Hargreaves Lansdown (HL.) - Annual Financial Report RNS Number : 3684P Hargreaves Lansdown PLC 24 October 2012 Hargreaves Lansdown plc Annual Financial Report For The Year Ended 30 June 2012 The company has now approved its Annual Report and Accounts for 2012. This Annual Financial Report announcement contains the information required to comply with the Disclosure and Transparency Rules, and extracts of the Directors' Report forming part of the full financial statements. The financial information set out below does not constitute the Company's statutory accounts for the year ended 30 June 2012. The Annual Report and Accounts will be available from 24 October 2012 on the Company's website www.hl.co.uk/investor-relations. Copies of the audited financial statements are also available from the registered office at One College Square South, Anchor Road, Bristol, BS1 5HL. A copy of the Company's statutory accounts for the year ended 30 June 2012 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do. Extract from Chief Executive's Review We present our results for the year ended 30 June 2012. In summary Hargreaves Lansdown has again delivered good growth, with record revenues (+15%) and operating profits (+21%). In addition new, innovative services have furthered growth in assets and client numbers. We remain committed to an asset gathering strategy. Our motivated staff and strong business model deliver value, efficiency and excellent service to retail investors. 95% of clients rate our services as good, very good or excellent, and client recommendation remains one of the key sources of recruiting new clients. We are focused on our clients and three areas of major potential growth: the private and occupational pensions market; our investment supermarket; and digital media and the internet. Within this framework we have invested and continue to invest in a wide portfolio of new initiatives. Review of the economic background Last year's report commented that the political environment was turbulent and uncertain and noted that much of Western society was heavily indebted, both at a sovereign and personal level. These statements remain equally valid for the year under review, indicative of the fact we are in a drawn-out recession. Concerns about the economy, the future of the euro and debt exposure of countries, banks and individuals are consistent themes. In our previous financial year to 30 June 2011 we benefited from a 21% stock market rise. This year, the succour of a stock market rise disappeared, with the FTSE All Share reversing by 7% in the year to 30 June 2012, leaving it at our year-end at the level it achieved 14 years ago in February 1998. All in all it is not surprising that the general retail investment market fared badly. The Investment Management Association (IMA) net retail sales figures for funds showed a fall of 58% for the year to 30 June 2012 compared to the comparative period last year. As investor confidence is heavily influenced by stock market momentum, our continued strong growth is a testament to the diligence of our company in focusing on clients and investing in new and innovative services. Hargreaves Lansdown's 2012 results We are delighted to report a record profit before tax of £152.8 million, up 21% on last year's £126.0 million. The key contributors to these excellent results have been the success of new services, careful husbandry of existing resources and cost control. Bearing in mind the headwind of a market fall of 7%, we report a commendable 7% increase in client assets under administration from £24.6 billion to £26.3 billion. Adjusting for the effects of markets, net new client investments for the year were £3.2 billion and 45,000 investors became new clients during the year. Our Corporate Vantage service continues to expand, with 47 schemes live or in implementation, a 74% increase in schemes which has been accompanied by a 182% increase in Corporate Vantage assets. Although still in its early stages, this project remains long-term, but we are delighted with the success to date and it is clearly on the path to becoming a material part of Hargreaves Lansdown's business. 2013 sees the first phase of pension auto-enrolment in the UK, which is advantageous to this division. Our mission is to retain our position as the best place in the UK to buy investments. During the year we improved our stockbroking services both in pricing and scope including Investment Trusts, passive funds and ETFs. Our share of the UK stockbroking market rose to 14.3% for the second quarter of 2012. We also introduced our Junior ISA and have gained a 15% share of the entire UK Junior ISA market. Digital media offers a new means of communication. We continue to invest in advanced online technology and expertise. Our iPhone app has now been downloaded over 60,000 times and 2012 will see us launch complementary iPad applications. Mobile investing will be a key part of the future of Hargreaves Lansdown. None of this success would be possible without the support of our clients. We continue to work hard to retain client loyalty and deliver high service levels. In 2012 Hargreaves Lansdown has been a shining example that a reputable company focusing on clients can delight the UK public. 2012 market outlook It is difficult to see the economic storm clouds dissipating in the next 12 months. We believe austerity will continue despite the political clamour for countries to focus on growth. In time a more positive environment might develop, but we do not expect short term improvement. We shall have to work hard to promote the benefits of investing. Reduced state support for the public means saving and investing is more important than ever. There is little prospect of higher interest rates on cash in the near future so equities and bonds remain good alternatives for potential higher income. The depressed levels of equity markets also offer patient investors the opportunity for future capital growth. Company outlook Hargreaves Lansdown's position is strong. We are estimated to have 28.6% of the direct investing market in the UK (Source: The Direct Platform Guide Issue 2 February 2012), a position built through delivering exceptional service, information and value. As a profitable company with no debt we present the financial strength to give investors comfort over the safety of their investments, to reinvest in our business and respond to competitive activity. In 2013 we shall continue to enhance our services. Many of these improvements will be revealed in due course but include improved SIPP incentives and an online transfer service. An iPad app and improved functionality to allow clients to more easily control their entire family's assets will augment the reasons to consolidate assets with Hargreaves Lansdown. As we continue to improve our business we share the benefits of scale, technology and success with our clients in a virtuous circle. Returning value to clients has been key to the success of Hargreaves Lansdown. Costs and charges for retail investors will continue to reduce over time. This will affect our revenue margins but we expect the market and our clients to reward us by increased business. The internet, dislocation of the financial advice market and initiatives such as auto-enrolment should aid further growth. Since the year-end, there has been nothing to change our outlook on the economic backdrop that we operate in, but given our strength of service and offering we are confident that we will continue to enhance the brand of Hargreaves Lansdown subsequently rewarding both clients and shareholders. The impact of regulation A by-product of perceived public and political disenchantment with financial services is the likelihood of more regulation. Whilst Hargreaves Lansdown has delivered excellent service and is an example of what a good financial services company should represent, there is no carve-out from regulation in our country for those with a good record. We therefore expect regulatory change to continue. Additional regulation presents challenge and cost, but also opportunity. Hargreaves Lansdown has the scale, resources and innovative skills to cope with additional regulation. It is an effective barrier to entry to new competitors. The Retail Distribution Review (RDR) reforms remain a major theme. It seems that as far as Hargreaves Lansdown is concerned the RDR reforms will take place in two phases. "RDR Phase 1" commences on 31 December 2012 and relates mainly to financial advice. Hargreaves Lansdown is entirely compliant with this regulation well in advance of its commencement. Our financial advisers are qualified well beyond the requisite levels and we charge a fee for any advice. This regulatory change also presents some opportunity, in particular improvements in portability of client investments which may assist clients who wish to transfer their assets to Hargreaves Lansdown. Although the proposals are still in consultation, it seems "RDR Phase 2" is likely to take place on 31 December 2013. It is likely the reforms then will require the unbundling of pricing on investment products. Fees for investment management and distribution and custodianship must be charged separately to clients. Whilst the detail remains to be confirmed, we remain confident about these proposals. Provided they are applied fairly to all participants in the market and well communicated, our proposition of a strong service and value offering to a loyal client base should help us weather the change well. We have undertaken a range of modelling and preparatory activities and have had dialogue with the FSA. The coming year will see two new regulators, the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA). Hargreaves