NCC Group plc (NCC) Earnings Call Transcript & Summary

Good morning, and welcome to the half year results for NCC Group for the financial period ending 30th of November 2020. This morning, I'm going to give you a brief summary of our highlights. I'm going to pass over to Tim, our CFO, for an in-depth look at some of the numbers, and I'm going to come back and talk a bit more about where we're heading as a group and our future strategy. So with no further ado, let's get into it. As we turn to the presentation, it's my absolute delight to present to you today a set of numbers which shows NCC Group moving forward year-on-year despite, of course, the comparative period last year being one that was free of COVID disruption. You can see the revenue has gone up. Gross profit is up. Adjusted EBIT is up. And once again, we've demonstrated disciplined cash generation. Crucially, we've also seen accelerated growth in service lines which are important for our future. MDR, our managed services business which promises more recurring revenues, more stability and more visibility grew 24%, 25%, up to GBP 23 million. Escrow-as-a-Service, our cloud proposition, so important for regenerating and revitalizing our Software Resilience division, up 83% on orders to GBP 1.1 million. Just to remind you, we captured GBP 1 million of orders last financial year, and this year, we've captured GBP 1 million of orders in the first half, showing growth and momentum that we are excited about. All of this experience of managing our way through the COVID disruption, demonstrating growth has given us great confidence in the future, standing on the foundations of our global business created through our 3-year transformation program, Securing Growth Together, standing on the foundation of our blue-chip client base, we are looking forward to investing in the future and making NCC Group ready for growth. Now to guide into a bit more detail. I talked -- I've told you that as a group, we are up on revenue, and here's some more of the breakdown. Assurance revenues up 2.4%. And in a minute, Tim will talk you through the geographic splits there. Software Resilience stabilized and, indeed, up a fraction, just 0.5% of growth, but an important milestone for that division in its stabilization and its return to growth. I've talked to you already about the acceleration that we're seeing in our key service lines for the future. And also, I'm pleased to announce further major contract wins, not just with clients that you will have seen or heard about before, Bose, Facebook, the Greater Atlanta transit area, but also just after the period had finished a GBP 25 million contract to supply managed services to SURF, which is the university network across the Netherlands, a tremendous win and an absolute tribute to our team and what they have achieved. On the right-hand side, you can see some of the statistics, which show NCC Group is thriving and a full part of the security ecosystem today. Billions of security events processed, we're dealing with many, many cyber threats every single day, 10,000 software escrow deposits made every single year, and we've found, of course, customers in over 135 countries. Overall, the macro trends that we first spoke to you about at our full year results in September are evolving just as we expected. The long-term growth prospects for the cyber market are excellent. Cyber resilience is more important than ever. We've all seen and witnessed the accelerated transformation firms in the time of COVID to more digital, more cloud operation, more working at home, and of course, all that does is increase the threat footprint for most people. The hackers have never had it so good. And over Christmas, we all saw, we all read about, the impact of the SolarWinds hack, which is just the latest example of persistent and pervasive threat that we all face as individuals, as companies and indeed as countries. Now COVID-19, hasn't finished with the world yet. It's still going on. We all know that. And that disruption is holding cyber's spend back from its full potential. Some of our clients and client sectors are experiencing some economic and logistical disruption, which is perfectly understandable. And indeed, when Tim takes you through some of our KPIs in a minute, you'll see a changing shape of the orders footprint that we are experiencing. We have seen sales cycles extend, and then we have seen clients putting off anything that they think is discretionary, but still, there is so much work that has to be done. We've been able to demonstrate growth, and every single piece of work that people [ concern ] is there to be done in the future. We once again reiterate that, on the whole, companies are building up a compliance debt that will have to be paid down in the future in order for them to operate safely and securely. To evidence that, we commissioned a piece of research, and you can see some of the outputs on the right-hand side there. Two-thirds of organizations expect to outsource cyber resilience world. They are struggling to understand what this threat landscape looks like. In the past year, many have seen delays and cancellations because of financial or other restrictions. And indeed, 1 in 5 have been furloughing staff responsible for cyber resilience program. So once again, we believe that, despite the disruption, we look through and see a growing and exciting market a long way into the future. All of that, just to reiterate, gives us great confidence in the future. Our balance sheet is strong. Once again, we've demonstrated robust cash conversion of over 100%, giving us a net cash position of GBP 3 million compared to a net debt position of almost GBP 21 million just 12 months ago. The 3-year program, putting in the foundations of Securing Growth Together, has given us a system and process landscape that allows us to deliver a global business. In a minute, you'll see that we've done much more cross-border delivery work, global delivery days, and that's been absolutely crucial to our performance because, in this time of disruptions, supply and demand are more variable. And quite often, demand is popping up in one part of the world. And actually, we've got the skills in another part of the world. Our global delivery model has allowed us to match skills with demand, efficiently and effectively delivering the results you are looking at today. And crucially, we're not stopping. We believe that this time of market disruption is exactly the moment for us to continue our transformation, to accelerate that transformation and prepare for the future. So that as spending patterns return to normal, the NCC Group is well placed to capture as much of that growth as possible. And I'll be back just after Tim's given us a bracing of the numbers to talk to you a bit more about that. Tim, over to you.

