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Edited Transcript of NCC.L earnings conference call or presentation 23-Jan-20 9:00am GMT

Half Year 2020 NCC Group PLC Earnings Call

Manchester Jan 27, 2020 (Thomson StreetEvents) -- Edited Transcript of NCC Group PLC earnings conference call or presentation Thursday, January 23, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Palser

NCC Group plc - CEO & Executive Director

* Tim J. Kowalski

NCC Group plc - CFO, Company Secretary & Executive Director

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Conference Call Participants

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* Derren Nathan

Hybridan LLP, Research Division - Director & Head of Research

* Julian Robert James Yates

Investec Bank plc, Research Division - Technology Equity Analyst

* Kenneth Charles Rumph

Jefferies LLC, Research Division - Equity Analyst

* Maria Christina Stormont

Numis Securities Limited, Research Division - Analyst

* Neil Shah;Stifel;Analyst

* Robin Alexander Speakman

Shore Capital Group Ltd., Research Division - Research Analyst

* Steven John Robertson

Canaccord Genuity Corp., Research Division - Analyst of Technology

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Presentation

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Adam Palser, NCC Group plc - CEO & Executive Director [1]

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So we're going to get started. So thanks for coming. Working on the assumption that you've all read the numbers and all read the RNS, I thought Tim and I this morning, over the course of the presentation, will attempt to give you a bit more color and a bit more contextualization around what you've already seen.

And so to start with that, I think the first couple of messages I want to give to you are as follows: number one, we're very pleased with the 6 months that have just gone. So we're very pleased to see another 6 months of progress, increased revenue, increased EBIT, continued cash discipline. We are as of the end of November, 18 months through the 3-year transformation program we launched in May 2018. And so there's a joy for us to see the benefits of that transformation program continuing to flow through into the financial results, but also into very real operational improvements.

The second thing to say is, we almost had a great half, and instead we have one we're very pleased with. And the difference between the 2 was simply quarter one in Assurance, where we had a pipeline doubling nicely, but just converting into revenue a little slower than we would have liked.

Of course, exiting what was a strong full year and going into a year where we expect and continue to expect future growth, we were hiring salespeople and had hired salespeople, we'd hired technical capacity, and we're hiring more technical capacity, and that's a journey we wanted to continue to go on.

So as that Q1 was a little bit softer than we expected that brought our gross margin down a little bit. But what you've seen is a very strong Q2.

So whereas, I think, Tim, correct me here if I get this wrong, Q1 over last year was only less than 3% up in Assurance in revenue terms, Q2 was over 10% up in Assurance in revenue, too. So we've seen a real sort of surge, underpinned by the global capacity we've been building. So there we go, 6 months that we're very pleased with. This is what it looks like. Revenue up just over 5% as a group in total, under the hood, Assurance, up just under 7%, Escrow down a bit just over 2.5%. Gross margin, down slightly, but still holding nicely at around 39%. And importantly, EBIT up and EBIT margin up.

Crucially, coming Q1, Q2 and exiting Q2 with great momentum, so sales orders significantly higher, 28% -- almost 30% increase in group sales orders to GBP 149 million. I've told you about the Q2 on Q1 surge in Assurance. And importantly, when we talk more about Escrow later, what I can tell you is that we have significant revenue both under contract and also in the pipeline, which should underpin a better H2 in Escrow.

Maintaining the cash discipline that you saw us put in last year, we've delivered a cash conversion rate of 75%, and our net debt is more than halved from this time last year despite, of course, paying out significant dividend in the first half of the year, and we are investing in the systems that we've highlighted to you before.

Securing growth together, I've mentioned, I'll talk about more in a moment. Our talent base continues to grow, which is a testament to the people in NCC and the environment that they create, which attracts and retains the scarce cyber skills. And importantly, we continue to see our trading finishing the year in line with expectations.

So what I'm going to do, I'm going to take a few slides just to remind you of the transformation program we are undertaking, talk a little bit about the impact we're seeing come through and the benefits that are flowing. I'll talk about what that means for the businesses, then I'll hand over to Tim for a bracing dip into the numbers.

So here we go, strategic priorities. Now rewinding 2 years ago to my very first investor presentation where I've been in post all of about 4 to 6 weeks or so, it was already apparent to me that NCC group has the most remarkable capabilities in the world of cyber. And actually, our mission was to build the infrastructure and the skills and the sales capabilities and the delivery capabilities to give that value to our clients in a more meaningful way. That is still a journey, I passionately believe on -- believe in. It's something you'll see us making progress to in the next few slides, and we're going to carry on that journey.

And we aim to be the leading cybersecurity adviser globally. As we move along that journey, it will bring benefits to all 3 of our main stakeholders. Our shareholders should see double-digit growth in Assurance, with further margin improvement, whilst maintaining disciplined cash generation.