Lansdown will be regulated by the FCA. As a reputable firm we continue to consider ourselves to have a constructive relationship with regulators and do not foresee any disruption from the changing regulatory structure. Costs for contributions to the Financial Services Compensation Scheme (FSCS) continue to rise. Whilst we are highly supportive of a safety net for retail investors, we remain critical of the conduct of the FSCS and the way it is funded. Recent proposals suggesting instigators of frauds should be allowed to claim compensation for their own misdemeanours and that checks on eligibility could be waived have done nothing to soften our view. We continue to campaign for a rational, sensible compensation scheme. Whilst Hargreaves Lansdown has had great success in promoting Junior ISAs to the public, the fact that many children cannot take part because they are locked into the Child Trust Fund (CTF) regime is a matter of concern on which we continue to lobby the Government. We support improved portability of client assets allowing retail investors to move easily from old, obsolete investment plans to better value modern products such as those offered by Hargreaves Lansdown. We remain the friend of the retail investor, and continue to work tirelessly to try and improve their lot. Conclusion I would again like to thank our clients, shareholders, staff and my fellow directors. Their continued support, good humour and efforts have delivered exceptional results. We shall continue to seek to be a role model for how financial services companies can deliver a great service, reputable behaviour and profitability in harmony with the UK public. Ian Gorham Chief Executive 5 September 2012 Extract from Financial Review Despite tough economic and market conditions, it has been another record year for the Group in terms of revenue and profits. Despite a fall in stock markets during the year to 30 June 2012, significant levels of organic growth from new business and new clients meant that we finished the year with a record £26.3bn of AUA. 2012 £'million 2011 £'million Revenue 238.7 207.9 Administrative expenses (83.3) (79.8) Total FSCS levy costs (4.8) (3.7) Operating profit 150.6 124.4 Non-operating income 2.2 1.6 Profit before taxation 152.8 126.0 Taxation (39.5) (34.1) Profit after taxation 113.3 91.9 Basic earnings per share (pence) 24.2 19.8 Diluted earnings per share (pence) 24.1 19.6 These record results are testament to our business model and the trust that our clients place in us to deliver the services they require. Total revenue increased by 15% to £238.7 million. The Vantage division revenue increased by 16%. The key drivers have been the recurring revenue streams of renewal income, interest and management fees, which combined accounted for an increase of £31.4 million. This was offset slightly by a fall in revenue from stockbroking resulting from the introduction of lower tariffs from 1 August 2011. The Group's operating profit increased by 21% to £150.6 million in 2012 compared to £124.4 million for 2011. The operating profit margin increased from 59.8% to 63.1%. There was 15% revenue growth, whereas the increase to operating expenses was contained to 6%. Statutory profit before tax increased by 21% to £152.8 million compared to £126.0 million in the previous year. The effective tax rate for the Group this year was 25.9%, resulting in a reported profit after tax for the year of £113.3 million (2011: £91.9 million). Total assets under administration can be broken down as follows: At 30 June 2012 At 30 June 2011 £'billion £'billion Vantage Assets Under Administration (AUA) 24.6 23.1 Assets Under Administration and Management (AUM) - Portfolio Management Service (PMS) 1.6 1.5 - Multi-manager funds outside PMS 0.8 0.8 AUM Total 2.4 2.3 Less: Multi-manager funds included in both (0.8) (0.8) AUA and AUM Total Assets Under Administration 26.3 24.6 Figures in the table have been rounded Total Assets under administration (AUA) have increased by 7%. Vantage AUA are up by 6% and the assets in PMS and our Multi-manager funds by 4%. These increases have helped to deliver revenue growth. Divisional performance The Group is organised into three core operating divisions, based around products and services: - Vantage - Discretionary and Managed - Third Party and Other services Revenue Year Ended 30 June 2012 Year Ended 30 June 2011 £'million £'million Vantage 185.7 160.5 Discretionary 27.3 24.7 Third Party and Other services 25.7 22.7 238.7 207.9 Vantage The Vantage division increased its revenues by £25.2 million or 16%, from £160.5 million to £185.7 million. This was driven primarily by growth in Assets Under Administration (AUA) by 6% from £23.1 billion to £24.6 billion and the impact of a full year's income on assets gathered during the previous year. The £1.5 billion (2011: £6.8 billion) increase in Vantage assets from £23.1 billion to £24.6 billion can be attributed primarily to £3.1 billion of net new business inflows (2011: £3.4 billion). This was moderated by the stock market decline which had a negative effect of £1.5 billion (net of interest credited to clients on cash balances) on assets compared to £3.2 billion of market growth in 2011. Despite the volatile financial markets and low investor confidence, the growth in AUA resulting from net new business inflows, or 'organic growth', has in this climate been commendable at 13% (2011: 21%). The growth in AUA derived from stock market and other growth factors was -6% (2011: +21%). Stock market declines had the biggest impact on the Fund and Share account where there is a bias towards equities rather than bonds and cash as compared with the SIPP and ISA. Markets caused a 7.8% fall in the Fund and Share AUA compared to declines of 5.9% and 5.6% in the SIPP and ISA. The combined impact of organic growth and market declines resulted in SIPP AUA growing by 15%, ISA by 6% and the Fund and Share account (traditionally most sensitive to markets) by 1%. Included within the Fund and Share account is a significant holding in Hargreaves Lansdown shares which decreased in value by 12% during the year. Removing this, the growth in Fund and Share AUA was 5%. As at 30 June 2012, the value of the Vantage ISA was £10.0 billion, (30 June 2011: £9.5 billion), the Vantage SIPP was £7.6 billion (30 June 2011: £6.6 billion) and the Vantage Fund and Share Account was £7.1 billion (30 June 2011: £7.0 billion). The ISA allowance has been increased from £10,680 to £11,280 in the tax year ending 5 April 2013 and as usual we saw increased activity levels around the tax year-end as clients ensured they did not miss last year's allowance and also sought to utilise the current year's allowance as soon as possible. The adult ISA has now been complemented with the introduction of the new Junior ISA as from 1 November 2011. The annual allowance is £3,200 and as at 30 June 2012 almost 9,000 such accounts had been opened totalling £26 million. A competitive cash ISA was launched on 9 March 2012 which gives clients a fixed rate of interest for either one or two years. Upon maturity new competitive offers will be available unlike the derisory level in so many competitor offerings. As at 30 June 2012 there were just over 3,000 cash ISA accounts totalling £24 million. The introduction of the Junior ISA helps to broaden the eligible client base of Vantage and enables us to build a valuable and loyal relationship with clients of the future. The introduction of the cash ISA affords us the opportunity to win a share of the c£200 billion invested in cash ISAs. The welcomed simplification of the pension tax relief rules means that, subject to earnings, clients can now contribute and receive tax relief on up to a £50,000 pension contribution each year in addition to any unused £50,000 allowance from the previous three tax years. This has led to an 18% increase in the average value of contributions in the SIPP (2011: -17%). An increased number of clients made contributions of new monies into their SIPP accounts this year (SIPP +18%) but fewer contributed to their ISAs (-2%) with average contributions into the ISA also reducing by 2% due to investors having reduced spare monies for investment and the effect of the Junior and Cash ISAs where subscription limits are lower. This resulted in an overall increase in value of new contributions in these accounts of £0.1 billion. Clients continued to transfer SIPP and ISA investments held by third parties into our Vantage service. Although the value of transfers decreased by 6%, net inflows of new business have been achieved across all the Vantage services with the SIPP achieving £1.4 billion (2011: £1.4 billion), the ISA £1.1 billion (2011: £1.3 billion) and the Fund and Share account £0.6 billion (2011: £0.7 billion). During the year the number of active Vantage clients increased by 45,000 to 425,000. Some of these clients hold more than one type of account with us, and hence when we look at the increase in accounts aggregated across the three main Vantage services the increase in accounts was higher at 63,000; SIPP accounts increased by 24,000, ISA by 26,000 and Fund and Share by 13,000. The number of SIPP accounts was then reduced by circa 22,000 accounts as the protected rights account was merged in with the other SIPP accounts. A number of our clients make regular contributions into their ISA, SIPP or Fund and Share account. The 'Regular Savers' service has been growing steadily since being introduced nine years ago, and as at 30 June 2012 we had 53,000 clients (2011: 47,000) saving a total of £19 million each month by way of direct debit instruction. Our Corporate Vantage service has the potential