K3’s results show another year of encouraging progress, with adjusted profit before tax*1 up 22% to £8.80m on revenues up 7% to £89.18m. This was despite a £0.83m write-off against profits after a major customer, My Local, went into administration. Importantly, gross margins have continued to improve, rising to 54.4% from 51.5%, and new orders hit a record high of £35.3m, up 66% year-on-year, helped by a strong performance from our retail software products. Recurring income, which delivers high margins, increased by 4% and now accounts for 47% of total revenues.
These pleasing results reflect the strength of our software offering, which now contains greater levels of our own intellectual property (“IP”). Approximately 25% of our total software and maintenance licence revenues were generated by our own IP this year. We continue to focus on the development of new and innovative products to bring competitive edge to our customers, with capitalisation of development costs of £4.64m gross (2015: £3.81m). Results also reflect our focus on driving sales through channel partners. As we previously reported, a major highlight in the first half was our first order for our “ax I is Fashion” solution through a Global Systems Integrator. This was to a leading European mail order fashion retailer, TriStyle Mode GmbH. Our channel partner network signed a total of 27 new customers in the year, which included two other major contracts for “ax l is Fashion” with Lacoste and KLiNGEL. We continue to view our channel partner network as a major sales opportunity.
Our cloud hosting and managed services activities grew strongly and we remain confident that the business will become increasingly important as customers move towards adopting cloud-based systems.
We made one acquisition in the year, in the fourth quarter, and a second smaller one after the year end in July. Both acquisitions are wholly complementary and bring valuable additional IP and recurring revenues. DdD Retail (“DdD”), purchased for an initial £6.80m in April, has added a state-of-the-art retail solution, “Retail in a Box”, and Merac Limited, acquired in July for an initial £1.70m, including £0.43m of cash acquired, is a leader in the visitor attractions retail sub-sector.
Looking ahead, our new business pipeline looks extremely strong with potential new deals standing at a record level of £76.1m, up by 23% on a like-for-like basis (2015: £62.0m). This includes our channel partner pipeline which also looks encouraging at £4.61m (2015: £3.69m). We therefore believe that K3 is well positioned to make further progress over the new financial year and continue to view prospects with confidence.
As we have previously reported, we expect subscription models to feature more strongly in our results as our industry moves towards cloud-based consumption licensing and away from traditional perpetual licensing. This means that income from contracts will be recognised over longer periods rather than upfront and that the lifetime value has the potential to be significantly higher.
13 September 2016
*1 Group adjusted profit before tax is calculated before amortisation of acquired intangibles of £2.73m (2015: £2.80m), exceptional reorganisation costs of £1.05m (2015: £0.41m), and acquisition costs of £0.49m (2015: £0.14m)