For our clients, they should reach for a global delivery platform, so that we can service our clients across the world with capacity across the world in the right way, whilst maintaining our leading position at the forefront of understanding and discovering cyber vulnerability, and crucially, our people. We are nothing without our people. And so our aim is to be the global hub for cyber talent, a quirky, interesting place where interesting and talented people can come and thrive.

So to achieve that, we launched Securing Growth Together, our transformation program, and it has 5 streams: lead the market, win business, deliver business, support growth and develop our people. And we measure our progress using those KPIs below, and you'll see me report against those or Tim report against those over the coming slides.

So I'm not going to dip into all of them, but I'm going to talk about some of the most important. Number one, lead the market, staying at the forefront of cybersecurity. Now NCC has a very privileged business model in this regard. We are able to stay at the leading edge of cyber resilience with a relatively CapEx-light model.

Our talented people yearn to do interesting research at the forefront of cyber. And by carving out space and providing some investment for them to do that, we have managed to deliver more research days over the last 6 months than in the previous year. And we continue to turn out the highest quality of research output.

Some of our papers on the right, we have further papers I could have demonstrated. Subjects as diverse as connected health to agriculture to quantum computing. And some wonderful anecdotes, I could tell you if I had the time. Buying medical devices off eBay, finding the most remarkable data on those and using that to demonstrate vulnerabilities to some really important class.

Our people have spoken and given high-quality presentations and just one example is the 15 we gave at the global conference, Black Hat, in the summer, picked up by over 70 publications, I believe, more talks, more impact than any other cybersecurity provider.

And this is hugely important because this is the underpin to our business model, providing space and time for our people to do leading research, using those discoveries to educate our clients about vulnerabilities and then helping them to address them.

And then the way we work with clients. When you boil our transformation program down to 2 things, it is about getting the information we need to run the business in an assertive and agile way. And secondly, it's developing the way we work with our clients so that we build stronger relationships. We understand their world, and we're able to deliver larger packages of work. We can take away their cyber pain so that they can just get on and thrive.

And what you can see here, crucially, is that half on half on half, 2018, 2019, 2020, we're seeing not just increased orders, but accelerating growth in orders. Some of the KPIs we monitor crucially going up as well. So average order value, up almost 30%.

The number of orders over 250,000 up 50% from 43 to 66. Now that's an arbitrary level. But we're saying to ourselves, if we're delivering more work of GBP 0.25 million and upwards, then we are delivering probably more offerings to our clients and delivering more value.

Managed detection and response, that's MDR, the managed services portion of our work increasing again, GBP 30 million, still small in comparison to the overall part, but already at 60% of last year's full year number. And if we continue the growth that we're seeing in MDR orders that's going to provide continued stability to our firm.

EaaS, our cloud offering. I will talk to you in more detail, but we've had wonderful traction in the first full 6 months of operation.

Just a few final points there. We ran a net promoter exercise in the U.K. some time ago, we've run it globally for the first time and come out with what I feel is a stunning figure of 54 a firm of our kind. Our pipeline of large orders continues to increase. But whatever I say, the ultimate validation is in the people who choose to come to NCC and purchase our services, which is a privilege.

So we have 58 -- or at the end of November, we had 58 of the Fortune 500. We had 85 of the FTSE 350. We don't talk a lot about our clients, but we have done some public-facing work with Microsoft, Google and Facebook, which I'm pleased to be able to tell you about.

As I sit here today, we have 61 of the Fortune 500 as clients. So lovely to see that momentum continue. And as I say, that ultimately is the validation of what we're doing.

People, the underpinning of our business. And we're all aware of the scarcity of talent in the cyber world. So again, very pleasing, to be able to say that during the half, we increased our technical talent base by 10%, welcoming net new 59 colleagues and seeing attrition in that area drop to 7% versus 9% a year ago, that's a 6-month attrition rate.

Globally, our voluntary attrition rate is largely stable, up slightly at 9%. The increased attrition is driven by turnover in our sales teams and also in our corporate areas as we continue to professionalize and improve the way that we work.

We continue to work hard at our people proposition, our people covenant to make sure that we do become the global hub for cyber talent. We've run a best company's engagement survey with a stunning response rate of 80%, something which shows just how much people care about NCC group and what they want it to be in the future.

We've retained our one to watch rating. And more importantly than that, we've learned a huge amount of what else we can do to make NCC a great place to work.

Systems wise, we've deployed Workday globally from an HR perspective, which gives us the foundations that we need to improve our career development, improve our performance management and lay the foundations for further improvement.

So let's talk briefly now about what that means when we come to focus on the divisions. So Assurance, what a joy to see it now flourishing as a sustainable, growing, increasingly profitable part of the business, so real powerhouse in its own right. And as we look going forward, we're going to employ and deliver securing growth together. And in so doing, Assurance will continue to lead the world in cyber vulnerability. We will develop stronger relationships with our clients that will increase the average order value, increase the value we give to them and provide us with greater visibility and predictability of work.