to make a significant increase to the value of regular monthly savings, currently circa £2.4 million each month. Vantage clients increased their cash weightings during the period as worldwide stock markets remained volatile and investor confidence was relatively low. The composition of assets across the whole of Vantage changed during the period: as at 30 June 2012, Vantage assets were 31% in direct stocks and shares (30 June 2011: 30%), 57% in funds (30 June 2011: 60%) and 12% in cash (30 June 2011: 10%). Vantage clients increased by 12% over the year and the volume of fund deals increased by 5%, reflecting low investor confidence and the switch to holding cash. Share deals fared better, showing a 16% increase in volume thanks to lower dealing charges and improved functionality launched in August 2011. Vantage clients transacted 4.1 million fund deals (2011: 3.9 million) and 1.5 million share deals in the year (2011: 1.3 million). No charge is made to our clients for dealing in investment funds and therefore fund dealing does not impact revenues. Although the share dealing charge was lowered, increased volumes resulted in a reduction to stockbroking commission of only £2.3m. The overall average gross revenue margin within Vantage increased from 78bps to 81bps. The improvement was driven by slightly higher interest rates achieved on client money held, which more than offset the reduction in margin relating to equities as a result of the lower dealing tariffs. The margin made on funds held by clients remained consistent with last year. Throughout the year we have again faced all-time historically low interest rates, with the Bank of England base rate being just 0.5%. The improved margin on cash we have achieved has enabled us to offer more fixed interest fixed term deposits to our clients, helping them to achieve better returns on their cash. Discretionary and Managed The Discretionary division earns recurring income on underlying investments held in the Group's Portfolio Management Service (PMS), and on investments in the Group's multi-manager funds. Revenues in the Discretionary division increased by 11% from £24.7 million to £27.3 million. Increased renewal income and management fees resulting from the increase in AUA were the key drivers of the increased revenue. The value of assets managed by Hargreaves Lansdown through its own range of multi-manager funds and PMS increased by £0.1 billion to £2.4 billion as at 30 June 2012 (2011: £2.3 billion). Of these, £0.8 billion of the Group's multi-manager funds were held within Vantage as at 30 June 2012 (2011: £0.8 billion). The growth in assets is due to net new business of £0.2 billion combined with a market decline of £0.1 billion. This division earns initial advice fees and management fees on assets introduced into PMS. £113m of net new business was introduced into PMS during the year (2011: £109m). Distribution of PMS is through the Group's team of advisers. The number of advisers as at 30 June 2012 was 68, the same as last year-end. The proportion of PMS assets invested in Hargreaves Lansdown multi-manager funds as at 30 June 2012 was 90% (2011: 91%). Third Party and Other Services The division as a whole saw an increase in revenues of 13%, from £22.7 million to £25.7 million. Although the Group continues to write some third party pension business, the focus has shifted towards the Corporate Vantage service and hence third party business will see a gradual decline. Other services, however, are delivering growth. Revenue from our Funds Library service increased by £1.2 million, driven by a general improvement on all revenues and in particular the user licence fees as we have made additional data services available to a larger client base. The total revenues from Hargreaves Lansdown markets (CFDs, spread betting and currency services) were up £0.7m on last year as increased numbers of clients utilise these additional services that we offer thus driving transactional volumes higher. Stockbroking services Stockbroking has transacted a record 1.5 million deals, up 15%. From 1 August 2011 the stockbroking tariff was improved. For online deals, clients pay as little as £5.95 and a maximum of £11.95. We expected the average online dealing charge to reduce from the £16.90 to c£10.40; in reality the average dealing charge has only fallen to £10.65 or to £12.73 if we include currency commission for online overseas deals. The functionality of our service was improved with the launch of our i-Phone and Android apps, stop loss and limit order service, and online overseas share dealing. Our initiatives have driven increased dealing volumes and substantial online overseas dealing which attracts a foreign currency commission margin. The increased volumes helped offset the loss in revenue from the drop in the average dealing charge. Operating expenses Year Ended 30 Year Ended 30 June June 2012 2011 £'million £'million Staff costs 43.5 40.1 Commission payable 16.4 15.7 Marketing and distribution 9.4 9.2 costs Office running costs 4.5 4.1 Depreciation, amortisation 2.6 2.6 and financial costs Other costs 6.9 8.1 Total administrative 83.3 79.8 expenses Total FSCS levy costs 4.8 3.7 Total operating expenses 88.1 83.5 Administrative expenses under our control have been contained to a 4% increase. FSCS costs, beyond our control, have increased by 30%. This resulted in a net increase in operating expenses of 6%. Taken in the context of a 15% increase in revenue and a 21% increase in operating profit year on year, the 4% increase in administration expenses demonstrates a strong focus on cost control, efficiencies and the scalability of our business model. Staff costs remain our largest cost and increased by 2% points to 52% (2011: 50%), as a percentage of administrative expenses. The number of staff on a full-time equivalent basis (including directors) employed at 30 June 2012 was 658, and the average number of staff during the year was 657, an increase of 2% against an average of 643 for the comparative year. The increase in numbers resulted mainly from an increased investment in information technology development staff. We operate a defined contribution pension scheme with staff and directors participating on equal terms. Pension costs are recognised as an expense when the contribution is payable. Commission payable includes the share of renewal income which the Group receives on investment funds held in Vantage, which is rebated to clients in our ISA and Fund and Share accounts as a loyalty bonus. It increased by 4%, from £15.7 million to £16.4 million, in line with the rise in value of the related client assets. On average 16% of renewal income earned in Vantage is returned to clients. Group marketing and distribution spend increased by 2%, from £9.2 million to £9.4 million and includes the costs of printing and sending information and newsletters to existing and potential clients, media advertising, online marketing and client incentives. There has been an overall increase in the level of client communication and direct marketing activity compared to the previous financial year but an increased proportion of marketing is conducted electronically at a cheaper cost and an increased number of clients opt for our online or paperless services. Offering incentives to existing and new clients for transferring business to our platform has been a successful method of gathering assets, although the related costs have increased this year. From 1 January 2013 we have decided to offer additional incentives to SIPP clients. These are estimated to cost £3 million in the financial year ending 30 June 2013 and £6 million per annum thereafter. Office costs include rent, rates, utility and security costs and have increased by £0.4 million, primarily relating to the rental of a disaster recovery site. Other costs include dealing costs, irrecoverable VAT, compensation, insurance, legal and professional services, computer maintenance and external administration charges. These collectively decreased by 15% from £8.1 million to £6.9 million. As the company grows certain costs such as computer maintenance and irrecoverable VAT inevitably grow too. More than offsetting such increases this year, however, has been a VAT recovery of £2.2 million following a successful challenge of the VAT treatment of certain services in prior years. FSCS levy Unlike administrative expenses where we have a degree of control over them, costs relating to the Financial Services Compensation Scheme ("FSCS") are beyond our control. The FSCS is the compensation fund of last resort for customers of authorised financial services firms. All authorised firms are required to contribute to the running of the scheme and the cost of compensation payments. Contributions to the scheme are proportional to the amount of eligible income that falls within each activity class of the scheme. The majority of Hargreaves Lansdown's income is classified as falling into either the Investment Intermediary, Life and Pensions or Fund Management class. Unfortunately many failures such as Arch Cru, Keydata and Wills & Co fall into the investment intermediary sub-class because the investments were sold through independent financial advisers. The investment intermediary sub-class also includes execution only business, and, as the majority of Hargreaves Lansdown's income is derived from execution-only business, we make a significant contribution to the cost of compensation on investments we would never have recommended to anyone. The number of failures and the cost of compensation do not seem to be abating despite increased regulation from the FSA, the cost of which is also borne by successful firms. The total amount