Serko
Annual Report 2018

Plain-text annual report

02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y 1 SERKO ANNUAL REPORT ABOUT SERKO Our PURPOSE Our purpose is to transform the way businesses manage travel and expenses. We do this by helping companies drive down the cost of their travel program, using smart technology and making the process of booking and managing travel and reconciling expenses a positive experience for their people. About SERKO Serko is a market-leading travel and expense technology solution, used by over 6,000 corporate entities through 50+ Travel Management Companies that combined book more than A$6b of travel a year through Serko’s platforms. Zeno is Serko’s next generation travel management application, using intelligent technology, predictive workflows and a global travel marketplace to transform business travel across the entire journey. Listed on the New Zealand Stock Exchange Main Board (NZX:SKO). Serko employs more than 100 people worldwide, with its HQ in New Zealand and offices across Australia, China, India and the United States (US) Visit www.serko.com for more information. 2 3 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT $19.3m Total Income 28% Operating Revenue Growth to $18.3m Revenue 20% increase in booking transactions Peak ATMR $18.4m 24% increase over same month prior year $2.2m EBITDA $4.7m turnaround from prior year Margin of 12% $5.2m Cash balances increased $0.8m over the year 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y $2.0m NPBT Net Profit Before Tax of $2 million $5.3m turnaround from prior year 4 5 SERKO ANNUAL REPORTSERKO ANNUAL REPORT CEO AND CHAIRMAN’S LETTER Dear Fellow Shareholders, Serko has had a strong year and it is with considerable pleasure representing a turnaround of $5.3 million from the loss last that we communicate this report and associated financial year of $3.3 million. results to you. During this pivotal year, we demonstrated the scalability of our cloud-based platform and recorded a dramatic improvement in financial performance as a result. Peak fourth quarter (February) Annualised Transactional Monthly Revenue (ATMR), an indicator of the company’s recurring revenues, stood at $18.4 million, an increase of 24% We have consolidated our position in our core Australasian on the same period a year ago. market as the leading online business travel and expense management platform and we saw strong growth in recurring revenues across all categories. We continue to win new customers, while those already using our suite of cloud-based services are turning to us to meet more of their travel needs. It is exciting to have embarked on our next phase of growth as we significantly expand our Northern Hemisphere presence. We have made pleasing progress so far. We have recruited highly respected and experienced leaders in the US and we are expanding our support operations to ensure we have 24-hour coverage for customer support. NPBT of $2.0 million, a $5.3 million turnaround from prior year With the Northern Hemisphere expansion that commenced in the 2018 financial year, Serko expected to be ‘break-even’ for the second half. The actual results were an additional EBITDA As the launch of our new premium travel and expense profit of $0.9 million over the first half $1.3 million to a total $2.2 solution Zeno shows, we remain at the forefront of million EBITDA profit for the year. This was primarily attributable technological innovation in the sector. Total operating revenue for the year to 31 March 2018 to savings associated with timing of new hires as well as some operating efficiencies. The costs associated with new hires is expected to be incurred in the first quarter of the 2019 financial increased 28% to $18.3 million from $14.3 million in the same period a year ago and in line with the guidance we gave in year (FY19). November 2017 of $18 million to $19 million. Total income We have successfully controlled costs, generated positive cash grew by 25% to $19.3 million. Total operating revenue for the year increased 28% to $18.3 million flows and benefited from our platform scaling to serve a larger number of customers. This is best demonstrated by reference to the average revenue per ‘full-time equivalent’ (FTE) staff member, which increased by $48,000 to $170,000. Meanwhile, we have continued to invest in the further development of our technology, including Zeno. At the end of the financial year Serko had net cash-on-hand of $5.2 million, up 18% on the $4.5 million cash-on-hand at the end of the last financial year. Increasing the number of services we provide to our customers is a core component of our strategy. In particular, In short, in the 2018 financial year we continued to validate content revenues such as hotels and airport transfers our strategy to transform business travel and expense increased 72% to $1.3 million, demonstrating Serko’s latent management by delivering market-leading technological potential to capture an increasing share of our customers’ innovations, growing our customer base and increasing travel spend. average revenue from each booking made on our platform. EBITDA for the full year was $2.2 million, representing a Further detail on our financial performance is covered in the $4.7 million turnaround on the prior year’s EBITDA loss of management commentary section on pages 18 to 27 of $2.5 million. The full-year profit before tax was $2.0 million, this report. SERKO DELIVERS MAIDEN FULL YEAR PROFIT This report is dated 23 May 2018 and is signed on behalf of the Board of Serko Limited by Simon Botherway, Chairman (Chair), and Darrin Grafton, Chief Executive Officer (CEO). SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CHIEF EXECUTIVE OFFICER 6 7 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT GROWTH STRATEGY: A key determinant of Serko’s future success in Australasia and The Board has a policy of maintaining a strong cash reserve in new markets was the take up of the new Zeno platform. We position and will monitor Serko’s capital requirements in light are pleased with the results we achieved this year. We have of the funding needed to execute growth opportunities both already signed a number of our existing Travel Management organic and inorganic. Companies (TMCs) to new contractual terms to resell Zeno as a premium solution. These TMCs are using Zeno to win new business and retain current business by providing the options of both Serko Online and Zeno. We are preparing for a dual-listing by way of a Foreign Exempt Listing on the ASX and are targeting a listing date of 25th June 2018, subject to ASX approval. We believe our strong presence in Australian markets will resonate with the deep As part of the Air New Zealand partnership, Tandem Travel pool of investors across the Tasman that understand travel and (Air New Zealand’s corporate travel division) is currently technology markets. We also believe activating this interest onboarding its entire customer base to Zeno, and its previous will benefit all shareholders. solution provider is discontinuing its system this month. 20% growth in booking transactions for 2018 Our global growth strategy is based on partnering with leading TMCs to enter new markets. This is the same strategy that has served us well in Australasia, and the success of our relationships in our home market is now creating Serko, however, intends to remain a New Zealand domiciled business and we are committed to our New Zealand investors. We are naturally delighted with the rise in the value of our shares over the past year. The Serko Team has worked hard on our market communication to better articulate our growth strategy and long-term prospects. Further guidance will be provided at our Annual Shareholders Meeting in August. Industry Recognition Category: Most Innovative Hi-Tech Service Category: Company of the Year opportunities in other markets. Signed Chair and CEO Category: Excellence in Innovation SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CEO Our new international business development team is actively pursuing significant distribution and marquee customer opportunities. As announced in February 2018, we have signed a global agreement with ATPI Group and we will begin to roll out Zeno to its customers in the United Kingdom (UK) in the first quarter of FY19. ATPI intends to extend the roll out to customers in Europe after the UK launch. OUTLOOK Serko is in a stronger position than it has ever been. We expect total operating revenue growth of between 15% and 30% in the year to 31 March 2019. We are excited by the interest we have received in the Northern Hemisphere and we are preparing the business to maximise the return on this interest through into the next financial year. As we undertake this expansion in Europe and North America, we expect sales, marketing, system development and support operation costs to increase. As a result, we do not expect a substantial uplift in EBITDA. Category: Top 16 corporate travel innovators Category: NZX Emerging Leaders Best Investor Relations 8 9 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT STRATEGIC OVERVIEW Grow ARPB by offering increased content and moving customers to Zeno Offer premium, integrated global solutions Expand into new territories through strategic alliances and reach the unserved SME market TECHNOLOGY INNOVATION Zeno set a new benchmark in travel & expense management and we can now expand the personalisation and monetisation opportunities of Zeno with NDC* What we achieved: • Zeno was successfully deployed into general release and is being used by hundreds of corporate and government organisations to book and manage travel • Zeno’s technology and content were globalised to support customers in new markets, including North America and Europe • Multiple white labelled self-service travel booking portals launched or are in development by partners (e.g. Corporate Traveller, HelloWorld for Business and Air New Zealand) powered by serko.travel Our focus for FY19: • Zeno will achieve NDC Level 3 certification, providing a foundation to integrate directly with airlines to unleash personalisation and monetisation opportunities that have not previously been possible • We will continue to expand on Zeno’s feature set including a ‘Right to travel’ workflow to streamline business travel approval processes • A ‘Duty of Care’ premium module will provide risk assessment, mitigation and management capabilities GROW CUSTOMER BASE International markets validated demand for Zeno in FY18. We are investing to unlock this growth potential in FY19 What we achieved: • ATPI signed agreement to resell Zeno in more than 50 countries, with first UK customer going live Q1 FY19 • Serko Expense was deployed into global enterprise organisations and validated as a competitive solution in Northern Hemisphere with sales expected in FY19 • Tandem Travel, Air New Zealand’s TMC, began migrating customers to Zeno from a competitor and is progressing towards 100% customer migration during FY19 Our focus for FY19: • Expanding on ATPI UK’s early success with expansion into its customer base across Europe, North America and Asia • Supporting Travel Encore, our first reseller in Canada, to build a Zeno customer base across travel & expense • Extending the relationship with our largest TMC customer, FCM, into new markets, including North America GROW ARPB We have proven we can lift transaction revenue through customer migration to Zeno and we will continue to expand opportunities for content monetisation with the Zeno Marketplace What we achieved: • Content revenue (derived from bookings that include content in addition to airfare, e.g. hotel, transfer, rental car) increased by 72% • HRS Hotels, GTA Hotels and Hotel Hub were added and increased available content to three million hotels • RouteHappy rich content for flight shopping was introduced, which enables differentiated airline merchandising Our focus for FY19: • Migration of existing Serko Online customers to our premium offering, Zeno, with associated increase in price per booking • The Zeno Marketplace serves as a central content hub for global suppliers across every phase of their journey and extends revenue opportunities into content such as ride-sharing services, restaurant bookings, meeting rooms and secure WiFi providers • Zeno’s NDC capability outlined above will facilitate the merchandising of ancillary services, such as in-flight meals, premium seat selection and lounge access, to generate additional content revenue per booking *NDC (New Distribution Capability) is a travel industry-supported program launched by IATA for the development and market adoption of a new, XML-based data transmission standard that enhances the capability of communications between airlines, travel agents and aggregators. 10 11 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT OUR PRODUCTS Until now, corporate travel programs have had to choose who loses. We do this with intelligent technology that provides personalised itinerary recommendations, an intuitive There was a spectrum with control and compliance at one end and choice and convenience at the other. Someone had to compromise. Not anymore. Zeno revolutionises the world of online travel and expense management, providing the control that travel managers need with the ease of use that compels travellers to get on board. interface that makes booking travel super simple and a global marketplace that allows travel managers to connect with preferred suppliers at every stage of the journey. The outcome is control and visibility over spend that was previously opaque, expense capture and reconciliation that provides confidence in governance and increased user adoption that drives higher levels of compliance with corporate travel policies. Zeno is Serko’s next generation travel management application, using intelligent technology, predictive workflows and a global travel marketplace Serko Online is an end-to-end online booking tool for corporates to book and manage airlines, hotels, rental cars and airport transfers Serko Expense is an online expense management solution that enables the capture and processing of corporate card and out-of-pocket claims Serko Mobile is a purpose-built mobile app for making, changing and managing flight and hotel bookings and travel expenses OUR CUSTOMERS The majority of Serko’s revenue comes from Travel Management Companies (TMCs) that provide our solution to their corporate customers The Connected Traveller Seamless Compliance Serko conducted research that identified there are seven phases that cover every aspect of business travel – fly, stay, move, eat, work, play and rest. Zeno is designed to connect travellers with preferred suppliers across every one of these phases, which means they will be able to turn to a single app to solve every need before and during their trip. Corporates can customise Zeno to show only approved content providers and will be able to integrate directly with their corporate accounts. One of the biggest challenges for travel managers is compliance, or rather lack thereof, with their corporate travel policies. This is not normally a significant problem with flights but more of a challenge with things like hotels, when travellers will often book directly with the hotel or through an aggregator, like booking.com or Expedia. The reasons for this are often down to choice (i.e. I can find a better hotel than the options shown in my corporate booking tool) or user experience (i.e. I don’t get the rich information, such as photos, reviews and room types) in their existing corporate booking tool. Zeno helps to overcome this by providing rich content from aggregators, including Booking.com, Wotif and Expedia, as well as corporate negotiated rates, and with an intuitive user interface that matches the consumer experience travellers are used to. 12 13 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT BOARD OF DIRECTORS MANAGEMENT TEAM Simon Botherway Independent Non-Executive Chairman, New Zealand Appointed 30 April 2014, re-elected August 2016 Simon is based in New Zealand. He holds a BCom, as well as the US-based Chartered Financial Analyst (CFA) designation. Simon has extensive experience in corporate governance, banking and investment management. In 2002 Simon co-founded Brook Asset Management and was Chairman from 2004 to 2008. He is also a past President of the CFA Society of New Zealand and was a member of the CFA Asia-Pacific Advocacy Committee. Simon was appointed as a member of the Securities Commission in 2009 and was appointed by the New Zealand Government