Thank you, Adam. Good morning, everybody. I'm very pleased to be able to present the half year financials for the NCC Group. So then let's have a look at the financial summary. As you can see, we've had a very strong and robust financial [ performance ] and this clearly demonstrates the resilience of our market, of our business model and the resilience within our operations. Now Adam has mentioned a few things on this slide already, so I'll just cover some of the other points. So gross margin is up to 41.1%. This is a result of high utilization and flat day rates and is a great result. Moving on to global resourcing, you can see this is the resourcing that we have from our technical delivery staff who resource in different regions of the world and cross borders, and that's more than doubled to over 5,000 days and clearly demonstrates our scalable global delivery model. Last but not least, we've got the cash conversion ratio over 100%. Again, it's maintaining and showing that we're keeping a strong, tight grip on cash and working capital disciplines. So moving to our next slide, which is the group income statement. You can see that we've grown year-on-year. We've grown revenue by growing gross profit. We've grown EBIT, and we've grown basic EPS. And you can see within these numbers, the Assurance growth of 2.4% is despite the impact of COVID, and Software Resilience has grown 0.5% to GBP 18.5 million, and this has all been enabled by our ability to work remotely and deploy our skills globally. Pleasingly, gross margin has improved both across Assurance and Software Resilience. And as you can see, EBIT is shaded down a bit in terms of percentage increase because, although our overheads are flat on an underlying basis, we put more money into our systems and depreciation and licenses, which we expect it to come through as a result of the SGT transformation project. Moving on from here to the Assurance performance area. You can see that we are reaping the benefits of a truly global model. U.K. and APAC has decreased by 1.5%, and it's especially hard hit within the U.K. of 3.5%, but this is where I said latterly that the COVID-19 had its largest impact across the world. North America, pleasingly, has improved by 3.1% despite the impact of COVID, mainly supported by the burgeoning tech sector over there. Europe has increased by 11%, mainly fueled by MDR, our professional services revenues. In terms of gross margin percentage, as I said, it's been increased and has benefited from high utilization of our technical staff, up from 78% to 88.3%. This is expected to decrease and normalize in half 2. Going on to Assurance detail by service line, on the next slide, we can see that we've had a great result in both MDR and in the diamond core of TSC. TSC has improved by 0.8% and it's shown that resilient performance in the face of COVID supported by that strong utilization I've mentioned before. MDR is up by 24.5% and is at an outstanding growth, which is focused on getting us more recurring revenue and predictability into the future. As you will note on the next slide, you would see that the sales cycle expansion is lower in order values because of the current environment where people have held back on the largest spend or pared back on what they are spending or delaying it. RMC has declined by 16.2%. This is the area that's been impacted most by the physical presence of on-site work with clients, and obviously, COVID has stopped all that. And what we're intending to do is combine both TSC and RMC together to evolve to provide our clients for the full spectrum of professional services. Moving on to Software Resilience. You can see that we have returned to growth up 0.5% to GBP 18.5 million. Within that, the U.K. has grown by 1.6%, building on last year. North America has gone backwards by 5.1%, but this was because of COVID impact by the Secure Discovery testing that requires on-site, on-premise testing. Europe, as a new market, has continued to progress positively. I am also pleased to say that our renewal rates within Software Resilience have increased to 89.1% and remain within our expected range. In terms of profitability, you can see it slightly edge backwards. This is further showing our anticipated investments in channel and cloud to make it an integrated sales approach and underpin a sustainable growth. Moving on to the Software Resilience products. On the next slide, you can see that our contracts have decreased by 2.3%, although this is the area where cloud will have the most impact and that will start to come through. Renewal rates have improved to 89%, as I said before. Verification has pleasingly grown by 7.1% to GBP 6 million. And of course, Escrow-as-a-Service