levied for FSCS costs increased from £3.7 million last year to £4.8 million. Non-operating income Includes investment revenues up from £1.6 million to £2.2 million driven by an increase in the average cash balances held and higher interest rates achieved on those balances. Taxation Taxation increased from £34.1 million to £39.5 million. The effect of the increase in pre-tax profits was slightly softened by the effective tax rate decreasing from 27.0% to 25.9%, the chief factor being a reduction in the corporation tax rate from 26% to 24% as from 1 April 2012. The Group's policy on tax is to pay the right amount of tax at the right time. We aim to be transparent in our activities; we prefer not to engage in aggressive, artificial or sophisticated tax planning activities, and we actively engage with the UK tax authorities. Earnings per share (EPS) The diluted EPS increased by 22% from 19.6 pence to 24.1 pence. This is calculated as the earnings for the year divided by the total weighted average fully diluted number of shares, including those held by the Employee Benefit Trust (the "EBT"). Further information on the funding of the EBT and potential dilution of share capital is provided within the Directors' Remuneration Report. Dividend The directors are now declaring a second (final) ordinary dividend of 10.65 pence and a special dividend of 6.84 pence per ordinary share, payable on 28 September 2012 to all shareholders on the register at the close of business on 14 September 2012. This brings the total dividends in respect of the year to 22.59 pence per ordinary share (2011: 18.87p), an increase of 20%. Dividend per share 2012 2011 Change Interim dividend paid 5.1p 4.5p +13% Second (final) dividend 10.65p 8.41p +27% Special dividend declared 6.84p 5.96p +15% Total dividend for the year 22.59p 18.87p +20% Balance sheet and cash flow We have continued to maintain a clean balance sheet with high cash reserves and no debt. Group net assets increased from £130.9 million to £157.4 million. Retained profits helped to increase the Group's own cash balances to £145.1 million. The most significant cash outflow during the current year was the payment of dividends totalling £90.2 million. There continues to be concern over the uncertainty in the Eurozone regarding the indebtedness of certain countries, particularly Greece, Portugal, Spain, Italy and Ireland, and the health of their banking sectors. As at 30 June 2012 the Group has no direct counterparty exposure to these countries. In addition, the Board has concluded that no impairment provisions are required for indirect exposures to Eurozone sovereign debt. Capital expenditure This year the capital expenditure of £1.1 million, like last year's amount of £1.9 million was mainly on IT hardware and software. Although the headline capital expenditure looks low, particularly given the extent of our client platform and service improvements, it is worth noting that our systems are maintained in-house. As such we have significant IT resource dedicated to IT development. For the year ended 30 June 2012 57 staff were employed in IT development and the related cost was expensed within staff costs, rather than a significant proportion of it being capitalised and subsequently depreciated. Going forwards we shall continue to invest in strengthening our IT infrastructure and although the overall cost may increase a bit the majority will continue to be expensed. Cash flow and treasury policy The Group is highly cash generative, with 104% of operating profit converted to operating cash flow during the year. The total cash balance of £157.7 million reported in the balance sheet includes £12.6 million of client settlement account balances. The Group's own cash balances of £145.1 million includes cash held within the EBT which has increased from £0.5 million as at 30 June 2011 to £2.7 million at 30 June 2012 following the sale of Hargreaves Lansdown plc shares held in the EBT upon the maturity of share options in the year. The Group has no borrowings, and deposits its liquid funds with selected financial institutions with strong credit ratings and financial ratios. The Treasury Committee reviews the deployment of banks on a regular basis with the primary objective of ensuring the security of its assets and the secondary but important objective of maximising return. The Group actively maintains cash balances on short-term deposit to ensure that it has sufficient funds for operations. This policy is designed to ensure that the Group takes no material credit risk. The Group is not exposed to significant foreign exchange translation or transaction risk. Decrease in counterparty balances In accordance with market practice, certain balances with clients, Stock Exchange member firms and other counterparties are included in the balance sheet. These balances fluctuate according to the volume and value of recent trading. At the year-end, trade receivables and trade payables included £93.4 million (2011: £134.3 million) and £105.6 million (2011: £146.7 million) respectively of counterparty balances. Capital requirement The Group has four subsidiary companies authorised and regulated by the Financial Services Authority (FSA). These firms maintain capital resources at a level which satisfies both their regulatory capital requirements as well as their working capital requirements. Within the industry generally, regulatory capital requirements have increased in recent years and we expect this to continue as a result of FSA requirements. During the 2012 financial year we held a healthy margin of at least six times the Pillar 1 minimum capital requirement. This equates to a margin of approximately three times the Pillar 2 capital requirement, which is our own assessment of the minimum amount of capital that we believe is adequate as identified during our Individual Capital Adequacy Assessment Process (ICAAP). As at 30 June 2012, the aggregated Pillar 1 regulatory capital requirement across the four regulated subsidiary companies was approximately £8.4 million compared to capital resources of approximately £65.3 million held in the four subsidiaries and £157.2 million held across the Group. Regulation The Chief Executive has highlighted changes to the regulatory landscape, in particular the FSA's Retail Distribution Review and its latest consultation paper CP 12/12. As expected, the consultation paper has confirmed that the FSA's direction of travel relating to Platforms is unchanged. The proposals are scheduled to be introduced in two phases. Stage One will take effect from 31 December 2012 relating to a range of matters including qualification standards for advisers, adviser charging, disclosure of platform income, re-registration standards and the provision of unit-holder information. Stage Two will relate to changes to Platforms. Further detail on the aims and timings of Stage Two are given below under the section "Principal risks and uncertainties". Overall we support increased transparency and investor choice, but will continue to lobby the FSA to ensure the proposals do not create an uneven playing field. During the history of Hargreaves Lansdown there have been many external factors which when initially revealed, could have projected serious pressure on profitability. Most of these potentially harmful circumstances revolved around the reduction of margin. In every single case, our response resulted in increased volumes of business which more than compensated for any reduction in margin. We are currently in the process of discussing the finer detail of our response to the Platform paper, however, we believe Hargreaves Lansdown's experience, business model and financial position will enable us to accommodate any necessary changes without harmful effect on long-term profitability. Conclusion Despite the continued economic headwinds, Hargreaves Lansdown has continued its growth in client numbers, AUA and profits, which is clearly an endorsement of the excellent service we provide. The investment landscape is constantly changing and we aim to always adapt accordingly to ensure we provide the best proposition for our existing clients and to win the business of new clients. The implementation of the RDR for both advisers and platforms will ensure the landscape will continue to change and there remains uncertainty in how the post RDR world will look. As the UK's leading investment supermarket, Hargreaves Lansdown will play its part in shaping the future and we are confident that we can continue to grow the business for many years to come by putting our clients first and meeting their investment needs. Tracey Taylor Group Finance Director 5 September 2012 Principal risks and uncertainties The following is extracted from page 24 to 27 of the 2012 Annual Report and Accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. Like all businesses, the Group faces a number of potential risks which, if not properly controlled, could hinder the successful implementation of its strategy and have a material impact on the long-term performance. The Board believes that a successful risk management framework balances risk and reward. Within the Group, responsibility for risk management and internal control rests with the Board. The Board and senior management of Hargreaves Lansdown are proactive in identifying, assessing and managing risk. The Executive management implements and maintains the systems of internal control. Further details of our systems for internal control and risk management can be found in the Corporate Governance statement. The low risk profile of the business has not changed significantly this year. One of our highlighted risks each year is market volatility and this