We will deliver that by drawing on a global talent base, managing resource better through disciplined application of systems and process. And of course, never forgetting that it's underpinned by great people.

When you look at the impact of what we've done so far in the first 6 months, this is the result when I talk about our Assurance business by business line. Again, most important thing to take away here is that the diamond core of NCC, our Technical Security Consulting, has grown by 15% year-on-year, which I think is a stunning achievement. So TSC, Technical Security Consulting world-class in finding cyber vulnerability. We probably find more vulnerabilities than anybody else in the world, across geographies, across technologies, across client sectors. So that broad-based growth is a real powerhouse for NCC.

Risk Management Consulting, RMC, slightly less good at a top line level, 13% down overall, that is entirely due to declines at the revenue level in the U.K. and Asia Pac. But those revenue declines in those areas were accompanied by increase in profits. So that is us focusing on things that we are better at, weeding out services lines that were less effective for us. And we still believe that RMC, Risk Management Consulting, has a huge runway for us as a business.

On the whole, there are more business issues to do with cyber than there are technical issues. So you should expect us to see continued portfolio development there over the coming years.

Products, the days of talking about third party, low-value reselling are gone. I'm pleased to say, the dip in products here, very much about timing of orders dropping into our FOX Business in the Netherlands.

First half of last year had some significant product orders. This year, they didn't drop into H1. But as Tim or I will talk about later, we see good growth in FOX for the full year.

And finally, a really important part of our business, Managed Detection and Response, very much based on managed services, more predictable revenues. Pleasingly, this is one that will tip bit, over 50% of FOX's revenue is now in the Netherlands come from ongoing maintenance and service. So they are the furthest ahead in terms of layering in that predictable revenue streams. Revenue-wise, a 6.2% growth, with very good orders already at 60% of last year's full year total.

Let me turn to Escrow. We continue to believe that Escrow's proposition is more important today than it's ever been. And in line with that, we're repositioning our software Escrow as a broader software resilience business. Our classic Escrow offering is as applicable in the growing environment of connected devices as it's ever been. And we see great opportunity for that offering in areas like Internet of Things, in transport and in other connected environments.

And that's before we start to talk about our cloud proposition. And I'll show you some numbers on the next page. From a win business perspective, we are developing a channel model to increase our reach with a number of the usual players, but also with the hyper-scalers of Microsoft, Amazon, Google and so on.

We're leaning out our operations to make sure that our processes are as modern and as effective as they can be. Escrow continues to benefit from the systems installations that the whole group is benefiting from, including pipeline management, pipeline visibility, et cetera. And we have been investing consciously and deliberately in our leadership, including a new Managing Director for the division overall, new sales leadership and very shortly, a U.K. MD.

My last slide here on Escrow. It brings out a few things here. So our contracts revenue overall has declined by 3.8%, our verification testing has remained flat. We have seen some phasing issues, which Tim will probably talk to a bit more. Some very good verification contracts dropping into H1 last year, which are in the pipeline for this year, but haven't as yet dropped. But probably the most exciting thing about this is the take-off of our Escrow as a service.

So it only launched, you'll recall, at the beginning of April 2019. And in the first half of this year, we've already seen GBP 700,000 worth of orders, which have converted, I think, so far into GBP 200,000 or so of revenue.

So we're well on way to meet our unofficial target of GBP 1 million of orders for the full year. This is a proposition that we are going to continue to refine and, in particular, to work for scalability and ease of purchase, but we're very, very pleased with the early benefits. And those are just some of the clients that have taken that proposition, specifically.

And with that, Tim?

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Tim J. Kowalski, NCC Group plc - CFO, Company Secretary & Executive Director [2]

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So moving on to the financials. Taking into account everything that Adam said about the business, I'm really pleased to report a robust set of financial results. So you can see, this is all happening with the background of major change happening all the way through our transformation program, which is a testament to all the people at NCC.

You can see there across the top, we've got revenue growing, we've got margin growing, we've got margin percent growing. In the middle, with gross margin, you can see that Escrow is flat on the margin side. And the gross margin within Assurance has only come down because of that investment Adam mentioned in the tech consulting and salespeople with a slow Q1 that's brought the overall margin down.

And lastly, you can see that cash is strong, and we've maintained that very strong cash discipline that we set up from last year, and it flows through the conversion rate of 75%, free cash flow and obviously the net debt more than halving.

Moving on to the P&L. You can see for the group that we've got a very pleasing revenue growth of 5.3%, within that when you split it out, you can see that Assurance grew at 6.7%, almost 7%. Q2 was weighted towards that where the momentum was coming through, which we'll talk about later, both in terms of sales orders and revenue. But in terms of expectations going forward into Half 2 that pipeline and sales orders and the revenue in Q2 really underpin our confidence in delivering the full year results in line with expectations.

