TIDMCRW
RNS Number : 4053L
Craneware plc
04 September 2012
Craneware plc
("Craneware", "the Group" or the "Company")
Final Results
04 September 2012 - Craneware plc (AIM: CRW.L), the market
leader in automated revenue integrity solutions for the US
healthcare market, announces its results for the year ended 30 June
2012.
Financial Highlights (US dollars)
-- Continued revenue and profit growth:
o Revenue increased 8% to $41.1m (2011: $38.1m)
o Adjusted EBITDA(1) increased 18% to $11.9m (2011: $10.1m)
o Adjusted profit before taxation increased 16% to $10.8m (2011:
$9.3m)
o Profit before tax increased 29% to $11.2m (2011: $8.7m)
o Basic adjusted EPS increased 23% to 31.6 cents (2011: 25.6
cents)
o Basic EPS increased 43% to 33.0 cents (2011: 23.1 cents)
-- Positive operational cash flow of $10.6m (2011: $10.1m)
-- Cash at year end $28.8m (2011: $24.2m) after returning $4.1m
to shareholders by way of dividends
-- Proposed final dividend of 5.7p (8.9 cents) per share giving
total dividend for the year of 10.5p (16.4 cents) per share (2011:
8.8p (14.2 cents) per share)
(1.) Adjusted EBITDA refers to earnings before interest, tax,
depreciation, amortisation, share based payments, released deferred
consideration and transaction related costs
Operational Highlights
-- Extension of market reach through two significant customer
deals signed in the year, one providing entry into the Federal and
State Healthcare market and the other taking Craneware's software
into a non-competitive parallel market
-- Increased sales activity in the second half of the year in core market
-- Increasing pressure being placed on hospitals by Medicare
Recovery Auditors (formerly known as RAC programme)
-- Craneware InSight fully integrated as at 1(st) July 2012, first cross-sales delivered
-- Renewal levels strong at over 100% of dollar value
-- Entered 2013 with revenue visibility back at historically high levels
Keith Neilson, CEO of Craneware commented:
"In a mixed trading environment Craneware delivered a solid
level of growth across key financial and operational metrics,
confirming the health of the business and giving a high degree of
confidence for the future.
"Added pressures on US hospitals have led to an increased sales
and opportunity pipeline for our products as we move into the
current financial year. Craneware's solutions help US healthcare
providers drive business improvements that will result in better
financial health. In this turbulent, demanding environment,
hospitals need financial accuracy, visibility and shared
accountability to survive. Fiscal and regulatory drivers are
expected to increase in the year ahead as they push for greater
transparency and accuracy, and although this creates a challenging
ever-evolving marketplace, it ultimately increases the
opportunities for Craneware's solutions.
"Craneware is a trusted and established part of the fabric of
the US healthcare industry, with a client base consisting of around
a quarter of all US hospitals. We are confident that the business
is ideally placed with its in-house expertise, industry-leading
product suite and balance sheet strength to help US healthcare
organisations deal with their increasing fiscal and regulatory
pressures. Furthermore with revenue visibility having returned to
the historic high levels, we view the future with confidence."
For further information, please contact:
Craneware plc Peel Hunt Newgate Threadneedle
+44 (0)131 550 3100 +44 (0)20 7418 8900 +44 (0)20 7653 9850
Keith Neilson, CEO Dan Webster Caroline Evans-Jones
Craig Preston, CFO Richard Kauffer Fiona Conroy
About Craneware
Founded in 1999, Craneware has headquarters in Edinburgh,
Scotland with offices in Atlanta, Arizona, Massachusetts and
Tennessee employing over 200 staff. Craneware is the leader in
automated revenue integrity solutions that improve financial
performance for healthcare organisations. Craneware's
market-driven, SaaS solutions help hospitals and other healthcare
providers more effectively price, charge, code and retain earned
revenue for patient care services and supplies. This optimises
reimbursement, increases operational efficiency and minimises
compliance risk. By partnering with Craneware, customers achieve
the visibility required to identify, address and prevent revenue
leakage. To learn more, visit craneware.com and
stoptheleakage.com
Chairman's Statement
Despite a mixed trading environment in the first half of the
year, Craneware has delivered a solid set of results showing an 8%
increase in revenues to $41.1 million, an 18% increase in adjusted
EBITDA to $11.9 million, and a 23% increase in basic adjusted EPS
to 31.6 cents. The Company continues to benefit from strong
operational cash flow, closing the year with a cash balance of
$28.8m. Renewal rates have remained high, at 109% by dollar value
and Craneware has entered the current financial year with revenue
visibility of $108.7m for the next three years, back at historic
high levels.
The level of new sales secured in the year was impacted by
short-term competing IT priorities within our customer base, driven
primarily by Electronic Health Records (EHR) incentive payment
deadlines. By June 2012, a total of 3,779 hospitals had registered
for the EHR Incentive Program and a total of 2,596 unique hospitals
had been paid out $3.96 billion by that date (source: Centers for
Medicare & Medicaid Services' (CMS)). During the first half of
the year, this resulted in lengthier sales cycles for all of the
Group's products. However, the second half saw an increase in sales
activity which supports our view that sales cycles will return to
normal lengths in the near-term, as healthcare organisations once
again refocus on revenue integrity.
2012 has been a year of unprecedented change within US hospitals
as the unintended consequences of some of the recently introduced
healthcare proposals work through the system. However, it is
unavoidable that US healthcare facilities will be required to
provide a higher level of patient care, to a greater number of
people, at a lower cost per patient in a climate of greater
transparency. Compounding these issues, and adding to pressures
placed on US healthcare organisations, is the Medicare Recovery
Auditors (MRAs, formerly known as RAC) programme. MRAs and their
other third party equivalents, continue to recover overpayments
from hospitals. Indeed, the latest reported quarter (April-June
2012) showed another consecutive rise in the amount of overpayments
collected. Audit readiness is getting real traction in the
marketplace and we believe the combination of these factors is
resulting in hospitals refocusing on revenue integrity solutions.
These pressures create a compelling need for Craneware's software
in order to efficiently protect the revenue to which these
healthcare facilities are entitled.
Craneware has a client base consisting of approximately 25% of
US hospitals and it is now an established part of the fabric of the
US healthcare industry making it a trusted partner. We are
confident that Craneware is ideally placed with its in-house
expertise, industry-leading product suite and balance sheet
strength to help US healthcare organisations deal with their
increasing fiscal and regulatory pressures. Consequently we
continue to be confident in the future growth of the Group.
We have entered the new financial year in a strong position,
with a return to the historic high levels of revenue visibility for
the coming years, a market leading product set, a focused sales
force and a large and growing market opportunity.
I would like to take this opportunity to thank our staff for
their unrelenting high levels of energy and commitment and our
shareholders for their continued support.
George Elliott
Chairman
3 September 2012
Operational Review
Introduction
Craneware's mission is to stop the loss of legitimate revenue
owed to healthcare organisations by establishing a culture of
revenue integrity within these organisations; our vision is to be
the partner that can be relied on to improve and sustain our
customers' strong financial performance.
Over the history of the Company we have come a long way towards
achieving this. Today, Craneware has a total of nine core products,
spanning four product families; Audit & Revenue Recovery,
Revenue Cycle, Supply Management and Access Management &
Strategic Pricing. Craneware has installed its software into an
extensive customer base which represents around quarter of all
registered US hospitals - from the smallest critical access
facilities to the largest healthcare networks. To support this
growing client base and the Company's future growth prospects,
Craneware now employs more than 200 professionals across the US and
UK.
We have achieved and are proud of our valuable and trusted
position at the centre of this expanding market. Through aiding our
customers in their implementation of a holistic revenue integrity
model we have helped them achieve substantial revenue improvements
and impressive returns on the investments made in our software,
which can be reinvested by hospitals to deliver improved patient
care. Over the year, the value of Craneware and its solutions to
customers has increased, our product set has been enhanced, the
addressable market has been extended and the sales team has been
augmented for future growth.
In the year Craneware was affected by the cessation of a third
party contract and lengthening sales cycles due to the unforeseen
consequences of the US government applying incentive payments to
Electronic Health Record (EHR) implementations - in a year
preceding a Presidential election, which is being fought on
healthcare and economic battle grounds. This created a competing
healthcare priority of meeting the initial EHR deadlines for these
incentive payments. This was mitigated to some extent through a
significant partner agreement signed in February 2012, opening
market opportunities for the Group. In addition, we are now seeing
indications of sales cycles returning to normal levels with the
majority of qualifying hospitals having received their initial
payments for EHR.
Once again, Craneware received recognition and awards for
several of its products, including a number one ranking by KLAS for
Chargemaster toolkit(R) for a sixth consecutive year, matched by
its Bill Analyzer product in the first year of appearance in the
programme. Additionally, InSight Audit received platinum level
status from Executive Health Resources.
In response to increasing demand and organisational expansion,
Craneware opened its extended premises in Scottsdale, Arizona
during April 2012. The opening of this enlarged office demonstrates
Craneware's commitment to the financial success of its clientele
and dedication to exceptional client service across North
America.
