy for fair value of the option adjusted for any dividends over the period. There are no market or non-market performance conditions attached to the option scheme and as such, no performance conditions are included in the fair value calculations. The market price of the shares at the grant date which was £1.43, which is the weighted average fair value of those share options at the measurement date. In calculating the fair value of the LTIPs, it has been assumed that no dividends will be paid on the shares during the three year service period, and that employee attrition will be 21% over that period (30 June 2018: 30%).

 

The Group's shares have been quoted since June 2017, therefore the amount of historical share price data was considered insufficient to determine the expected volatility parameter at the time of valuation. Instead, a measure was taken by assessing the volatility, over a 10 year period, of certain quoted companies that were considered to offer some degree of comparability to the Company. The fair value of the Company's shares was the intrinsic value at the date of grant, because the exercise price was nil. The appraisal value at the date of grant (being 4 October 2018), with a three-year vesting period, was determined to be the intrinsic value at that date.

 

The total value of the awards granted on 31 May 2018 was £2.7 million and the share based compensation charge in the six month period to 30 June 2019 is £0.4 million (30 June 2018: £0.1 million).

 

12  Related party

The immediate and ultimate parent undertaking is CHP Software and Consulting Limited, which is the Parent undertaking of the smallest and largest group in relation to these interim consolidated financial statements. The ultimate controlling party is Andrew Page. There was no trading between the Group and the Parent.

 

In the six months ended 30 June 2019 and 2018 there were no transactions and at 30 June 2019 there were no balances outstanding from, or to, the Parent (30 June 2018: nil).

 

Additionally, an arms-length transaction with Classic Technology Limited, a company in which the Chairman holds an interest, was undertaken for the rental of property. These transactions amount to £0.02 million (H1 2018: £0.02 million) with no outstanding receivable balances at the end of either reporting period.

 

13  Subsequent events

In the period since 30 June 2019, three NEDs have been appointed and two NEDs resigned, as follows:

 

Chris Sullivan (appointed 18 July 2019)

Steve Breach (appointed 9 August 2019)

David Stead (appointed 20 August 2019)

Robin Taylor (Resignation effective 26 September 2019)

Karen Slatford (Resignation effective 26 September 2019)

 

No other material subsequent events have taken place after the reporting period ended.

 

14  Changes in accounting policies

This note explains the impact of the adoption of IFRS 16 Leases on the group's financial statements and discloses the new accounting policies that have been applied, from 1 January 2019.

 

In the current year, Alfa has updated its accounting policies as a result of adopting IFRS 16 "Leases". This new standard supersedes IAS 17 'Leases', IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC-15 'Operating Leases-Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'.   

 

The Group has applied IFRS 16 'Leases' from 1 January 2019 and, in accordance with the transition provisions in the standard, has recognised the cumulative effect of initially applying the new standard at that date. Comparatives for the prior six-month period have not been restated, as permitted under the specific transitional provisions in the standard.  Alfa has also elected not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4, 'Determining whether an Arrangement contains a Lease'.

 

IFRS 16 introduces new or amended requirements with respect to lease accounting, along with significant changes to lessee accounting by removing the distinction between operating and finance leases.  The standard requires the recognition of a right‑of‑use asset and a lease liability at commencement for all leases, except for short‑term leases and leases of low value assets.  The Group is not party to any material leases where it acts as a lessor, but the Group does have various lease contracts relating to property and motor vehicles, where it acts as the lessee.

 

Details of Alfa's accounting policies under IFRS 16 are set out below, followed by a description of the financial impact of adopting IFRS 16.

 

14(a) The Group's leasing activities and how these are accounted for

Alfa enters into lease contracts in respect of various properties and motor vehicles. These rental contracts are typically made for fixed periods of two to 10 years, and sometimes have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. In accordance with IFRS 16, leases are recognised as a right-of-use asset with a corresponding liability, at the date at which the leased asset is available for use by Alfa.  These assets and liabilities are initially measured on a present value basis (as set out in more detail below), with each subsequent lease payment allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

 

Alfa assesses whether a contract is, or contains a lease, at inception of the contract. The Group recognises a right‑of‑use asset and a corresponding lease liability, with respect to all lease arrangements in which it is the lessee, except for short‑term leases (defined as leases with a lease term of 12 months, or fewer) and leases of low-value assets. For these leases, the Group recognises the lease payments as an expense on a straight‑line basis over the term of the lease unless, another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

 

Lease payments included in the measurement of the lease liability comprise:

•      fixed lease payments (including in substance fixed payments), less any lease incentives;

•      variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

•      the amount expected to be payable by the lessee under residual value guarantees;

•      the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

•      penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

 

The lease liability is presented as a separate line in the consolidated statement of financial position. It is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

 

The Group re-measures the lease liability (and makes a corresponding adjustment to the related right‑of‑use asset) whenever:

•      the lease term has changed, or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is re-measured by discounting the revised lease payments using a revised discount rate.

•      the lease payments change due to changes in an index, or rate, or a change in expected payment under a guaranteed residual value. In these cases, the lease liability is re-measured by discounting the revised lease payments, using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). 