to chair the Financial Markets Authority Establishment Board in 2010. Simon is currently also a Director of the Callaghan Innovation Board and Fidelity Life Assurance. Claudia Batten Independent Non-Executive Chairman, United States Appointed 30 April 2014, re-elected August 2017 Claudia has been a founding member of two highly successful entrepreneurial ventures. Starting with Massive Incorporated, a network for advertising in video games, she helped pioneer ‘digital’ as a media buy. Massive was sold to Microsoft in 2006. In 2009 she co-founded Victors & Spoils (‘V&S’), the first advertising agency built on the principles of crowd-sourcing. V&S was majority acquired by French holding company Havas Worldwide in 2011. Claudia is based in the United States but remains a strong supporter of the New Zealand start-up scene as an active mentor and adviser. She is also the digital adviser to the Board of Westpac New Zealand and holds an LLB (Hons) and BCA from Victoria University (Wellington). Clyde McConaghy Independent Non-Executive Chairman, Australia Appointed 30 April 2014, re-elected August 2017 Clyde is based in Australia. He holds a BBus and MBA from Cranfield University United Kingdom (UK). Clyde is a fellow of the Australian Institute of Company Directors and a fellow of the Institute of Directors UK. He is the founder of Optima Boards, providing independent director and advisory services to public, private, family office and charitable entities around the world. Clyde has worked in publishing, media, online and technology sectors, living in the UK, Germany, China and Australia. He is a Director of ASX-listed technology company, Infomedia Limited and Chairman of the Board of Chapman Eastway Pty Limited. Darrin Grafton Executive Director, Chief Executive Officer & Co-Founder Appointed 5 April 2007 Darrin has more than 25 years' experience in travel technology and is highly experienced in technology commercialisation. He previously held senior management positions with Gullivers Travel Group (listed on the Australian and New Zealand Stock Exchanges 2004-2006) and Interactive Technologies. Robert (Bob) Shaw Executive Director, Chief Strategy Officer & Co-Founder Appointed 5 April 2007, re-elected August 2016 Bob has more than 25 years' experience creating and commercialising technology for the travel industry. He has held a number of directorships and senior management positions in various high-profile ventures, including Gullivers Travel Group (listed on the Australian and New Zealand Stock Exchanges between 2004 and 2006) and Interactive Technologies. Charlie Nowaczek Chief Operating Officer (COO) Charlie has over 25 years’ experience as an operations executive and management adviser, specialising in business transformation and operational excellence. Over the last decade he has been COO for a number of technology start-ups in the US and Canada. Susan Putt Chief Financial Officer (CFO) Susan has over 25 years’ experience working in New Zealand and has also worked in Australia and Canada. She is a Chartered Accountant and Chartered Member of the Institute of Directors. Susan has worked as CFO, Head of Strategy, and Director for a number of New Zealand businesses and specialises in working with high-growth companies. John Challis Head of Business Development John has 18 years' experience in the corporate travel technology sector across operations, implementations and sales. John has been with Serko for 11 years and was until recently responsible for managing the Australasian sales team, however, as part of Serko's global expansion plans John is now responsible for growth in new markets with a heavy focus on the Northern Hemisphere. Murray Warner Head of Australasian market Murray has 20 years’ experience working with cloud software technology building new sales and revenue operations. He has previously held several senior management positions with Concur Technologies, an SAP company, across Asia-Pacific, Europe and North America. Tony D’Astolfo Senior Vice President, NORAM Tony is a 35-year travel industry veteran, with deep expertise in travel and technology. Most recently he was Chief Commercial Officer at Deem and prior to this Tony was Managing Director of Phocuswright. Tony is a long-time member of GBTA and ACTE, and current Vice Chairman of WINiT (Women In Travel). Darrin Grafton and Bob Shaw are also part of the executive team, see facing page for their details 14 15 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT CORPORATE RESPONSIBILITY Serko aims to be a successful growth company. To realise this ambition we must do the right thing by our people, customers, community and our shareholders. We aim to achieve this through: 1) Focusing on long-term growth and business sustainability; 2) Applying best practice governance and risk management procedures; 3) Cultivating an inclusive workplace of diverse and engaged staff; and 4) Enabling environmentally sustainable choices through technology. Serko is committed to developing long-term value creation and making positive improvements in social, economic and environmental outcomes. This year, we have prepared our first Environmental Social and Governance (ESG) Report and started reporting how the United Nations (UN) Sustainable Development Goals are applicable to our ESG initiatives. Further information and our full report can be found online at www.serko.com/investor-centre/. Serko’s ESG framework remains under development and will continue to be progressed over time. The Sustainable Development Goals (SDGs) are a set of global initiatives set by the United Nations for everyone to contribute to. For Serko, the SDGs are a way to see which areas of sustainability we are directly contributing to and how our community initiatives relate to a larger vision for positive change. The UN SDGs relevant to Serko and our actions are as follows: UN SDGs People: Good health and well-being Health and Safety Policies Quality education Training and intern programmes Gender equality Diversity and inclusion policies Decent work and economic growth Remuneration policies Reduced inequalities Diversity and inclusion policies UN SDGs Customers: Industry, innovation and infrastructure Industry recognition for innovation Responsible consumption and production Privacy and security policies UN SDGs Community: Sustainable cities and communities Sponsorships and donations Climate action Environmental practices SERKO ANNUAL REPORT 16 17 SERKO ANNUAL REPORT 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y MANAGEMENT COMMENTARY Please read the following commentary with the financial statements and the related notes in this report. Some parts of this commentary include information regarding the plans and strategy for the business and include forward-looking statements that involve risks and uncertainties. Actual results and the timing of certain events may differ materially from future results expressed or implied by the forward- looking statements contained in the following commentary. All amounts are presented in New Zealand dollars (NZD), except where indicated. All references to a year are the financial year ended 31 March, unless otherwise stated. Non-GAAP (generally accepted accounting practices) measures have been included, as we believe they provide useful information for readers to assist in understanding Serko’s financial performance. Non-GAAP financial measures do not have standardised meanings and should not be viewed in isolation or considered as substitutes for measures reported in accordance with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS). These measures have not been independently audited or reviewed. $2.0m NET PROFIT BEFORE TAX $5.3m TURNAROUND BUSINESS RESULTS Year ended 31 March Revenue Other income Total income Operating expenses Percentage of revenue Net finance income Net profit (loss) before tax Percentage of operating revenue Income tax expense Net profit (loss) 2018 2017 $ (000) $ (000) 18,279 994 19,273 14,277 1,092 15,369 Change $ (000) 4,002 (98) 3,904 % 28% -9% 25% (17,684) (18,763) 1,079 6% -97% 414 2,003 11% (171) 1,832 -131% 88 (3,306) -23% (144) (3,450) 326 370% 5,309 161% (27) -19% 5,282 153% Annual total operating revenue grew by $4 million to $18.3 million from $14.3 million in the prior year, driven by strong recurring revenue growth across all revenue categories predominantly from our Australian operations. The company recognised $0.96 million in Callaghan Innovation growth grants within other income, leading to total income for the year of $19.3 million up from $15.4 million for the prior year. Serko became profitable in the financial year in line with guidance as it benefited from the operational efficiencies of a scalable technology platform and from tight cost control. Total operating expenses decreased by $1.1 million to $17.7 million from the prior year $18.8 million. This resulted in a profit after tax of $1.8 million, which represents a turnaround of $5.3 million from a loss of $3.5 million in the prior year. $2.2m EBITDA $4.7m TURNAROUND EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTISATION (EBITDA) Year ended 31 March Net profit (loss) Add back: income tax expense Deduct: net finance income Add back: depreciation and amortisation EBITDA profit/(loss) EBITDA margin 2018 2017 $ (000) $ (000) Change $ (000) % 1,832 171 (414) 597 2,186 12% (3,450) 5,282 153% 144 (88) 858 (2,536) -177% 27 19% (326) -370% (261) -30% 4,722 186% EBITDA is a Non-GAAP measure representing Earnings Before the deduction of costs relating to Interest, Taxation, Depreciation and Amortisation and Impairment. Serko uses this as a useful indicator of cash profitability. EBITDA improved by $4.7 million from a loss of $2.5 million to a profit of $2.2 million. This was driven by an increase in total income of $3.9 million and decrease in operating costs (excluding depreciation and amortisation) of $0.8 million. 18 19 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 28% INCREASE TOTAL REVENUE 25% INCREASE TOTAL INCOME INCOME Year ended 31 March Travel platform booking revenue Expense platform revenue Supplier commissions revenue Other revenues Recurring product revenue Percentage of total revenue Services revenue Total revenue Other income Total income 2018 2017 $ (000) $ (000) Change $ (000) 13,283 1,539 1,288 334 16,444 90% 10,808 1,125 751 238 12,921 91% 1,835 1,356 18,279 14,277 994 1,092 19,273 15,369 2,475 414 537 96 3,522 479 4,002 (98) 3,904 % 23% 37% 72% 40% 27% 35% 28% -9% 25% HOW SERKO MAKES MONEY How Serko makes money Corporate traveller makes a booking via Serko Online/Zeno Corporate books a hotel or taxi via Serko Online/Zeno Traveller downloads and uses Serko Mobile Traveller submits receipts using Serko Expense/Zeno Booking & other fees Supplier commission Mobile subscription Monthly user fee Serko’s main source of revenue in 2018 was from its Serko Online travel booking platform. This is predominantly invoiced to TMC resellers on a monthly basis for the total transactions generated from the online travel bookings made by their customers. As Zeno was launched firstly in beta to trial customers during the second half of 2018, booking volumes for 2018 are not material. Travel platform revenue is made up of transaction fees, ancillary service fees and contracted minimum payments (where applicable) and is stated net of volume-related rebates and discounts. Recurring product revenue (a Non-GAAP measure) is the revenue derived from transactions and usage of Serko products by contracted customers. It excludes services revenue. The serko.travel platform for small and medium enterprises is a free booking service and Serko earns commission income on those Total operating revenue is revenue excluding grants and finance income, while total income includes grants bookings direct from suppliers, therefore income from this platform is included in supplier commissions. Serko also earns income from its expense management platform Serko Expense, which allows registered users of corporate customers to process travel and expense claims for accounting and reimbursement. Revenues are derived from a combination of fees for active users, registered users and reports processed. Supplier commission revenue is earned when corporates opt to book Serko-sourced hotel and other traveller-related services. Serko is paid directly from the suppliers of those services. Other income includes income from Serko Mobile licence fees and other miscellaneous revenues. Services revenue is derived from installation service and customised software development undertaken on behalf of the TMC customers. It also includes the fees charged to develop connections to third party systems wanting to integrate with Serko’s platforms. The basis of charging can vary depending on the contractual terms with the customer, which may specify time and materials, capped or fixed pricing. Other income is primarily government grants for research and development projects. Travel platform revenue grew by 23% for the year and was primarily related to a 20% increase in booking numbers. The difference between transaction growth and booking volume growth is owing to minimum volume commitments recognised. Minimum volume commitments contribute to revenue when actual volumes transacted are less than the stated contractual commitments. Revenue from these sources in 2018 was $0.6 million, significantly higher than the contribution in the prior year. The anticipated transactional business related to these minimums is expected to be onboarded onto the Serko platform in the first quarter of 2019. Expense platform revenue grew 37% to $1.5 million. This growth is a result of the successful reseller program introduced in the prior year with our partner TMCs. Supplier commissions revenue grew by 72% to $1.3 million. The number of bookings that Serko earned additional commission revenue over the travel platform booking fee increased by 77%. The average attachment rate of commission bookings versus total bookings for the year was 5.4% up from 3.7% for the prior year. Other revenues grew by 40%. Total services revenue was up 35% over the prior period. This reflects the increase in payments from content suppliers for the integration of their content to our travel platform, as well as growth in the paid work to configure our platforms for customer needs. Total recurring product revenues grew by 27% to $16.4 million compared to $12.9 million in the prior year. Recurring revenue as a percentage of total revenue remains steady at 90%. Serko launched its premium travel booking tool called Zeno during 2018. Some customers have already transitioned to this platform, as commercial negotiations progressively conclude with various TMC partners for the reseller rights. The volumes were not significant and revenues are not material for this year and thus have not been separately disclosed in this report. 