Market Developments
In 2012 total US healthcare expenditure is expected to exceed $3
trillion, and with an anticipated 4% growth per annum, it will
rapidly approach a projected 20% of US GDP by 2017; US Healthcare
is the largest Healthcare market in the world. It is a market which
is striving for greater levels of transparency to understand and
better quantify the areas of spend within healthcare providers,
resulting in ever-increasing complexity as data becomes more
granular. This complexity produces high levels of data which need
to be analysed in an effort to understand and bring some control to
this unsustainable growth. Even without changing legislation, the
US healthcare industry's reimbursement model is unique and complex.
Nearly 50% of healthcare costs are paid by the government, with the
rest paid by private insurers and individuals; each of these payers
has different criteria and rates of reimbursement.
The US healthcare market faces new and increasing regulatory
challenges as part of the US Government's healthcare reform which
seeks to reduce the burden of healthcare on the State whilst making
healthcare available to a larger percentage of the population. In
addition to this, North America is experiencing the effects of an
increasing aging population which brings its own care and cost
challenges.
This changing economic landscape necessitates that US healthcare
organisations find ways to ensure operational efficiency, quality
and financial success while managing compliance risks. The evolving
regulations and healthcare reforms make it more important than ever
for healthcare organisations to proactively ensure the accuracy and
defensibility of their charges as they face tightening
reimbursement and increasing scrutiny from auditors.
These factors mean a growing number of hospitals are seeking
technology-based solutions to help improve accuracy of billing and
reduce regulatory burdens, thereby protecting their slim profit
margins. Craneware's strategy to meet this growing need is to
provide software solutions that help at the points in systems where
clinical and operational data transform into financial
transactions. Our solutions automate data normalisation, combining
disparate data sets while maintaining the localised context. This
produces valuable, actionable information and creates
organisation-wide visibility and accountability.
The need for continued innovation in this changing environment
will drive Craneware's future growth. By providing the tools to
normalise data across disparate areas of the hospital and remaining
agnostic to data formats and other vendors, Craneware gives the
power to take a step back and provide a holistic view indentifying
areas of productivity improvement, inefficiencies and errors.
The American Hospital Association estimates the total number of
registered US hospitals at 5,754. Fewer than half of these manage
their charge description masters, the central dataset from which
all bills are generated, with software such as Craneware's
Chargemaster toolkit. As healthcare reform requires hospitals to
manage data and resources better, charging accurately will be
nearly impossible without automation tools. Craneware's four
product families enable the improvement of financial performance
along multiple points in the hospital's operational areas, far
beyond the charge description master. One point of increasing
importance is in management of claims denials and audits by
Medicare Recovery Auditors. Reducing risks associated with managing
financial transactions in order to keep earned revenue is a
pressing priority for US hospitals facing a myriad of audits from
State and federal entities as well as private payers.
Medicare Recovery Auditors (MRA)
Medicare Recovery Auditors are tasked with detecting and
correcting past improper payments to hospitals, whether these are
overpayments which need to be recouped or underpayments. The
medical record submission process is lengthy and has several strict
deadlines. This, coupled with the increased number of audits
expected, represents a significant burden for healthcare providers;
a hospital can lose 7%-10% of its revenue to denied claims that
could be corrected and resubmitted, and this can make the
difference between financial success and failure.
Since its nationwide roll-out on 1 January 2010, the Centers for
Medicare & Medicaid Services' (CMS) Medicare Fee-for-Service
Recovery Audit Program has consistently increased in scale. In the
first quarter of FY2012 the recoupment total was $397.8m, in the
second quarter it was $588.4m, and, in the third quarter it was
$657.2m; therefore in nine months a total of $1,643.4m has been
recouped, this represents an increase of 206% when compared to the
previous full 12 month period (FY2011 $797.4m). This escalating
rate of take-backs has driven a greater emphasis on compliance in
healthcare and a demand for best practice tools to help healthcare
providers support compliance and manage audits. As a result,
several healthcare industry associations invited Craneware to share
information at audit and compliance events and conferences.
Craneware's InSight Audit product organises, manages and reports
on all audit requests, responses and appeal activities for all
audit types. It stores the relevant information and documents the
steps taken to appeal denials, whilst also identifying trends and
areas of exposure. InSight Audit manages (1) the patient record,
(2) the RAC audit workflow, and (3) reports on areas of risk.
Craneware's solutions have helped hospitals successfully manage the
audit process to win more than twice as many appeals as their
peers, defending millions of dollars in denials.
In February 2012, Craneware announced its participation in the
CMS electronic submission of medical documentation (edMD) Gateway
Services pilot program. The program provides a mechanism for the
digital exchange of medical record documentation in order to
streamline and improve the efficiency of audit appeals; this
therefore also reduces the potential cost burden. In August 2012,
Craneware was pleased to achieve certification from CMS as a
Healthcare Information Handler (HIH), enabling its InSight Audit
solution to digitally submit medical record documentation and
joining a list of less than 20 to have achieved this status.
The Patient Protection and Affordable Care Act (PPACA)
In June 2012, after years of legislative and legal battles the
Supreme Court ruled that the Patient Protection and Affordable Care
Act (PPACA) was constitutional. The most significant effect of this
wide ranging package of legislation is to increase pressure on the
entire US healthcare system to slow the growth in costs while
bringing roughly 32 million previously uninsured Americans into the
system.
Accountable Care Organisations (ACOs) and bundled payments
The Medicare shared savings program rewards Accountable Care
Organisations (ACOs) that take responsibility for the costs and
quality of care received by their patients. ACOs can include groups
of healthcare providers, including physician groups, hospitals,
nurse practitioners, physician assistants and others. As stated by
the PPACA, the objective of ACOs is to attain a degree of financial
responsibility on the providers in the hope of improving care
management and limiting unnecessary expenditures, ultimately
fostering clinical excellence while simultaneously controlling
costs.
ACOs that meet quality-of-care targets and reduce costs of their
patients relative to a spending benchmark are rewarded with a share
of the savings they achieve for the Medicare programme. There are
two models based on a degree of risk. Model one is low risk and
involves shared savings in year one, two and shared savings/risk in
year three. Model two is high risk and involves shared savings/risk
in all three years. Both models have caps on savings and losses,
but there are potential savings of up to 60%.
Bundled payments align incentives for providers - hospitals,
post-acute care providers and doctors - to partner closely across
all specialties to improve the patient's experience and reduce
costs by replacing fragmented care with coordinated care. Many
organisations view bundled payments as a measured foray into
accountable care at an acceptable level of risk and adjustment.
Much of the benefits from bundled payments can be reaped via data
normalisation which would have to be a key area of an informed
bundled payment movement. The increased transparency and
accountability of this normalisation also has obvious benefits to
the ACO models.
Alternative payment models like Medicare Shared Savings and
bundled/value based payments have the potential of shifting the
focus away from the quantity of services to the clinical outcomes
achieved. Currently there are 310 ACOs in the US, located in mostly
urban areas across 45 states.
However, with these alternative models only expected to yield
savings of $1 billion over the next three years (less than 0.01% of
total healthcare costs) and the highly unpredictable nature of
small population insurance risk, it is being widely predicted by
industry experts that they will have a limited impact on healthcare
provision for the foreseeable future and will probably remain at
the fringes of the healthcare model accounting for no more than 20%
of hospital reimbursement over the long-term. Similar models (e.g.
capitation) have been tried and failed in the past in different
States to provide the cost savings and clinical improvements
expected from these models.
Electronic Healthcare Records (EHR)
Healthcare Reform authorised CMS to provide incentives to
providers to implement Electronic Health Records (EHR). There are
two main programs under EHR that hospitals can register for;
Medicare and Medicaid. Qualifying hospitals may register for both.
As Medicare has set the initial higher standard, hospitals that
meet the meaningful use criteria (MU) and are Medicaid eligible can
automatically claim for a Medicaid incentive. A hospital may,
through choice or eligibility only apply for a Medicaid incentive
payment following the criteria set at the local State level.
At 30 June 2012, with six States still to start their Medicaid
Incentive scheme, 2,596 unique hospitals have received their share
of the $4 billion that has been paid to hospitals under the
incentive schemes (60% of eligible hospitals).
It is likely that the disruption in hospitals seen to December
2011, caused by EHR systems, will continue for many years to come
as new levels of EHR integration and standards are introduced.
However hospitals need to return their focus to revenue integrity
very quickly after making their initial EHR purchasing decisions as
it is widely recognised that there are limited additional returns
in the short and medium term. Since technologies like Cranewares'
with its unique normalisation of data approach, when combined with
EHR's are critical to achieving the improvements necessary to
provide the increased care levels and the required cost
efficiencies expected of this programme the Company is well placed
to address this expanding market opportunity.
Sales and Marketing
During the year the geographical alignment of our sales team
across the US, which began in the prior year, was completed.
Experienced Regional Vice Presidents now oversee each of our three
geographical regions, and each has a team comprised of mixed
experience and skill sets. In addition, the separate Sales Support
and Marketing Teams in our Atlanta office have been strengthened
allowing the field Sales Team to concentrate on their customers and
sales opportunities. We anticipate further investment into these
teams, in line with our revenue growth, as we work to address the
market opportunity.