•      a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is re-measured by discounting the revised lease payments using a revised discount rate.

 

During the period, one of the Group's property leases was subject to a market review of the lease payment.  As a result, the right-to-use asset and corresponding lease liability were re-measured and increased by £0.01 million to reflect the present value of the additional lease payments to be paid over the remaining lease term.

 

The right‑of‑use assets comprise:

·      the initial measurement of the corresponding lease liability;

·      lease payments made at, or before, the commencement day;

·      any initial direct costs; and

·      restoration cost.

 

The right‑of‑use assets are presented as a separate line in the consolidated statement of financial position.

 

The right-of-use assets are subsequently measured at cost less accumulated depreciation and impairment losses (if applicable).  They are depreciated from the commencement date of the lease and over the shorter period of the lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset, or the cost of the right‑of‑use asset reflects an expectation that the Group will exercise a purchase option, the related right‑of‑use asset is depreciated over the useful life of the underlying asset. Currently, the Group does not have any leases that include a purchase option, or transfer ownership of the underlying asset.

 

Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located, or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. 

 

Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).  The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. During the current financial period, there have been no changes in such assessments.

 

Variable rents that do not depend on an index, or rate, are not included in the measurement of the lease liability and the right‑of‑use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included as an expense in the income statement.

 

14(b) Approach to transition

The Group has applied IFRS 16 using the modified retrospective approach, without restating the comparative information. In respect of those leases that the Group previously treated as operating leases, the Group has:

·      recognised the lease liability as the present value of the remaining lease payments, discounted using the borrowing rate at the date of initial application; and

·      elected to measure its right-of-use assets using the approach set out in IFRS 16.C8(b)(i) to calculate the carrying value as if the Standard had applied at the lease commencement date, but discounted using the borrowing rate at the date of initial application.

 

The Group's weighted average incremental borrowing rate applied to lease liabilities as at 1 January 2019 is 3%.

 

14(c) Practical expedients adopted on transition

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is, or contains, a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered into, or modified, before 1 January 2019.

 

As part of the Group's adoption of IFRS 16 and application of the modified retrospective approach to transition, the Group also elected to use the following practical expedients:

·      the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

·      accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases;

·      the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and

·      the use of hindsight in determining the lease term, where the contract contains options to extend, or terminate, the lease.

 

14(d) Financial impact of applying IFRS 16

IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off‑balance sheet.  The main changes are detailed below:

·      all leases (except as noted above) are now recognised as right‑of‑use assets and lease liabilities in the consolidated balance sheet, initially measured at the present value of the future lease payments as described above;

·      lease incentives (e.g. rent free periods) are recognised as part of the measurement of the right‑of‑use assets and lease liabilities whereas under IAS 17 they resulted in the recognition of a lease incentive liability, amortised as a reduction of rental expenses on a straight line basis;

·      right‑of‑use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This replaces the previous requirement to recognise a provision for onerous lease contracts.  There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application;

·      the Group recognises depreciation of right‑of‑use assets and interest on lease liabilities in the consolidated income statement, whereas, under IAS 17, operating leases previously gave rise to a straight‑line expense in other operating expenses; and

·      the Group separates the total amount of cash paid for leases that are on balance sheet into a principal portion (presented within financing activities) and interest (presented within operating activities) in the consolidated cash flow statement. Under IAS 17, operating lease payments were presented as operating cash outflows.

 

In addition, IFRS 16 requires changes with respect to the accounting for assets formerly held under a finance lease.  The main difference between IFRS 16 and IAS 17 is the measurement of the residual value guarantees provided by the lessee to the lessor.  IFRS 16 requires that the Group recognises as part of its lease liability only the amount expected to be payable under a residual value guarantee, rather than the maximum amount guaranteed as required by IAS 17. This change did not have a material effect on the Group's consolidated financial statements at 30 June 2019, because the Group did not have any assets formerly held under finance leases at the date of transition.

 

The following table sets out the impact on the statement of financial position at 1 January 2019:

 

 

£'000

31 December 2018

Impact of IFRS 16

Adjusted 1 January 2019

Non-current assets




Property plant and equipment

1,455

-

1,455

Right-of-use assets

-

19,758

19,758

Other non-current assets

25,948

-

25,948

Total non-current assets

27,403

19,758

47,161





Current assets




Total current assets

61,134

70

61,204

Total assets

88,537

19,828

108,365

 

Current liabilities




Lease liabilities

-

1,808

1,808

Other current liabilities

15,470

(961)

14,509

Total current liabilities

15,470

847

16,317

 

Non-current liabilities




Lease liabilities

-

20,170

20,170

Other non-current liabilities

152

-

152

Total non-current liabilities

152

20,170

20,322

Total liabilities

15,622

21,017

36,639





Shareholders' equity

72,915

(1,189)

71,726

Total liabilities and equity

88,537

19,828

108,365

 

Of the total right‑of‑use assets of £19.8 million recognised at 1 January 2019, £19.7 million related to leases of property and £0.1 million to leases of motor vehicles.

 

At the date of transition, Alfa had no finance leases recognised. The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease liabilities recognised at 1 January 2019.