has certainly been experienced in 2012. Although the markets remained volatile in 2012 and in fact were down circa7% for the year, the business still managed to grow organically such that the value of clients' investments grew which in turn helped increase the Group revenue. Market volatility arising from such factors as the Euro crisis remains an accepted risk, although the high percentage of assets in tax wrappers and a cash option on our platform does reduce the impact of such market turbulence on our performance. In terms of regulatory risk, on 27 June 2012, the FSA issued Consultation Paper CP 12/12 "The Platform Paper". In this paper the FSA repeated messages made in earlier papers about the future regulation of Platforms. The FSA is consulting on the following: 1. Banning Platforms from being funded by product providers for both advised and non-advised business 2. Permitting the only platform charge to be a charge payable by the platform client 3. Permitting unit rebates to be provided to Platform clients to enhance the value of their investments 4. Banning cash rebates to clients for both advised and non-advised business The FSA is also asking whether it should extend the above points to all retail investments and not just focus on Platforms. The FSA aim to publish final rules by the end of 2012 which would then take effect on 31December 2013.Hargreaves Lansdown believes that if these proposals are likely to be implemented, there are a range of recurring revenue models available and currently used in the business, which could be extended to mitigate the loss of revenue from product providers. Althoughpayments from product providers currently represent a significant revenue stream, we believe changesto our revenue model can be made whilst remaining highly competitive to existing and potential clients. Having the ability to provide unit rebates to clients will help us to continue to offer clients highly competitive pricing and discounts. With any rule changes only commencing from 31 December 2013 at the earliest, there is time to successfully make a transition to an alternative model. We continue to engage with the FSA on its work on platform regulation. We will respond to the Consultation Paper and we will work to ensure we can provide the good outcomes for our clients. The risk factors mentioned below do not purport to be exhaustive as there may be additional risks that the Group has not yet identified or has deemed to be immaterial that could have a material adverse effect on the business. Risk Mitigating Factors/Controls Industry Risks Fluctuations in the capital · Focus on recurring revenue streams over markets the more volatile transaction-based alternative. Fluctuations in capital markets may adversely affect trading · High proportion of assets under activity and/or the value of the administration in tax wrappers so clients Group's assets under less likely to withdraw funds and lose tax administration or management, benefits. from which we derive revenues. · Cash option enables clients to shelter from market volatility. Changing markets and increased · Strong market position with pricing competition power. The Group operates in a highly · Full control over flexible platform. competitive environment with developing demographic trends and · Experienced management team with a strong our continued profitability track record of innovation and depends on our ability to respond responsiveness to the market. to these pressures and trends. · Organisational structure and culture promotes responsiveness. · Client focused with a loyal customer base. Evolving technology · Track record of successful development. The Group's technology needs to · High awareness and sponsorship of the remain current if we are to importance of technology at Board level. develop and enhance our systems to accommodate changing · Substantial development team in place. preferences, new products and the emergence of new industry · Scalability project team in place standards. Regulatory risk · Strong compliance culture. The Group may be materially · Business model and culture geared towards adversely affected as a result of FSA principle of treating clients fairly. new or revised legislation or regulations or by changes in the · Financial strength of the organisation interpretation or enforcement of provides comfort should the capital resource existing laws and regulations requirement be increased. emanating from the UK or Europe. · Alternative recurring revenue models are The Group will need to replace a already successfully operated by the Group significant revenue stream if the and these could be used to offset the FSA bans payments from product potential reduction in revenue from product providers to platforms as stated providers. as a desirable intention in its Consultation Paper CP 12/12. · There is no guarantee that such a ban on revenue from product providers will ultimately be implemented as much consultation will first need to take place. This means there is plenty of time to make representations and carefully review and implement the most appropriate strategic change to our revenue model that works for both our clients and the profitability of the Group. · Competitive prices and service offering will be maintained to ensure business will not be lost to competitors many of whom will in any case be faced with the same rule change should it occur. Changes in taxation law · The Government has a clear priority to reinvigorate savings in order to plan for an Changes made to tax legislation ageing population, which is currently could reduce the attractiveness under-provided for. This will create of some of the Group's investment opportunities for SIPP and ISA business. products such as ISAs and SIPPs. Damage to the Group's reputation · Clients educated to improve awareness of potential 'boiler room' and other online The risk of reputational damage scams. through the actions of unassociated third parties (such · Hargreaves Lansdown security procedures as copycat websites to are well communicated to clients so they are fraudulently target client funds) more likely to question anything out of the needs to be minimised. ordinary. · Ongoing intensive monitoring and response. Operational Risks Errors, breakdowns or security breaches · High level of resilience built in respect of the Group's software or into daily operations. information technology systems · IT performance, scalability and security are deemed top priorities by the Board and are included in the IT Serious or prolonged breaches, errors or Strategy. breakdowns in the Group's software or IT systems must be avoided. · Large, experienced in-house team of IT professionals and established name suppliers. · Internal procedures benchmarked against industry best practice. Business continuity · Critical applications and infrastructure mirrored across The risk of disruption to the business primary and two secondary sites. as a result of IT or power failure, fire, flood, acts of terrorism, · Business Continuity Plan produced relocation problems and similar must be in line with best practice minimised. methodologies and tested regularly. Damage to the Group's reputation · High level of internal controls including checks on new staff. The risk of reputational damage from employee misconduct, failure to manage · Well trained staff. inside information or conflicts of interest and fraud or improper practice · Strong compliance culture. must be controlled. Key personnel risk · Succession planning encouraged throughout Group via management and Key personnel must be recruited and staff objectives. retained to prevent a material adverse effect on the Group's business, results · Success of the Group should of operations or financial condition. attract high calibre candidates. · A continuous programme of SAYE and other share option schemes are in operation to incentivise staff and encourage retention. Litigation or claims made against the · High levels of Professional Group Indemnity Insurance cover. The Group needs to protect against the · Comprehensive internal review risk of litigation from clients or third procedures for marketing literature. parties and actions taken by regulatory agencies. Reliance on third parties · Due diligence forms part of the selection process for key suppliers. Outsourced service providers must meet appropriate standards to protect the · Ongoing review by our internal Group from the risk of regulatory audit team of key business partners. sanctions and reputational damage. Strategic risk · Very experienced management team, with a highly successful track record Management must remain focused on to date. appropriate strategies and implement the Group's strategy effectively. · Management has demonstrated an excellent understanding of the market and continues to monitor this effectively through regular dialogue with clients. Performance of in-house managed funds · Only manage Funds of Funds, divested equity management to focus Investment performance of the Hargreaves on core strength. Lansdown multi-manager funds needs to remain good relative to the market or in · Fund analysis focuses on 'stock absolute terms, or the Group may be selection' skills of manager rather vulnerable to outflows in those funds than basic performance analysis. and a consequential reduction in revenues. · Multi-manager funds well diversified at the underlying fund level as well as by number of funds. · Well established and proven investment process overseen by an Internal Investment Committee. · Our Funds of Funds give investors exposure to a broad range of underlying investments. They are therefore less vulnerable to sector specific poor performance than