We have completed thorough internal and external training as a
result of our enlarged product set and increasing market
opportunities presented by various US healthcare reforms, including
internally developed industry leading 'boot camps' for every member
of the sales team and a sales partner 'boot camp'.
In addition to our direct field sales opportunities, there are a
number of major contract opportunities which all have the ability
to yield significant potential revenues. Previously we have
referred to these deals as 'channel partners'; however it is more
accurate to instead refer to these as different 'routes to market',
as we shall do going forward. These potential contracts follow the
same revenue recognition methodology as an individual hospital and
group hospital contracts; although the sales approach for these
deals is quite different. These different routes to market can be
broken down into six categories (as listed below), and range in
potential total contract value from $5 million to $100 million in
any instance.
IDN's & Large Hospital Systems
An Integrated Delivery Network (IDN) is a network of facilities
and providers working together to offer a continuum of care to a
specific market or geographic area. These always involve a
significant number of multi-site licences, and, like the large
hospital systems involve multiple people from within Craneware
working as a team to sign the contract. Craneware continues to have
very good traction in this area, being the only software company
with the ability to provide proven "corporate" solutions.
Consolidation within the US healthcare industry increases the reach
and number of these organisations. Typically a team of Craneware
staff representing various areas of the Company will be responsible
for the success of these deals from prospecting through
implementation.
Business Process Outsourcers/Consultants (BPO)
Typically BPO's/consultants work with hospitals, on a gain-share
model ("at risk") with the improvements found generating the
revenue for them (a model we do not utilise). The BPO's will often
employ erstwhile hospital staff and outsource large functions of
the hospital's back office. This provides Craneware with the
opportunity to provide best-of-breed software to BPO's for a true
win-win-win, for them, their hospital client and Craneware. In many
instances we will explore white-labelling in this area so that we
provide the functionality of our software in a software wrapper
that they can brand, but for which we charge a premium.
BPO's can range from large national players (including the
largest accountancy firms) to small, regional "mom & pop"
players. In some cases, IDN's or Large Hospital Systems will
spin-out experts in a particular field and create BPO's that may
also want to resell our software into external hospitals. BPO deals
are typically led by Business Development and utilise the experts
within Craneware as required.
Hardware Vendors
Hardware vendors primarily want to use advanced functionality to
push a greater requirement for further computer hardware and to
embed their brand in a facility. This is commonly under the
auspices of a division of the hardware manufacturer or distributor
that provides BPO or consultancy services. These deals are
typically led by Business Development and utilise the experts
within Craneware as required. There are white-label opportunities
within this category.
Software Vendors
Third party software vendors often wish to integrate areas of
our functionality with their software so that they can leverage
more sales, for which we are paid a fee. Sometimes the opportunity
is on a pure Value Added Reseller basis; where they are looking for
more to sell to their customers and it is seen by Craneware as a
quicker route to market. This can work in both directions where
Craneware has additional functionality to sell to our customers.
These deals are typically led by Business Development and utilise
the experts within Craneware as required. There are white-label
opportunities within this category.
Group Purchasing Organisations (GPO's)
A Group Purchasing Organisation (GPO) is an entity that is
created to leverage the purchasing power of a group of hospitals to
obtain discounts from vendors based on their collective buying
power. GPO's also provide a route to market and may include a
division that has a BPO or consultancy offering in specialist
areas. The GPO involvement can be from simple referral or list
generation through to senior executive level sponsorship and cross
hospital references. These deals are typically led by Business
Development and utilise the experts within Craneware as required.
There are white-label opportunities within this category.
Content Acquirers
Due to the ever-increasing amount of data powering the Craneware
software - and the added functionality we can offer our customers
through blinded data - there is a growing desire from some
organisations to purchase the data that we use to power our
software solutions, to incorporate into different non-competing
offerings. These would typically be led by Product Management who
utilise Business Development for the commercial terms. There are
white-label opportunities within this category.
Routes to Market Summary
Craneware has experience in working with organisations in all
these categories and in FY2012 new revenues from these sources
accounted for less than 20% of total revenue. Although there has
been much debate around our increased exposure to these
opportunities in FY12, it is merely their absence that has further
highlighted their always present existence. They are not
contributing a larger proportion of the revenue in this year than
they have previously nor are they increasing the risk profile of
Craneware. In addition to our direct sales efforts, these different
routes to market are a valuable extra opportunity for Craneware to
generate further revenues from its technology.
A larger number of these organisations successfully promoting
products in the US Healthcare market, regardless if by their nature
they are white-label, further educates and evangelises the
importance of Revenue Integrity and leads to further Craneware
success.
Brand building, Conferences & Events
During the year important progress was made in brand building
and brand awareness. This has been achieved through a variety of
activities including sponsorship in support of our different market
segments including the Community Hospital 100, the American
Association of Medical Audit Specialists (AAMAS) and the Modern
Healthcare Women Leaders in Healthcare. Brand building continued
through awards, conferences and white papers.
Several healthcare industry associations invited Craneware to
present information at audit and compliance events and conferences
during the year. Craneware was selected to lead an educational
session at ANI: Healthcare Financial Management Association's
(HFMA) National Institute 2012, held in June 2012. During the
presentation, Craneware's client University Medical Center (UMC)
Health System explained that moving to a revenue integrity approach
increased their gross revenues across all clinical departments by
100%, enhanced electronic charge capture and improved UMC's
Medicare case mix by 7%.
Craneware and its client, The Bellevue Hospital, presented at
October 2011's Revenue Integrity HFMA MAP event. The Bellevue
Hospital shared insights gained from their revenue integrity
initiatives, including the successful implementation of revenue
integrity solutions that helped them to improve the accuracy and
efficiency of charge processes, find missed revenue and strengthen
compliance. The Bellevue Hospital reduced its denial write-offs
from $1.8 million in 2009 to $155,000 in 2010, decreased days in
accounts receivable by approximately 30%, nearly doubled bad debt
collections and achieved a net revenue potential impact of more
than $1 million.
In its first year of implementation of Craneware's Chargemaster
Toolkit, Online Reference Toolkit and Bill Analyzer products,
Amerinet member Adams County Regional Medical Center (ACRMC), a
25-bed Critical Access Hospital in the Southern Ohio region,
significantly improved its financial performance, operational
efficiency and compliance. The CFO of ACRMC noted that there has
been a dramatic financial turnaround having significantly reduced
errors, and identified millions in financial performance
improvement opportunities. AMRMC is projecting a profit for the
first time in five years.
Craneware is a partner in the Amerinet Strategic Alliance for
Financial Efficiency (SAFE), a consortium of market-leading
companies providing best-in-class revenue cycle and financial
performance improvement solutions that support healthcare
facilities of all sizes.
Awards
The Company's supplier award from Amerinet demonstrates the
continued success with our partner network. Many awards were
achieved during the year across the product portfolio. Craneware's
Chargemaster toolkit received, for its sixth consecutive year, the
number one ranking in the KLAS 'Revenue Cycle - Chargemaster
Management market' category. Craneware was delighted that its Bill
Analyzer product also achieved the number one ranking in 2011 for
its KLAS ranking. KLAS is the leading source of healthcare
information technology vendor performance metrics.
In addition, the Chargemaster toolkit achieved Healthcare
Financial Management Association (HFMA) Peer-Review status for its
eighth consecutive year.
Craneware's InSight Audit software, one of our newer products,
achieved platinum-level status; this is the highest level of
integration certification from Executive Health Resources, a
leading provider of medical necessity compliance and appeals
management solutions.
Product Development
In the year, product development has been focused on leveraging
the best innovative combinations of the Craneware and Craneware
InSight enlarged product set, whilst ensuring that the direction of
the product set moves consistently with the long-term strategic
positioning of Craneware as the revenue integrity partner of
choice.
Organisational Changes
As of 1 July 2012 Craneware InSight (formerly ClaimTrust,
acquired in February 2011) has been fully integrated into the
management structure of the Group.
With this integration, Glen Johnson formerly CIO of ClaimTrust
has joined the Operational Board of the Company to lead our Product
Management division.
Sharon Cuming has joined the Operational Board as Senior VP of
Human Resources.
We would also like to take this opportunity to thank Joe Ferro
(former CEO of ClaimTrust and EVP Craneware InSight) who left the
Group in February 2012, for his service to both organisations and
his continued positive advocacy of Craneware Solutions in his new
role heading-up one of the partners we have recently entered into a
relationship with.
Financial Review
The financial results for the current year, for the first time,
include a full year contribution from our February 2011 acquisition
ClaimTrust Inc, in comparison to the 4 months contribution in the
prior year. These results reflect the mixed trading environment we
experienced, especially in the first half of the financial year.
However, despite this environment we have continued to invest in
the future growth of the Group whilst delivering an 18% increase in
our Adjusted EBITDA to $11.9m from $10.1m in the prior year.
