Executive Review

Against a continuing difficult economic backdrop, K3's results for the 18 month period, and in particular for the year to 30 June 2010 (where revenues rose by 20% and adjusted profit from operations^*1 by 14% year on year), represent a very good performance.  I am also pleased to report that the value of our new business wins reached a record high, at £11.2m in the last 12 months.  The full benefit of these wins is not yet fully reflected in our results.   Strategically, we also made some important steps forward in the last four months of the financial period, completing three acquisitions, which should fundamentally enhance growth prospects for the Group.   

Our encouraging results demonstrate the robustness of K3's business model. Some 40% of the Group's annual revenue is underpinned by income from software licence renewals. In addition, typically, a further 35% of Group sales is derived from existing customers purchasing additional services or products, including extended duration licence deals. More broadly, these results demonstrate the increasing success of our approach in taking core business software products from Microsoft and enriching and tailoring them with our own Intellectual Property ("IP") for the specific market sectors we serve. In recent years, we have become increasingly focused on developing our library of IP to build competitive advantage in our markets.  In addition to the commercial advantages this gives us, there are also significant margin benefits for the Group.

Strategically, we see this period as having been very significant for us.  The three acquisitions we made, DigiMIS Limited ("DigiMIS"), Pebblestone Netherlands and Pebblestone IP, are all highly complementary but, more critically, they move the business forward in new ways, opening up additional growth opportunities. The addition of UK-based hosting and managed services business, DigiMIS, in March 2010, was important to us as we seek to develop our managed services activities.  Most significantly, DigiMIS has provided us with the ability to deliver Cloud Computing solutions and ‘Software as a Service'. Pebblestone IP has not only added valuable market-leading retail software IP but has also opened up a global distribution network.  We see this as an attractive route-to-market to sell more of our IP and services.

After the period end, in July 2010, we were pleased to announce the formation of a strategic partnership with Omnica Ltd, the UK-based specialist in multi-channel retail software. The partnership provides us with enhanced expertise and capability in providing solutions for the online retail sector and will help to keep our product offering at the forefront of this high growth sector. 

Looking ahead, we remain focused on our plans to develop the business and continue to seek further complementary acquisitions, in line with our growth strategy. We believe that our high levels of predictable income and cash generative model position K3 very well for continuing growth.    More generally, as a result of the acquisitions we have made, we have widened the scope of the Group's growth opportunities.   We therefore remain confident about prospects both short and longer term.

Tom Milne

Chairman

^{1*Calculated before amortisation of acquired intangibles of £2.08M (2009:£1.88m) and share-based payment credit of £0.09m (2009:charge of £0.10m).}