Eckoh : Interim Results FY21 24 11 2020

24 November 2020

Eckoh plc

Unaudited interim results for the six months ended 30 September 2020

Robust performance, driven by high recurring revenues and prudent cost control

Eckoh plc (AIM: ECK) ("Eckoh" or the "Group"), the global provider of secure payment products and customer contact solutions, is pleased to announce unaudited results for the six months to 30 September 2020.

£m unless otherwise stated	H1 FY21	H1 FY20	Change
Revenue	15.7	18.0	(13%)
Gross profit	12.8	14.2	(10%)
Adjusted operating profit1	3.4	3.4	n.m.
Profit after taxation	2.0	2.0	n.m.
Adjusted diluted earnings pence per share2	1.11p	1.10p	+1%
Net cash	12.9	10.9	+2.0m
Total business contracted3	14.0	19.4	(28%)
New business contracted4	7.9	11.8	(33%)

Financial highlights

• Year on year profit maintained, in line with Board expectations, despite difficult conditions in recent months
• Revenue down 13% overall; 4% decrease after adjusting for the one-off Coral contract in the prior year
• US Secure Payments revenue increased significantly by 80% to $6.5m (H1 FY20: $3.6m), offset by planned decline in Support (61%) and expected decline in Coral (85%)
• UK revenue down 11%, with COVID-19 impacting some transactional revenues
• Adjusted operating profit1 level to prior year at £3.4m, and up 34% after adjusting for the Coral contract
• Recurring revenue5 £11.5m (H1 FY20 £12.8m), 73% of total revenues (H1 FY20: 79%, excluding the Coral contract), reflecting a transition towards higher growth US Secure Payments
• Strong cash generation, robust balance sheet and special dividend; net cash £12.9m (H1 FY20: £10.9m)

Strategic highlights

• Total business contracted3, £14.0m (H1 FY20 £19.4m, excluding Coral contract £16.4m) down 15%
• New business contracted4, £7.9m (H1 FY20: £11.8m, excluding Coral contract £9.3m) down 15%
• UK new business up 17% to £3.2m (H1 FY20: £2.7m) with 68% of new business coming from existing clients. Total UK business up 8% with several significant renewals completed and more expected in the second half
• US Secure Payments revenue grew very strongly, reinforcing the rationale to focus on this growth opportunity by instigating a planned transition away from Support, which is progressing as expected

1. New business contracted $5.9m (H1 FY20: $7.3m), with H1 FY21 increasing 73% over H2 FY20 ($3.4m), and momentum increasing in the second quarter after a challenging first quarter

1. Larger number of contracts won in the period for contracts to be delivered in the Cloud

1. US Secure Payments Order book $25.9m (H1 FY20: $26.9m or FY20 $25.9m)

Outlook

1. • With a highly relevant product portfolio and resilient business model, Eckoh is well prepared to successfully manage the current challenges, although the outlook remains uncertain due to COVID-19
   • The Board expects profits for this financial year to be comparable to the prior year
2. Adjusted operating profit is the profit before tax adjusted for finance income, finance expense expenses relating to share option schemes and acquired intangibles amortisation
3. Adjusted diluted earnings per share (eps) is the diluted eps adjusted for expenses relating to share option schemes and acquired intangibles amortisation
4. Total business contracted includes new business from new clients, new business from existing clients as well as renewals with existing clients.
5. New business contracted excluding renewals with existing customers.
6. Recurring revenue is defined as on-going revenue on a transactional basis, rather than revenue derived from the set-up and delivery of a new service or hardware.

Nik Philpot, Chief Executive Officer, said:

"In this challenging trading period Eckoh delivered a robust performance, in line with our expectations, generating comparable levels of profit to last year, which reflects the resilience of our business. I would like to thank everyone at Eckoh for this performance. All of our team have adapted extremely well to the challenges presented by COVID-19, they've been committed and highly effective, despite the difficult conditions of recent months.

Our high levels of recurring revenue, a solid order book, enterprise clients, a strong balance sheet, and prudent cost control have enabled us to manage the impact of the pandemic effectively. With a strong sales pipeline, we look to the future with confidence."