There have been no changes during the year to the business model
underlying the Group's revenue recognition policies. The Group
continues to recognise revenue primarily under its Annuity
Software-as-a-Service (SaaS) revenue recognition policies with
these revenues accounting for between 75% to 80% of all revenue in
any one year. Under this model we recognise software licence
revenue and any minimum payments due from our 'partner' contracts
evenly over the life of the underlying signed contracts.
With any new contract we sign, we normally expect to deliver a
professional services engagement, relating to the implementation of
the software, the training of the hospital staff and further
assisting the hospital in developing its processes to ensure the
software is utilised to its maximum potential. Within any
individual contract we would expect these services to account for
12% to 20% of the total contract value (dependent on the product
and needs of the individual hospital). However of total Group
revenue in any one year we would expect services revenues to
account for between 10% to 20% of revenue. This revenue is
typically recognised as the service is delivered, usually on a
percentage of completion basis.
As a result of the ClaimTrust Inc acquisition in 2011 we now
have a third revenue model. For revenue recognition purposes it is
effectively the same recognition as the normal Annuity SaaS model
described above. It is recurring in its nature, however, it is not
signed under long term non-breakable contracts and is invoiced
monthly in arrears rather than annual in advance, therefore it does
not include the inherent advantages of the Craneware Annuity SaaS
revenue model. This revenue currently accounts for less than 10% of
total revenues in any one year and as new contracts for the InSight
product range are being signed under the Annuity SaaS model, we
would expect the proportion of revenue derived from this model to
reduce over time.
As a result of these revenue recognition models, based on our
historical normal average contract life of 5 years, the maximum
value of an average contract that can be recognised as revenue in
any one year is 20% plus the value of associated services that have
been delivered. In all cases, if the contract contains any material
contingencies or any increased risk of collection is identified,
revenue is deferred until the contingency is satisfied, at which
point the revenue that has been deferred is released and the
revenue recognition is 'caught up' to the level that would have
been recognised had there been no contingency.
Revenue
Revenue for the year has increased by 8% to $41.1m (2011:
$38.1m). Growth of 8%, whilst meaningful, is below both the
challenging targets we set for the Group and the historical high
levels of growth we have reported in prior years. The primary
reasons for this relate to:
-- The cessation of a contract 'acquired' as part of the
ClaimTrust acquisition at the end of the first quarter of the
financial year. This contract was administered through a third
party and was unexpectedly terminated as a result of the third
party losing its contract with its end hospital network. As with
most ClaimTrust contracts, this contract was subject to a 'break
clause' which allowed for early termination in the event the end
customer contract was lost. The loss of this contract negatively
impacted revenues by c$2m in the current year.
-- The lengthening sales cycles due to the unforeseen
consequences of the US government applying incentive payments to
Electronic Health Record (EHR) implementations. Further details of
these unintended consequences have been provided earlier, however
the lengthening of these sales cycles and the resultant reduction
in new contract signed in the year has impacted current year
revenues. The most significant impact relates to professional
services revenues. As stated above, with any new sale we would
expect to deliver and recognise 12 to 20% of the total contract
value within the first 3 to 6 months of signing. As a result of the
lower level of sales, professional services revenues, on like for
like services, have decreased in the current year by c$1.8m. Whilst
we have managed to mitigate some of this loss in other areas, total
professional services revenue is $1.2m below the prior year.
However we would expect to see this revenue quickly return to prior
year levels as new sales levels return to historical norms.
During the second half of the financial year, we saw month on
month sales activity increases which based on our historical norms
for sales cycles we would expect to positively impact revenue
growth in the second quarter of FY2013 and thereafter.
In any single year large hospital deals and/or deals signed
through other routes to market are an important part of our growth
and we would normally expect to sign at least one significant
contract in each half year. Whilst the quantum of revenue we derive
from any one deal has increased, the actual percentage of our total
revenues derived from these deals in any one year has fallen
considerably, with now less than 20% of our revenue expected from
new large deals in a single year. Despite signing two large deals
in the year, the revenue recognised from these deals only served to
mitigate the revenue shortfalls discussed above rather than
significantly add to our annual revenue growth as we would normally
expect.
One of these large deals signed in the year introduced, for the
first time since we entered the public markets, a "White-Labelling
fee". This is in effect paid for development services (which carry
a significant premium), where we provide the functionality of our
software in a software wrapper that the partner can brand. We have
recognised this revenue as we would any other services revenue,
i.e. as we deliver the underlying service on a percentage of
completion basis. As a result $3.5m of revenue has been recognised
in the current year, bringing the total services revenue recognised
in the year to $7m or 17% of our current year's revenue, this
compares to 12% in the prior year. This increase is primarily a
result of total revenue growth being below expectations rather than
a significant long term increase in total services revenues.
Earnings
In the prior year, the Company introduced an 'Adjusted' earnings
metrics to adjust for one-off acquisition costs. In keeping with
this methodology a one-off benefit of $0.95m relating to the
release of the provision for contingent consideration has been
removed. We believe the disclosure of these adjusted earnings
metrics is consistent with other acquisitive companies and that it
allows for a more accurate understanding of the underlying profit
generated from operations and for a direct comparison year on
year.
Adjusted earnings before interest, taxation, share based
payments, depreciation and amortisation ("EBITDA") has grown in the
year to $11.9m (2011: 10.1m) an increase of 18%. Accordingly
Adjusted EBITDA margins have increased from 26.5% in the prior year
to 29%.
Revenue Visibility and other KPI's
The Company continues to believe the "Three Year Visible
Revenue" metric is key to assessing the medium term growth
prospects. This metric includes:
-- Future revenue under contract;
-- Revenue generated from renewals (calculated at 100% dollar value renewal).
-- InSight revenue identified as recurring in nature (subject to
an estimated churn rate of 8% per year);
The different categories of revenue reflect any inherent future
risk in recognising these revenues. Future revenue under contract,
is as the title suggests subject to contract without break clauses
and therefore only has to be invoiced to be recognised in the
respective years (only subject to future collection risk that
exists with all revenue). Renewal revenues are contracts coming to
the end of their original contract term (e.g. 5 years) and will
require the contracts to be renewed for the revenue to be
recognised, however as we are renewing contracts at over 100%
dollar value it is reasonable to conclude minimal additional risk
is associated to this revenue. The final category "Insight revenue
identified as recurring in nature" is revenue that we would expect
to recur in the future but as the underlying contracts do contain
break clauses there is potential for this revenue not to be
recognised in future years, however we apply an estimated 8% churn
rate to make allowance for this risk.
To better aid understanding, the three year visible revenue as
at 30 June 2012 (i.e. visible revenue for FY2013, FY2014 and
FY2015) is being presented against the visible revenue for the same
three year period as at 30 June 2011. As such, visible revenue for
the three years to 30 June 2015 has increased to $108.7m from
$100.9m at 30 June 2011, as follows:
-- InSight revenue of $10.8m.
-- Revenue generated from renewal activities contributing $38m;
being $5.0m in FY13, $12.5m in FY14 and $20.5m in FY15.
-- Future revenue under contract contributing $59.9m of which
$28.5m is expected to be recognised in FY13, $20.6m in FY14 and
$10.8m in FY15.
Average contract length during the period has dipped to c4
years, below our historical normal average contract length of 5
years, this is due to the smaller number of contracts signed in the
year and the sales mix of size of hospital being skewed as a
result. The Company does not anticipate this to be a long term
trend as overall sales levels and mix return to historical
levels.
The product attachment rate, being the average number of our
nine products that are in place across our entire customer base,
has increased from 1.5 in the prior year to 1.6 products. The
remaining 7.4 reflects the significant cross sell opportunity that
still exists for the Group.
Operating Expenses
The current year cost base includes the full year cost of the
Craneware InSight cost base as well as the planned for investment
'released and executed on' in the year. As a result net operating
expenses (before acquisition benefits/costs, share based payments,
depreciation and amortisation) have increased to $27.6m an 18%
increase over the prior year (FY11: $23.4m). The most significant
increases relate to Client Servicing and Product Development where
ClaimTrust had made significant investment prior to the acquisition
and we will now look to leverage this cost base investment in
future years as we increase sales levels and hospital customer
numbers.
Client Servicing has increased 24% to $7.2m (FY11: $5.8m) and
Product Development has increased 36% to $6.8m (FY11: $5.0m).
Product Development spend has increased to 16.5% of our total
revenue (2011: 13%) reflecting the increased number of core
products we are now supporting. We continue to capitalise very low
levels of Development spend with $0.3m capitalised in the year
(FY11: 0.2m).
Acquisition of ClaimTrust Inc.
In the prior year, Craneware completed the acquisition of
ClaimTrust Inc. via a newly formed subsidiary Craneware InSight
Inc. During the course of the year we made substantial progress on
the integration of this business, ultimately completing the
integration by 1st July 2012. At an early stage of the integration
plan the InSight and the original Craneware sales forces were
brought together such that the Group had one common sales force
selling nine core products. All nine products are sold into 'one
market segment' being revenue integrity solutions to healthcare
organisations within the United States of America. As a result of
the level of integration achieved throughout the year combined with
the Group serving a single market it is not appropriate to show the
results of Craneware InSight separate from the rest of the
Group.