20 21 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT Revenue Trend Travel platform Expense platform Supplier commissions & other Services Booking trend Online booking trend over the last 6 years* FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18 * Booking volumes not disclosed for commercial reasons Revenue by Geography Year ended 31 March 2018 2017 $ (000) $ (000) Change $ (000) Australia New Zealand North America India Singapore Other Revenue 16,599 13,195 3,404 1,038 457 57 42 86 672 158 136 18 98 366 299 (79) 24 (12) 18,279 14,277 4,002 % 26% 54% 189% -58% 133% -12% 28% Serko currently earns 91% of revenue from Australia and 6% from New Zealand sources. It is currently undertaking the development required to localise content and integrate its systems with Northern Hemisphere markets and expects these regions to grow during 2019. Peak ATMR Year-on-year movement 20% $15.3m Mar 2017 24% $18.4m Feb 2018 $14.8m Feb 2017 37% $11.2m Mar 2016 2017 2018 ATMR is a Non-GAAP measure representing Annualised Transactional Monthly Revenue. Serko uses this as a useful indicator of recurring revenues from Serko products. It is based on the monthly transactions and average revenue per booking (for its travel platform revenue) and monthly active user charges (for its expense platform revenue) annualised on a constant currency basis. Owing to seasonality, Serko uses the latest month that is not affected by seasonality trends. The period ended March 2018 was affected by Easter falling over the last weekend in March whereas in 2017 Easter fell in April. Thus the peak ATMR month for 2018 was February 2018. Serko’s transaction volumes over any month are driven by the number of corporate working days within that month. To aid comparison between months from year to year, Serko now annualises the figures using the weekday average booking transactions for non-seasonal months and multiplies that by 260 days in a year. 22 23 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT$15m$10m$5m-$20m$15m$10m-$20m 20% INCREASE ONLINE BOOKINGS 24% INCREASE PEAK ATMR ACTIVITY Online bookings increased 20% over the prior year, while transaction volumes also grew strongly, driven entirely by growth in our core Australasian markets. Serko is currently expanding into Northern Hemisphere markets, however, these regions did not make a contribution in 2018. ARPB increased marginally during the year by 1%, however, additional content revenue at $1.3 million is now contributing significantly to Serko’s profit, with a 72% uplift over the prior year. ATMR, an indicative measure of forward revenue from currently transacting customers, rose 24% for the year to $18.4 million, lifted by increases in ARPB, total bookings and the number of users of our Expense platform. Actual recurring product revenue of $16.4 million for 2018 was ahead of the March 2017 ATMR of $15.3 million. Serko’s TMC partners have indicated they expect additional Australasian corporate customers, that are not currently using an online booking tool, to transition to Serko products over the next year. Therefore, we expect transaction growth in Australia and New Zealand to continue. In addition, Serko is expanding into Northern Hemisphere territories and this segment is also expected to grow over the next financial year. While transaction growth is difficult to forecast, Serko is expecting total operating revenue to grow between 15% and 30%. Serko is rolling out Zeno to its Australasian customers. Zeno is a premium product that offers a door-to-door booking experience and Marketplace hub that incorporates additional content for hotels and other traveller services. Consequently, supplier content commissions are also expected to grow. With a healthy pipeline of Serko Expense management customers we expect this product line will continue to grow. Meanwhile, as we expand into Northern Hemisphere markets we are seeing increased interest in customers adopting integrated travel and expense solutions. Serko uses Online bookings, Annualised Transactional Monthly Revenue (ATMR) and Average Revenue per Booking (ARPB) as indicators of strategic achievement. 6% DECREASE OPERATING EXPENSES OPERATING EXPENSES Year ended 31 March 2018 2017 $ (000) $ (000) Remuneration and benefits 11,667 12,285 Selling and marketing expenses Administration expenses Other expenses Total operating expenses Percentage of operating revenue 1,258 3,692 1,067 17,684 97% 1,658 3,880 940 18,763 131% Change $ (000) (618) (400) (188) 127 (1,079) % -5% -24% -5% 13% -6% -34% Remuneration and benefits are the total costs of employees and contractors engaged within the business during the financial year, including gross salary, additional payroll taxes, superannuation and KiwiSaver, bonuses, commissions and the value of any share-based remuneration or awards. Selling and marketing expenses comprise all the direct costs of sales that are not people- or salary-related. Administration expenses are other general overheads and operating costs, including depreciation and amortisation charges. Other expenses comprise direct technology costs, including hosting. Total operating expenses were down 6% or $1.1 million from the prior year to $17.7 million, mainly owing to a decrease in marketing, remuneration and benefit expenses. Remuneration and benefits (R&B) decreased owing to the integration of the Arnold platform in the first half of 2017 resulting in operating efficiencies owing to the reduced need to maintain two platforms. Included in R&B was $1.3 million related to employee share-based payments and short-term incentive performance payments for 2018, compared to $1.0 million in the prior year. As Serko expands in the Northern Hemisphere, R&B costs will increase, as additional resources are hired to support growth into new territories. This will be offset somewhat by capitalisation of internal staff time spent on development of revenue-earning modules for the Serko platforms. Selling and marketing expenses decreased as a result of a shift in focus from a direct sales and marketing effort towards assisting TMC partners to resell Serko products. With the launch of Zeno in Australasia, as well as into Northern Hemisphere markets, Serko expects selling costs to increase to drive revenue growth in 2019 by supporting the successful acquisition and onboarding of new customers to the product. Administration costs were slightly lower than the prior year owing mainly to a decrease in depreciation and amortisation (D&A). For 2018, D&A at $0.6 million was $0.2 million lower than the prior year. Administration costs are expected to increase owing to our growth activities. Hosting costs increased and generally are expected to increase when revenue increases. However, thanks to efficiencies achieved this year, these costs increased 13%, while revenues increased 28%. 24 25 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT RESEARCH AND DEVELOPMENT (R&D) COSTS EMPLOYEES AND AVERAGE REVENUE FTE 16% DECREASE R&D COSTS Year ended 31 March 2018 2017 Change % Total R&D cost (including amounts capitalised) Percentage of operating revenue Less: capitalised product development costs Percentage R&D costs Research costs (excluding amortisation of amounts previously capitalised) $ (000) $ (000) $ (000) 4,906 27% (383) 8% 5,836 41% (780) 13% (930) -16% 397 51% 4,523 5,056 (533) -11% Less: Government grants (956) (1,073) 117 11% Add: Amortisation of capitalised development costs 412 450 (38) -8% Net product development costs Percentage of operating revenue 3,979 22% 4,433 31% (454) -10% Research & Development (R&D) cost is a Non-GAAP measure representing the internal and external costs related to R&D that have been included in operating costs and capitalised as computer software development during the period. Research expenditure includes all reasonable expenditure associated with R&D activities that does not give rise to an intangible asset. R&D expenses include employee and contractor remuneration related to these activities. It also covers research expenditure defined by NZ IAS 38. R&D costs (capitalised and expensed) have declined $0.9 million during the year with integration of the Arnold platform in the first half of 2017. Software development resources, used to support a higher level of services revenue, has been excluded from R&D. R&D costs represent 27% of operating revenue. Capitalised development costs have also declined by 51% to $0.4 million. The majority of R&D was research related. Research costs of $4.5 million mostly related to improving the traveller booking experience in Zeno, including work on predictive booking, natural language transactions and chat bots. These were partially funded through $1 million of government grants received from Callaghan Innovations. Serko expects capitalised development costs to increase with the current developer resources focused on Zeno development for the Northern Hemisphere and new functionality that will further contribute to increases in revenue. 2% DECREASE FTE 18% INCREASE CASH BALANCES Year ended 31 March 2018 2017 Change % Product development and maintenance Sales and marketing Customer support Administration Total employee numbers at end of year Average revenue per FTE (NZD $000) 54 12 27 13 106 170 59 9 27 13 108 122 -5 3 - - -8% 33% - - -2 -2% 48 39% Serko’s staff head count was relatively flat for the year, moving to 106 from 108 full-time equivalent (FTE) staff at the end of 2017, with 58 staff based in New Zealand, 20 in Australia, 26 in China and two based in other countries. Average revenue per FTE increased by $48,000 to $170,000, demonstrating the economies of scale we are achieving from the platform as revenue grows. CASH FLOWS Year ended 31 March 2018 2017 Change % Receipts from customers Grant income receipts Other operating cash flows $(000) $(000) $(000) 17,754 15,113 915 1,075 (17,253) (17,783) 2,641 (114) 484 17% -11% 3% Total cash flows from operating activities 1,416 (1,595) 3,011 188% Investing and financing cash flows (565) (1,038) 473 46% Total net cash flows 851 (2,633) 3,484 132% Net foreign exchange differences Closing cash balances (70) (34) 5,232 4,451 (36) 781 -106% 18% Receipts from customers increased by 17% over 2018 from $15.1 million to $17.8 million. Other operating cash outflows decreased by $0.5 million resulting in positive operating cash flows for the year of $1.4 million. Cash outflows for property, plant and equipment and intangibles were $0.5 million lower than prior year resulting in total net inflows of $0.8 million for the year, including foreign exchange differences. Cash balances increased by 18% as at 31 March 2018, from $4.5 million to $5.2 million. 26 27 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT FINANCIAL STATEMENTS The directors of Serko Limited are pleased to present the financial statements for Serko Limited and its subsidiaries (the group) for the year ended 31 March 2018 to shareholders. The directors are responsible for presenting financial statements in accordance with New Zealand law and generally accepted accounting practice, which fairly present the financial position of the group as at 31 March 2018 and the results of its operations and cash flows for the year ended on that date. The directors consider the financial statements of the group have been prepared using accounting policies that have been consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed. The directors believe that proper accounting records have been kept that enable, with reasonable accuracy, the determination of the financial position of the group and facilitate compliance of the financial statements with the Companies Act 1993, NZX Main Board Listing Rules, Financial Reporting Act 2013 and the Financial Markets Conduct Act 2013. The directors consider they have taken adequate steps to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Internal control procedures are also considered to be sufficient to provide a reasonable assurance as to the integrity and reliability of the financial statements. The financial statements are signed on behalf of the Board on 23 May 2018 by: SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CHIEF EXECUTIVE OFFICER CONTENTS Statement of comprehensive income Statement of changes in equity Statement of financial position Statement of cash flows Notes to the financial statements Independent auditor’s report 30 31 32 33 34-62 63-65 28 29 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 March 2018 STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2018 Notes 2018 2017 Notes Share Capital Share-based Payment Reserve Foreign Currency Reserve Accumulated Losses Total Revenue Other income Total revenue and other income Operating Expenses Remuneration and benefits Selling and marketing expenses Administration expenses Other expenses Total operating expenses Finance income Finance expenses Profit/(loss) before income tax Income tax expense Net profit/(loss) attributable to the shareholders of the company Movement in foreign currency reserve Total comprehensive income for the year Earnings per share Basic profit/(loss) per share Diluted profit/(loss) per share 4 4 5 5 5 6 16 16 $ (000) 18,279 994 19,273 $ (000) 14,277 1,092 15,369 Balance as at 1 April 2017 Net profit/(loss) for the year Other comprehensive income/(loss)* Total comprehensive income for the year (11,667) (12,285) Transactions with owners (1,258) (3,692) (1,067) (1,658) (3,880) (940) Shares allocated to employees Shares forfeited from employees Share options to non-executive directors (17,684) (18,763) Balance as at 31 March 2018 $ (000) $ (000) $ (000) $ (000) $ (000) 25,185 1,021 (33) (19,897) - - - - - - - - - 252 (23) 59 - 1,832 (52) (52) - 1,832 - - - - - - 6,276 1,832 (52) 1,780 252 (23) 59 25,185 1,309 (85) (18,065) 8,344 25,185 888 107 (16,447) 9,733 - - - - - - - - - (3,450) (3,450) (140) (140) - (140) (3,450) (3,590) 372 (239) 1,021 - - - - (33) (19,897) 372 (239) 6,276 15 15 15 15 15 Balance as at 1 April 2016 Net profit/(loss) for the year Other comprehensive income/(loss)* Total comprehensive income for the year Transactions with owners Shares allocated to employees Shares forfeited from employees Balance as at 31 March 2017 25,185 475 (61) 2,003 (171) 1,832 (52) 1,780 $0.03 $0.02 142 (54) (3,306) (144) (3,450) (140) (3,590) $(0.05) $(0.05) The accompanying notes form part of these financial statements. The accompanying notes form part of these financial statements. *Items in other comprehensive income may be reclassified to the income statement and are shown net of tax. 30 31 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT STATEMENT OF FINANCIAL POSITION As at 31 March 2018 STATEMENT OF CASH FLOWS For the year ended 31 March 2018 Current assets Cash at bank and on hand Receivables Derivative financial instruments Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred tax asset Total non-current assets Total assets Current liabilities Trade and other payables Income tax payable Interest-bearing loans and borrowings Derivative financial instruments Total current liabilities Non-current liabilities Trade and other payables Interest-bearing loans and borrowings Derivative financial instruments Total non-current liabilities Total liabilities Equity Share capital Share-based payment reserve Foreign currency reserve Accumulated losses Total equity Total equity and liabilities Notes 2018 $ (000) 2017 $ (000) 11 7 8 9 10 6 12 14 8 12 14 8 15 15 5,232 3,831 288 9,351 893 1,574 155 2,622 4,451 3,167 - 7,618 886 1,603 112 2,601 11,973 10,219 2,793 98 351 - 3,242 183 204 - 387 2,582 160 399 245 3,386 269 254 34 557 3,629 3,943 25,185 1,309 (85) (18,065) 8,344 11,973 25,185 1,021 (33) (19,897) 6,276 10,219 Cash flows from operating activities Receipts from customers Interest received Receipts from grants Taxation (paid)/refund received Payments to suppliers and employees Interest payments Net GST refunded (paid) Net cash flows from/(used in) operating activities 20 Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangibles Net cash flows from/(used in) investing activities Cash flows from financing activities Net repayment of loans Net cash flows from/(used in) financing activities Net increase (decrease) in total cash Net foreign exchange difference Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash and cash equivalents comprises the following: Cash at bank and on hand 11 Notes 2018 $ (000) 17,754 93 915 (262) 2017 $ (000) 15,113 99 1,075 (469) (17,065) (17,349) (22) 3 1,416 (192) (327) (519) (46) (46) 851 (70) 4,451 5,232 5,232 5,232 (16) (48) (1,595) (247) (791) (1,038) - - (2,633) (34) 7,118 4,451 4,451 4,451 For and on behalf of the Board of Directors, who authorise these financial statements for issue on 23 May 2018. SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CHIEF EXECUTIVE OFFICER The accompanying notes form part of these financial statements. The accompanying notes form part of these financial statements. 32 33 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2018 1 CORPORATE INFORMATION The financial statements of Serko Limited (‘the company’) In reaching their conclusion, the directors have considered and subsidiaries (‘the group’) were authorised for issue in the following factors: accordance with a resolution of directors. The company is a limited liability company domiciled and incorporated in New Zealand under the Companies Act 1993 and is listed on the New Zealand Stock Exchange (NZX). Its registered office is at Unit 14d, 125 The Strand, Parnell, Auckland. • Cash reserves at 31 March 2018 of $5.2 million provides a sufficient level of headroom to help support the business for at least the next 12 months. • The 2019 financial year budget has been prepared to achieve profitability and positive net cash flow over the year. The group is involved in the provision of computer • The directors have made due enquiry into the software solutions for corporate travel. The group is appropriateness of the assumptions underlying the headquartered in Auckland, New Zealand. budgetary forecasts. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below and within this notes section. These policies have been consistently applied to all the years presented, unless otherwise stated. a) Basis of preparation The financial statements have been prepared in accordance with generally accepted accounting practice in New Zealand (NZ GAAP) and the requirements of the Financial Market Conduct Act 2013. The financial statements have been prepared on a historical cost basis, modified by the revaluation of certain assets and liabilities • In approving the 2019 financial year budget, the directors have considered detailed contingency plans presented by the management, including the ability to adjust resource levels and reduce operating costs, that can be implemented in the event that adverse variances in performance versus budget exceed certain thresholds. A number of significant judgements have been made in preparing the budget, the most significant relate to the timing and level of uptake of demand for new products and services that are expected to launch or grow significantly during the year. However, in view of the contingencies and risk mitigations that have been identified, the directors consider there is a reasonable expectation that the group can continue to operate as a going concern for the foreseeable future. as identified in specific accounting policies. c) Statement of compliance The financial statements are presented in New Zealand The financial statements have been prepared in dollars and all values are rounded to the nearest thousand accordance with NZ GAAP. They comply with New dollars unless stated otherwise. The financial statements provide comparative information in respect of the previous period. Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards, as appropriate for profit-oriented entities. b) Going concern The directors have carefully considered the ability of the group to continue to operate as a going concern for at least the next 12 months from the date the financial statements are authorised for issue. It is the conclusion of the directors that the group will continue to operate as a going concern and the financial statements have been prepared on that basis. d) New accounting standards and interpretations NZ IFRS standards that have recently been issued or amended but are not yet effective and have not been adopted by the group are: NZ IFRS 15 Revenue from Contracts from Customers is effective for accounting periods beginning on or after 1 January 2018. Serko will adopt the standard when required for the year ended 31 March 2019. The standard requires entities to recognise revenue when control of a good or service transfers to a customer with revenue recognised for the amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods and services. As permitted by the standard, Serko will apply the modified retrospective approach on transition. Consequently, any adjustments required to historic revenues at the date of transition will be recognised against the opening balance of retained earnings at 1 April 2018 and prior year comparatives will not be restated. To date, a sample of contracts have been analysed, focusing initially on revenue from the Serko Online product, which represents the majority of revenue. Serko Online charges mostly involve transaction and usage fees, which are recorded as revenue at the time the initial booking is processed. Under NZ IFRS 15, we expect that this will continue except where the transaction fee is bundled to include ‘changes post booking’ where some revenue may need to be deferred until subsequent changes occur, and where there are minimum transaction commitments where a different revenue recognition profile is being considered. A detailed analysis is ongoing for the remaining bespoke customer contracts and further areas of adjustment may still be identified. NZ IFRS 9 Financial Instruments is effective for accounting periods beginning on or after 1 January 2018. Serko will adopt the standard when required for the year ended 31 March 2019. The standard includes a revised model for classification and measurement of financial instruments, including a new expected credit loss model for the calculation of impairment on financial assets, and changes to general hedge accounting requirements. The group considers that the standard will not have a significant impact on the financial statements, given the non-complex nature of financial instruments held. The main change expected will be in respect of receivables held at amortised cost where the new impairment model requires the recognition of impairment provisions based on expected credit losses rather than incurred credit losses. While calculation of the opening expected credit loss has not yet been determined, the impact is not expected to be significant, given the short payment terms and low level of past due receivables as disclosed in note 7. The group does not apply hedge accounting and does not propose to change this on transition to NZ IFRS 9. NZ IFRS 16 Leases, effective for accounting periods beginning on or after 1 January 2019. Serko does not expect to apply the standard early. When the standard is adopted Serko’s operating leases will be recorded on balance sheet, with the recognition of right-to-use assets and an obligation to make lease payments. The right-to-use assets will be depreciated over the lease term and the liability will be measured at amortised cost. As a result, there will be increased depreciation and interest expense, with a reduction in rental expense. Until the project is completed and decisions are made, such as the transition method to apply and applicable discount rate to calculate the lease obligation, it is not practicable to quantify the effect of the standard. Existing operating lease commitments are set out in note 18. Amendments to NZ IFRS 2 Share-based Payment. The following apply prospectively to annual periods beginning on or after 1 January 2018: • The accounting for the effects of vesting conditions on cash-settled share-based payment transactions; • The classification of share-based payment transactions with net settlement features for withholding tax obligations; and • The accounting for a modification to the terms and conditions of a share-based payment that changes the transaction from cash-settled to equity-settled. Management will assess the impact of the amendment during the 2019 financial year. e) Basis of consolidation The consolidated financial statements comprise the financial statements of Serko Limited and its subsidiaries as at and for the year ended 31 March each year. Control is achieved when the group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the group controls an investee if and only if the group has: • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee; • Exposure, or rights, to variable returns from its involvement with the investee; and • The ability to use its power over the investee to affect its returns. When the group has less than a majority of the voting or similar rights of an investee, the group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • The contractual arrangement with the other vote holders of the investee; • Rights arising from other contractual arrangements; and • The group’s voting rights and potential voting rights. 34 35 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT The group reassesses whether or not it controls an indicate that it might be impaired, and carried at cost less investee if facts and circumstances indicate there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the group obtains control over the subsidiary and ceases when the group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the financial statements from the date the group gains control until the date the group ceases to control the subsidiary. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the group loses control over a subsidiary, it: • Derecognises the assets (including goodwill) and liabilities of the subsidiary; • Derecognises the carrying amount of any non- controlling interests; • Derecognises the cumulative translation differences recorded in equity; • Recognises the fair value of the consideration received; • Recognises the fair value of any investment retained; • Recognises any surplus or deficit in profit or loss; and • Reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate, as would be required if the group had directly disposed of the related assets or liabilities. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. The identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values. Acquisition-related costs are expensed as incurred and recognised in profit or loss. The difference between the above items and the fair value of the consideration is recorded as either goodwill or gain on bargain purchase. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the group’s cash-generating units expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Goodwill is tested annually for impairment, or immediately if events or changes in circumstances accumulated impairment losses. Impairment losses on goodwill are not reversed. Any gain on bargain purchase is recognised immediately on acquisition to profit and loss. Inter-company transactions, balances and unrealised gains and losses on transactions between group companies are eliminated. Non-controlling interests are allocated their share of comprehensive income after tax in the statement of comprehensive income and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent. f) Foreign currency translation i) Functional and presentation currency Items included in these financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). These financial statements are presented in New Zealand dollars, which is the group’s presentation currency and the parent’s functional currency. ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at balance date. Non-monetary items measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. iii) Foreign Currency Translation Reserve For the purposes of presenting these consolidated financial statements, the assets and liabilities of the group’s foreign operations are translated into currency units using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated equity. g) Financial instruments Financial assets are classified as either loans and receivables. When financial assets are recognised initially they are measured at fair value plus directly attributable transaction costs. The group determines the classification of its financial assets on initial recognition and, when allowed and appropriate, re-evaluates this designation at each financial year end. i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the group provides money, goods or services directly to a debtor with no intention of selling the receivable. Such assets are subsequently carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. The group’s loans and receivables comprise trade receivables, loans and GST receivable. ii) Financial liabilities Financial liabilities are classified as ‘other financial liabilities’. Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised using an effective interest method. The effective interest method calculates the amortised cost of a financial liability and allocates the interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, where appropriate, a shorter period to the net carrying amount of the liability. Financial liabilities are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after balance date. iii) Impairment of financial assets The group assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that have occurred since the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. iv) Financial assets carried at amortised cost For financial assets carried at amortised cost, the group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant or collectively for financial assets that are not individually significant. If the group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as finance income in the income statement. Loans, together with the associated allowance, are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the group. If, in a subsequent year, the amount of the estimated impairment 36 37 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT loss increases or decreases, because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write off is later recovered, the recovery is credited to finance costs in the income statement. h) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. A qualifying asset is one that takes 12 months or longer to prepare for its intended use or sale. Other borrowing costs are expensed when incurred. i) Other taxes Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) except where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. All receivables and payables are stated GST inclusive. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. j) Comparative amounts When the presentation or classification of items is changed, comparative amounts are reclassified unless the reclassification is impracticable. 3 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Significant judgements In the process of applying the group’s accounting policies, management has made the following judgements, which have an effect on the amounts recognised in the consolidated financial statements. Share-based payments The fair value applied to shares granted under the restricted share plan is the volume weighted average price (VWAP) of shares traded in the previous 20 trading days preceding the date of grant. Vesting of the shares is reviewed periodically to determine that the assumptions around vesting dates and employee churn rate are still valid (refer note 17). Development costs Development costs of a project are capitalised in accordance with the accounting policy. Initial capitalisation of costs is based on management’s judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. In determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generation of the project and the expected period of benefits (refer note 10). Functional currency The group periodically reviews the functional currency for reporting purposes. The group believes, that there are sufficient justifications for the continued use of NZD as the functional currency. The key factors behind this conclusion are: • Serko is NZX listed and has raised capital in NZD; • Research and development grant funding is in NZD; • NZD is the main currency for labour, operating cost and capital expenditure; and • The group also generates certain revenues in NZD. 4 REVENUE & OTHER INCOME b) Revenue from services Revenue is recognised and measured at the fair value of Revenue from a contract to provide installation services the consideration received or receivable to the extent it is is recognised by reference to the completion of the probable that the economic benefits will flow to the group contract or services delivered at balance date. When the and the revenue can be reliably measured. Revenue is contract outcome cannot be estimated reliably, revenue disclosed net of credit notes, rebates and discounts. is recognised only to the extent of expenses recognised a) Revenue from transaction and usage fees Revenue from transaction and usage fees is recorded at the time travel or expense transactions are processed through Serko’s platforms. Contracts that have minimum that are recoverable. Customised software development services are recognised by reference to stage of completion at balance date. c) Government grants booking volume arrangements are recognised over the When the grant relates to an expense item, it is recognised period of volume commitment. Revenue from licence fees as income over the periods necessary to match the grant on is recognised over the term of the licence agreement. a systematic basis to the costs it is intended to compensate. Revenue – transaction and usage fees: Travel platform booking revenue Expense platform booking revenue Supplier commissions revenue Other revenues Revenue – services Total revenue Government grants Sundry income Total other income Notes 13 2018 $ (000) 13,283 1,539 1,288 334 1,835 18,279 956 38 994 2017 $ (000) 10,808 1,125 751 238 1,356 14,277 1,073 19 1,092 Impairment of intangible or non-financial assets Total revenue and other income 19,273 15,369 Management reviews the carrying value of intangible and non-financial assets on an annual basis, in particular, computer software and development work in progress. Consideration is placed on a number of factors, depending on the specific asset in question, which may include discounted cash flow forecasts, the ability to continue to generate discrete cash flow and returns, any changes or anticipated changes in the business or product circumstances and the nature of the events that originally gave rise to the recognition of any non-financial