Nasstar plc (LON: NASA), the provider of hosted managed and cloud computing services, has today announced its preliminary results for the year ended 31 December 2018.
· Revenue up 7% to £25.7m (2017 restated: £24.1m)
· 91% of 2018 revenues generated from contracted recurring services (2017: 91%)
· EBITDA* up 9% to £5.2m* (2017 restated: £4.8m*)
· Adjusted EBITDA** up 6% to £5.6m** (2017 restated: £5.3m**)
· Adjusted EBITDA** margin 22% (2017 restated: 22%)
· Adjusted earnings per share up 9% to 0.50p *** (2017 restated: 0.46p***)
· Statutory Loss Per Share 0.17p (2017 restated: 0.23p)
· Proposed final dividend of 0.09p per share (2017: 0.06p per share), a 50% increase on prior year
· Year-end Net Cash+ at £1.5m (31 December 2017: Net Cash £1m)
· IFRS 9, 15 and 16 adopted as at 1 January 2018, prior year restated for IFRS 15
* Comprising earnings adjusted for interest, taxation, depreciation, profit on sale of fixed assets and amortisation. Refer to Alternative Performance Measures for reconciliation to GAAP measure.
**Comprising earnings adjusted for interest, taxation, depreciation, profit on sale of fixed assets, amortisation, share based payments and exceptional items (being costs in relation to reorganisation and data centre closure, share repurchase costs and provisions). Refer to Alternative Performance Measures for reconciliation to GAAP measure.
***Adjusted for amortisation of acquired intangibles, share based payments and exceptional items. Refer to Alternative Performance Measures for reconciliation to GAAP measure.
+ reported on a consistent basis with prior periods excluding IFRS 16 property lease liabilities from debt
· Second year of the “Nasstar 10-19” plan, with further investment in key strategic areas designed to:
o Secure future long-term growth
o Speed up delivery and recognition of revenues
o Improve efficiencies
o Retain competitive advantage
o Develop sales pipeline of larger opportunities
· Significant new three year contract win with top 50 UK law firm to deliver a fully managed public/private hybrid cloud solution to 850 users provides clear evidence of the benefit of the “Nasstar 10-19” programme – demonstrating ability to win contracts of increasing complexity and size.
· The implications of IFRS 15 are that contract setup revenues are spread over the full term of the customer contract rather than being recognised at the point of installation. The cost of the install is recognised as an asset with the cost recognised over the contract term in line with revenue. Therefore, in order to expedite short and long-term revenue delivery, the leadership team chose to invest into additional engineering resource.
· As a result of revenue recognition in respect of one-off setup revenues changing on the adoption of IFRS 15 combined with continuing cost pressure associated with licensing, gross margin percentages have reduced in 2018. In response to this, towards the end of 2018 Nasstar initiated further mitigation works designed to improve margins through a combination of pricing strategies and licensing cost reductions through driving further technical consolidation. In addition, the “Nasstar 10-19” programme objective around automation is designed to help further in this area.
· Further data centre rationalisation achieved with closure of the Singapore site. Rationalisation programme expected to complete in 2019 with the reduction of the UK footprint by a further two sites; Microsoft Azure (“Azure”) being utilised for the certain workloads.
· Integration of all teams achieved across the Group under “Nasstar 10-19” programme; further operational cost savings will result in 2019 with the end of the London office lease.
· Development of an innovative talent management programme designed to help attract and retain the best talent in the face of an extremely competitive market for technical resource.
· Further investment into product strategy and increased account management capability.
· Principal impact of adoption of IFRS 9, 15 and 16 has been to defer contract set up revenues (and related costs) over the term of the customer contract, resulting in:
o Mitigating actions taken to counter margin impact, including pricing strategies and licensing cost reductions
o Additional investment in engineering resource to expedite short and long-term revenue delivery
o Adjusted EBITDA margin target associated with the “Nasstar 10-19” programme reset to 23% by the end of 2019
· Nasstar listed in the “1,000 Companies to Inspire Britain” for the third year running.
Nigel Redwood, Chief Executive Officer of Nasstar plc, commented:
“Despite the very challenging macroeconomics of the technical sector, caused by wider economic uncertainties combined with increasing cost pressures and competition, Nasstar has had a positive 2018. The “Nasstar 10-19” programme has focused on key areas to mitigate as much as possible the market pressures seen across the technical sector whilst structuring the business as a single entity.
As a result Nasstar is now better positioned than ever to take advantage of its increased capabilities to deliver larger and more complex projects and the wider acceptance by larger SMEs of cloud as the primary solution for their IT requirements. The securing of the recently announced UK top 50 law firm further demonstrates this capability.