As required by International Accounting Standards (IAS), in the
prior year we were required, on consolidation, to both separately
identify intangible assets and their fair value and estimate the
fair value of contingent consideration that would ultimately be
paid. In respect of intangible assets and the fair value of assets
acquired, the finalisation of the original fair values are detailed
in Note 16 to the accounts and relate primarily to the recognition
of a deferred tax asset of $1.34m relating to pre-acquisition
losses and an adjustment for a unrecorded liability of $0.26m that
existed at the opening balance sheet date. As a result finalised
Goodwill is $11.2m (2011: $12.3m).
In respect of the estimate of contingent consideration, this
estimate was produced prior to both the cessation of the third
party contract reported in the interim results statement and the
effect of lengthening sales cycles due to the unforeseen
consequences of the US government applying incentive payments to
Electronic Health Record (EHR) implementations which impacted the
InSight products as well as the other Craneware products. As a
result, no contingent consideration is payable in respect of the
ClaimTrust Inc. acquisition and as required by IAS the original
provision of $0.95m has been released to the current year's
results.
Again as required by IAS a detailed review for impairment of
Goodwill has been carried out at the balance sheet date and no
impairment has been identified. Full details of the impairment
review are disclosed in Note 14 to the accounts.
Cash
We continue to measure the quality of our earnings through our
ability to convert them into operating cash. As in prior years, we
have continued to have very high levels of cash conversion which
has enabled us to grow our cash reserves to $28.8m (FY11: $24.2m).
These cash levels are now approaching the levels prior to the $9m
paid for the acquisition despite having paid out a further $4.1m to
our shareholders by way of dividends.
Our ability to return our cash balances to pre-acquisition
levels gives us confidence in our ability to fund further 'bolt-on'
acquisitions from the Company's own reserves, and as such
acquisitions continue to be part of our future growth strategy.
Balance Sheet
The Group maintains a strong balance sheet position, not only
through our significant cash balance but with rigorous controls
over working capital and no debt.
Currency
The reporting currency for the Group (and cash reserves) is US
Dollars. Whilst the majority of our cost base is US located and
therefore US Dollar denominated we do have approximately one
quarter of the cost base based in the UK relating primarily to our
UK employees (and therefore denominated in Sterling). As a result,
we continue to closely monitor the Sterling to US Dollar exchange
rate, and where appropriate consider hedging strategies. During the
year, we have not seen a significant impact through exchange rate
movements, with the average exchange rate throughout the year being
$1.5840 as compared to $1.5906 in the prior year.
Taxation
The Group's effective tax rate remains dependent on the
proportion of profits generated in the UK and overseas and the
applicable tax rates in the respective jurisdictions. As detailed
above, the current year has seen a significant decrease in the
levels of professional services revenues generated. As all
professional services are delivered in the US, this reduction
combined with the lower level of sales generated in the year in
this revenue has significantly reduced the levels of income subject
to taxation in the US. This combined with the reducing tax rate in
the UK and our continued ability to agree enhanced Research and
Development tax relief has resulted in an effective tax rate of
20.6% (FY11: 30.5%). We would expect effective tax rates to
increase in future years as sales levels return to normal and the
levels of professional services increase accordingly.
EPS
As with EBITDA, the Group is reporting an Adjusted EPS figure,
adjusting for the $0.95m of contingent consideration provision
release.
In the year adjusted EPS has increased by 23% to $0.316 (FY11:
$0.256) and adjusted diluted EPS has increased by 25% to $0.315
(FY11: $0.253). This is despite the increase in weighted number of
average shares as a result of the full year effect of the shares
issued in FY11 as a result of the acquisition of ClaimTrust. The
increase in EPS is driven by the increase in EBITDA further
enhanced by the lower effective tax rate resulting in the year.
Dividend
The Board recommends a final dividend of 5.7p (8.9 cents) per
share giving a total dividend for the year of 10.5p (16.4 cents)
per share (2011: 8.8p (14.12 cents) per share). Subject to
confirmation at the Annual General Meeting, the final dividend will
be paid on 7th December 2012 to shareholders on the register as at
9th November 2012, with a corresponding ex-Dividend date of 7th
November 2012.
The final dividend of 5.7p per share is capable of being paid in
US dollars subject to a shareholder having registered to receive
their dividend in US dollars under the Company's Dividend Currency
Election, or who register to do so by the close of business on 9th
November 2012. The exact amount to be paid will be calculated by
reference to the exchange rate to be announced on 9th November
2012. The final dividend referred to above in US dollars of 8.9
cents is given as an example only using the Balance Sheet date
exchange rate of $1.5685/GBP1 and may differ from that finally
announced.
Outlook
In a mixed trading environment Craneware delivered a solid level
of growth across key financial and operational metrics, confirming
the health of the business and giving a high degree of confidence
for the future.
Added pressures on US hospitals have led to an increased sales
and opportunity pipeline for our products as we move into the
current financial year. Craneware's solutions help US healthcare
providers drive business improvements that will result in better
financial health. In this turbulent, demanding environment,
hospitals need financial accuracy, visibility and shared
accountability to survive. Fiscal and regulatory drivers are
expected to increase in the year ahead as they push for greater
transparency and accuracy, and although this creates a challenging
ever-evolving marketplace, it ultimately increases the
opportunities for Craneware's solutions.
Craneware is a trusted and established part of the fabric of the
US healthcare industry, with a client base consisting of around a
quarter of all US hospitals. We are confident that the business is
ideally placed with its in-house expertise, industry-leading
product suite and balance sheet strength to help US healthcare
organisations deal with their increasing fiscal and regulatory
pressures. Furthermore with revenue visibility having returned to
the historic high levels, we view the future with confidence.
Keith Neilson Craig Preston
Chief Executive Officer Chief Financial Officer
3 September 2012 3 September 2012
Consolidated Statement of Comprehensive Income
For the year ended 30 June 2012
Total Total
2012 2011
Notes $'000 $'000
------------------------------------------- ------ --------- ---------
Revenue 3 41,067 38,124
Cost of sales (1,556) (4,696)
--------- ---------
Gross profit 39,511 33,428
Net operating expenses 4 (28,416) (24,874)
--------- ---------
Operating profit 11,095 8,554
Analysed as:
Adjusted EBITDA* 11,932 10,077
Acquisition costs on business combination - (517)
Released deferred consideration on
business combination 954 -
Share based payments (152) (139)
Depreciation of plant and equipment (579) (312)
Amortisation of intangible assets (1,060) (555)
------------------------------------------- ------ --------- ---------
Finance income 107 99
--------- ---------
Profit before taxation 11,202 8,653
Tax on profit on ordinary activities 5 (2,309) (2,638)
--------- ---------
Profit for the year attributable to
owners of the parent 8,893 6,015
------------------------------------------- ------ --------- ---------
Total comprehensive income attributable
to owners of the parent 8,893 6,015
------------------------------------------- ------ --------- ---------
*Adjusted EBITDA is defined as operating profit before
acquisition costs, released deferred consideration, share based
payments, depreciation and amortisation.
Earnings per share for the period attributable to equity
holders
Notes 2012 2011
------------------------------- ------ ------ ------
Basic ($ per share) 7a 0.330 0.231
*Adjusted Basic ($ per share) 7a 0.316 0.256
Diluted ($ per share) 7b 0.329 0.228
*Adjusted Diluted ($ per
share) 7b 0.315 0.253
------------------------------- ------ ------ ------
*Adjusted Earnings per share calculations allow for the release
of deferred consideration on the business combination and
acquisition costs (in the prior year) together with amortisation on
acquired intangible assets to form a better comparison with
previous years.
