Interim Report for six months ended 30 June 2018

H1 2018 Highlights

      ·     Total sales closed * £4.3 million - a 39% increase on H1 2017
·     Multi-year product subscriptions add £1.4 million to recurring revenue pipeline
·     H1 Revenue of £2.9 million - revenue recognition £0.2 million below H1 2017 (£3.1 million)
·     Post tax loss of £280,000 (H1 2017: £227,000 loss) - net of R&D tax credits
·     Net cash plus receivables flat across the period (£3.9 million)   
·     Busy programme of product investment - delivered on time and to cost
·     FY sales are typically weighted to H2 - this period opening with a $0.9 million data sale

Getech (AIM; GTC) provides geoscience and geospatial products and services to companies and governments, which they use to de-risk exploration programmes and improve their management of natural resources.

In 2017, through a programme of commercial, operational and cultural change, we refocused the Group's activities around a suite of data, software and information products, the value of which we enhance through services that leverage our products and geoscience-geospatial skills. This product-led strategy targets growth in high-margin recurring-revenue opportunities. The impact of this repositioning is evident in the scale, structure and timing of the sales closed in H1 2018 - factors that flow through the financial results presented in this report.

* Total sales closed equals the revenues recognised for products and services delivered within the period plus the value of additional contracts signed for products and services that will be delivered after the period.

H1 2018 overview

Total sales closed in H1 2018 rose 39% to £4.3 million. This was driven by a significant increase in the number of customers purchasing multi-year subscriptions to our information products and software.

With the environment for oil and gas investment remaining challenging, particularly in relation to exploration expenditure, we see these commitments as a positive demonstration of the practical operational value that our customers find in our products. In H1 2018 we further strengthened this value proposition through our programme of customer collaboration, product investment and service enhancement.

Given the multi-year nature of many of these sales, revenue recognition splits sales between products and services delivered in H1 2018 and those that will be delivered in future periods (mostly H2 2018 and FY 2019). On this basis, H1 revenue was a little below H1 2017 (£2.9 million versus £3.1 million) but the £1.4 million balance (H1 2017: zero) strengthens Getech's pipeline of recurring revenue.

The £0.2 million reduction in sales booked as H1 revenue flows through our accounts but this is balanced post-tax by lower total costs and receipt of our annual R&D tax credit - the Group delivering an H1 post tax loss of £280,000 (H1 2017: £227,000 loss). An additional $0.9 million high-margin data sale frustratingly missed the 30 June period-end. Now closed, it would have resulted in H1 revenue growth of 16% and delivered a significant expansion in profit.

With Getech's sales typically weighted to the second half of any year, inclusive of debt repayments and product investment, the Group narrowed its H1 cash outflow to £0.5 million (H1 2017: £0.7 million). With c. 50% of H1 2018's forward sales yet to be invoiced at 30 June, net cash plus receivables (£3.9 million) were flat across the period.

We enter H2 with a robust sales pipeline and are working closely with our customers to prioritise spend against products and services that maximise their investment in people and technology. The purchasing power of Exploration and New Venture teams remains constrained by budgets set in 2017 but we are optimistic that as our customers gear up for their 2019 work programmes this will generate new demand for our value-add offering.

Getech is committed to making our capital work hard for the benefit of shareholders. We do this through organic investment and in 2018 we are focused on rationalising our office locations. We also see acquisitional opportunities to grow and diversify the Group and we understand the value to shareholders of reinstating a dividend.

Operational Review

·     G&M data and services - demand underlines our market-leading position in gravity & magnetics

·     Globe 2018 - delivered on time and to cost, multi-year contracts signed with majority of user-base

·     Software - small exploration losses balanced by multi-year contracts and production growth

·     GIS services - super-major support contract win and further diversification

·     Geoscience services - on the road to resetting profitability

Our operational strategy places the customer at the heart of our business. We do this through customer collaboration, a focus on how we add value, the provision of training and a commitment to continuous product and service enhancement. In H1 2018, whilst maintaining capital discipline we have invested in our products, reshaped our services, enhanced our focus on project delivery and strengthened our sales and marketing team.

Gravity & Magnetic Solutions

At the heart of our product suite is our portfolio of market-leading Gravity & Magnetic (G&M) data. These data are used by our oil & gas and mining customers to model variations in the Earth's crust, which helps them to visualise the Earth's structures and understand its evolution.

During H1 2018 demand for G&M data was good and we added new data to our portfolio on the Irish Atlantic Margin. We also updated our Global Depth to Basement product and completed enhancements of Colombian data.

Data sales are typically high-value, high-margin and lumpy. Demand for G&M data has continued despite oil price uncertainty but the broader budget constraints of our customers have lengthened the sales cycle. This creates financial volatility in our internal budgets, which we are working to mitigate by growing our sources of recurring revenue. In H1 2018 the impact of this volatility was highlighted by a $0.9 million data sale that we negotiated in the period but that frustratingly missed the 30 June period-end. This data sale is now closed.