For more information, please contact:
Eckoh plc
Nik Philpot, Chief Executive Officer	Tel: [phone]
Chrissie Herbert, Chief Financial Officer
www.eckoh.com
FTI Consulting LLP	Tel: [phone]
Ed Bridges, Jamie Ricketts, Darius Alexander
[e-mail]
N+1 Singer (Nomad & Joint Broker)
Shaun Dobson, Tom Salvesen, Justin McKeegan	Tel: [phone]
www.n1singer.com
Canaccord Genuity Limited (Joint Broker)
Simon Bridges, Emma Gabriel	Tel: [phone]
www.canaccordgenuity.com

About Eckoh plc

Eckoh is a global provider of Secure Payment products and Customer Contact solutions, supporting an international client base from its offices in the UK and US.

Our Secure Payments products help our clients take payments securely from their customers through all engagement channels. The products, which include the patented CallGuard and ChatGuard, can be hosted in the Cloud or deployed on the client's site and remove sensitive personal and payment data from contact centres and IT environments. They offer merchants a simple and effective way to reduce the risk of fraud, secure sensitive data and become compliant with the Payment Card Industry Data Security Standards ("PCI DSS") and wider data security regulations. Eckoh has been a PCI DSS Level One Accredited Service Provider since 2010, securing over £2 billion in payments annually.

Eckoh's Customer Contact solutions enable enquiries and transactions to be performed on whatever device the customer chooses, allowing organisations to increase efficiency, lower operational costs and provide a true Omnichannel experience. We also assist organisations in transforming the way that they engage with their customers by providing support and transition services as they implement our innovative customer contact solutions.

Our large portfolio of clients come from a broad range of vertical markets and includes government departments, telecoms providers, retailers, utility providers and financial services organisations.

For more information go to www.eckoh.com or email [e-mail].

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Introduction and Financial Highlights

Eckoh's business model and market position, with high levels of recurring revenue, a solid order book, enterprise clients and a strong balance sheet, combined with prudent cost control, have enabled Eckoh to manage the impact of the global pandemic effectively and deliver a robust first half performance.

Our US revenues are entirely underpinned by fixed fee contracts and as we continue our planned transition away from the Support channel, we will have even greater visibility of our revenues going forward. For example, Secure Payment contracts are typically three years in length, whereas Support contracts are by their nature short term and generally one year.

The UK delivers a high level of guaranteed revenue, in aggregate, from a combination of fixed fees and transactional commitments, albeit from a wide range of different commercial structures. Volumes were impacted significantly at the onset of the pandemic in mid-March but due to the contractual arrangements we had in place, this was not reflected proportionately in revenue. We saw volumes increasing from mid-May and throughout the summer, returning to normal levels in September. The lockdown in November is not expected to impact volumes or revenue to the same extent as earlier in the year, unless it were to continue for significantly longer than has been indicated.

Despite the difficult conditions of recent months, Eckoh delivered a first half performance in line with the Board's expectations, with comparable levels of profit to the prior year, reflecting the resilience of its business model. Last year we had a significant one-off contract for Coral, the agent desktop product, worth $3.8 million of which $2.1 million in revenue was recognised in the first half last year. Adjusted operating profit for the period was £3.4 million and level with the prior year (H1 FY20: £3.4 million). Excluding the £0.9 million of operating profit from the Coral contract in the prior year, profit increased by 33.7%. Also included in the profit from the prior year was a foreign currency gain of £0.3 million, in the current period there was a foreign currency loss of £0.1 million.

Total revenue for the six months was £15.7 million, a decrease on the prior year of 12.9% (H1 FY20: £18.0 million) or adjusting for constant exchange rates a decrease of 12.2%. After adjusting for the Coral contract and at constant exchange rates, revenue was down 3.0%.

Total contracted business for the Group in the period was £14.0 million compared to £19.4 million in the prior year, down 28.2%. After excluding the Coral contract of $3.8 million in the prior year, total contracted business saw a decrease of 14.8%. New business in the first half was £7.9 million (H1 FY20: £11.8 million, excluding Coral contract £9.3m), a decrease of 14.9% after adjusting for the non-repeatable Coral contract.

Gross profit fell by 10.0% to £12.8 million (H1 FY20 £14.2 million). The US fell 11.4% to £4.7 million (H1 FY20: £5.3 million),

with gross profit margin increasing to 75% (H1 FY20: 71%, excluding Coral licences 77%). The UK gross profit fell by 9.3%

to £8.0 million (H1 FY20: £8.8 million), where gross profit margin increased marginally by 1% to 85%.