Statements of Changes in Equity for the year ended 30 June
2012
Share
Share Premium Other Retained Total
Capital Account Reserves Earnings Equity
Group $'000 $'000 $'000 $'000 $'000
----------------------------------- -------- -------- --------- --------- --------
At 1 July 2010 512 9,250 3,237 9,053 22,052
Total comprehensive income -
profit for the year - - - 6,015 6,015
Transactions with owners:
Share-based payments - - 139 1,249 1,388
Impact of share options exercised 13 - (3,074) 3,074 13
Issue of ordinary shares related
to business combination 11 5,989 - - 6,000
Dividends (Note 6) - - - (3,063) (3,063)
-----------------------------------
At 30 June 2011 536 15,239 302 16,328 32,405
Total comprehensive income -
profit for the year - - - 8,893 8,893
Transactions with owners:
Share-based payments - - 152 (538) (386)
Impact of share options exercised 2 169 (245) 692 618
Dividends (Note 6) - - - (4,093) (4,093)
-----------------------------------
At 30 June 2012 538 15,408 209 21,282 37,437
----------------------------------- -------- -------- --------- --------- --------
Consolidated Balance Sheet as at 30 June 2012
Notes 2012 2011
$'000 $'000
---------------------------------- ------ ------- -------
ASSETS
Non-Current Assets
Plant and equipment 2,027 2,167
Intangible assets 8 16,010 16,652
Deferred tax 1,470 1,287
19,507 20,106
------- -------
Current Assets
Trade and other receivables 12,560 13,121
Cash and cash equivalents 28,790 24,176
41,350 37,297
------- -------
Total Assets 60,857 57,403
---------------------------------- ------ ------- -------
EQUITY AND LIABILITIES
Non-Current Liabilities
Contingent consideration 9 - 954
Deferred income 183 250
183 1,204
------- -------
Current Liabilities
Deferred income 15,766 15,638
Current tax liabilties 1,527 288
Trade and other payables 5,944 7,868
23,237 23,794
------- -------
Total Liabilities 23,420 24,998
------- -------
Equity
Called up share capital 10 538 536
Share premium account 15,408 15,239
Other reserves 209 302
Retained earnings 21,282 16,328
Total Equity 37,437 32,405
------- -------
Total Equity and Liabilities 60,857 57,403
---------------------------------- ------ ------- -------
Statements of Consolidated Cash Flows for the year ended 30 June
2012
Notes 2012 2011
$'000 $'000
------------------------------------------ ------ -------- ---------
Cash flows from operating activities
Cash generated/(used) from operations 11 10,602 10,089
Interest received 107 99
Tax paid (1,316) (1,595)
------------------------------------------ ------ -------- ---------
Net cash from operating activities 9,393 8,593
Cash flows from investing activities
Purchase of plant and equipment (439) (1,790)
Acquisition of subsidiary, net
of cash acquired 9 - (8,772)
Capitalised intangible assets 8 (418) (247)
------------------------------------------ ------ -------- ---------
Net cash used in investing activities (857) (10,809)
Cash flows from financing activities
Dividends paid to company shareholders 6 (4,093) (3,063)
Proceeds from issuance of shares 171 13
------------------------------------------ ------ -------- ---------
Net cash used in financing activities (3,922) (3,050)
Net increase/(decrease) in cash and cash
equivalents 4,614 (5,266)
Cash and cash equivalents at the
start of the year 24,176 29,442
Cash and cash equivalents at the
end of the year 28,790 24,176
------------------------------------------ ------ -------- ---------
Notes to the Financial Statements
General Information
Craneware plc (the Company) is a public limited company
incorporated and domiciled in Scotland. The Company has a primary
listing on the AIM stock exchange. The principal activity of the
Group continues to be the development, licensing and ongoing
support of computer software for the US healthcare industry.
Basis of preparation
The financial statements are prepared in accordance with
International Financial Reporting Standards, as adopted by the
European Union (IFRS), IFRIC interpretations and with those parts
of the Companies Act 2006 applicable to companies reporting under
IFRS. The consolidated financial statements have been prepared
under the historic cost convention and prepared on a going concern
basis. The applicable accounting policies are set out below,
together with an explanation of where changes have been made to
previous policies on the adoption of new accounting standards in
the year, if relevant.
The preparation of financial statements in conformity with IFRS
requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Although these estimates are
based on management's best knowledge of the amount, event or
actions, actual results ultimately may differ from those
estimates.
The Company and its subsidiary undertakings are referred to in
this report as the Group.
1 Selected Principal accounting policies
The principal accounting policies adopted in the preparation of
these accounts are set out below. These policies have been
consistently applied, unless otherwise stated.
Reporting currency
The Directors consider that as the Group's revenues are
primarily denominated in US dollars the Company's principal
functional currency is the US dollar. The Group's financial
statements are therefore prepared in US dollars.
Currency translation
Transactions denominated in foreign currencies are translated
into US dollars at the rate of exchange ruling at the date of the
transaction. Monetary assets and liabilities expressed in foreign
currencies are translated into US dollars at rates of exchange
ruling at the balance sheet date $1.5685/GBP1 (2011 :
$1.6055/GBP1). Exchange gains or losses arising upon subsequent
settlement of the transactions and from translation at the balance
sheet date, are included within the related category of expense
where separately identifiable, or in general and administrative
expenses.
Revenue recognition
The Group follows the principles of IAS 18, "Revenue
Recognition", in determining appropriate revenue recognition
policies. In principle revenue is recognised to the extent that it
is probable that the economic benefits associated with the
transaction will flow into the Group.
Revenue is derived from sales of, and distribution agreements
relating to, software licenses and professional services (including
installation). Revenue is recognised when (i) persuasive evidence
of an arrangement exists; (ii) the customer has access and right to
use our software; (iii) the sales price can be reasonably measured;
and (iv) collectability is reasonably assured.
Revenue from standard licensed products which are not modified
to meet the specific requirements of each customer is recognised
from the point at which the customer has access and right to use
our software. This right to use software will be for the period
covered under contract and, as a result, our annuity based revenue
model recognises the licensed software revenue over the life of
this contract. This policy is consistent with the Company's
products providing customers with a service through the delivery
of, and access to, software solutions (Software-as-a-Service
("SaaS")), and results in revenue being recognised over the period
that these services are delivered to customers.
'White-labelling' or other 'Paid for development work' is
generally provided on a fixed price basis and as such revenue is
recognised based on the percentage completion or delivery of the
relevant project. Where percentage completion is used it is
estimated based on the total number of hours performed on the
project compared to the total number of hours expected to complete
the project. Where contracts underlying these projects contain
material obligations, revenue is deferred and only recognised when
all the obligations under the engagement have been fulfilled.
Revenue from all professional services is recognised as the
applicable services are provided. Where professional services
engagements contain material obligation, revenue is recognised when
all the obligations under the engagement have been fulfilled. Where
professional services engagements are provided on a fixed price
basis, revenue is recognised based on the percentage completion of
the relevant engagement. Percentage completion is estimated based
on the total number of hours performed on the project compared to
the total number of hours expected to complete the project.
Software and professional services sold via a distribution
agreement will normally follow the above recognition policies.
Should any contracts contain non-standard clauses, revenue
recognition will be in accordance with the underlying contractual
terms which will normally result in recognition of revenue being
deferred until all material obligations are satisfied.
The excess of amounts invoiced over revenue recognised are
included in deferred income. If the amount of revenue recognised
exceeds the amount invoiced the excess is included within accrued
income.
Intangible Assets
(a) Goodwill
Goodwill arising on consolidation represents the excess of the
cost of acquisition over the fair value of the identifiable assets
and liabilities of a subsidiary at the date of acquisition.
Goodwill is capitalised and recognised as a non-current asset in
accordance with IFRS 3 and is tested for impairment annually, or on
such occasions that events or changes in circumstances indicate
that the value might be impaired.
Goodwill is allocated to cash-generating units for the purpose
of impairment testing. The allocation is made to those
cash-generating units that are expected to benefit from the
business combination in which the goodwill arose.
(b) Proprietary software
Proprietary software acquired in a business combination is
recognised at fair value at the acquisition date. Proprietary
software has a finite life and is carried at cost less accumulated
amortisation. Amortisation is calculated using the straight-line
method to allocate the associated costs over their estimated useful
lives of 5 years.
(c) Contractual customer relationships
Contractual customer relationships acquired in a business
combination are recognised at fair value at the acquisition date.
The contractual customer relations have a finite useful economic
life and are carried at cost less accumulated amortisation.
Amortisation is calculated using the straight-line method over the
expected life of the customer relationship which has been assessed
as 10 years.
(d) Research and Development expenditure
Expenditure associated with developing and maintaining the
Group's software products is recognised as incurred. Where,
however, new product development projects are technically feasible,
production and sale is intended, a market exists, expenditure can
be measured reliably, and sufficient resources are available to
complete such projects, development expenditure is capitalised
until initial commercialisation of the product, and thereafter
amortised on a straight-line basis over its estimated useful life,
which has been assessed as 5 years. Staff costs and specific third
party costs involved with the development of the software are
included within amounts capitalised.
(e) Computer software
Costs associated with acquiring computer software and licensed
to-use technology are capitalised as incurred. They are amortised
on a straight-line basis over their useful economic life which is
typically 3 to 5 years.
Impairment of non-financial assets
At each reporting date the Group considers the carrying amount
of its tangible and intangible assets including goodwill to
determine whether there is any indication that those assets have
suffered an impairment loss. If there is such an indication, the
recoverable amount of the asset is estimated in order to determine
the extent of the impairment loss (if any) through determining the
value in use of the cash generating unit that the asset relates to.
Where it is not possible to estimate the recoverable amount of an
individual asset, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
If the recoverable amount of an asset is estimated to be less
than its carrying amount, the impairment loss is recognised as an
expense.
Where an impairment loss subsequently reverses, the carrying
amount of the asset is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does
not exceed the carrying amount that would have been determined had
no impairment loss been recognised for the asset. A reversal of an
impairment loss is recognised as income immediately. Impairment
losses relating to goodwill are not reversed.
Taxation
The charge for taxation is based on the profit for the period
and takes into account deferred taxation. Taxation is computed
using the liability method. Under this method, deferred tax assets
and liabilities are determined based on temporary differences
between the financial reporting and tax bases of assets and
liabilities and are measured using enacted rates and laws that will
be in effect when the differences are expected to reverse. The
deferred tax is not accounted for if it arises from initial
recognition of an asset or liability in a transaction that at the
time of the transaction affects neither accounting nor taxable
profit or loss. Deferred tax assets are recognised to the extent
that it is probable that future taxable profits will arise against
which the temporary differences will be utilised.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries except where the timing of the reversal
of the temporary difference is controlled by the Group and it is
probable that the temporary difference will not reverse in the
foreseeable future. Deferred tax assets and liabilities arising in
the same tax jurisdiction are offset.