With our Gravity & Magnetics Service line also delivering good staff utilisation and strong profitability in the period, we believe that this underlines our market-leading position in these data products.

Information Products

Globe is a large geospatial information product that its customers, a broad group of super-majors and large independent oil & gas companies, use to model the Earth's geological evolution and predict the location of oil & gas. Our Regional Reports then add further value to exploration focus areas through more in-depth analysis and project-ready geospatial datasets.

By aligning our Information Products with the programme of continuous improvement already established in Software, Globe's development is now structured around an annual release-cycle. The first of these - Globe 2018 - was completed on time/within budget in H1 2018 and delivered to customers in July 2018. The product's content and functionality has been expanded to include innovative new heat flow and palaeo-surface geology modules, and a variety of interactive analytic capabilities have been added. These upgrades draw on geoscience, G&M and software development expertise from across the Group. Our customers have responded positively to Globe's repositioning - the majority signing multi-year contracts in H1 2018.

Software

Our software enables our oil & gas customers to easily integrate data from sub-surface interpretation applications, run play-based exploration projects and manage unconventionals developments such as shale oil.

In H1 2018 we enhanced our software products to include a range of new customer-requested functionality and upgraded them to include support for Esri's latest 10.6 release. In H1 three Exploration Analyst customers took the strategic decision to significantly scale back their exploration activities. This impacted H1 revenue but a significant portion of this was offset by a new global customer for Exploration Analyst. Several regional and global software customers also upgraded to multi-year licenses and we expanded our exposure to onshore production operations by doubling the number of Unconventional Analyst license holders.

Geospatial Services

We provide Geospatial Services to oil & gas companies that range from small independents to super-majors. In H1 2018 we won an additional support contract from a super-major. The transferable nature of our geospatial skills enables us to diversify revenues and in H1 2018 we undertook contracts in the environmental, utilities and maritime sectors.

Geoscience Services

On the roadmap to improve the profitability of our Geoscience Services we are repositioning this offering around the delivery of projects that integrate complex geoscience with geospatial insights. By taking steps in H1 to consolidate our Henley and London activities into a single location, we anticipate that greater collaboration between the geoscience and geospatial teams will further support our efforts to transform what we do.

Building on our long history of assisting governments we are promoting Sierra Leone's Fourth Licensing Round. This Round enables us to broker a potentially high value portfolio of seismic and well data to prospective investors. The dialogue around these data will continue through the recently announced industry consultation period.

Financial Review

·     £4.3 million sales closed in the period (up 39% from H1 2017)

·     H1 2018 revenue £2.9 million (down £0.2 million, 6% from H1 2017)

·     £1.4 million balance strengthens pipeline of recurring revenue

·     Post tax loss £280,000 (H1 2017: £227,000 loss)

·     Net cash generated from operations totalling £0.1 million (2017 H1: £0.3 million)

·     Cash balance, net of borrowings £1.4 million (H1 2017: £0.8 million)

Having recently moved our Accounting Reference Date to 31 December, this is Getech's first Interim Results for the 1 January to 30 June period. The new Reference Date introduces seasonality to our financial results, H1:H2 revenue historically being split in a 40:60 ratio.

Revenues and Sales

Following successful sales campaigns targeting multi-year subscriptions to our products and software, sales closed in H1 2018 totalled £4.3 million, a 39% increase versus H1 2017 (£3.1 million).

Given the multi-year nature of many of these sales, recognition of their revenue has been split between H1 2018 and future periods. Reflecting this, H1 2018 revenues totalled £2.9 million (H1 2017: £3.1 million); the £1.4 million balance relating to products and services that will be delivered in future periods. The majority of these forward sales will be delivered in H2 2018 and FY 2019 and at 30 June 2018 we had invoiced for c. 50% of the total forward sales value.

In addition, a $0.9 million data sale negotiated in H1 2018 frustratingly missed the 30 June period-end. This sale is now closed. With it H1 revenue would have risen 16% year-on-year and total sales closed would have risen 61%.

Cost management

Between 2016 and 2017 Getech reduced its cost base by 32%. In H1 2018 we have continued to exercise capital discipline, whilst maintaining a programme of product investment. In the past 12 months we have also invested in our sales and marketing teams and strengthened our project management capabilities.

The Group's cost base for H1 2018 was £3.5m (H1 2017: £3.6m) - a 4% period on period reduction, inclusive of internal investments. More detail is given below.