Cash and cash generation remain strong with a net cash position of £12.9 million, an increase of £2.0 million on the previous year and £1.3 million since March 2020. This comprises a cash balance of £14.8 million, less an outstanding loan of £1.9 million, taken out in 2015 in part to purchase the Group's UK head office.

Impact of COVID-19 and Current Trading

Our teams in both the UK and US have adapted well to the challenges and continue to work extremely effectively despite the difficult and changing conditions. All employees are equipped to work from home, including our in-house Contact Centre agents in the UK, who utilise Eckoh's own remote-working technology.

In March 2020, because of the pandemic, we took a number of precautionary measures including a freeze on new hires, postponing salary increases for 2021, limiting discretionary spend and making no allowances for staff bonuses in the first half. During the period we have maintained headcount to manage ongoing demand, sustain our high service levels and ensure we are well-placed for a recovery in demand. We have identified a number of key hires that are required in the second half of the year and as a result, certain costs are likely to be higher than in the first half.

In addition to the precautionary measures above, in March we also deferred the quarterly loan repayments in April 2020 and July 2020 and the Board considered it prudent not to propose a year-end dividend. The loan repayments have recommenced and a repayment was made in October 2020, the normal date for the quarterly repayments. In addition, and due to the business performance and the prudent balance sheet management, in September the Board announced a special dividend, in lieu of the final dividend from the financial year ending 31 March 2020. A dividend of 0.61p per ordinary share was paid to Shareholders on 23 October 2020, who were on the Register as of 25 September 2020.

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The significant disruption to businesses that has arisen from the pandemic will, we believe, lead to an adjustment in the way that organisations approach their customer engagement strategy. In particular, we foresee a proportion of remote working agents becoming a permanent feature of large contact centre operations, that will force a greater number of organisations to adopt a more rigorous approach to data and payment security. This view is supported by the interest in and sales for our CallGuard Remote product, which facilitates the taking of payments securely in remote working environments. Furthermore, we expect an even faster adoption of emerging engagement technologies such as conversational bots working in tandem with human agents. and the number of companies who are accelerating their shift to Cloud-based solutions. Eckoh will be able to assist new and existing clients in responding to these changes.

Whilst there remains uncertainty in the general macro-economic climate, given the high levels of recurring revenue Eckoh has along with its strong order book, the Board expects profits for the full year 2021 to be comparable to the prior year, subject to there being no further extended lockdowns in either the UK or the US.

A Clear Growth Strategy

Our strategic objectives reflect our primary goal to become the global leader in our areas of expertise, and in particular, Contact Centre payment security.

Our strategic objectives include:

• Being the market leader for Contact Centre payment security in premised, hosted and Cloud delivery
• Capitalise on the fast-growing US market for Contact Centre payment security
• Maximise client value through cross-selling to generate higher levels of recurring income
• Continue to enhance the Eckoh Experience Portal to enable faster and more flexible delivery of our solutions
• Use Cloud Native technologies to develop next-generation products and enhance our proprietary technologies
• Identify and evaluate acquisition opportunities that can support our growth strategy in Contact Centre security and customer engagement

Operational Review

US Division (40% of group revenues)

In the US, revenue in the period was $8.0 million, a decrease of 14.7% (H1 FY20: $9.4 million). Secure Payments grew significantly by 79.6% and was offset by a planned decline in Support and an expected decline in Coral, with the prior year period including the large one-off contract with $2.1 million of recognised revenue. If the Coral contract is excluded, revenue grew by 18.0% in the US, despite the planned decline in the US Support business.

Total contracted business was $6.9 million (H1 FY20 $14.5 million). Included in total contracted business for the prior year was the $3.8m Coral contract and Support and Coral renewals of $2.6 million. In the period, new Secure Payments business contracted was $5.9 million, a decrease of 19.6% (H1 FY20: $7.3 million).

In the US, the Group's focus remains on the US Secure Payments opportunity, where it has the greatest differentiation and the least competition. The performance of the Secure Payments business is summarised below, together with the Support business that we are strategically exiting, as well as the Coral business.