Escrow decreased by 2.6%. If you take out the phasing issue, in terms of jobs landing last year into this year, it actually reduces to about 1.8%. Last year, it was 1.6% for the whole of the year the decline in Escrow, which means we're broadly stable with an Escrow if you adjust for the phasing difference.

Moving on to gross profit. You can see that, that was affected by the technical sales and capacity and investment in people that we've done. And then lastly, on overheads, I just wanted to stress here the leverage that was coming through. Now you can see that the EBIT has gone up by 11.5% ahead of revenue because now we've got a good control across all overheads on a global basis, and we're going to use that going forward to make sure it drives to the bottom line.

Moving on then to Group EBIT. You can see, up by 11.5%. You can see that now Assurance is the major contributor to EBIT at 62%, and it's really driving it forward, and it has done for the last couple of years and taken over.

The Assurance EBIT obviously grew with -- even with the investment in people and the techs and sales because we controlled our overheads in that area. And in Escrow, the decrease is really around the contract revenue, which I'll come to on a later slide.

So one thing I wanted to point out is that we're going to have an increase in software licensing, depreciation and amortization in the second half. As we turn on the Workday systems and Salesforce, obviously, the cost of those systems comes through, but that's all covered in our expectations for the full year.

And lastly, I wanted to say, just on a constant currency basis, there's an appendix that gives all the figures in there. But you can see it's worth 0.5 percentage points within -- on a constant currency. And IFRS 16, the new standard coming in on leasing has only had a minor impact of GBP 200,000 on the P&L.

So as -- the main point of this slide is to show you on the bridge that Assurance is the main driver of our profitability.

Turning on to the strengthening Q2 globally, the momentum. What you can see there is the growth half-to-half going forward in terms of the average revenue trend. And you can see a double-digit growth in North America of 10.6%. You have the U.K. pleasingly returning to growth. If you remember last year, it was flat, it's now growing at almost 7% in the U.K., which is great news. And then Europe and the rest of the world is towards flat. But it's actually to do with the timing that Adam mentioned before about the FOX IT revenue recognition, which will come through in the further periods.

So Q2 to Q1, you can see it's up 12% compared to 4.4% when you've compared Q2 to Q1. And if you do revenue growth, which is just Q2 on Q2 and Q1 on Q1, you can see it goes from 3% up to 10% on a revenue basis, which is a real testament to how you could see that momentum coming through.

In terms of average order values, they have increased by almost 30%, and utilization has gone down by 3% to around 78%. So we've done all this progression on the numbers with a lower utilization as well. And if you remember, we were saying, it should run at about 80%. So that's a good testament to us getting the efficiencies out of the P&L.

Turning to Escrow. You can see now, what we've said there is that the timing has been amplified by the timing of the big verification deals. So overall, it's trended down, as you can see by 2.6% but adjusted to the 1.8, I was saying if you take out the timing, specifically, it's within contract revenues. And when you look at North America, you can see it's down by 7.1%.

If we look at the timing of the phasing of last year into this year, and there are big deals coming to the Half 2 of America, that 7.1% actually flattens out if you take account of that phasing difference.

Gross margin is pleasingly flat which is good news. And the overheads really relate to the increase in the transformation of professionalizing the Escrow service that Adam was mentioning before about the investment in people, especially on the sales side. And our renewal rates have remained in the level of the expected range, as you can see at 87%.

Moving on to cash. So net debt has more than halved compared to last year, which is a testament not just to the people like the finance team, but it's right across the business. The cash culture that I mentioned last year has carried on, and it's going right across the business from the sales teams, the delivery teams and the fact everybody's playing their part, and that still continues.

You can see on here just to pick out debtor days, which I mentioned before, have improved and creditor days have improved to the point now where they crossed there. Remember, last year, they were the wrong way around. This year, now the creditor days are higher than the debtor days. And the 75% cash conversion is -- always improves in the second half, and we've said it will normalize around about 85%. So we're expecting that, obviously, to improve in the second half for the full year to get to where we'd expect it to be normalized, so that will come through.

And I think the only other point I'd mention on here is that Adam mentioned, the dividend is at GBP 8.8 million in the first half that was paid out in the cash flow. We've maintained the dividend policy, but we keep it under constant review as we said, but the Board has maintained it going forward.

Just one word on transformation. So this is our transformation program, it's is called Securing Growth Together. Over the last 18 months, as Adam mentioned, we're at midpoint of this transformation, we've learned lots of lessons, and we've really looked at the benefits that are coming out of that transformation, especially on the systems side of what we've been putting together. And what we found is that we thought we needed to invest a bit more. So we put a bit of incremental spend into this program to drive additional benefits of GBP 2.7 million additional spend to take it up to GBP 21 million, but it gets an enhanced system, both for our customers and for our employees.