	Percent variance from prior 6 months	Six months ended 30 June 2018 Unaudited £'000	Six months ended 30 June 2017 Unaudited £'000	17 months ended 31 Dec 2017 Audited £'000
Cost of sales		1,690	1,871	6,262
Increase/(decrease) in inventories		59	82	(395)
Development costs capitalised		420	470	1,154
Administrative costs (including restructuring costs)		1,711	1,583	5,345
Depreciation and amortisation charges		(353)	(393)	(1,184)
Exchange adjustments		(30)	23	8
Non-cash provisions		-	-	(118)
Cost base	(4)%	3,497	3,636	11,072
Restructuring costs		-	-	(487)
Cost base, excluding one-off restructuring costs	(4)%	3,497	3,636	10,585

Cost base is measured as: cost of sales, administrative costs and development costs capitalised, less depreciation and amortisation, and adjusted for movement in inventories, foreign exchange and non-cash provisions.

Profitability

From H1 revenue of £2.9 million, Getech reports Gross Profit of £1.2 million (H1 2017: £1.2 million) and Gross Profit Margin of 41% (H1 2017: 39%). This translates to a loss before interest, depreciation and amortisation of £169,000 (H1 2017: £6,000 loss).

This reflects our largely fixed cost base and the H2-weighted seasonality in our financial results. It does not, however, reflect the groups improved pipeline of sales of products and services that will be delivered in future periods (see revenue and sales section).

Getech's post-tax loss was £280,000 (H1 2017: £227,000).

Operating cash flow

Getech generated a net operating cash inflow of £76,000 (H1 2017: £296,000). This is inclusive of tax receipts of £608,000 (H1 2017: £572,000), and includes tax credits for expenditure on R&D.

Investment, capital expenditure and financing

Getech has continued investment in its Globe platform and Software products, with expenditure of £420,000 during the reported period (H1 2017: £470,000).

During H1 2018 the Group upgraded its geospatial software products to include a range of new customer-focussed functionality and development of the 2018 phase of Globe was completed on budget and to schedule. Work has now commenced on the next annual phase of Globe development, for which we have secured pre-funding.

At the end of H1 2018, Getech's outstanding loan balance was £0.5 million (H1 2017: £0.8 million), having made capital repayments of £0.3 million since the end of H1 2017, which includes £145,000 repaid during H1 2018.

Liquidity
At the end of the six-month period under review, Getech held £1.9 million in cash and cash equivalents, and borrowings of £0.5 million (2017 H1: £1.6 million in cash and cash equivalents, and borrowings of £0.8 million). This represents a net cash position of £1.4 million versus £0.8 million at the same point in 2017.

Reflecting the seasonal H2-weighting of Getech's revenue, Net Cash was lower than at 31 December 2017 (£1.8 million). However, with the rate of sales ramping up through H1 2018 and c. 50% of forward product sales yet to be invoiced at 30 June 2018, receivables grew to £2.5 million (31 December 2017: £2.1 million).

As such, net cash plus receivables totalled £3.9 million and were flat across the period.

Dividends

Having considered the continued volatility of the oil & gas investment environment the Board decided that it was appropriate to not pay a dividend at this time.

Outlook

Since 30 June 2017 oil prices have risen c. 75%. With industry costs at a cyclical low and against budgets set 12 months or more previous, the increased oil price has transformed the cash generation of our customers. The oil and gas sector has used this unbudgeted cashflow to rebuild balance sheets. There has also been a rise in production-focused M&A but despite falling rates of reserve replacement there has not yet been a sector-wide return to exploration.

The upstream investment environment for our products and service therefore remains volatile but we expect 2019 budgets to set a clearer and more positive path. Evidence for this comes from our customers' renewing investment in their tools and people - which in H1 2018 resulted in an increase in total sales through multi-year commitments.

H2 2018 investment and sales activity

In H2 2018 we are investing in further releases of our software, we have commenced work on the next release of Globe and we are actively refreshing our data holdings. We are also rationalising our office locations and using our products and geoscience-geospatial skills to reshape and differentiate our services.

With Getech's revenue historically distributed 40:60 in favour of H2, our sales team is working on a series of campaigns that target the ramp-up in spending that comes at our customer's year-end. We expect these campaigns to deliver both 'spot' and recurring revenue sales, delivering revenue in both H2 2018 and future periods.

We are following up leads in new geographies - the Middle East and Asia of note, exploring ways to expand access to our data products and solutions, and working to grow our software footprint in onshore US production.

We enter H2 with a robust sales pipeline and the $0.9 million data sale described in this report delivered a good start to the half. We are working closely with our customers to prioritise spend against products and services that maximise their investment in people and technology. The purchasing power of Exploration and New Venture teams remains constrained by budgets set in 2017 but we are optimistic that as our customers gear up for their 2019 work programmes this will generate new demand for our value-add offering.

Operational and Capital Management

In H1 2018 we placed Getech's Leeds office on the market for sale. A number of parties have expressed interest and we will update as discussions proceed. We estimate costs associated with the Leeds sale, closure of our Henley office and relocation of staff to London to total c. £200,000. We expect to report these costs as an exceptional item in H2 2018. Inclusive of these exceptional costs we do not expect Group full year costs to exceed those in 2017.