It’s a shame, really, that what should have been such a sweet acquisition would turn out to be such a margin burden. I’m talking about assurance and escrow services firm, NCC, and its acquisition last year of UK testing firm SDLC (see NCC tests out SDLC). NCC CEO, Rob Cotton, didn’t disclose the numbers other than noting that SDLC achieved its revenue targets (higher? lower?), but knocked 4 points off Assurance division profitability. When NCC acquired SDLC, it was turning over some £12m with about £1.5m in adjusted EBIT.
All this took a little of the shine off what were otherwise reasonably respectable FY results. NCC's headline revenues for the year to 31st May grew by 49% to £71m, of which 12% was organic (and see NCC sticks to the knitting for more recent inorganic bits). However, operating margins dived from 28.0% to 19.0%, reflecting a similar cut in gross margins, from 45% to 36%. Even ‘adjusted’ operating margins fell too, from 30.6% to 25.2%. This left pre-tax profit 2% lower at £12.7m though some help on the tax line kept EPS on continuing operations just above the prior year, at 26.7p. Discounting NCC’s now discontinued consulting operations left EPS down 13% at 23.5p.
So for NCC, it’s really all about the Escrow businesses, which contributed 35% of group revenues but 69% of operating profit. Escrow margins were steady at 58% vs 14% in the Assurance division. Escrow should remain a nice little earner, though I would like to understand better whether this level of profitability is sustainable – or can even be increased – as it looks like testing will remain a burden.
It also looks like attrition is back on the rise, at 8% group wide, compared to 7% in H1. But this group number belies huge variations between the Escrow and Assurance divisions, as testing attrition had been raging at 30% (see NCC 1, Fate 1).
All in all, NCC’s ‘business of two halves’ really isn’t there quite yet. Cotton still has much work to do to achieve a more balanced performance between its many moving parts.
TechMarketView Foundation Services clients can read about my conversation with NCC CEO, Rob Cotton, here.