What that gives us, is it gives us improved control and visibility of the data that Adam was mentioning to run the business in terms of an agile and assertive way and gives us global visibility across our cost base to make further efficiencies.

So SGT is on time, and it's on track, but we just had to spend a little bit more money to get the benefits coming through. So by July '20, all these systems will be in across the world on a global basis, which will allow us to run the business one firm one way, okay?

Thank you very much, and I'll hand back to Adam.

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Adam Palser, NCC Group plc - CEO & Executive Director [3]

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Lovely. Thank you, Tim. And so one half over, another one starts, on we go. And the pleasing thing is we launch into H2, we did launch into H2 with strong momentum. So just to reiterate, sales orders growth in Assurance of 34% in H1 versus the previous year. We're expecting growth across all of our regions. Europe and rest of world were flat, but we pointed to the product phasing that was behind that.

And we were sales constrained in Q1, we did have that slightly softer Q1, but we continue to invest during that period in sales, in technical capacity to feed future growth.

Escrow, as you can see, we are huge believers here. We continue to invest in deliberate and focused manner, both in leadership, both in sales leadership, and in the underpinning. I'm very pleased to say we have good pipeline and also contracted revenue, especially in the verification services lines going into H2.

And so there we are. In summary, a half that we're very pleased with. Revenue up, good trading, at a time of intense transformation, EBIT up, EBIT margin up, cash discipline maintained. And our operational priorities are those that you've already heard about to deliver operational -- sorry, continued revenue growth in Assurance with margin improvement to develop the MDR proposition and sell it more aggressively, which has the opportunity to stabilize and give us more visibility. And on Escrow, this repositioning as broader software resilience, completely current with the opportunities in today's world.

And as we said before, we expect full year trading to be in line with expectations.

Thank you. And we'd be delighted to take any questions.

Robin, you straight off the blocks there.

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Questions and Answers

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [1]

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Yes, it's Robin Speakman with Shore Capital. A bit more color on Escrow. They used to say that Escrow services had to be sold, they were never bought. So just in relation to that thinking. The renewal rate remains good in the 80% range, but down a bit. Should we expect that to fall further as you move further into the cloud?

In terms of the sales process, is it a different sales process now given the EaaS sort of product that's building momentum? And lastly, just on future expected margins in Escrow. Clearly, they have come back. Should we expect them to sort of stabilize around current levels? Or do you see them coming back a bit further? Or indeed, can you push them back towards historic levels?

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Adam Palser, NCC Group plc - CEO & Executive Director [2]

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No, great. So I'll -- in a minute, I'll pass over to Tim to comment on the margin point. I'll talk a bit about sales point. I mean, yes, you do have to sell Escrow. I mean, that said, we have a very lovely position because as a significant provider of Escrow services around the world, we are often the de facto choice.

So in many cases, people will turn to us as they put their vendor relationships in place, all their contracts in place, and it will be NCC that gets written in. So what a great place to be.

But we do have to sell them. And we have a very powerful, very strong call center based sales team, which we've been working on very hard. We've upgraded some of the sales leadership. We've introduced a refreshed sales academy to help bring new starters in, get them up to speed, train them rather than drop them in, in a single swim, kind of, way. So we expect to see that continue.

Talking now to the cloud. I wouldn't necessarily expect to see termination rates drop just because people are taking on cloud software as well. So we're just going to have to watch, right? But I mean, the consuming narrative of Escrow's decline has been around, certainly for the 2 years I've been here, and actually termination rates held up. So whatever we think that's going quite nicely. The wonderful thing about our cloud proposition is it gives our salespeople something else to talk about. So when you (inaudible) but we're not doing that, we're moving to a cloud offering. We go well fantastic because now we've got this proposition for you. So it continues the conversation.

I think the opportunity for channel, which we're at the very early days of here, we haven't fully launched is one we're quite excited about. I think if you do rewind back into time, you will have seen some of the more explosive growth in the early days of Escrow being fueled by working a channel. And I see the opportunity for us to do that again in -- certainly in the cloud environment.

And so we're doing everything you'd expect there, right? We're setting up partner programs, commoditizing our offerings, and we're looking to make this as easy to buy. And so when I refer to leaning out our processes, this is part of it. So someone can just check a box on electronic forms somewhere, and it'll flow through ultimately to automatic provisioning.

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Tim J. Kowalski, NCC Group plc - CFO, Company Secretary & Executive Director [3]

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In terms of margins, I would expect margins on the existing business to be maintained. And that'll be a combination of efficiency. And as Adam just mentioned, we're moving the bottom half of Escrow in terms of contracts into a self-service routine through a portal.