assets (refer note 10). Revenue recognition Serko has reseller customer agreements that contain annual minimum transaction volume commitments that span financial reporting periods. Based on this, management needs to make a judgement about estimated future transaction volumes to determine related revenue for the specific financial reporting period (refer note 4). Geographic information Australia New Zealand US India Singapore Other Total revenue 2018 $ (000) 16,599 1,038 457 57 42 86 2017 $ (000) 13,195 672 158 136 18 98 18,279 14,277 38 39 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 5 EXPENSES Auditor remuneration Notes 2018 $ (000) 2017 $ (000) The directors of Serko Limited appointed Deloitte Limited as the auditor of the group for the year ended 31 March 2018. Ernst & Young (EY) was the auditor for the year ended 31 March 2017. EY tax services for the year ended 31 March 2018 are excluded from auditor remuneration below. Amounts received or due and receivable by: Audit of financial statements – Deloitte Limited Audit of financial statements – EY Other assurance-related services (a) – EY Total audit fees Tax services (b) – EY Total non-audit fees Notes 2018 $ (000) 2017 $ (000) 79 - - 79 - - - 82 15 97 19 19 (a) Other assurance-related services include services for research and development assurance procedures and half year agreed upon procedures. (b) Tax services relate to compliance services. Operating profit/(loss) before taxation includes the following expenses: Auditor remuneration and advisory fees Amortisation of intangibles Depreciation Rental and operating lease expenses Employee remuneration Contributions to pension plans Share-based payment expenses Marketing expenses Hosting expenses Other operating expenses Expenses from ordinary activities 10 9 15 79 412 185 729 116 633 225 686 10,764 11,462 480 288 410 1,067 3,270 17,684 416 133 936 904 3,252 18,763 Research expenses (excluding capitalised development costs) 4,523 5,056 Research expenditure includes all reasonable expenditure associated with R&D activities that does not give rise to an intangible asset. R&D expenses include employee and contractor remuneration related to these activities. Research expenditure includes expenditure that meets the definition of research expenditure as defined in NZ IAS 38. Finance income and expenses includes: Finance income Interest received Dividends received Foreign exchange gains – net Total finance income Finance expenses Interest expense Other finance expenses Total finance expenses Total finance income and expenses Notes 2018 $ (000) 2017 $ (000) 111 - 364 475 (43) (18) (61) 414 116 1 25 142 (36) (18) (54) 88 40 41 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 6 INCOME TAX The prima facie tax payable on profit before income tax is reconciled to the income tax expense as follows: Current tax assets and liabilities for the current period are Deferred income tax assets are recognised for all deductible temporary differences and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. The carry forward of unused tax losses can be utilised except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred income tax assets is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) relevant to the appropriate tax jurisdiction, that have been enacted or substantively enacted at the balance date. measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted in the jurisdictions on which the group operates at the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of comprehensive income. Management periodically evaluates positions taken in the tax returns, with respect to situations in which applicable tax regulations are subject to interpretation, and establishes provisions where appropriate. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: • Except for a deferred income tax liability arising from the initial recognition of goodwill; and • Except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Notes 2018 $ (000) 2017 $ (000) Current income tax Current income tax charge/(credit) Adjustments in respect of previous years Deferred income tax Origination and reversal of temporary differences Income tax expense reported in the statement of comprehensive income 225 (12) 213 (42) 171 308 6 314 (170) 144 Accounting profit (loss) before income tax At the statutory income tax rate of 28% (2017:28%) Non-deductible items Adjustments in respect of current income tax of previous years Chinese branch tax Foreign tax credits not utilised Share-based payments Tax losses recognised Future income tax benefit, not recognised Effect of tax on overseas subsidiaries at different rate Income tax expense At effective income tax rate of: Deferred income tax at 31 March relates to the following: Notes 2018 $ (000) 2,003 561 7 (12) 98 - 81 (570) - 6 171 8.5% 2017 $ (000) (3,306) (926) 7 6 61 16 37 - 934 9 144 -4.4% Deferred income tax liabilities recognised Intangibles Unrealised foreign exchange Deferred income tax asset recognised Intangibles Employee entitlements Net deferred tax asset/(liability) recognised Deferred income tax asset not recognised Employee entitlements Bonus provision Accruals Allowance for impairment Leasehold liabilities Tax losses available to be carried forward and offset against future income Total deferred tax asset not recognised 2018 2017 Statement of financial position Statement of comprehensive income Statement of financial position Statement of comprehensive income $ (000) $ (000) $ (000) $ (000) - (10) 85 80 155 112 195 - - (11) 296 3,785 4,081 - 41 (2) 3 42 5 103 - (2) 9 115 - (51) 87 76 112 107 92 - 2 (20) 181 4,484 4,665 71 15 87 (3) 170 3 92 (28) - (33) 34 42 43 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 7 RECEIVABLES Receivables are recognised initially at fair value and that the group will not be able to collect all amounts due subsequently measured at amortised cost using the according to the original terms of the receivable, changes effective interest method, less provision for impairment. in credit quality and past default experience. Collectibility of receivables is reviewed on an ongoing The impairment, and any subsequent movement, basis. Debts that are known to be uncollectible are including recovery, is recognised in the statement of written off when identified. A provision for impairment of comprehensive income. receivables is established when there is objective evidence Notes 19 Trade receivables Allowance for impairment Trade receivables (net) Loan receivable Allowance for impairment Other receivables (net) GST receivable Prepayments Total receivables The carrying amounts of the group’s receivables are denominated in the following currencies: New Zealand dollars Australian dollars US dollars Indian rupees 2018 $ (000) 3,046 - 3,046 326 (25) 301 30 454 2017 $ (000) 2,544 (7) 2,537 353 - 353 22 255 3,831 3,167 1,918 1,846 52 15 3,831 1,493 1,634 29 11 3,167 At 31 March, the ageing analysis of receivables is as follows: Total 0-30 days 31-60 days 61-90 days 91+ days $ (000) $ (000) $ (000) $ (000) $ (000) 2018 Trade receivables Other receivables 2017 Trade receivables Other receivables Allowance for impairment loss 3,046 326 2,544 353 2,922 - 2,432 - 16 - 8 - 46 - 11 - 62 326 93 353 i) Trade receivables ii) Other receivables Group trade receivables over 60 days of $108,099 (2017: Other receivables consist of an interest-bearing loan $103,287). This balance of $108,099 is not considered to nuTravel Technology Solutions LLC (nuTravel) of impaired as amounts outstanding are in accordance US$200,000, which was assigned by Financial Equities with agreed payment plans and payment record of the Limited (FEL) to Serko Limited in return for an interest- customers concerned. Trade receivables are non-interest bearing and are generally on 30 - 60-day terms. A provision for impairment loss is recognised where there is objective evidence that an individual trade receivable is impaired. No impairment loss has been recognised (2017: $nil) by the group in the current year. No individual amount within the impairment allowance is material. bearing loan repayable on receipt of the loan receivable. A revised repayment arrangement with nuTravel was entered into and this receivable was reassigned back to FEL subsequent to year end (refer note 23). There is no financial risk to Serko as the loan receivable is back to back with the associated loan payable to FEL (refer note 14). FEL is a company associated with directors Bob Shaw and Darrin Grafton (refer note 19). 44 45 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 8 FINANCIAL INSTRUMENTS Derivative financial instruments The group uses derivatives in the form of forward exchange contracts (FECs) to reduce the risk that movements in the exchange rate will affect the group’s New Zealand dollar cash flows. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The following table presents the group’s foreign currency forward exchange contracts measured at fair value: Notes 2018 $ (000) 2017 $ (000) Current: Foreign currency forward exchange contracts 288 (245) Non-current: Foreign currency forward exchange contracts - (34) Contractual amounts of forward exchange contracts outstanding were as follows: Foreign currency forward exchange contracts 10,763 13,027 Derivative financial instruments have been determined to be within level 2 of the fair value hierarchy. Foreign currency forward exchange contracts have been fair valued using published market foreign exchange rates and contract forward rates discounted at a rate that reflects the credit risk of the counterparties. 9 PROPERTY, PLANT AND EQUIPMENT The following estimates have been used: All items of property, plant and equipment are recorded at cost less accumulated depreciation and impairment. Initial cost includes purchase consideration and those costs attributable to bringing the asset to the location and condition necessary for its intended use. Where an item is • Leasehold improvements 7% • Furniture and fittings 6 - 36% • Computer equipment 17.5 - 48% self-constructed, its construction cost includes the cost of a) Impairment materials, direct labour and an appropriate proportion of production overheads. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in Subsequent expenditure relating to an item of property, circumstances indicate the carrying value may not plant and equipment is added to its gross carrying amount when such expenditure either increases the future economic benefits beyond its existing service potential or is necessarily incurred to enable future economic benefits to be obtained and if that expenditure would have been included in the initial cost of the item be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amounts. had it been incurred at that time. The carrying amount of b) Disposal any replaced part is derecognised. All other repairs and maintenance expenditure is recognised in profit or loss as incurred. An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the Depreciation is calculated on a straight-line basis over difference between the net disposal proceeds and the the estimated useful life of the asset. The residual value carrying amount of the asset) is included in profit or loss in of assets is reviewed and adjusted, if appropriate, at each the year the asset is derecognised. balance date. 46 47 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 9 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) 10 INTANGIBLES Research and development 2018 Cost or valuation Balance at 1 April 2017 Additions Currency translation Balance at 31 March 2018 Depreciation Balance at 1 April 2017 Depreciation expense Balance at 31 March 2018 Net carrying amount 2017 Cost or valuation Balance at 1 April 2016 Additions Disposals Currency translation Balance at 31 March 2017 Depreciation Balance at 1 April 2016 Depreciation expense Disposals Balance at 31 March 2017 Net carrying amount Leasehold improvement Furniture & fittings Computer equipment Total $ (000) $ (000) $ (000) $ (000) 354 13 - 367 139 36 175 192 343 27 (16) - 354 106 39 (6) 139 215 398 176 - 574 378 43 421 153 388 10 - - 1,519 193 (1) 1,711 633 185 818 893 1,027 538 (45) (1) 398 1,519 260 118 - 378 20 414 225 (6) 633 886 767 4 (1) 770 116 106 222 548 296 501 (29) (1) 767 48 68 - 116 651 48 Intangible assets acquired separately or in a business Research costs are expensed as incurred. An intangible combination are initially measured at cost. The cost of asset arising from development expenditure on an an intangible asset acquired in a business combination internal project is recognised only when the group can is its fair value as at the date of acquisition. Following demonstrate the technical feasibility of completing the initial recognition, intangible assets are carried at cost intangible asset so that it will be available for use or less any accumulated amortisation and any accumulated sale, its intention to complete and its ability to use or impairment losses. Costs related to internally generated sell the asset. Also how the asset will generate future intangible assets, excluding capitalised development costs, economic benefits, the availability of resources to are not capitalised and expenditure is recognised in profit complete the development and the ability to reliably or loss in the year in which the expenditure is incurred. measure the expenditure attributable to the intangible The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a asset during its development. Following initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and impairment losses. Any expenditure capitalised is amortised over the period of expected benefit from the related project. finite useful life is reviewed at least at each financial year Intangible assets under development at balance date are end. Changes in the expected useful life or the expected recorded as capital work in progress and are not subject pattern of consumption of future economic benefits to amortisation. embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised. An intangible asset with an indefinite useful life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised. A summary of the policies applied to the group’s intangible assets is as follows: • Computer Software (finite, amortised on a straight-line basis 40 - 60%). • Capitalised software development costs (finite, amortised on 5 years straight-line basis). 49 Impairment of non-financial assets Intangible assets that have an indefinite useful life or are not yet completed are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In undertaking an impairment review of non-financial assets that have definite useful lives the following assumptions were used in the impairment model; • 5-year forecast period; • Discount rate of 15%; and • Discount factor applied using a mid-year convention. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell, and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets, other than goodwill that suffered impairment, are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 10 INTANGIBLES (CONTINUED) 11 CASH AT BANK AND ON HAND Goodwill Key employee retention Customer contracts Development work in progress Computer software Total $ (000) $ (000) $ (000) $ (000) $ (000) $ (000) 2018 Cost Balance at 1 April 2017 Additions Transfer of cost Balance at 31 March 2018 Amortisation and impairment Balance at 1 April 2017 Amortisation Balance at 31 March 2018 Net carrying amount 2017 Cost Balance at 1 April 2016 Additions Transfer of cost Currency translation Balance at 31 March 2017 Amortisation and impairment Balance at 1 April 2016 Amortisation Balance at 31 March 2017 Net carrying amount 220 - - 220 220 - 220 - 220 - - - 220 220 - 220 - 78 - - 78 78 - 78 - 78 - - - 78 58 20 78 - 443 - - 443 443 - 443 - 443 - - - 443 280 163 443 - 205 328 (484) 49 - - - 49 407 780 (982) - 205 - - - 2,376 55 484 3,322 383 - 2,915 3,705 978 412 1,390 1,525 1,377 - 982 17 1,719 412 2,131 1,574 2,525 780 - 17 2,376 3,322 528 450 978 1086 633 1,719 1,603 205 1,398 Cash and short-term deposits in the statement of financial position comprise cash at bank, and on hand, short-term highly liquid investments with an original maturity of three months or less. Cash at bank – New Zealand dollar balances Cash at bank – foreign currency balances 2018 $ (000) 4,529 703 5,232 The carrying amounts of the group’s cash at bank and on hand are denominated in the following currencies: New Zealand dollars Australian dollars US dollars Indian rupees 12 TRADE AND OTHER PAYABLES 4,529 532 171 - 5,232 2017 $ (000) 3,045 1,407 4,451 3,045 1,340 58 8 4,451 Employee benefits Trade and other payables Liabilities for wages and salaries, including non-monetary Trade payables and other payables are carried at benefits, long service leave and annual leave expected amortised cost and represent liabilities for goods and to be settled within 12 months of the reporting date services provided to the group prior to the end of the are recognised in respect of employees’ services up to financial year that are unpaid and arise when the group the reporting date. They are measured at the amounts becomes obliged to make future payments in respect of expected to be paid when the liabilities are settled. the purchase of these goods and services. Liabilities for wages and salaries that are not expected to be settled within 12 months are measured at the present value of the estimated future cash outflows to be made by the group in respect of services provided by employees up to the reporting date. Post-employment benefits Contributions made on behalf of eligible employees to defined contribution funds are recognised in the period they are incurred. The defined contribution funds receive fixed contributions from the group whose legal or constructive obligation is limited to these contributions only. 50 51 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 12 TRADE AND OTHER PAYABLES (CONTINUED) 15 EQUITY Trade payables Accrued expenses Lease incentive Annual leave accrual GST payable Total trade and other payables Disclosed as: Current Non-current 2018 $ (000) 428 1,640 223 665 20 2,976 2,793 183 2,976 2017 $ (000) 532 1,442 227 634 16 2,851 2,582 269 2,851 The average credit period on trade payables is approximately 30 days. 13 GOVERNMENT GRANTS Government grants are received for direct reimbursement of expenses to assist with research and development of software solutions to improve service delivery and develop new enhancements to existing platforms. There are no unfulfilled conditions or contingencies attached to these grants. 14 INTEREST-BEARING LOANS AND BORROWINGS Current Loan payable Leasehold fitout loan Non-current Leasehold fitout loan Notes 19 2018 $ (000) 2017 $ (000) 301 50 351 204 204 353 46 399 254 254 An interest-bearing loan to nuTravel Technology Solutions LLC of US$200,000 was assigned by Financial Equities Limited (FEL) to Serko Limited in return for an interest-bearing loan repayable on receipt of the loan receivable (refer to note 7). FEL is a company associated with directors Bob Shaw and Darrin Grafton (refer note 19). Subsequent to year end, the receivable was reassigned back to FEL (refer to note 23). Ordinary share capital is recognised at the fair value of the consideration received. Transaction costs relating to the listing of new ordinary shares and the simultaneous sale and listing of existing shares are allocated to those transactions on a proportional basis. Transaction costs relating to the sale and listing of existing shares are not considered costs of an equity instrument as no equity instrument is issued and, consequently, costs are recognised as an expense in the statement of comprehensive income when incurred. Transaction costs relating to the issue of new share capital are recognised directly in equity as a reduction of the share proceeds received. 2018 2017 2018 2017 Number of shares Number of shares $ (000) $ (000) (000) (000) Ordinary shares Share capital at beginning of year 25,185 25,185 74,894 Issue of new shares to employees via Restricted Share Plan - - - Share capital at 31 March 25,185 25,185 74,894 72,894 2,000 74,894 Share-based payment reserve Balance at beginning of year Shares allocated to employees via Restricted Share Plan Shares forfeited from employees via Restricted Share Plan Share options to non-executive directors (refer note 17) Share-based payment reserve at 31 March 2018 $ (000) 2017 $ (000) 1,021 252 (23) 59 1,309 888 372 (239) - 1,021 In the current year the group issued no shares (2017: 2,000,000) under the Restricted Share Plan (RSP). In respect of the RSP 230,050 restricted shares (2017: 710,313) had been allocated to key management personnel and 116,107 (2017: 228,519) allocated to other Serko employees. Unallocated shares are 1,592,299 (2017: 1,819,732) (refer to note 17). 52 53 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 16 EARNINGS PER SHARE (EPS) 17 SHARE-BASED PAYMENTS Basic EPS amounts are calculated by dividing the loss for the year, attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the year. Diluted EPS amounts are calculated by dividing the loss attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of shares that would be issued on conversion of all of the dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic and diluted EPS computations: Loss attributable to ordinary equity holders of the parent Continuing operations Basic earnings per share Issued ordinary shares (refer note 15) Adjusted for employee restricted share plan shares Weighted average of issued ordinary shares Basic earnings per share (dollars) Diluted earnings per share Weighted average of issued ordinary shares Weighted average of issued ordinary shares for diluted earnings per share Diluted earnings per share (dollars) 2018 $ (000) 1,832 1,832 2017 $ (000) (3,450) (3,450) 2018 Number 2017 Number 74,894 (2,991) 71,903 0.03 74,894 74,894 0.02 74,894 - 73,074 (0.05) 73,074 73,074 (0.05) Employees of the group receive remuneration at the Board’s discretion in the form of share-based payment transactions, where services are provided as consideration for the receipt of equity instruments. The cost of share-based payment transactions are recognised, together with a corresponding increase in equity, over the period in which the service conditions are fulfilled. The cumulative expense recognised for share- based transactions at each reporting date, until the vesting date, reflects the extent to which the vesting period has expired and the group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit for a period represents the movement in cumulative expenses recognised at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest except where vesting is conditional upon a market condition. Employee Restricted Share Plan Limited are issued to a trustee, Serko Trustee Limited, a wholly-owned subsidiary, and allocated to participants, on grant date, using funds lent to them by the company. The price for each share issued during the year under the RSP is the higher of the market price of the share on the date on which the shares are allocated or the invitation price. Under the RSP, shares are beneficially owned by the participants. The length of retention period before the shares vest is between one and three years. If the individual is still employed by the group at the end of this specific period, the employee is awarded a cash bonus that must be used to repay the loan and shares are then transferred to the employee. The number of shares awarded is determined by the Board. The weighted average grant date fair value of restricted shares issued during the year was $0.49 (2017: $0.46) and was determined by the volume weighted average price (VWAP) of shares traded in the previous 20 trading days preceding the date of grant. The group has no legal or constructive obligation to repurchase the shares or settle The Serko Limited Employee Restricted Share Plan (RSP) the RSP for cash. was introduced for selected executives and employees of the group. Under the RSP, ordinary shares in Serko Unvested shares at beginning of year Granted Forfeited Vested There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and Unvested shares at 31 March – allocated to employees the date of authorisation of these financial statements. Net tangible assets per security 2018 Cents 9.04 2017 Cents 6.24 Plus Unallocated shares – held by trustee Total shares in Restricted Share Plan Percentage of total ordinary shares Ageing of unvested shares Vest within one year Vest within two to five years Unallocated shares Total 54 55 2018 2017 Number of shares Number of shares 1,359,226 356,066 (128,633) (187,952) 1,398,707 1,275,502 938,832 (264,135) (590,973) 1,359,226 1,592,299 2,991,006 1,819,732 3,178,958 4.0% 4.2% 183,810 1,214,897 1,592,299 2,991,006 184,084 1,175,142 1,819,732 3,178,958 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 17 SHARE-BASED PAYMENTS (CONTINUED) Share options The group’s non-executive directors were granted share options, settled by way of a non-recourse loan. The non-recourse loan is due for repayment 30 June 2020, following an extension to the previous loan due 30 June 2017. The following table lists the inputs to the model used for the share options for the year ended 31 March 2018: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life of share options (years) Weighted average share price ($) Model used 2018 0.00 60.00 3.00 3 1.10 Black Scholes 2017 n/a n/a n/a n/a n/a n/a The expected life of the share options is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome. 18 LEASE COMMITMENTS The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership, and operating leases under which the lessor effectively retains substantially all such risks and benefits. Operating lease commitments No later than one year Later than one year and not later than five years Later than five years a) Operating leases Operating lease payments are recognised as an expense in profit or loss on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability (refer note 12). 2018 $ (000) 2017 $ (000) 562 1,365 - 1,927 514 1,755 193 2,462 19 RELATED PARTIES a) Subsidiaries The consolidated financial statements include the financial statements of Serko Limited and subsidiaries as listed in the following table: Name Balance date 2018 2017 2018 2017 % Equity interest Investment $(000) Serko Australia Pty Limited Serko Trustee Limited Serko India Private Limited Serko Investments Limited Foshan Sige Information Technology Limited Serko Inc 31 March 31 March 31 March 31 March 31 March 31 March 100% 100% 99% 100% 100% 100% 100% 100% 99% 100% - - 1 - 2 - - - 3 1 - 2 - - - 3 Serko Australia Pty Limited’s principal business is the marketing and support of travel booking software solutions supplied by Serko Limited. Serko Trustee Limited was incorporated on 4 June 2014 to hold the shares issued to key management and staff in the Restricted Share Plan and Salary Sacrifice Scheme in trust until vesting. Serko India Private Limited was incorporated on 18 February 2015 as a subsidiary for the India-based operations. Serko Investments Limited was incorporated on 5 November 2014 as a holding company. It holds 1% of the shares in Serko India Private Limited. Foshan Sige Information Technology Limited was incorporated on 7 August 2017 as a subsidiary for the China-based operations. Serko Inc was incorporated on 30 October 2017 as a subsidiary for the US-based operations. 56 57 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 20 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Net profit/(loss) after tax Add non-cash items Amortisation Depreciation Loss on property, plant and equipment disposal Increase/(decrease) in deferred tax Loss/(gain) on foreign exchange transactions Share-based compensation Add/(less) movements in working capital items (Increase)/decrease in receivables excluding loans Increase/(decrease) in trade and other payables Increase/(decrease) in income tax Net cash flow from operating activities 2018 $ (000) 1,832 412 185 - (42) (556) 288 2,119 (764) 123 (62) (703) 1,416 2017 $ (000) (3,450) 633 225 36 (170) 175 133 (2,418) 820 158 (155) 823 (1,595) 19 RELATED PARTIES (CONTINUED) b) Transactions with related parties The following table provides the total amount of transactions that have been entered into with related parties, excluding key management and executive director remuneration. Notes Purchases from related parties Interest to related parties Amounts owed to related parties Amounts owed by related parties $ (000) $ (000) $ (000) $ (000) Other related parties Financial Equities Limited 14 Simon Botherway – Chairman Claudia Batten – Non-executive Director Clyde McConaghy – Non-executive Director Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 - - 80 70 74 60 74 60 228 190 21 20 - - - - - - 21 20 301 353 - - - - - - 301 353 - - - - - - - - - - Non-executive directors provide services to Serko in their capacity as non-executive directors and have service agreements with specified amounts of fees payable per annum. The non-executive directors also hold share options with related non- recourse loan (refer note 17). Financial Equities Limited (FEL) is a company associated with directors Bob Shaw and Darrin Grafton. Subsequent to year end, the receivable from nuTravel (refer note 7) was assigned back to FEL and the loan payable (note 14) fully extinguished (refer note 23). c) Key management remuneration Short-term benefits employees (*) Share-based payments Post-employment benefits Total compensation 2018 $ (000) 3,294 162 72 3,528 2017 $ (000) 2,974 92 94 3,160 d) Terms and conditions of transactions with related parties. Outstanding balances at year end are unsecured and settlement occurs in cash. For the year ended 31 March 2018, the group has not made any allowance for impairment loss relating to amounts owed by related parties (2017: $nil). An impairment assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates to determine whether there is objective evidence that a related party receivable is impaired. When such objective evidence exists, the group recognises an allowance for the impairment loss. (*) Key management personnel includes the executive directors in their capacity as Chief Executive Officer and Chief Strategy Officer, the executive management team and their direct reports. 58 59 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 21 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES b) Currency risk The group’s principal financial instruments comprise cash at bank, bank overdrafts, receivables, payables and loans. The group has exposure to foreign exchange risk as a result of transactions denominated in foreign companies. The risk The group manages its exposure to key financial risks, including currency risk, in accordance with the group’s financial risk management policy. The objective of the policy is to support the delivery of the group’s financial targets whilst protecting future financial security. Group capital consists of share capital and retained earnings. To maintain or adjust the capital structure, the group may adjust specifically relates to the variability of foreign exchange rates for the currencies the group trades in and the impact this has on the group’s financial results. The majority of the group’s trading activities occur in New Zealand dollars, however, sales to overseas customers are transacted in United States and Australian dollars. Refer to notes 7 and 11 for further details on the group’s foreign currency denominated accounts receivable and cash balances. amounts of dividends paid to shareholders, return capital to shareholders, issue new shares or amend capital spending plans The following table summarises the sensitivity to foreign currency exchange rate movements. A sensitivity of +/- 15% (2016: +/- 15%) has been selected owing to exchange rate volatility observed. The main risks arising from the group’s financial instruments are foreign currency, interest, credit and liquidity risk. The group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to foreign exchange risk, and assessments of market forecasts for foreign exchange. Ageing analyses and monitoring of specific credit allowances are undertaken to manage credit risk. Liquidity risk is monitored through the development of future rolling cash flow forecasts. The Board reviews and agrees policies for managing each of these risks as summarised below. a) Risk exposures and responses i) Interest rate risk The group has exposure to interest rate risk to the extent it borrows funds at fixed and floating interest rates. The risk specifically relates to the variability of interest rates and the impact this will have on the group’s financial results. The group manages its cost of borrowing by placing limits on the proportion of borrowings at floating rate and the proportion of fixed rate borrowing repriced in any year. At balance date this year and prior year, the group did not have any financial liabilities exposed to variable interest rate risk. ii) Liquidity and interest rate risk Liquidity risk represents the group’s ability to meet its financial obligations on time. In terms of managing its liquidity risk, the group generates sufficient