In the UK and the US, the Group is entitled to a tax deduction
for amounts treated as compensation on exercise of certain employee
share options under each jurisdiction's tax rules. As explained
under "Share-based payments", a compensation expense is recorded in
the Group's statement of comprehensive income over the period from
the grant date to the vesting date of the relevant options. As
there is a temporary difference between the accounting and tax
bases a deferred tax asset is recorded. The deferred tax asset
arising is calculated by comparing the estimated amount of tax
deduction to be obtained in the future (based on the Company's
share price at the balance sheet date) with the cumulative amount
of the compensation expense recorded in the statement of
comprehensive income. If the amount of estimated future tax
deduction exceeds the cumulative amount of the remuneration expense
at the statutory rate, the excess is recorded directly in equity
against retained earnings.
Share-based payments
The Group grants share options to certain employees. In
accordance with IFRS 2, "Share-Based Payments" equity-settled
share-based payments are measured at fair value at the date of
grant. Fair value is measured by use of the Black-Scholes pricing
model as appropriately amended. The fair value determined at the
date of grant of the equity-settled share-based payments is
expensed on a straight-line basis over the vesting period, based on
the Group's estimate of the number of shares that will eventually
vest. Non-market vesting conditions are included in assumptions
about the number of options that are expected to vest. At the end
of each reporting period, the entity revises its estimates of the
number of options that are expected to vest based on the non-market
vesting conditions. It recognises the impact of the revision to
original estimates, if any, in the statement of comprehensive
income, with a corresponding adjustment to equity. When the options
are exercised the Company issues new shares. The proceeds received
net of any directly attributable transaction costs are credited to
share capital and share premium.
The share-based payments charge is included in net operating
expenses and is also included in 'Other reserves'.
2 Critical accounting estimates and judgements
The preparation of financial statements in accordance with IFRS
requires the directors to make critical accounting estimates and
judgements that affect the amounts reported in the financial
statements and accompanying notes. The estimates and assumptions
that have a significant risk of causing material adjustment to the
carrying value of assets and liabilities within the next financial
year are discussed below:-
-- Impairment assessment:- the Group tests annually whether
Goodwill has suffered any impairment and for other assets including
acquired intangibles at any point where there are indications of
impairment. This requires an estimation of the value in use of the
applicable cash generating unit to which the Goodwill and other
assets relate too. Estimating the value in use requires the Group
to make an estimate of the expected future cashflows from the
specific cash generating unit using certain key assumptions
including growth rates and a discount rate. Reasonable changes to
these assumptions such as increasing the discount rate by 5% (18%
to 23%) and decreasing the long term growth rate applied to
revenues by 1% (2% to 1%) would still result in no impairment.
-- Provision for impairment of trade receivables:- the Group
assesses trade receivables for impairment which requires the
directors to estimate the likelihood of payment forfeiture by
customers.
-- Revenue recognition:- the Group assesses the economic benefit
that will flow from future milestone payments in relation to
sub-licensing partnership arrangements. This requires the directors
to estimate the likelihood of the Group, its partners, and
sub-licensees meeting their respective commercial milestones and
commitments.
-- Capitalisation of development expenditure:- the Group
capitalises development costs provided the conditions laid out
previously have been met. Consequently the directors require to
continually assess the commercial potential of each product in
development and its useful life following launch.
-- Provisions for income taxes:-the Group is subject to tax in
the UK and US and this requires the directors to regularly assess
the applicability of its transfer pricing policy.
-- Share-based payments:- the Group requires to make a charge to
reflect the value of share-based equity-settled payments in the
period. At each grant of options and Balance Sheet date, the
directors are required to consider whether there has been a change
in the fair value of share options due to factors including number
of expected participants.
3 Revenue
The chief operating decision maker has been identified as the
Board of directors. The Group revenue is derived entirely from the
sale of software licences, white labelling and professional
services (including installation) to hospitals within the United
States of America. Consequently the Board has determined that Group
supplies only one geographical market place and as such revenue is
presented in line with management information without the need for
additional segmental analysis. All of the Group assets are located
in the United States of America with the exception of the Parent
Company's, the net assets of which are disclosed separately on the
Company Balance Sheet and are located in the UK.
Revenue is analysed as follows:-
2012 2011
$'000 $'000
---------------------------------- ------- -------
Software licencing 34,002 33,381
White labelling 3,500 -
Professional services 3,565 4,743
Total revenue 41,067 38,124
---------------------------------- ------- -------
4 Net operating expenses
Net operating expenses are comprised of
the following:-
2012 2011
$'000 $'000
------------------------------------------- ------- -------
Sales and marketing expenses 8,804 8,368
Client servicing 7,189 5,775
Research and development 6,844 5,024
Administrative expenses 4,763 4,143
Acquisition costs on business combination - 517
Release of contingent consideration on
business combination (Note 9) (954) -
Share-based payments 152 139
Depreciation of plant and equipment 579 312
Amortisation of intangible assets 1,060 555
Exchange loss/(gain) (21) 41
Net operating expenses 28,416 24,874
------------------------------------------- ------- -------
5 Tax on profit on ordinary activities
2012 2011
$'000 $'000
----------------------------------------------- -------- ------
Profit on ordinary activities before tax 11,202 8,653
Current tax
Corporation tax on profits of the year 3,790 3,257
Foreign exchange on taxation in the year 2 42
Adjustments for prior years (762) 68
----------------------------------------------- -------- ------
Total current tax charge 3,030 3,367
Deferred tax
Origination & reversal of timing differences (1,371) (749)
Adjustments for prior years 645 -
Change in tax rate 5 20
----------------------------------------------- -------- ------
Total deferred tax (credit) (721) (729)
Tax on profit on ordinary activities 2,309 2,638
----------------------------------------------- -------- ------
The difference between the current tax charge on ordinary
activities for the year, reported in the consolidated
statement of comprehensive income, and the current tax
charge that would result from applying a relevant standard
rate of tax to the profit on ordinary activities before
tax, is explained as follows:
Profit on ordinary activities at the UK
tax rate 25.5% (2011: 27.5%) 2,857 2,380
Effects of:
Adjustment in respect of prior years (117) 68
Change in tax rate 5 20
Additional US taxes on losses/profits 39%
(2011: 39%) (256) 136
Foreign Exchange 2 34
Non taxable income (243) -
Expenses not deductible for tax purposes 82 13
Tax deduction on share plan charges (21) (13)
Total tax charge 2,309 2,638
----------------------------------------------- -------- ------
6 Dividends
The dividends paid during the year were as follows:-
2012 2011
$'000 $'000
---------------------------------------------- ------ ------
Final dividend, re 30 June 2011 - 7.68 cents
(4.8 pence)/share 2,036 1,333
Interim dividend, re 30 June 2012 - 7.54
cents (4.8 pence)/share 2,057 1,730
Total dividends paid to company shareholders
in the year 4,093 3,063
---------------------------------------------- ------ ------
The proposed final dividend for 30 June 2012 is subject to
approval by the shareholders at the Annual General Meeting and has
not been included as a liability in these accounts.
7 Earnings per share
a) Basic
Basic earnings per share is calculated by dividing the profit
attributable to equity holders of the Company by the weighted
average number of shares in issue during the year.
2012 2011
------------------------------------------------ -------------- ---------------
Profit attributable to equity holders of
the Company ($'000) 8,893 6,015
Weighted average number of ordinary shares
in issue (thousands) 26,946 26,079
Basic earnings per share ($ per share) 0.330 0.231
------------------------------------------------ -------------- ---------------
Profit attributable to equity holders of
Company ($'000) 8,893 6,015
Release of deferred consideration on business
combination (Note 9) (954) -
Acquisition costs ($'000) - 517
Amortisation of acquired intangibles ($'000) 574 147
Adjusted Profit attributable to equity holders
($'000) 8,513 6,679
------------------------------------------------ -------------- ---------------
Weighted average number of ordinary shares
in issue (thousands) 26,946 26,079
Adjusted Basic earnings per share ($ per
share) 0.316 0.256
------------------------------------------------ -------------- ---------------
b) Diluted
For diluted earnings per share, the weighted average number of
ordinary shares calculated above is adjusted to assume conversion
of all dilutive potential ordinary shares. The Group has one
category of dilutive potential ordinary shares, being those granted
to directors and employees under the share option scheme.