So what that will mean is the cost of servicing that will be lower, which will help with the maintaining margin. The one area where we have not yet done enough to know where we're going to be is on the cloud, because with the cloud, we're going to be dealing, hopefully with the ISPs of the future. And then there will be a debate around the commission that you have to pay those ISPs going forward. So that's the one area that we haven't yet experienced. But what you will get is you get, hopefully, large volumes, but it depends what the -- what margin that make sense, there'll be a balance.

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Adam Palser, NCC Group plc - CEO & Executive Director [4]

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Sorry, Tintin was next.

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Maria Christina Stormont, Numis Securities Limited, Research Division - Analyst [5]

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Tintin Stormont from Numis. Just a few more Escrow questions. In terms of the Escrow-as-a-service and the incentivization of the sales people versus the other product, could you maybe give us some color on the sales cycles, and sort of -- kind of, to some extent, actually, to the margin point, is it a very different margin in the -- that you're earning with the initial customers versus your more established Escrow product? And just really trying to understand the incentivization of a salesperson to sell this, if it's going to take quite a longer period of time versus selling the established product? And then I have 2 more follow-up questions. But on the -- nothing in Escrow.

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Adam Palser, NCC Group plc - CEO & Executive Director [6]

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No, sure. So I'll confess for not having all of the detail on that to my fingertips, but I'm not aware that we're incentivizing our salespeople very differently today to sell one or the other.

We do have cloud call out days. So we'll spend the whole day focusing just on pitching the cloud into our clients as we try and get that up. So that's more a management focus point rather than necessarily an incentives point.

As I said, the great thing is it gives our sales team something else to talk about when they get in and talk to the client. We're not seeing the margin to be very different, right? Ultimately, the -- and I'll get these slightly wrong, but indicatively, our classic Escrow on prem is about 85% gross margin. Our verification is a little lower, 65%, 70% gross margin, something like that.

And again, when you think about the cloud proposition here, the very basic access cloud proposition, which stores the keys in the cloud is something, which lends itself to automated provisioning. There's no reason why we can't tend toward 0 incremental cost for a lot of that. When you're into the more complicated verification side, and you're perhaps providing failover environments, there will be a higher cost of sale. I expect the gross margin to be similar to the verification testing side. But -- I mean Tim is right, we've got -- just got to live this for a little bit longer to see a few more things.

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Maria Christina Stormont, Numis Securities Limited, Research Division - Analyst [7]

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Just another question on staffing. Because obviously, you said that you were a bit sales constrained in the start of the year with Assurance, I think, towards the back end of last year. Certainly, we were assured that Escrow was in full capacity entering into the current year. How should we think about how you've exited the first half in terms of your staffing levels?

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Adam Palser, NCC Group plc - CEO & Executive Director [8]

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Sure. So I think in Assurance, we are in what I will [trickly] call good shape. We've been hiring our salespeople at the end of last year. We've continued to hire with higher technical capacity and whilst we take nothing for granted, and I'm not going to pretend that everything is perfect at NCC, we are really pleased to be able to attract and maintain some absolutely magnificent talent.

With Escrow, we entered the start of this year with a full complement of sales people. And as you can imagine, the task over the 6 months has been to make those individuals effective. Some will have fallen off. We have to recruit some more. So that is an ongoing cycle. I would say we've made significant progress from where we were last year on Escrow sales. And we probably got a little bit further again.

Ken, to be fair.

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Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [9]

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Ken Rumph from Jefferies. Three on the, sort of, change and when kind of change is finished. One is on, sort of, systems wise, it appears that not long after the end of the year, all the systems changes you want in the program are going to be completed and perhaps we then see some more benefits of that in the final year.

On Escrow, it feels like you've made the, sort of, management and product development changes you want to make, and therefore, beginning in the second half and certainly next year, in a sense, the foundations are all in place.

And the last one, so really this is -- am I right in saying all these things? And the last one was, in terms of some of the kind of, if you like, voluntary sales reductions you soar in Assured, so you mentioned in RMC, that there's been a bit of product creep, you're doing some things perhaps that you shouldn't have been doing and sales were down, is that sort of change finished and we get back to a growing business?

Likewise, FOX, I think, perhaps the evidence and the move to profit, but had been doing some sort of blue sky stuff that may be didn't make sense financially. So all of those things sound like we've been going through a transition that's either finished or will be finished by the end of the year and can look forward to sort of growth and better profitability, is that a fair picture?

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Adam Palser, NCC Group plc - CEO & Executive Director [10]

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It's a very fair picture, Ken. So let me be more...

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Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [11]

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Should have been a better question.

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Adam Palser, NCC Group plc - CEO & Executive Director [12]

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It was a wonderful question, don't worry. So let me help. We are, to overuse a word of this morning, we're very pleased with the systems progress. It's remarkable. When you think about the reach of NCC, it's 35 offices, encompassing 2,000 people, spread right across the world. A lot of which have been built through acquisition.