cash flows from its operating activities and holds sufficient cash reserves to meet its obligations arising from its financial liabilities and has credit lines in place to cover potential shortfalls. The following table sets out the contractual cash flows for all non-derivative financial liabilities settled on a gross cash flow basis. Weighted average effective interest rate % Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years $ (000) $ (000) $ (000) $ (000) $ (000) $ (000) 2018 Accounts payable Related party loans Leasehold fitout 2017 Accounts payable Related party loans Leasehold fitout 0% 6% 8% 0% 6% 8% 2,754 2,754 301 302 301 34 3,357 3,089 2,624 2,624 353 300 353 23 3,277 3,000 - - 34 34 - - 23 23 - - 68 68 - - 20 20 - - 166 166 - - 234 234 - - - - - - - - Foreign currency risk -15% +15% Carrying amount Post-tax profit Equity Post-tax profit $ (000) $ (000) $ (000) $ (000) Equity $ (000) 703 1,913 (110) 2,506 1,398 1,310 (176) 2,532 89 243 (14) 318 179 223 (16) 386 89 243 (14) 318 179 223 (16) 386 (66) (180) 10 (236) (132) (165) 12 (285) (66) (180) 10 (236) (132) (165) 12 (285) 2018 Foreign exchange balances Cash at bank Trade receivables Trade payables Net exposure 2017 Foreign exchange balances Cash at bank Trade receivables Trade payables Net exposure c) Credit risk Credit risk arises from the financial assets of the group, which comprise cash and cash equivalents, and receivables. The group’s exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Exposure at balance date is addressed in each applicable note. The group does not hold any credit derivatives to offset its credit exposure. Receivable balances are monitored on an ongoing basis with the result that the group’s exposure to bad debts is not significant. At reporting date 100% (2017: 100%) of the group’s cash and cash equivalents were with one bank. The group has no other concentrations of credit risk. 60 61 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT 21 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) d) Fair value The directors consider that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair value. e) Derivative offsetting INDEPENDENT AUDITOR’S REPORT The group does not have financial assets or liabilities subject to an enforceable master netting agreement, hence has not offset or net financial assets or financial liabilities. To the Shareholders of Serko Limited 22 SEGMENT INFORMATION OPINION AUDIT MATERIALITY We have audited the consolidated financial statements of We consider materiality primarily in terms of the magnitude Serko Limited (‘the company’) and its subsidiaries (the ‘Group’), of misstatement in the financial statements of the Group that The Board and senior management team monitors the results of the group’s operations as a whole for making decisions which comprise the statement of financial position as at 31 in our judgement would make it probable that the economic about resource allocation and performance assessment and therefore the Board has determined the group is a single March 2018, and the statement of comprehensive income, decisions of a reasonably knowledgeable person would be reportable segment. Serko derives operating revenue from Serko Online, Serko Zeno, Serko Mobile and Serko Expense technology platforms. Serko product and geographical revenue presented in note 4. As required under IFRS 8, Serko is required to report on major customers making up more than 10% of the revenue for the year. Under this disclosure Serko advises that two customers had revenue more than 10% of the revenue for the group. These customers accounted for $9,219,226 of the revenue for the year ended 31 March 2018 (2017: $7,709,305). 23 EVENTS AFTER BALANCE SHEET DATE On 8 May 2018 the receivable from nuTravel (refer note 7) was reassigned to Financial Equities Limited (FEL) (a related party refer note 19) and the loan payable to FEL (refer note 14) was fully extinguished (2017: nil events). In addition to its current listing on the NZX, Serko intends to list on the Australian Securities Exchange (ASX) on 25 June 2018, subject to ASX approval. 24 CONTINGENT LIABILITIES There were no contingent liabilities at balance date (2017: $nil). statement of changes in equity and statement of cash flows changed or influenced (the ‘quantitative’ materiality). In for the year then ended, and notes to the financial statements, addition, we also assess whether other matters that come to including a summary of significant accounting policies. our attention during the audit would in our judgement change In our opinion, the accompanying consolidated financial statements, on pages 30 to 62, present fairly, in all material respects, the consolidated financial position of the Group as or influence the decisions of such a person (the ‘qualitative’ materiality). We use materiality both in planning the scope of our audit work and in evaluating the results of our work. at 31 March 2018, and its consolidated financial performance We determined materiality for the Group financial statements and cash flows for the year then ended in accordance with as a whole to be $195,000. New Zealand Equivalents to International Financial Reporting Standards (‘NZ IFRS’) and International Financial Reporting Standards (‘IFRS’). BASIS FOR OPINION KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These We conducted our audit in accordance with International matters were addressed in the context of our audit of the Standards on Auditing (‘ISAs’) and International Standards consolidated financial statements as a whole, and in forming on Auditing (New Zealand) (‘ISAs (NZ)’). Our responsibilities our opinion thereon, and we do not provide a separate opinion under those standards are further described in the Auditor’s on these matters. Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Other than in our capacity as auditor, we have no relationship with or interests in the Company or any of its subsidiaries, except that partners and employees of our firm deal with the Company and its subsidiaries on normal terms within the ordinary course of trading activities of the business of the Company and its subsidiaries. 62 63 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT Key audit matter How our audit addressed the key audit matter Revenue recognition The Group has reported revenue of $18.3 million, as set out in note 4 ‘Revenue and other income’. Revenue is based on multiple customer contracts that contain different pricing schedules and varying revenue recognition triggers. Complexity exists because of the specific nature of each customer contract, which can include transactional and usage fees, establishment and installation fees, and chargeable work orders. Management judgment is required to estimate revenue recognition where cash flows do not align to contract performance obligations, in particular when minimum transaction volume commitments have period end dates that do not align to the financial year end. We have included revenue recognition as a key audit matter due to the significance of revenue to the financial statements and the specific nature of individual customer contracts. We performed walkthroughs of the major revenue processes and evaluated the design and implementation of key controls. We tested a sample of transactions by agreeing invoices to signed customer contracts in order to validate pricing inputs and assess whether revenue has been recorded in the correct period. We used data analytic tools to: • identify revenue transactions that appear unusual and agree that prices have been correctly allocated to customer invoices • agree travel booking transactions recorded in IT systems to the financial ledger • test samples of manual journal entries recorded outside of normal business processes by profiling for revenue impacting journals. We assessed key judgements adopted by the Group in recognising revenue including the timing and disclosure of revenue net of credit notes, rebates and discounts. We have challenged management’s revenue recognition based on the likelihood of customers not achieving contractual minimum volume commitments spanning the financial year end. Accounting for development expenditure The Group capitalised $328,000 in relation to software For each product, we have understood the nature of development, as set out in note 10 ‘Intangibles’. expenditure, the stage of product development, and As a Software as a Service (“SaaS”) provider, the Group incurs significant expenditure in developing new software products to meet the strategic objectives of the business. Judgement is required to determine if the recognition criteria within NZ IAS 38 Intangible Assets have been met, which include technical feasibility, the likelihood of generating future economic how the Group distinguishes expenditure between research, development and maintenance costs. We performed audit procedures over development costs capitalised as computer software, by testing a sample of additions and evaluating if the recognition criteria under NZ IAS 38 have been met. benefits and sufficient funding for completion. We assessed key judgements adopted to determine NZ IAS 36 also requires the Group to assess whether any indicators of impairment exist as at balance date. We have included accounting for development expenditure as a key audit matter due to the level of judgement required for management to determine whether: • internal staff time or external developer costs incurred meet the criteria to be capitalised; and • information exists as at year end that would indicate the need to impair an intangible asset. whether indicators for impairment exist. In particular we considered existing software for technical obsolescence, by ensuring appropriate revenues exist for those products and corroborating with management whether features or product enhancements previously capitalised are still in use. OTHER INFORMATION The directors are responsible on behalf of the Group for the other information. The other information comprises A further description of our responsibilities for the audit of the consolidated financial statements is located on the External the information in the Annual Report that accompanies the Reporting Board’s website at: consolidated financial statements and the audit report. https://www.xrb.govt.nz/standards-for-assurance- Our opinion on the consolidated financial statements does not practitioners/auditors-responsibilities/audit-report-1 cover the other information and we do not express any form of assurance conclusion thereon. This description forms part of our auditor’s report. RESTRICTION ON USE This report is made solely to the Company’s shareholders, as a body. Our audit has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. Bryce Henderson, Partner for Deloitte Limited Auckland, New Zealand 23 May 2018 Our responsibility is to read the other information and consider whether it is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If so, we are required to report that fact. We have nothing to report in this regard. DIRECTORS’ RESPONSIBILITIES FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors are responsible on behalf of the Group for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible on behalf of the Group for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and ISAs (NZ) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. 64 65 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT CORPORATE GOVERNANCE & DISCLOSURES For the year ended 31 March 2018 INTRODUCTION OVERVIEW OF SERKO’S GOVERNANCE STRUCTURE The Board and management of Serko Limited (Serko or The Serko Board has been appointed by shareholders to the company) are very committed to ensuring that Serko protect and enhance the long-term value of Serko and to act maintains corporate governance practices that are in line in the best interests of Serko and its shareholders. The Board with or, where possible, exceed best practice and that Serko is the ultimate decision-making body of the company and is adheres to the highest ethical standards. responsible for the corporate governance of the company. The The Board has had regard to the NZX Listing Rules and a number of corporate governance recommendations when establishing its governance framework, including the revised role and responsibilities of the Board are set out in the Board Charter, which can be found on the investor centre of the company’s website. NZX Corporate Governance Code 2017 (NZX Code) and The Board currently comprises an independent non- the Third Edition of the Australian Securities Exchange executive Chair, two independent non-executive directors (ASX) Corporate Governance Council Principles and and two executive directors, as detailed on page 14 of this Recommendations. Annual Report. The NZX Listing Rules require Serko to formally report The Board has established two standing Board Committees to its compliance against the recommendations contained assist in the execution of the Board’s responsibilities: in the NZX Code. How Serko has implemented these recommendations is set out in Serko’s Corporate Governance Statement, which is included in its ESG Report and can be found on the investor centre of the company’s website. Go to: www.serko.com/investor-centre/. The Board considers that Serko’s corporate governance structures, practices and processes have followed all of the recommendations in the • Audit and Risk Committee – The current members of the Committee are Clyde McConaghy (Chair), Simon Botherway and Claudia Batten. All members are independent, non-executive directors. Their qualifications and experience is set out under Board of Directors in this Annual Report. NZX Code during the financial year ended 31 March 2018. • Remuneration and Nominations Committee – The Serko’s Corporate Governance Statement and governance charters and policies can be found on the investor centre of the company’s website. Go to: www.serko.com/investor- centre/. Serko’s corporate governance charters and policies have been approved by the Board and are regularly reviewed by the Board and amended (as appropriate) to reflect developments in corporate governance practices. STOCK EXCHANGE LISTINGS Serko is listed on the New Zealand Stock Exchange (NZX Main Board) and intends to list on the Australian Securities Exchange (ASX) as an ASX Foreign Exempt Listing, subject to ASX approval. As an ASX Foreign Exempt Listing, Serko will need to comply with the NZX Listing Rules (other than as waived by NZX) but does not need to comply with the vast majority of the ASX Listing Rule obligations. Serko is incorporated in New Zealand. current members of the Committee are Claudia Batten (Chair), Simon Botherway and Clyde McConaghy. All members are independent, non-executive directors. Their qualifications and experience is set out under Board of Directors in this Annual Report. DIRECTOR REMUNERATION Serko’s shareholders have approved a total cap of $350,000 per annum for non-executive directors’ fees, for the purposes of the NZX Listing Rules. This annual fee pool has not been increased since it was approved by shareholders in 2014. Serko currently pays directors’ fees that, in aggregate, amount to approximately $250,000 per annum, subject to exchange rate fluctuations. More information about remuneration payable to directors is set out in Serko’s Corporate Governance Statement, which is located on the investor centre of the company’s website. The Board has agreed that the following fixed annual fees will apply to all non-executive directors for the year ending 31 March 2019: Board of Directors Audit & Risk Committee Position Chair Non-executive directors Committee Chair Committee Member Fees per annum NZD$90,000 AUD$65,000 AUD$10,000 - Remuneration & Nominations Committee Committee Chair AUD$10,000 Committee Member - Non-executive directors received the following directors’ fees, remuneration and other benefits from the company in the year ended 31 March 2018: Name of Director Non-Executive Audit & Risk Directors’ Board fees2 Committee fees Remuneration & Nominations Committee fees Shares and other payments or benefits3 Total remuneration Remuneration and value of other benefits received1 Simon Botherway $80,000 (Chair) Clyde McConaghy $63,626 - $10,604 (Chair) Claudia Batten $63,626 - TOTAL $207,252 $10,604 - - $10,604 (Chair) $10,604 - - - - $80,000 $74,230 $74,230 $228,460 1 The figures shown are gross amounts, which have been converted into NZD and exclude GST (where applicable). Increases in Chair and non-executive Directors fees were effective from 1 October 2017, while Committee Chair fees were introduced effective 1 April 2017. 