2012 2011
------------------------------------------------ ---------------- ---------------
Profit attributable to equity holders of
the Company ($'000) 8,893 6,015
Weighted average number of ordinary shares
in issue (thousands) 26,946 26,079
Adjustments for:- Share options (thousands) 84 324
Weighted average number of ordinary shares
for diluted earnings per share (thousands) 27,030 26,403
Basic earnings per share ($ per share) 0.329 0.228
------------------------------------------------ ---------------- ---------------
Profit attributable to equity holders of
Company ($'000) 8,893 6,015
Release of deferred consideration on business
combination (Note 9) (954) -
Acquistion costs ($'000) - 517
Amortisation of acquired intangibles ($'000) 574 147
Adjusted Profit attributable to equity holders
($'000) 8,513 6,679
------------------------------------------------ ---------------- ---------------
Weighted average number of ordinary shares
in issue (thousands) 26,946 26,079
Adjustments for:- Share options (thousands) 84 324
------------------------------------------------ ---------------- ---------------
Weighted average number of ordinary shares
for diluted earnings per share (thousands) 27,030 26,403
Adjusted Basic earnings per share ($ per
share) 0.315 0.253
------------------------------------------------ ---------------- ---------------
8 Intangible assets
Goodwill and Other Intangible assets
Group
Goodwill Customer Proprietary Development Computer
Relationships Software Costs Software Total
$'000 $'000 $'000 $'000 $'000 $'000
--------------------- --------- -------------- ------------ ------------ --------- -------
Cost
At 1 July 2011 11,188 2,964 1,222 2,584 453 18,411
Additions - - - 328 90 418
At 30 June 2012 11,188 2,964 1,222 2,912 543 18,829
--------------------- --------- -------------- ------------ ------------ --------- -------
Amortisation
At 1 July 2011 - 66 82 1,308 303 1,759
Charge for the year - 329 244 410 77 1,060
At 30 June 2012 - 395 326 1,718 380 2,819
Net Book Value at
30 June 2012 11,188 2,569 896 1,194 163 16,010
--------------------- --------- -------------- ------------ ------------ --------- -------
Cost
At 1 July 2010 - - - 2,385 293 2,678
Additions - - - 199 48 247
Additions acquired
at Fair Value 11,188 2,964 1,222 - 112 15,486
At 30 June 2011 11,188 2,964 1,222 2,584 453 18,411
--------------------- --------- -------------- ------------ ------------ --------- -------
Amortisation
At 1 July 2010 - - - 944 260 1,204
Charge for the year - 66 82 364 43 555
At 30 June 2011 - 66 82 1,308 303 1,759
Net Book Value at
30 June 2011 11,188 2,898 1,140 1,276 150 16,652
--------------------- --------- -------------- ------------ ------------ --------- -------
In accordance with the Group's accounting policy, the carrying
values of goodwill and other intangible assets are reviewed for
impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Goodwill
arose on the acquisition of Craneware InSight Inc. (Note 9).
The carrying values are assessed for impairment purposes by
calculating the value in use (net present value (NPV) of future
cashflows) of the Craneware InSight cash generating unit. The
goodwill impairment review assesses whether the carrying value of
goodwill is supported by the NPV of the future cashflows based on
management forecasts for 5 years and then using an assumed sliding
scale annual growth rate which is trending down to give a long-term
growth rate of 2% in the residual years of the assessed period.
Management have made the judgement that this long-term growth rate
does not exceed the long-term average growth rate for the industry
and also estimated a pre-tax discount rate of 18% based on the
Groups estimated weighted average cost of capital.
Sensitivity analysis was performed using a combination of
different annual growth rates and a range of different weighted
average cost of capital rates. Management concluded that the
tempered growth rates resulting in 2% during the residual period
and the pre-tax discount rate of 18% were appropriate in view of
all relevant factors and reasonable scenarios and that there is
currently sufficient headroom over the carrying value of the assets
in the acquired business that any reasonable change to key
assumptions is not believed to result in impairment.
9 Acquisition of subsidiary: Craneware InSight Inc
On 17 February 2011, the Company acquired 100% of the issued
share capital of ClaimTrust Inc. On the date of acquisition the
assets and liabilities of ClaimTrust Inc. were merged into the
newly created entity, Craneware InSight Inc. The total
consideration for the acquisition along with the fair value of the
identified assets and assumed liabilities is shown below:
Fair Value Final Final
Adjustments Fair Value Fair Value
Recognised amounts
of identifiable Book Value 30-Jun-11 Adjustments
assets acquired and
liabilities assumed $'000 $'000 $'000 $'000
Tangible fixed assets
Plant and equipment 408 - - 408
Intangible assets
Computer software 112 - - 112
Customer relationships - 2,964 - 2,964
Proprietary software - 1,222 - 1,222
Other assets and liabilities
Trade and other receivables 1,171 - - 1,171
Bank and cash balances 228 - - 228
Trade and other payables (741) - (263) (1,004)
Deferred tax - (1,674) 1,339 (335)
1,178 2,512 1,076 4,766
------------------ ------------------ ------------ ------------------
Goodwill 11,188
Fair Value 15,954
------------------
Satisfied by: $'000
Cash 9,000
Ordinary shares issued - 641,917 shares
at $9.347 (GBP5.83) 6,000
Fair value of contingent deferred
consideration 954
15,954
------------------
Bank balances and cash
acquired 228
Cash consideration (9,000)
Net cash on acquisition (8,772)
------------------
Provisional accounting for the business combination as disclosed
in the Financial Statements for the year ended 30 June 2011
The contingent consideration is subject to performance criteria,
including revenue and profit targets, set for the next financial
year and consequently the actual consideration is payable following
the respective year end. The maximum potential deferred
consideration payable is an additional $4.5m subject to meeting all
the performance criteria. The acquisition costs, including all due
diligence costs that related to the transaction amounted to
$516,796 and these have been expensed as operating costs in
compliance with IFRS 3 (revised).
Goodwill of $12,263,819 has been recognised on acquisition and
is attributable to future customers, future software and the
assembled workforce.
In the period following the acquisition, Craneware InSight Inc.
contributed $2,612,624 to Group revenue and $3,016 to adjusted
EBITDA* which has been included with the consolidated statement of
comprehensive income for the year. Had Craneware InSight Inc. been
consolidated from 1 July 2010, the consolidated statement of
comprehensive income would show revenue of $42,958,489 and adjusted
EBITDA* of $10,235,219.
*Adjusted EBITDA is defined as operating profit before
acquisition costs, share based payments, depreciation and
amortisation.
Completed accounting in respect of the business combination
reported in the prior year
The accounting for the business combination was completed during
the year and resulted in two further separate fair value
adjustments, as reflected in amended table above, both of which had
a resulting impact on the final Goodwill recognised on acquisition,
which remains attributable to future customers, future software and
the assembled workforce.
The first fair value adjustment to the acquired balance sheet
was in respect of obligations to third parties which were not
recorded in the opening balance sheet. Following the completion of
a rigorous internal review of inherited systems and all potential
obligations to a total of $262,776 and as such this liability was
recognised as at the date of acquisition, the subsequent
expenditure satisfies the liability that existed on the 17 February
2011.
With regard to the second fair value adjustment the directors
have now determined that the cumulative historical net operating
losses of ClaimTrust Inc. have survived the merger agreement. As
such they are therefore available to offset against future profits,
in so much as they are derived in the same trade and tax
jurisdiction as before. Consequently, Craneware InSight Inc. has
recognised a deferred tax asset that existed at the date of
acquisition equal to the net operating losses at the Federal rate
of US tax against which they may be utilised. The directors have
also considered any potential lapses and restrictions that apply to
the utilisation of these losses in conjunction with the timing of
forecasted future taxable profits made by Craneware InSight in
order to arrive in their conclusion. The resulting fair value
adjustment was to recognise a deferred tax asset of $1,338,800.
These fair value adjustments concluded the accounting for the
business combination and as such the initial recognised Goodwill of
$12,263,819 was amended to a finalised Goodwill of $11,187,795.
Comparative balances have been restated throughout to reflect the
fair value adjustments note above.
10 Called up share capital
Authorised
2012 2011
Number $'000 Number $'000
---------------------------- ----------- ------ ----------- ------
Equity share capital
Ordinary shares of 1p each 50,000,000 1,014 50,000,000 1,014
---------------------------- ----------- ------ ----------- ------
Allotted called-up and fully paid
2012 2011
Number $'000 Number $'000
---------------------------- ----------- ------ ----------- ------
Equity share capital
Ordinary shares of 1p each 26,991,891 538 26,792,681 536
---------------------------- ----------- ------ ----------- ------
The movement in share capital during the year is represented as
follows:
-- 175,024 Ordinary Share options were exercised in the year.
-- 24,186 Ordinary Shares were issued in the year which
represented the remaining outstanding equity in respect of the
final consideration for the Craneware InSight Inc acquisition at
price of $9.35 (GBP5.83).
11 Cash flow generated from operating activities
Reconciliation of profit before tax to net cash inflow from
operating activities
2012 2011
$'000 $'000
------------------------------------- -------- --------
Profit before tax 11,202 8,653
Finance income (107) (99)
Depreciation on plant and equipment 579 312
Amortisation on intangible assets 1,060 555
Share-based payments 152 139
Movements in working capital:
Increase / (decrease) in trade
and other receivables 611 (3,353)
(Decrease) / increase in trade
and other payables (2,895) 3,882
Cash generated from operations 10,602 10,089
------------------------------------- -------- --------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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