We put in a CRM system globally. We put in an HR system globally. We put in a secure single sign-on system globally. We've got the communication tools. And all this is just systems, they don't solve anything but moving a very security-conscious firm to the cloud in a rapid way, actually, because I don't think anybody is going to beating us to speed records here.

We're delighted. So we've got some important ones have to come, some big systems to come in, in the last half of this year, that's fine. We will be substantially finished with our systems installation by July 2020, as you correctly surmised.

As we go a long way, we learned a lot, right? We learned a lot about our own processes. We learned lot about how we could do things better. And so the investment that Tim has pointed to is an increment will be us refining our workflow and making the systems work for us so that everything is a little smoother.

And then on we go. From an Escrow perspective. So yes -- sorry. So let me give a slight more perspective. We get the systems in July '20, and then it's about continuing to work those processes, make ourselves ever more efficient, realize the benefits and really grab the value out of them.

Escrow, we've invested hard in our management team, as you can see. So we'll continue with that. The real things on the horizon now are the channel program, getting that up to speed, getting that access to market, getting the volumes flowing through that. And as the demand comes through, I'd expect us to see us work on the more automated and seamless provisioning of some of our offerings, no point building that before they've come, if that makes sense.

So we're going to -- going for the demand first. And I think you asked me about voluntary sales reduction?

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Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [13]

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Yes. So (inaudible) product that feels like that's you've kind of finished doing less of what you were going to do in Assured.

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Adam Palser, NCC Group plc - CEO & Executive Director [14]

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Yes, I hope so. I mean we've got some wonderful teams in our risk management business. And we shouldn't forget that risk management as a service grew really rapidly to quite a significant size in the U.K. So it's been a great success story in the round for NCC Group, and it will be again. Little bit of product overreach, perhaps. Some stuff has been very, very strong for us on the compliance, on the process front, other stuff, less so. Again, new leadership in the U.K., looking after our risk management division, probably fair to give them a little bit of time before declaring victory, but I think the major work is done, as you say.

Julian?

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Julian Robert James Yates, Investec Bank plc, Research Division - Technology Equity Analyst [15]

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Julian Yates from Investec. Just a couple of questions on the Assurance business. And you mentioned that sales hires helped the pickup in Q2 versus Q1, generally. But was there anything else? Was it sort of volatility of any client demand, industry factors? Did you, sort of, give a really big increase push, i.e., increased focus that drove that Q2 pickup? It seems like a very big differential just for some sort of extra sales people coming on board and making such a big difference in a short space of time? So I guess, that's the one point really understanding that and not understanding the trends and the sustainability of that.

And the second point is utilization. You mentioned utilization was down versus H1 last year, but it was improving, I think, versus a full year last year. I think maybe H2 was slightly weaker. I'm just trying to understand what level of utilization you're looking to run this business at? And what does it need to be, I guess, in H2 to get to where you want the overall business to be. I'm thinking sort of a sustainable utilization number as opposed to a red hot number that doesn't allow for research days, et cetera, et cetera, what sort of levels are you comfortable with in the business?

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Adam Palser, NCC Group plc - CEO & Executive Director [16]

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Yes. No, that's great. So in terms of what's pie Q1 versus Q2, I would love to sit here and give you a sophisticated macroeconomic arguments to what drove it, there isn't one. At least not one that we could find.

So I think your phrase of, was it industry-specific volatility, yes, it was. Everyone just went quiet for a few months.

And so yes, of course, we pushed, of course, we focused because after quite a Q1, we weren't going to sit there and just relax. But I would point to some really great hires and some really great hiring across the world, and particularly in North America, actually, where they brought on some very strong people and made them productive I think more quickly than we expected. So that's good. I'd love to give you the reason, Julian, because I could stop it from happening again. But I think quarters come quarter shaped sometimes.

From a utilization perspective, what I'd love to do is run this business at around 80%, day in, day out on a predictable basis because I can plan exactly how much research I'm going to do and all the rest of it. I can always hear the screaming back at home base because when I'm trumpeting research, everybody wants to do more research and making sure we maintain that balance. When you run the manpower business, like we do, you've either got more work from people or more people who work. And so it's just about maintaining that within a sensible band. So that's our strive, right?

Hopefully as we get bigger, and as we've managed to globalize our delivery capability, we'll get a bit better at that. And looking forward into next year, some of the promises to our people are that we will budget more research time in a more deliberate, more methodical way because it's important, right? We can't just squeeze it out for extra utilization because it's what keeps us at the forefront of cyber. And I don't know what the precise figure is for H2 utilization that we've got to hit.

Yes, under the hood of those utilization figures, they were lower in Q1 and they were higher in Q2. We've got to hire some more people to hit Q4, that's in train, that's in progress and on we go.

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Derren Nathan, Hybridan LLP, Research Division - Director & Head of Research [17]

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Derren Nathan from Hybridan. On the Assurance side, to what extent is that a man-hour sale? And to what extent is it software services, either proprietary or third party? And is there anything new you've added to the range you're particularly excited about?