2018 was the second year of our three-year integration strategy known as “Nasstar 10-19″ and I am excited by the organisation this strategy has created.”
I am pleased to report continued improvements in our key KPI’s with contracted recurring revenues representing 91% of total revenues demonstrating Nasstar’s strong visibility of earnings. Total revenues increased by 7% for the year, which is a very positive outcome and slightly ahead of management expectations. This has been achieved despite the inertia in the wider market place caused by the uncertainties in the economic climate.
The management team’s concentration on the “Nasstar 10-19” priorities and commitment to delivering the three-year strategic plan has had a positive effect on EBITDA, which grew at 9%, a slightly faster rate than sales. Continued refinement of the Group strategy has been imperative to ensure Nasstar’s capabilities are evolving to maximise the opportunities and mitigate the threats seen in the technical sector. As a result, I am very pleased to see the positive impact this has had on our customer relationships and capability in delivering larger more complex solutions.
Net Cash was in line with management expectations giving me continued confidence to support our progressive dividend policy with a final dividend for 2018 being declared of 0.09p per share (2017: 0.06p), a 50% increase on last year.
The “Nasstar 10-19” strategy has structured the business to be able to more effectively recognise revenue and cost synergies from potential acquisitions. As a result, the Board continues to be alert to further opportunities in this area.
The implications of the decision of the UK to leave the EU are obviously wide ranging, but the most notable one impacting Nasstar is the exposure that the Group has to the US Dollar exchange rate, as previously reported. On a trading front, our target market has predominately been UK head quartered businesses and therefore any immediate impacts of the UK leaving the EU are not expected to be material. We are alert to the fact that the continued delay in the BREXIT process could cause further delays in decision making which may slow new business wins, we also recognise that there is an increased risk of business failure within the customer base. As a result, the Board monitors the situation closely on a monthly basis and is prepared to adjust investment plans if necessary.
The continued development of the single leadership team has seen pleasing advancements in the capabilities of the functional management team driving further organisational resilience. Finally, I recognise that what makes Nasstar great is the combined effort of every member of the team, and I would like to place on record my thanks and appreciation for the hard work and dedication of every member of the Group.
Chief Executive’s Report
Strategy execution during 2018
Continuing our strategic momentum during the second year of the three-year “Nasstar 10-19” programme, 2018 saw the launch of a number of projects with specific objectives designed to deliver continually improving customer service and efficiency in execution. These comprised:
· Priority objective: A continuation of the single leadership team and single team philosophy for each function across the entire Group with a clear focus on continuing to embed the right management structure acting on the right management information and KPI’s. Activities against this objective included:-
o Invested in management and team leader training
o Improved the leadership team’s business cadence combining strategy development and tactical execution
o Introduced external management mentoring from an industry and management expert
o Completed full team integration meaning at the end of the London office lease in 2019 it is likely that renewal will not be required, driving further operational cost savings
· Priority objective: A continuation of the consolidation of the technical platforms and the development of a new platform based on the best available hybrid technologies, with the goal of facilitating full technical consolidation of all customer systems across the Group. Activities against this objective included: –
o Closure of Singapore data centre migrating remaining workloads to Azure
o Data centre rationalisation expected to be completed in 2019 with the reduction of the UK footprint by a further two sites;
o Investment into expanding current platform to enable consolidation
o R&D team established to work on next generation hybrid design
· Priority objective: To embed further the Nasstar security-centric culture, placing “security at the heart” of all processes and technologies. Activities against this objective included:-
o Evolved a closer partnership with Nasstar’s security partners
o Introduced mandatory multi factor authentication for all new clients and rebuilds
o Rolled out an enhanced internal information security programme training regime
o Employed additional security qualified resource
o Increased investment in intrusion prevention technologies
o Researched and tested intent based and artificial intelligence driven security technologies with a view to adoption in 2019
· Priority objective: We recognise that the management of talent is a significant contributor to the success and health of the business. The competitive landscape for attracting technical skills is more challenging than ever and, as a result, further investment is being made into our training and development strategy, health and wellbeing strategy, employee engagement techniques and apprenticeship programmes. All are designed to help attract and retain the best talent in the industry. Activities against this objective included:-
o Launched a new health and wellbeing programme
o Invested in additional HR resource focused on talent management
o Increased training budget across all technologies
o Launched a new online training platform for employees
o Launched an apprenticeship programme and apprentice’s charter
o Launched a school’s programme including schools visits, careers support and work experience placements
· Priority objective: Investment into product strategy and service acceptance to ensure that innovation continues to be at the heart of our service capability, ensuring that our strategic product direction is well mapped in what is a very fast-moving sector. Activities against this objective included: –