has gained momentum with orders up 83% on prior year and a weighted pipeline at the end of the half of GBP 1.1 million. Some mentionable wins here include BT, Barclays and just demonstrate the quality of the product on offer. I would now like to turn to the operational KPIs on the next slide. Key thing to stress here is that we're comparing a pre-COVID period of last year to a post-COVID period of this year, and that's represented on the top lines of group sales orders and average order values. And this is a testament to both our sales and delivery teams that they're able to move seamlessly and successfully transition to working remotely, but unfortunately, quite a few of our customers not all have the same smooth transition, and that has resulted in slow procurement processes, causing delays and caution in terms of larger or longer-term solutions, which you can see in that order pipeline. In terms of research, which is one of our USPs, it remains a priority, and we've maintained that at a grade level. And you can see some great work in our appendix at the back of this presentation. From a people perspective, our technical attrition and global voluntary attrition have improved. So last but not least, we turn to cash. In terms of cash, you can see we've maintained our strong cash generation and discipline with net cash at GBP 3 million. This compares to net debt of GBP 21 million last year, so we've moved from net debt to net cash, and we've been in a cash positive position for a number of months now. Cash conversion has increased to over 100%, although I expect it still to normalize at around 85% over the medium term. We've still maintained our fully drawn down facilities from the bank over the period, and all those cash timing benefits I mentioned from the COVID-related tax deferral schemes are all now being paid back and are no longer in the cash flow going forward. So all of this great performance in cash has enabled the Board to declare a maintained interim dividend, for us to now look at paying down the RCF from the bank in the half 2, paying it back, and we've got the balance sheet strength now to give us optionality to fund both organic and inorganic opportunities. And with that, that ends my review of the finances, and I'll pass you back to Adam now, who'll look forward. Thank you.

Thank you, Tim. And so there you go, a set of numbers that we are really pleased with. Despite the thumbprint that COVID-19 has left on the world, NCC has managed to move forward. And therefore, let me now take the opportunity to spend a couple of minutes just talking about what is next for us. The experience in the last 6 months has given us the confidence to recommit to our mission, our vision and objectives. We do believe we are blessed to be working in the cyberspace. It's a great market. It's growing. It's going to continue to grow for a long time. And whatever disruption comes along over the next 2 months, 3 months, 4 months, however long this COVID lasts, we have the confidence now to look through and build the NCC Group of the future. Our mission, to make world a safer and more secure place. Our vision, to be the leading cybersecurity advisor globally, sought after for our complete cyber resilience solutions. And that is the journey we're going on. And I'll tell you a bit more about how we're going to get there. Importantly, we're recommitting to our objectives. For our shareholders, double-digit revenue growth and margin improvement in Assurance, to return Software Resilience to sustainable single-digit growth and, of course, at all times, disciplined cash generation. For our customers, to use our unique data capability and insight to help them meet their cyber resilience needs, and importantly, for our people to be a global hub for cyber talent, the destination where people come to get training, to get the experience, to get the brand on their CV, staying with us for a while, do some great work and no doubt go to a fantastic opportunity elsewhere as we see many of our colleagues do. This last 6 months, I also want to mention the work that we have done to make NCC Group an even more diverse and inclusive place. We have 4 steering committees, staffed by people from across the globe in NCC, the LGBTQIA+ group, the gender steering committee, race and ethnicity, and also, particularly important for us, neurodiversity, where we welcome people into the firm and provide them with an environment where they can be productive and effective. So looking forward with ever more confidence to make our vision a reality, we continue our Securing Growth Together program. Our strategic priorities, which we previewed for you in our full year results, are here. I'm not going to