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Adam Palser, NCC Group plc - CEO & Executive Director [18]

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Yes, sure. So we are -- we don't sell software, okay? I mean, we do knit together some third party solutions, whether it's endpoints from Carbon Black and the like in our Managed Detection and Response offering, okay? So we do knit together some third parties there, but we don't sell software. That's not what we do. Yes, we do develop some automated tools to make ourselves more productive. We do develop some productivity enhancements and all the rest.

But we -- in Assurance, it is largely a manpower business, the exception being our managed services, which fall under the MDR part. The way we work today is a blend of selling fixed packages and selling time and materials. Some parts, for example, the U.S. part of our business in risk management only sells fixed price packages of work. A lot of the other parts of the business sells on time and materials. So that's a balance that we maintain. We'll probably do a little bit more fixed price as we go forward. Yes, that's it.

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Neil Shah;Stifel;Analyst, [19]

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It's Neil Shah from Stifel. Gentlemen, could you speak a little bit about the competitive landscape and how you see that evolving?

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Adam Palser, NCC Group plc - CEO & Executive Director [20]

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I will give my opinion on this, and then Tim will run it back and probably give you some facts. But the cyber landscape is characterized by massive investment. Some might say overinvestment. So the cyber landscape is incredibly busy with a lot of people spending marketing dollars, making claims that are just not right. So it's hugely confusing for the client, actually, it's what I would say.

And one of our missions is to -- I'll keep my language polite, is to take the rubbish out of cyber and turn it into more of a science.

My Chief Technology Officer, often says that cyber is where medicine was in the 1800s. We've got drilling holes and occasionally people get better and we claim the credit for it and occasionally don't. So much more evidence-based work, required much more science in the world of cyber. So that we can actually give people offerings and solutions, which they can quantify and understand the reduction in their risk profile that they're going to get for $1 or EUR 1 or GBP 1 that they spend, okay?

Today, I'm afraid there's a lot of -- we call them magical amulets being sold, that will just take away your pain. So there you go, got one opinion that is -- how that manifests itself busy landscape, lot of people pretending that if you buy that box, it will take away the problem entirely. Our view, cyber risk is like health and safety, okay? You just need to understand what the risks are and then sensibly, sequentially, progressively reduce the risk through application of programmatic work.

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Neil Shah;Stifel;Analyst, [21]

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Sorry, just a quick follow on to that. And how about in terms of the MDR and MSSP landscape, do you see that evolving? Are you seeing increased competition out of the Americas or is that no changing?

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Adam Palser, NCC Group plc - CEO & Executive Director [22]

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Yes. So that -- I mean, look, that's a busy -- it's a busy landscape. There's a lot of people who're doing much lower value transactions than we are and probably will for a while. So it's a huge quality base of people that will get a tick box for having a certain level.

The clients who come to us, and this is a joy, actually because part of me is just so delighted by this. There are some very big players in the managed services landscape. And there's no question that they've got research and development dollars to spend, but we absolutely do not have. So the fact that we are able to take contracts of some significant systems integrator, as working for first tier financial institutions is a joy and a validation of what we're doing.

And I think it comes down to the fact that people turn to us if they really care about the cyber problem. We are not systems integrators, IT services people first, we are cyber first. And so you come to us, if you really do care about the safety of your data. Perhaps you care about the sovereignty of your data and you want stores in places other than the U.S., for example. And yes, on we go.

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Tim J. Kowalski, NCC Group plc - CFO, Company Secretary & Executive Director [23]

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And if I could just add to Adam's comment because we're an independent company with products and software agnostic so what we will do is recommend the best software out there if the client needs software and they can trust us as an independent consultant.

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Adam Palser, NCC Group plc - CEO & Executive Director [24]

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I think we have one more at the back.

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Steven John Robertson, Canaccord Genuity Corp., Research Division - Analyst of Technology [25]

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It's Steve Robertson from Canaccord. Just on the Assurance division and on your sales order figures of up 34% in the half, can you say how quickly those sales orders convert into revenue? I guess, given the mix of the activities in the division and the fact that the contracts are getting larger, I would assume that they convert quite quickly into revenues. So mostly in half two or would there be a follow-on for quite while through the next financial year?

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Adam Palser, NCC Group plc - CEO & Executive Director [26]

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Yes, sure. So most will convert into revenue or begin to yield revenue very quickly. Certainly true of our Technical Security Consulting business, our managed services revenues will kick in, in a matter of weeks or a couple of months as that mobilization project is completed. And then the -- those revenues can last for longer, 12 months or even a couple of years or sometimes 3 years. But the good news for me is that it's all adding to the forward visibility of the order book and the stability.

Lovely. Well, thanks very much for coming. We appreciate it.