• Secure Payments revenue grew 79.6% to $6.5 million (H1 FY20: $3.6 million), and now represents 81% of US revenue. In the second half we expect revenue to be at similar levels to the first half due to the timing of the new contracts signed in the first half.
• Coral had revenues of $0.4 million in the period, compared to $3.0 million in H1 FY20, reflecting the non- repeatable revenue of $2.1 million from the large one-off contract in the prior period. In the first half, Coral accounted for 6% of US revenue (H1 FY20: 32%). As noted previously, the timing of Coral orders remains hard to forecast and they will be lumpy in nature.
• Support revenue declined as expected to $1.1 million, a decrease of 61% (H1 FY20: $2.8 million) and represents 13% of the US revenue. It is expected to fall to approximately 10% of US revenues for the full year in line with the strategic decision taken last year to focus our staff and resources on the high growth opportunity of Secure Payments and manage a transition away from Support.

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Secure Payments, where we deliver a patented solution that enables enterprises to take card payments securely within their Contact Centre operations, continued to have excellent momentum. The pandemic made it extremely difficult to close new contracts in the first quarter, as many sales processes were put on hold by the customer whilst they dealt with the disruption to their businesses. In the second quarter momentum started to build, and ultimately the number of contracts signed in the period exceeded that in the prior year. The new contracted business in the first half of $5.9m was significantly greater than the $3.4m in the second half of last year, which was also impacted by the pandemic, giving us confidence that we can continue to make good progress in the second half of the year.

Since 2015, when we launched our Secure Payments product in the US, the total of new business contracted has grown significantly, as shown below.

Financial Year	FY16	FY17	FY18	FY19	FY20	H1 FY21
New Business	$1.6m	$8.3m	$9.3m	$13.7m	$10.7m	$5.9m
Contracted

The Company is focused on large enterprise contracts, but with many of the sales processes for the largest companies temporarily suspended in the period there was a greater emphasis on contracts with medium-sized organisations, which generally have a lower average contract value than the $750k previously indicated. The majority of contracts won were in the second quarter and will be delivered in the Cloud. These projects are easier to execute and deliver in the current environment and illustrate ongoing demand for our innovative technology and solutions that are designed to safeguard our clients' migration to digital, remote working.

We do anticipate that a lasting impact of the pandemic will be a general acceleration in Cloud deployments, although the very large enterprises are still likely to take many years to achieve that goal. We have recently started to see some of these large organisations re-commence their sales processes and depending on when these are concluded we will see the average contract values rising again. Contracts secured in the period came from a range of sectors including business process outsourcing, insurance, utilities, retail, gaming and financial services, which delivered the largest contract of the half through a large global organisation that is already a client in the UK.

The average length of contracts for Secure Payments is three years, therefore there have been few contracts due for renewal in the first half due to the early stage of maturity for our business in this area. There are two larger contracts due for renewal in the second half of the current year and we anticipate the contracts to be renewed successfully, and others to follow, mirroring the trend of the UK.

External factors, such as the impending change to the Payment Card Industry Data Security Standard (PCI DSS), the implementation of new data laws like the newly passed California Privacy Rights Act and significant fines levied on US organisations through the GDPR legislation, are undoubtedly helping raise awareness of the risks of not protecting sensitive data properly. This will assist us in continuing to build our pipeline which is substantial and growing. Our focus on these larger contracts means that in future periods the timing of contract wins continues to be hard to predict given the typically longer sales cycle.

Coral is a browser-based agent desktop that increases efficiency by bringing all the contact centre agent's communication tools into a single screen. It also enables organisations, particularly those who have grown by acquisition, to standardise their contact centre facilities, as Coral can be implemented in environments that operate on entirely different underlying technology. In the prior period, we secured a contract extension with a Fortune 100 telecommunications company for our agent desktop tool Coral. The contract was worth a minimum of $3.8 million, and of this, $2.1 million relating to the purchase of licences was recognised in the prior first half revenue. As we indicated at the time, we would not expect a further deal of additional licences of this size in FY21.

In Support, as we stated last year, we are transitioning away from this activity to focus on the high growth Secure Payments opportunity. The majority of the employees servicing the Support channel have been switched to increasingly service the more substantial and higher growth Secure Payments opportunities, and this will continue.

Recurring revenues in the US were 56% in the period compared to 63% for the same period last year, after adjusting for the one-off $2.1 million of Coral licences. Recurring revenue for the Secure Payments activity was 47% compared to 44% in the prior year. We would expect recurring revenue to increase in the second half and continue to grow over time as we continue to deploy new clients live, particularly given the recent Secure Payment contracts which will be delivered in the Cloud. Recurring revenue for Secure Payments is lower than the UK operation due to the hardware component and in particular the disproportionately large value of non-recurring revenue relating to hardware and set-up fees from our largest Secure Payment contract that went live last year.

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