specialised or focused funds. Financial Risks Liquidity risks · Highly cash generative business. The Group must remain able to meet liabilities as they become due and be able · Low working capital to liquidate assets or obtain adequate requirement. funding as necessary. · Group maintains a substantial surplus above regulatory and working capital requirements. · Treasury management policy provides for the availability of liquid funds at short notice. Bank default · Only use banks with strong financial ratios where we do not Given the current economic climate and in believe the Government would allow particular the unprecedented problems faced them to fail. by banks, the Group must protect against the risk that a bank could fail. · Deposits spread across several banks, with limits placed on each. · Regular review and challenge of treasury policy by management. Interest rate risks · Access to competitive interest rates due to large value of cash Risk of decline in earnings due to a deposits placed. decline in interest rates. · Regular fixed high interest cash offers available to clients. Directors' Responsibility Statement The following is extracted from page 57 of the 2012 Annual Report and Accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. The statement relates solely to the Company's 2012 Annual Report and Accounts and is not connected to the extracted information set out in this announcement. The names and functions of the Directors making the responsibility statement are set out on page 35 of the full Annual Report and Accounts. The Directors confirm to the best of their knowledge: · the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and · the Review of Group Operations and the Risk Report, which are incorporated into the Directors' Report, include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. . Consolidated Income Statement Year ended 30 June Year ended 30 June 2012 2011 Note £'000 £'000 Revenue 2 238,741 207,904 Total operating income 238,741 207,904 Administrative expenses (83,355) (79,813) FSCS costs* (4,774) (3,646) Operating profit 150,612 124,445 Investment revenue 4 2,229 1,496 Other (losses) / gains (2) 72 Profit before tax 152,839 126,013 Tax 5 (39,520) (34,066) Profit after tax 113,319 91,947 Attributable to: Equity shareholders of the parent 112,960 91,820 Company Non-controlling interest 359 127 113,319 91,947 Earnings per share Basic earnings per share * (pence) 7 24.2 19.8 Diluted earnings per share * 7 24.1 19.6 (pence) All income, profits and earnings are in respect of continuing operations. * FSCS costs are those relating to the running of and the levies issued under the Financial Services Compensation Scheme. In previous years these costs were included within administrative expenses. These financial statements are unaudited. Consolidated Statement of Comprehensive Income Year ended 30 June Year ended 30 2012 June 2011 £'000 £'000 Profit for the financial year 113,319 91,947 Increase in fair value of 30 39 available-for-sale investments Total comprehensive income for the 113,349 91,986 financial year Attributable to:- Equity holders of the Company 112,990 91,859 Non-controlling interest 359 127 113,349 91,986 Consolidated Statement of Changes in Equity Attributable to the owners of the Company Shares Share Investment Capital held by Share premium revaluation redemption EBT EBT Retained Non-controlling Total capital account reserve reserve reserve reserve earnings Total interest Equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 July 2010 1,897 8 91 12 (14,505) 10,166 68,445 66,114 (61) 66,053 Profit for the - - - - - - 91,820 91,820 127 91,947 period Other comprehensive income:- Net fair value gains on available-for-sale assets - - 39 - - - - 39 - 39 Employee Benefit Trust:- Shares sold in the - - - - 131 - - 131 - 131 year Shares acquired in - - - - (2,155) - - (2,155) - (2,155) the year EBT share sale net - - - - - 128 - 128 - 128 of tax Employee share option scheme:- Share-based - - - - - - 1,618 1,618 - 1,618 payments expense Deferred tax effect of share-based payments - - - - - - 4,510 4,510 - 4,510 Dividend paid - - - - - - (31,404) (31,404) - (31,404) At 30 June 2011 1,897 8 130 12 (16,529) 10,294 134,989 130,801 66 130,867 Profit for the - - - - - - 112,960 112,960 359 113,319 period Other comprehensive income:- Net fair value gains on available-for-sale assets - - 30 - - - - 30 - 30 Employee Benefit Trust:- Shares sold in the - - - - 2,500 - - 2,500 - 2,500 year EBT share sale net - - - - - (280) - (280) - (280) of tax Employee share option scheme:- Share-based - - - - - - 2,136 2,136 - 2,136 payments expense Current tax effect - - - - - - 4,636 4,636 - 4,636 of share based payments Deferred & current tax effect of share-based payments - - - - - - (5,617) (5,617) - (5,617) Dividend paid - - - - - - (90,172) (90,172) - (90,172) At 30 June 2012 1,897 8 160 12 (14,029) 10,014 158,932 156,994 425 157,419 The share premium account represents the difference between the issue price and the nominal value of shares issued. The investment revaluation reserve represents the change in fair value of available-for-sale investments held by the Group, net of deferred tax. The capital redemption reserve relates to the repurchase and cancellation of the Company's own shares. The Shares held by Employee Benefit Trust reserve represents the cost of shares in Hargreaves Lansdown plc purchased in the market and held by the Hargreaves Lansdown plc Employee Benefit Trust to satisfy options under the Group's share option schemes. The EBT reserve represents the cumulative gain on disposal of investments held by the Hargreaves Lansdown Employee Benefit Trust ("the EBT"). The reserve is not distributable by the Company as the assets and liabilities of the EBT are subject to management by the Trustees in accordance with the EBT trust deed. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Non-controlling interests consist of the minority's proportion of the net fair value of the assets and liabilities acquired at the date of the original business combination and the non-controlling interest's change in equity since that date. The non-controlling interest represents a 25% shareholding in Library Information Services Limited, a subsidiary of the Company. Consolidated Balance Sheet At 30 June 2012 At 30 June 2011 Note £'000 £'000 Non-current assets Goodwill 1,333 1,333 Other intangible assets 168 296 Property, plant and equipment 5,792 6,980 Deferred tax assets 10 2,939 8,117 10,232 16,726 Current assets Trade and other receivables 9 142,606 176,178 Cash and cash equivalents 9 157,719 121,951 Investments 8 2,228 2,240 Current tax assets 17 12 302,570 300,381 Total assets 312,802 317,107 Current liabilities Trade and other payables 11 136,952 167,439 Current tax liabilities 18,154 18,742 155,106 186,181 Net current assets 147,464 114,200 Non-current liabilities Provisions 277 59 277 59 Total liabilities 155,383 186,240 Net assets 157,419 130,867 Equity Share capital 12 1,897 1,897 Share premium account 8 8 Investment revaluation reserve 160 130 Capital redemption reserve 12 12 Shares held by Employee Benefit Trust (14,029) (16,529) reserve EBT reserve 10,014 10,294 Retained earnings 158,932 134,989 Total equity, attributable to equity 156,994 130,801 shareholders of the parent Company Non-controlling interest 425 66 Total equity 157,419 130,867 Statement of Cash Flows Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Net cash from operating activities, 13 122,549 84,257 after tax Investing activities Interest received 2,158 1,443 Dividends received from investments 71 53 Proceeds on disposal of 42 121 available-for-sale investments Proceeds on disposal of plant and 2 78 equipment Purchases of property, plant and (998) (1,596) equipment Purchase of intangible fixed assets (104) (349) Net cash used in investing activities 1,171 (250) Financing activities Purchases of own shares - (2,155) Proceeds on sale of own shares 2,220 258 Dividends paid (90,172) (31,404) Net cash used in financing activities (87,952) (33,301) Net increase in cash and cash 35,768 50,706 equivalents Cash and cash equivalents at 121,951 71,245 beginning of year Cash and cash equivalents at end of 157,719 121,951 year Notes to the Financial Statements 1. General information Hargreaves Lansdown plc (the "Company") is a company incorporated in the United Kingdom under the Companies Act 2006 whose shares are publicly traded on the London Stock Exchange. The address of the registered office is One College Square South, Anchor Road, Bristol, BS1 5HL, United Kingdom. This Preliminary Announcement is presented in pounds sterling which is the currency of the primary economic environment in which the Group operates. The consolidated financial statements contained in this preliminary announcement do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial statements are extracted from the 2012 Group financial statements which have yet to be signed and have not yet been delivered to the Registrar of Companies. The audit of the statutory accounts for the year ended 30 June 2012 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting. The financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of EU endorsed International Financial Reporting Standards (IFRS). The principal accounting policies will be set out in the Group's 2012 statutory accounts. The comparative figures for the financial year ended 30 June 2011 are based on the statutory accounts for that year. The report of the auditors on the financial statements for the year ended 30 June 2011, which were prepared in accordance with IFRS, was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under section 498 (2) or 498 (3) of the Companies Act 2006. The financial statements for the financial year ended 30 June 2011 have been delivered to Companies House. 