concentrate, in particular, on the first 2, broadening our portfolio and enhancing how we sell and deliver. So our vision to be a complete provider of cyber resilience services, let's bring that to life for you. We see the cyber life cycle as one where you assess the cyber risk, you develop cyber maturity and then you manage cyber operations. And our ambition is for NCC Group to be a one-stop shop where any customer, wherever they are in the world, can come to us, and we can deliver that full spectrum of capability, making sure that they are safe and secure. How are we going to get there? Well, we're going to get there by building on our strong foundations, building on our highly engaged and diverse talent base, building upon the global platform that we have developed of processes and technology, and we're going to move forward now to broaden our portfolio, adding services and solutions to create the full spectrum suite of offerings for our clients and, of course, improve how we go-to-market globally so that anybody anywhere in the world can access that capability. Looking at the life cycle, we'll assess, develop and manage and doing a light-touch assessment with NCC Group ourselves. We are world-class at security testing. Our ability to hack into systems, to find vulnerabilities, to tell people where they are vulnerable is world-class. That is where we are world-leading. In the next phase in developing cyber maturity, well, we do have the world's largest and leading software resilience business and an increasingly burgeoning cloud proposition that is adding to that. Excitingly, we've also begun to offer remediation, which is where we help clients, not just understand where the risks are but also to generally improve their resilience. We're getting some rapid early traction on that. It still supports small scale, but we have high hopes for the future. And down in manage, managing cyber operations, you've seen the tremendous growth in this half of our Managed Detection and Response business, up 24.5% I think it was. That is an offering we have. It is technically excellent, and we have further to go, and we're going to develop that further. So just looking at in a little bit more detail of the investments we're going to make building on our H1 successes. Well, remediation in H1, we won GBP 2 million worth of deals in the U.K. from a standing start. Over the course of H2, we're going to be investing further, not just to nurture that business in the U.K. but also to begin rolling it out in our other territories. Escrow-as-a-Service. We saw it win GBP 1 million last year. We closed GBP 1.1 million of orders in the first half of this year, and we're going to continue that process both building out a channel infrastructure to distribute it more effectively and to expand the cloud proposition to offer other environments to our clients. In terms of MDR, our Managed Detection and Response business, we're going to upgrade and upscale. We're going to deploy further automation to make ourselves more efficient, more cost-effective and will then deploy more advanced analytics and embrace new technologies so that we can capture more threats and also offer our clients more services for them to take. And all that together will round out NCC Group, making us the complete provider of cyber resilience services, a one-stop shop where any customer anywhere in the world can come to us and get a full spectrum of support. And so that brings me to a brief summary, and of course, to the outlook. In a nutshell, we are blessed to work in a great market. The long-term prospects for cyber are excellent. There is a big compliance debt out there. It is building up as spending patterns returns to normal. We are well-placed to capture that growth. Our half year performance demonstrates that, in the teeth of pandemic, we were able to develop. We're able to take revenue up, gross profit, adjusted EBIT, all up alongside disciplined cash generation and further transformation of our firm for the future. We continue to invest in a focused way systematically to ensure that NCC Group is as well-placed as possible to capture the maximum growth as spending patterns return, and we stand here today with a strong and flexible balance sheet that will allow us to capture further opportunities, both organic and inorganic as we see them begin to arise from the ashes of the pandemic. Our outlook, well, full year trading remains in line with our expectations. We're very pleased to declare a continuing interim dividend of GBP 1.5p. And we are recommitting to our medium-term objectives, double-digit growth in our Assurance business and sustainable growth in Software Resilience. And with that, thank you. Thank you very much.