 



 

£'000s

Unaudited

Operating lease commitments disclosed under IAS 17 at 31 December 2018

19,627

Short‑term and low-value lease commitments straight‑line expensed under IFRS 16

(41)

Payments due in periods covered by extension options that are included in the lease term

6,652

Operating lease commitments recognised on adoption of IFRS 16

26,238



Discounted using the incremental borrowing rate at 1 January 2019

21,978

Finance lease liabilities recognised under IAS 17 at 31 December 2018

-

Lease liabilities recognised at 1 January 2019

21,978

 

The recognised right-of-use assets relate to the following types of assets:

 

 

£'000s

1 January 2019

Unaudited

H1 2019

Unaudited

Property

19,666

18,771

Motor vehicles

92

127

Total net book value

19,758

18,898

 

In terms of the income statement impact, the application of IFRS 16 resulted in a decrease in rental expenses and an increase in depreciation and interest expense compared to IAS 17. During the six months ended 30 June 2019, in relation to leases under IFRS 16 the Group recognised the following amounts in the consolidated income statement:

 

 

£'000

H1 2019

Unaudited

Depreciation

(928)

Interest expense

(317)

Short‑term lease expense

31

Low‑value lease expense

-

 

Additionally, if IFRS 16 had been applied from 1 January 2018, it would have increased operating profit by £0.2 million and decreased profit before taxation by £0.4 million for the year ended 31 December 2018. Operating cash flows would have been higher by £1.6 million for the full year ended 31 December 2018, because cash payments for the principal portion of the lease liability are classified within financing activities. Only the interest part of repayments can continue to be presented as operating cash flows under IFRS 16.

 



 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors' confirm that these condensed consolidated interim financial statements (the 'Interim Financial Statements') have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

 

•    an indication of important events that have occurred during the first six months and their impact on the condensed Interim Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

•    material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

 

The current directors of Alfa Financial Software Holdings PLC are:

 

Andrew Page

Andrew Denton

Chris Sullivan (appointed 18 July 2019)

Steve Breach (appointed 9 August 2019)

David Stead (appointed 20 August 2019)

Robin Taylor (resignation effective 26 September 2019)

Karen Slatford (resignation effective 26 September 2019)

 

 

By order of the Board

 

 

 

 

 

 

Andrew Denton

Chief Executive Officer

26 September 2019

 



 

 

INDEPENDENT REVIEW REPORT TO ALFA FINANCIAL SOFTWARE HOLDINGS PLC

 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 which comprises the consolidated statement of profit or loss account and comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and related notes 1 to 14. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

 

Our responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30th June 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

Deloitte LLP

Statutory Auditor

London, England

26 September 2019



 

DEFINITIONS

 

Constant currency - When the Company believes it would be helpful for understanding trends in its business, the Company provides percentage increases or decreases in its revenues or operating profit to eliminate the effect of changes in currency values.  When trend information is expressed herein "in constant currencies", the comparative results are derived by re-calculating non-GBP denominated revenues and/or expenses using the average exchange rates of the comparable months in the current reporting period, excluding gains or losses on derivative financial instruments.  The material applicable rates are as follows:

 

Average exchange rates for the period

H1 2019

H1 2018

USD

1.2940

1.3760

Euro

1.1454

1.1366

 

ODS - Ongoing development and services, being one of the Alfa revenue segments.

 

Operating free cash flow (FCF) conversion - Operating FCF Conversion is calculated as cash from operations, less gains and losses on settlement of derivative instruments and margin calls, less capital expenditures and the principal element of lease payments, as a percentage of operating profit.  Operating FCF is calculated as follows:

 


H1 2019

H1 2018

Unaudited

£'000s

£'000s

Cash generated from operations

12,890

9,948

Settlement of derivative financial instruments and margin calls

-

21

Capital expenditure

(891)

(591)

Principal element of lease payments

(907)

-

Operating FCF generated

11,092

9,378

Operating FCF Conversion

205%

109%

 

Total contracted value ('TCV') - TCV is calculated by analysing future contracted revenue based on the following components: (i) an assumption of three years of current maintenance payments (actual maintenance contracted length varies by customer); (ii) the estimated remaining time to complete any software implementations and recognise deferred and material right-to-use licence amounts; and (iii) ODS work which is contracted under a statement of work.

 

Revenue from customers - revenue excluding unrealised gains or losses on derivative instruments.

 

Adjusted Earnings, Adjusted EBIT and Adjusted EPS, diluted - In the past the Company has used these measures to adjust the profit for the period from continuing operations attributable to equity holders of the Group, and the profit from continuing operations before income taxes and finance income / expenses, for IPO related expenses and pre-IPO share based payments. These measures were used in order to allow management to monitor the underlying performance of the business by excluding items not considered by management to be reflective of the underlying trading operations of the Group or adding items which are reflective of the overall trading operations.  During the year ended 31 December 2018, during the six months ended 30 June 2019, there were no IPO related expenses, pre-IPO share based payments or other adjusting items incurred.  As such Adjusted Earnings, Adjusted EBIT and Adjusted EPS, diluted have not been used in these interim financial statements.

 


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