o Head of Commercial Strategy role established to lead service acceptance and vendor management
o Creation of dedicated technical pre-sales team for new services
o Launch of Nasstar’s new cloud communications offering based on Mitel’s MiCloud Flex solution
o Refined the public/private cloud offering enabling the business to deliver larger and more complex integrations
· Priority objective: Investment in automation and systems integration continued in 2018 with the on-going roll out of Cherwell, our new IT Service Management (ITSM) solution, being pivotal to further integration benefits being recognised. Activities against this objective included: –
o Recruited a new Head of Internal Systems and allocated a budget for an increased team dedicated to system automation
o Created a knowledge management function for the increased use of the proactive knowledge base within Cherwell, designed to improve customer service and leverage economies of scale
o Rolled out an interim resource management solution whilst developing a new Group project management tool which will be fully integrated
o Plans established for 2019 to rationalise the remaining back office systems onto a centralised and fully integrated best of breed solution for each function
· Priority objective: Nasstar will continue to focus on its vertical markets, defining deeper and more selective criteria upon which to target customers. In addition, structured account plans for key customers are designed to ensure our long-term relationships with clients are maintained. Activities against this objective included: –
o Invested in desk-based account management team to proactively manage smaller clients, freeing field-based account managers to focus on key strategic accounts
o Reallocated customer account managers across the customer base to better align with the increased size and capability of the team
o Standardised account management procedures and process across all customers
· Priority objective: We will continue to invest in automation and improved processes and technical capabilities in our delivery teams in order to further decrease the on boarding time for clients. Activities against this objective included: –
o A full review of our install processes was completed
o A new Head of PMO (Project Management Office) was employed, bringing considerable experience of project and process improvement to a complex technical delivery
o Investment made into resource management tools giving a central view of all resource and projects
o Increased the size of the project management team to improve project throughput
· Priority objective: Resulting from the implementation of new financial reporting standards, in particular IFRS 15, the main impact being to defer contract set up revenues (and related costs) over the term of the customer contract, we took a number of specific decisions to assist alongside the many initiatives already implemented under the “10-19” programme, namely:-
o Incremental investment in engineering resource to expedite short and long-term revenue delivery, with the resulting spend deferred for subsequent amortisation over contract duration
o Implementation of new pricing strategies towards the end of the year
o Technical consolidation of all customer systems to drive licence cost savings
Nasstar recognise that the recruitment, retention and management of talent is a significant contributor to the success and health of the business. As a result, a priority objective of the “Nasstar 10-19” programme focused on developing Nasstar’s talent management techniques, which saw further investments being made into training and development strategies, a health and wellbeing strategy, employee engagement techniques and apprenticeship programmes.
The entire team have embraced the opportunities that have developed as the Group has evolved into one integrated operation which has created an organisation that has given team members clear career progression opportunities. Nasstar acknowledge that every one of its employees make a significant contribution to the success of the business and we would like to take this opportunity to thank our loyal and hardworking team of employees.
The high quality of earnings and financial security of the Group is underpinned by the high percentage of revenues that are generated by contracted recurring services across Nasstar’s customer base (2018: 91%). That said we are by no means complacent and will continue during 2019 to take steps under the “Nasstar 10-19” programme to focus on strategies to mitigate the competitive pressure we experience every day in the context of a dynamic market place.
Our strategic goals for 2019 are well established with delivery in hand, including the ongoing review of our sales pricing policies and license cost consolidation through further technical integration and the continuation of our talent management scheme.
The continuation of our capabilities to win and deliver larger and more complex projects will be key for 2019 and will be evidenced by the implementation of the previously announced 850 user law firm.
The protracted BREXIT process continues to create an uncertain economic climate, the tangible effect of which for Nasstar has been the lengthening of the decision-making process seen in some opportunities in the sales pipeline. The majority of our customers are UK headquartered so are impacted by the continued climate of macroeconomic uncertainty. The Board monitors the situation on an ongoing basis and is prepared to make alterations to strategic plans and investment decisions as appropriate.
In the meantime, we will continue to work hard to differentiate Nasstar by focusing on vertical specialisms, whilst investing heavily in account management capabilities, technical skills and support processes all designed to deliver first class customer service.
We believe that solutions delivered on public and private cloud hybrid technologies will continue to form the basis of a growing market and I therefore believe Nasstar is well positioned, from solid foundations to take advantage of the continuing opportunity.
Chief Executive Officer