2. Revenue Revenue relates to services provided in the UK and is stated net of value added tax. An analysis of the Group's revenue is as follows: Year ended 30 June 2012 Year ended 30 June 2011 Revenue from services: £'000 £'000 Recurring income 192,609 161,240 Transactional income 42,479 44,186 Other income 3,653 2,478 Total operating income 238,741 207,904 Recurring income principally comprises renewal income, management fees and interest income on client money. Transactional income principally comprises commission earned from stockbroking transactions. Other income principally represents the amount of fees receivable from the provision of funds library services. The policies adopted for the recognition of each significant revenue stream are set out in note 2 above. In previous periods the Group's revenue was analysed into the categories of fees and commission income, interest and similar income and subscriptions and sundry charges. This analysis has been changed in the current year to analyse revenue as recurring, transactional or other. This change has been made as the directors believe the analysis set out above more appropriately reflects the nature of the revenue being earned and the key performance indicators monitored. The policies for the recognition of each significant revenue stream and the total revenue recognised for each accounting period have not changed as a result of this reclassification. 3. Segment information At 30 June 2012, the Group is organised into three business segments, namely the Vantage Division, the Discretionary Division and the Third Party/Other Services Division. This is based upon the Group's internal organisation and management structure and is the primary way in which the Chief Operating Decision Maker (CODM) is provided with financial information. The CODM has been identified as the Board of Executive Directors. The 'Vantage' division represents all activities relating to the Vantage service, our direct to private investor platform. The 'Discretionary' division is focused on the provision of managed services such as our Portfolio Management Service (PMS) and range of Multi-Manager funds. The 'Third Party/Other Services' division includes activities relating to the broking of third party investments and pensions, certificated share dealing and other niche services such as currency, CFD's and spread betting. In this division, clients' investments are not administered within the Group. The 'Group' segment contains items that are shared by the Group as a whole and cannot be reasonably allocated to other operating segments. Segment expenses are those that are directly attributable to a segment together with the relevant portion of other expenses that can reasonably be allocated to the segment. Gains or losses on the disposal of available-for-sale investments, investment income, interest payable and tax are not allocated by segment. 3. Segment information (continued) Segment assets and liabilities include items that are directly attributable to a segment plus an allocation on a reasonable basis of shared items. Corporate assets and liabilities are not included in business segments and are thus unallocated. At 30 June 2012 and 2011, these comprise cash and cash equivalents, short-term investments, tax-related and other assets or liabilities. Consolidation adjustments relate to the elimination of inter-segment revenues, balances and investments in group subsidiaries required on consolidation. Third Party/ Consolidation Vantage Discretionary Group Adjustment Consolidated Other Services £'000 £'000 £'000 £'000 £'000 £'000 Year ended 30 June 2012 Revenue from external customers 185,731 27,260 25,718 32 - 238,741 Inter-segment revenue - 3,796 - - (3,796) - Total segment revenue 185,731 31,056 25,718 32 (3,796) 238,741 Depreciation and amortisation 1,719 264 432 - - 2,415 Investment revenue - - - 2,229 - 2,229 Other gains and losses - - - (2) - (2) Reportable segment profit before tax 118,236 18,367 14,611 1,625 - 152,839 Reportable segment assets 133,036 10,495 14,612 161,883 (7,225) 312,802 Reportable segment liabilities (99,380) (7,883) (13,018) (40,176) 5,074 (155,383) Net segment assets 33,656 2,612 1,594 121,707 (2,151) 157,419 Year ended 30 June 2011 Revenue from external customers 160,524 24,711 22,669 - - 207,904 Inter-segment revenue - 3,424 - - (3,424) - Total segment revenue 160,524 28,135 22,669 - (3,424) 207,904 Depreciation and amortisation 1,737 205 376 - - 2,318 Investment revenue - - - 1,496 - 1,496 Other gains and losses - - - 72 - 72 Reportable segment profit before tax 96,688 16,905 11,269 1,151 - 126,013 Reportable segment assets 169,234 9,827 13,155 131,446 (6,555) 317,107 Reportable segment liabilities (139,238) (6,397) (11,686) (33,323) 4,404 (186,240) Net segment assets 29,996 3,430 1,469 98,123 (2,151) 130,867 Information about products/services The Group's operating segments are business units that provide different products and services. The breakdown of revenue from external customers for each type of service is therefore the same as the segmental analysis above. Information about geographical area All business activities are located within the UK. Information about major customers The Group does not rely on any individual customer. 4. Investment revenue Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Interest on bank deposits 2,158 1,443 Dividends from equity investment 71 53 2,229 1,496 5. Tax Year ended 30 June 2012 Year ended 30 June 2011 £'000 £'000 Current tax 39,959 34,732 Deferred tax (note 10) (439) (666) 39,520 34,066 Corporation tax is calculated at 25.5% of the estimated assessable profit for the year to 30 June 2012 (2011: 27.5%). In addition to the amount charged to the income statement, certain tax amounts have been charged directly to equity as follows: Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Deferred tax relating to share based 5,617 (4,510) payments Current tax relating to share-based (4,636) - payments 981 (4,510) Factors affecting tax charge for the year It is expected that the ongoing effective tax rate will trend to a rate approximating to the standard UK corporation tax rate in the medium term. The Finance Act 2012 received Royal Assent on 17 July 2012 and reduced the standard UK corporation tax rate to 24% (from 26%) on 1 April 2012. Deferred tax has been recognised at 24%, being the rate in force at the balance sheet date. A deferred tax asset in respect of future share option deductions has been recognised based on the Company's share price as at 30 June 2012. Factors affecting future tax charge Any increase or decrease to the Company's share price will impact the amount of tax deduction available in future years on the value of shares acquired by staff under share incentive schemes. The standard rate of UK corporation tax is due to reduce to 23% from 1 April 2013 which will reduce the deferred tax assets shown in note 10 by an estimated £123,000; this will be recognised in the financial statements for the year ended 30 June 2013. The charge for the year can be reconciled to the profit per the income statement as follow: Year ended 30 June Year ended 30 2012 June 2011 £'000 £'000 Profit before tax from continuing 152,839 126,013 operations Tax 38,976 34,653 - at the UK corporation tax rate of 25.5% 27.5% Items not allowable/(allowable)for tax 397 (92) Effect of adjustments relating to prior years 7 (617) Utilisation of rate applicable to trusts - 3 Impact of the changes in tax rate 140 119 Tax expense for the year 39,520 34,066 Effective tax rate 25.9% 27.01% 6. Dividends Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Amounts recognised as distributions to equity holders in the period: 2011 Final dividend of 8.41p (2010: 38,947 2,688 0.58p) per share 2011 Final special dividend of 5.96p 27,601 7,879 (2010: 1.7p) per share 2012 First interim dividend of 5.1p 23,624 20,837 (2011: 4.5p) per share After the balance sheet date, the directors declared a second interim (final) ordinary dividend of 10.65 pence per share and a special dividend of 6.84 pence per share payable on 28 September 2012 to shareholders on the register on 14 September 2012. Dividends are required to be recognised in the financial statements when paid, and accordingly the declared dividend amounts are not recognised in these financial statements, but will be included in the 2013 financial statements as follows: £'000 2012 Second interim (final) dividend of 10.65p per share 49,743 2012 Special dividend of 6.84p per share 31,948 Under an arrangement dated 30 June 1997 the Hargreaves Lansdown Employee Benefit Trust, which held the following number of ordinary shares in Hargreaves Lansdown plc at the date shown, has agreed to waive all dividends. Year ended 30 June Year ended 30 June 2012 2011 Number of shares held by the Hargreaves 7,263,396 11,214,774 Lansdown Employee Benefit Trust Representing % of called-up share 1.53% 2.36% capital 7. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in free issue during the period, including ordinary shares held in the EBT reserve which have vested unconditionally with employees. Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Year ended Year ended 30 June 2012 30 June 2011 £'000 £'000 Earnings (all from continuing operations): Earnings for the purposes of basic and diluted EPS - net profit 112,960 91,820 attributable to equity holders of parent company Earnings for the purposes of basic 112,960 91,820 EPS and diluted EPS Number of shares: Weighted average number of ordinary shares for the purposes 469,424,156 469,074,636 of diluted EPS Weighted average number of shares held by HL EBT which have not (2,304,199) (5,831,871) vested unconditionally with employees Weighted average number of ordinary shares for the purposes 467,119,957 463,242,765 of basic EPS Earnings per share: Pence Pence Basic EPS 24.2 19.8 Diluted EPS 24.1 19.6 The weighted average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 2,806,402 at 30 June 2012 (2011: nil). 8. Investments Year ended Year ended 30 June 2012 30 June 2011 £'000 £'000 At beginning of year 2,240 2,322 Sales (42) (121) Net increase in the value of 30 39 available-for-sale investments At end of year 2,228 2,240 Comprising: Current asset investment - UK listed securities valued at quoted 1,486 1,499 market price Current asset investment - 742 741 Unlisted securities valued at cost £308,000 (2011: £350,000) of investments are classified as held at fair value through profit and loss and £1,920,000 (2011: £1, 890,000) are classified as available-for-sale. Available-for-sale investments have been included at fair value where a fair value can be reliably calculated, with the revaluation gains and losses reflected in the investment revaluation reserve as shown in the Consolidated Statement of Changes in Equity, until sale when the cumulative gain or loss is transferred to the income statement. If a fair value cannot be reliably calculated by reference to a quoted market price or other method of valuation, available-for-sale investments are included at cost where the directors believe that this is not significantly different to fair value, with a fair value adjustment recognised upon disposal of the investment. 9. Other financial assets Trade and other receivables At 30 June 2012 At 30 June 2011 £'000 £'000 Trade receivables 105,654 147,738 Other receivables 91 218 Prepayments 36,861 28,222 142,606 176,178 Trade receivables are measured at initial recognition at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. In accordance with market practice, certain balances with clients, Stock Exchange member firms and other counterparties are included in debtors. Trade receivables include £93.4 million (2011: £134.3million) of counterparty balances. Cash and cash equivalents At 30 June 2012 At 30 June 2011 £'000 £'000 Cash and cash equivalents 157,719 121,951 Comprising: Restricted cash - client settlement account 12,644 13,538 balances Restricted cash - balances held by EBT 2,695 469 Group cash and cash equivalent balances 142,380 107,944 Cash and cash equivalents comprise cash held by the Group and institutional cash funds with near-instant access. Included in cash and cash equivalents are amounts of cash held on client settlement accounts as shown above. At 30 June 2012 segregated deposit amounts held by the Group on behalf of clients in accordance with the client money rules of the Financial Services Authority amounted to £2,922 million (2011: £2,248 million). The client retains the beneficial interest in these deposits and accordingly they are not included in the balance sheet of the Group. 10. Deferred tax The following are the major deferred tax assets recognised and movements thereon during the current and prior reporting years. Deferred tax has been recognised at 24%, being the rate in force at the balance sheet date. The Finance Act 2012 reduces the standard UK corporation tax rate to 23% from 1 April 2013 which will reduce the deferred tax assets and liabilities shown below. Future Accelerated relief on Other deductible tax capital Share-based temporary depreciation losses payments differences Total £'000 £'000 £'000 £'000 £'000 Group At 1 July 2010 206 - 1,975 760 2,941 Credit to income 377 - 249 40 666 Credit to equity - - 4,510 - 4,510 At 30 June 2011 583 - 6,734 800 8,117 Credit/(charge) 305 to income 67 22 45 439 Charge to equity (5,617) (5,617) At 30 June 2012 650 22 1,162 1,105 2,939 11. Other financial liabilities Trade and other payables At 30 June 2012 At 30 June 2011 £'000 £'000 Current payables Trade payables 107,206 147,450 Social security and other taxes 7,615 3,359 Other payables 7,806 4,950 Accruals and deferred income 14,325 11,680 136,952 167,439 In accordance with market practice, certain balances with clients, Stock Exchange member firms and other counterparties are included in creditors. Trade payables include £105.6 million (2011: £146.7 million) of counterparty balances. Accruals and other payables principally comprise amounts outstanding for trade purchases and on-going costs. 12. Share capital At 30 June 2012 At 30 June 2011 £'000 £'000 Authorised: 525,000,000 ordinary shares of 0.4p each 2,100 2,100 Issued and fully paid: Ordinary shares of 0.4p each 1,897 1,897 Shares Shares Issued and fully paid: Number of ordinary shares of 0.4p each 474,318,625 474,318,625 The Company has one class of ordinary shares which carry no right to fixed income. 13. Note to the consolidated cash flow Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Profit for the year after tax 113,319 91,947 Adjustments for: Investment revenues (2,158) (1,496) Other gains and losses (71) (72) Income tax expense 39,520 34,066 Depreciation of plant and equipment 2,186 2,055 Amortisation of intangible assets 229 263 Loss on disposal 2 - Share-based payment expense 2,136 1,618 Increase /(decrease) in provisions 218 (839) Operating cash flows before movements 155,381 127,542 in working capital Decrease/(Increase) in receivables 33,572 (72,004) (Decrease)/Increase in payables (30,487) 58,748 Operating cash flows 158,466 114,286 Income taxes paid (35,917) (30,029) Net cash from operating activities 122,549 84,257 14. Going concern The Group maintains ongoing forecasts that indicate continued profitability in the 2013 financial year. Stress test scenarios are undertaken, the outcomes of which show that the Group has adequate capital resources for the foreseeable future even in adverse economic conditions. The Group's business is highly cash generative with a low working capital requirement; indeed, the forecast cash flows show that the Group will remain highly liquid in the forthcoming financial year. The Directors therefore believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries, the Directors' expectation is that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing this preliminary results statement. Related Party Disclosures The following is extracted from note 26 on pages 84 and 85 of the 2012 Annual Report and Accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. The Company has a related party relationship with its subsidiaries, and with its directors and members of the Executive Committee (the "key management personnel"). Transactions between the Company and its key management personnel are disclosed below. Details of transactions between the Company and other related parties are also disclosed below. Trading transactions The Company entered into the following transactions with directors within the Hargreaves Lansdown Group and related parties who are not members of the Group: During the years ended 30 June 2012 and 30 June 2011 the Company has been party to a lease with P K Hargreaves and S P Lansdown, who are both directors of the Company, for the rental of the old head office premises at KendalHouse. Previously the rental was £302,400 per annum for the whole building but as from 6 April 2011 a new ten year lease was signed for a rental of part of the building, to be used for disaster recovery purposes at a rental of £105,000 per annum. No amount was outstanding at either year-end. During the years ended 30 June 2012 and 30 June 2011 the Group has provided a range of investment services to shareholders, directors and staff on normal third party business terms. Remuneration of key management personnel The remuneration of the key management personnel of the Group being those personnel who were either a member of the Board of a Group company or a member of the Executive Committee during the relevant year shown below, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Short-term employee benefits 9,165 7,861 Defined contribution pension costs 420 245 Share-based payments 1,540 1,097 Gains on exercise of share options 947 - 12,072 9,203 Included within the previous table are the following amounts paid to directors of the Company who served during the relevant year. Full details of directors' remuneration are shown in the Remuneration Committee report. Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Wages and salaries 3,022 2,583 Pension contributions 112 47 Share-based payments 912 763 Gains on exercise of share options 107 - 4,153 3,393 Emoluments of the highest paid director 1,896 1,278 Number of directors who were members of 2 2 money purchase pension schemes Transactions between subsidiaries and between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. The parent Company, Hargreaves Lansdown plc, entered into the following transactions with subsidiaries and the Employee Benefit Trust, which are related parties. Year ended 30 June Year ended 30 June 2012 2011 £'000 £'000 Dividends received from subsidiaries 109,000 87,500 Management charges to subsidiaries 720 720 Amount owed to related parties at 30 32 12 June Amounts owed by related parties at 30 18,355 227 June All amounts outstanding with related parties are unsecured and will be settled in cash. No guarantees have been given or received in respect of amounts outstanding. No provisions have been made for doubtful debts in respect of the amounts owed by the related parties. This information is provided by RNS The company news service from the London Stock Exchange END FR BKNDDABDDOKB -0- Oct/24/2012 07:00 GMT
Hargreaves Lansdown HL. Annual Financial Report
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