2 Board fees includes the amount of base fees payable to Mr Botherway and Ms Batten, which are used to acquire shares in the company under the non-executive Director Fixed Trading Plan (refer to the Corporate Governance Statement on the investor centre of Serko’s website for more information on the Plan). 3 In addition to directors fees, Serko meets costs incurred by non-executive directors that are incidental to the performance of their duties. This includes paying the costs of directors’ travel. As these costs are incurred by Serko to enable directors to perform their duties, no value is attributable to them as benefits to directors for the purposes of the above table. 66 67 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT The executive directors, Darrin Grafton and Bob Shaw, receive remuneration and other benefits in their respective executive roles EMPLOYEE REMUNERATION DIVERSITY as Chief Executive Officer and Chief Strategy Officer and, accordingly, do not receive directors fees. The table below shows the number of employees and former The respective numbers and proportions of men and women at The table below (and accompanying notes) sets out the total remuneration and value of other benefits earned by, or paid to, each employees of Serko and its subsidiaries, not being directors various levels within the Serko workforce as at 31 March 2017 executive director of Serko during, and in respect of, the financial period ended 31 March 2018: of Serko, who, in their capacity as employees, received and 31 March 2018 are set out in the table below: Base salary1 Taxable benefits2 Subtotal Pay for performance Total remuneration remuneration and other benefits during the period ended 31 March 2018 totalling at least NZ$100,000. The remuneration of those employees paid outside of New Zealand has been converted into New Zealand dollars. No employee appointed as a director of a subsidiary company of Serko receives any remuneration or other benefits for acting STI LTI5 Subtotal in that capacity. Darrin Grafton $282,266 $30,000 $312,266 $85,0003 Bob Shaw $256,694 $30,000 $286,694 $50,0004 $41,900 in the form of 54,460 restricted shares $20,950 in the form of 25,103 restricted shares $126,900 $439,166 $70,950 $357,644 1 Base salary includes employer contributions towards KiwiSaver at 3%. 2 Taxable benefits include a car allowance, carpark and medical insurance. 3 The short-term incentive stated was earned in FY18 and will be paid in FY19. Darrin Grafton’s potential short-term incentive payment for FY18 was $120,000. During the financial period Darrin Grafton also received a short-term incentive of $21,000, which was earned in FY17 and paid in FY18. 4 The short-term incentive stated was earned in FY18 and will be paid in FY19. During the financial period Bob Shaw also received a short-term incentive of $10,500, which was earned in FY17 and paid in FY18. 5 The FY18 long-term incentive was granted in July 2017, following partial achievement of pre-grant performance targets based on FY17 performance. The restricted shares will vest three years after the allocation date. The value stated is the gross amount earned. Female 2018 2017 no. % no. % Directors Officers1 Senior employees2 1 1 4 20% 20% 33% 1 1 7 20% 14% 47% Remaining workforce 35 39% 40 44% Male 2018 2017 no. % no. % Directors Officers1 Senior employees2 4 4 8 80% 80% 67% 4 6 8 80% 86% 53% Remaining workforce 54 61% 47 56% 1 Officers are considered to be the Chief Executive Officer and his direct reports (the Executive Team). Note that Chief Executive Officer, Darrin Grafton and Chief of Strategy, Bob Shaw, are included in both the number of directors and Officers reported. 2 Direct reports to the Executive Team with managerial responsibilities. The Board’s assessment of Serko’s performance against its Diversity and Inclusion Policy is set out in latest ESG report, 44 which can be found on the investor centre of the company’s website. Remuneration range (NZD) Total number of employees $100,000 - $110,000 $110,001 - $120,000 $120,001 - $130,000 $130,001 - $140,000 $140,001 - $150,000 $150,001 - $160,000 $160,001 - $170,000 $170,001 - $180,000 $180,001- $190,000 $190,001 - $200,000 $210,001 - $220,000 $220,001 - $230,000 $240,001 - $250,000 $310,001 - $320,000 $320,001 - $330,000 $360,001 - $370,000 Total number of employees and former employees 4 7 3 6 7 1 2 3 2 2 1 1 1 2 1 1 The table above includes base salaries, short-term incentives and vested or exercised long-term incentives. The table does not include long-term incentives that have been granted and have not yet vested. Where the individual is a KiwiSaver member, contributions of 3% of gross earnings towards that individual’s KiwiSaver scheme are included in the above table. Where the individual works in Australia, contributions of 9.5% of gross earnings towards Australian Superannuation are included in the table above. 68 69 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT BOARD AND COMMITTEE ATTENDANCE Directors have given general notices disclosing interests pursuant to section 140(2) of the Companies Act 1993. All of those interests, and any changes to interests notified and recorded in Serko’s Interests Register during the financial year ended 31 March The table below shows the Board and Committee meeting attendance during the year ended 31 March 2018: 2018, are set out below: Director attendance Darrin Grafton Bob Shaw Simon Botherway Clyde McConaghy Claudia Batten Board 12/12 12/12 12/12 12/12 12/12 Audit & Risk Committee Remuneration & Nominations Committee * * 5/5 5/5 5/5 * * 4/4 4/4 4/4 * Indicates the director is not a member of the Committee (although they were in attendance for these meetings). DIRECTOR INDEPENDENCE The Board currently comprises five directors – being the two co-founders and executive directors, Darrin Grafton and Bob Shaw; and three non-executive directors – Claudia Batten, Simon Botherway and Clyde McConaghy. The Board has determined, based on information provided by directors regarding their interests, that as at 31 March 2018 and the date of this Annual Report, Simon Botherway, Claudia Batten and Clyde McConaghy are independent directors. The Board has also determined that Darrin Grafton and Bob Shaw are not independent directors owing to also being executives and major shareholders in Serko. DIRECTOR INTEREST DISCLOSURES Directors have given notices disclosing interests pursuant to section 140(1) of the Companies Act 1993. Those interests (and any changes to interests) notified and recorded in Serko’s Interests Register during the financial year ended 31 March 2018 are set out below: Date of disclosure Director Entity 20-Jun-17 Simon Botherway Claudia Batten Clyde McConaghy Gave notice that they were interested in a Deed of Amendment to be entered into between each interested director and the company extending the term of the Director Share Loan between the director and the company (originally approved by shareholders at the time of the IPO) for a further three-year term. 22-Nov-17 Darrin Grafton Bob Shaw Gave notice to the Board that Financial Equities Limited, in which they are shareholders and directors, is interested in a Deed of Assignment to be entered into between Serko Limited and Financial Equities Limited in respect of a loan to nuTravel Technology Solutions. Director Entity Relationship Claudia Batten Simon Botherway Darrin Grafton Broadli Inc New Zealand Trade & Enterprises1 Serko Inc2 Westpac New Zealand Limited Arrow Trust Callaghan Innovation Board EBT Capital Limited Fidelity Life Insurance Landcorp Board MSH Trustee (Arrow Limited) Financial Equities Limited Grafton-Howe No.2 Trust Serko Australia Pty Limited2 Serko Inc2 Serko India Private Limited2 Serko Investments Limited2 Serko Note Limited Travelog World for Windows Pty Limited Director Regional Director Appointed Director  Board Adviser Trustee Board Member Ceased to be Director  Director Ceased to be Board Adviser Trustee Director Trustee Director Appointed Director Director Director Director Director Clyde McConaghy Chapman Eastway Pty Limited Infomedia Limited Optima Boards Chairman (Advisory Board) Director Director Bob Shaw Financial Equities Limited Ripon Trust Serko Australia Pty Limited2 Serko India Private Limited2 Serko Investments Limited2 Serko Note Limited Travelog World for Windows Pty Limited Director Trustee Director Director Director Director Director 1 Claudia Batten ceased to hold this position from 30 April 2018. 2 Serko subsidiary as detailed on page 76. 70 71 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT In accordance with Section 148(2) of the Companies Act 1993, directors disclosed the following acquisitions or disposals of In accordance with the NZX Listing Rules, as at 31 March 2018, directors had a relevant interest (as defined in the Financial relevant interests in Serko ordinary shares during the financial year ended 31 March 2018: Markets Conduct Act 2013) in Serko ordinary shares as follows: Name Date of acquisition/ (disposal) Number of shares acquired/(disposed) Nature of relevant interest Claudia Batten 5-Feb-18 2,181.63 ordinary shares1 Beneficial interest in ordinary shares held in custody for Claudia Batten pursuant to non-executive Director Fixed Trading Plan Consideration paid/received $4,125.00 5-Mar-18 1,927.57 ordinary shares1 Beneficial interest in ordinary shares held in custody for Claudia Batten pursuant to non-executive Director Fixed Trading Plan $4,125.00 Simon Botherway 5-Feb-18 2,181.63 ordinary shares1 5-Mar-18 1,927.57 ordinary shares1 Darrin Grafton 6-Jul-17 54,460 restricted shares2 6-Jul-17 3,469 restricted shares3 24-Nov-17 (320,000) ordinary shares4 Bob Shaw 6-Jul-17 25,103 restricted shares2 Beneficial interest in ordinary shares held in custody for Simon Botherway pursuant to non-executive Director Fixed Trading Plan $4,125.00 Beneficial interest in ordinary shares held in custody for Simon Botherway pursuant to non-executive Director Fixed Trading Plan $4,125.00 Beneficial interest in ordinary shares with restrictive conditions allocated pursuant to the Serko Limited Employee Restricted Share Plan, held in trust until vesting. $41,900.005 Indirect interest in restricted shares allocated pursuant to the Serko Limited Employee Restricted Share Plan to Ms Bailey, by virtue of a personal relationship with Ms Bailey. $2,699.035 Indirect interest in the shares being disposed of by virtue of a personal relationship with the registered holder, Ms Bailey. $464,000.00 Beneficial interest in Ordinary Shares with restrictive conditions allocated pursuant to the Serko Limited Employee Restricted Share Plan, held in trust until vesting. $20,950.005 1 Shares are acquired automatically, on a monthly basis, by an independent broker pursuant to the non-Executive Director Fixed Trading Plan. For more details refer to Serko’s Corporate Governance Statement on the investor centre of Serko’s website. These shares may not be disposed of while the holder remains a director of Serko and, in any event, for three years from the commencement of the Plan. 2 These shares are subject to a deed restricting exercise of voting rights attached to the shares. 3 By virtue of Darrin Grafton’s personal relationship, he is implied to have the power to exercise, or to control the exercise of, a right to vote attached to these shares by virtue of a personal relationship with the beneficial holder of these shares. These shares are subject to a deed restricting exercise of voting rights attached to the shares. 4 These shares were disposed of by Ms Bailey. By virtue of Darrin Grafton’s personal relationship with Ms Bailey, he is implied to have the power to dispose of or to control the disposal of shares held by Ms Bailey. Darrin Grafton did not dispose of any of his direct interest in Serko shares. 5 Paid in the form of services to Serko. Name Darrin Grafton1 Bob Shaw2 Simon Botherway3 Claudia Batten4 Clyde McConaghy5 Relevant interest Percentage 13,988,491 12,918,505 2,323,109.20 185,927.20 181,818 18.678% 17.249% 3.102% 0.248% 0.243% 1 12,667,629 shares are held via a trust in which the director is a trustee and beneficiary. This includes an indirect interest in (and by virtue of the indirect interest is considered to have the power to exercise, or to control the exercise of, a right to vote attached to) 1,217,594 shares and 9,296 restricted shares by virtue of a personal relationship with the legal and beneficial holder of these shares. This includes beneficial interest in 93,972 restricted shares allocated pursuant to the Serko Employee Restricted Share Plan and held on trust until vesting. 2 12,884,296 shares are held via a trust in which the director is a trustee and beneficiary. This includes beneficial interest in 34,209 restricted shares allocated pursuant to the Serko Employee Restricted Share Plan and held on trust until vesting. 3 2,034,091 shares are held via a trust in which the director is a trustee and beneficiary. 284,909 shares are held directly. 4,109.20 shares are held in custody pursuant to the Serko non-Executive Director Fixed Trading Plan. 4 4,109.20 shares are held in custody pursuant to the Serko non-Executive Director Fixed Trading Plan. 5 Held via a trust in which the director is a trustee and beneficiary. For the purposes of section 161 of the Companies Act 1993, the following entries were made in the Interests Register in relation to the payment of remuneration and other benefits to directors: Date Director Particulars of Board authorisation 20-Jun-17 Bob Shaw Darrin Grafton 20-Jun-17 20-Sep-17 24-Nov-17 Simon Botherway Claudia Batten Clyde McConaghy Simon Botherway Claudia Batten Clyde McConaghy Simon Botherway Claudia Batten Clyde McConaghy The payment of remuneration and the provision of other benefits by the company and the making of the loan by the company under the Restricted Share Plan on the terms set out in the resolution dated 20 June 2017 and in accordance with the terms of the Serko Employee Restricted Share Plan documentation. The extension of loans for a further three-year period to 30 June 2020 (originally authorised on 30 April 2014) by the company to each of the non-executive directors on the terms set out in the relevant Deed of Amendment and Original Loan Agreement. The payment of increased directors fees and the provision of other benefits by the company to the non-executive directors on the terms detailed in the Board minutes dated 20 September 2017 and, on the grounds, set out in the corresponding directors’ certificate. Entry into a Fixed Trading Plan for non-executive Directors For the purposes of section 162 of the Companies Act 1993, an entry was made in the Interests Register in relation to insurance effected for directors and officers of Serko, in relation to any act or omission in their capacity as directors. There were no entries made in the subsidiary company Interests Registers during the financial reporting period. 72 73 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT SHAREHOLDING INFORMATION As at 30 April 2018 there were 74,894,342 Serko ordinary shares on issue, each conferring on the registered holder the right to Set out below are details of the 20 largest shareholders of Serko as at 30 April 2018: vote on any resolution at a meeting of shareholders, held as follows: Size of shareholding Number of holders1 % Number of ordinary shares % Shareholder1 Number of ordinary shares held % 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 50,000 50,001 to 100,000 100,001 and over TOTAL 184 414 158 165 30 47 998 18.44 127,191 0.17 41.48 1,290,780 1.72 15.83 1,295,283 1.73 16.53 3,776,593 5.04 3.01 4.71 2,199,773 2.94 66,204,722 88.40 100.00 74,894,342 100.00 1 Includes 2,991,006 ordinary shares with restrictive conditions held by Serko Trustee Limited on behalf of 37 beneficial holders pursuant to the Serko Restricted Share Plan. Restricted shares have voting rights attached, which are exercised on behalf of a beneficial holder by the Trustee at the direction of the beneficial holder. As at 30 April 2018 there were five shareholders holding between 1 and 100 ordinary shares (a minimum holding under the NZX Listing Rules) in respect of 326 shares. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Robert James Shaw & Geoffrey Robertson Ashley Hosking 12,884,296 Darrin Grafton & Geoffrey Robertson Ashley Hosking 12,667,629 National Nominees New Zealand Limited 9,045,214 Serko Trustee Limited 2,991,006 Simon John Botherway & MSH Trustee (Arrow) Limited 2,034,091 JPMORGAN Chase Bank 1,827,835 Public Trust Forte Nominees Limited 1,807,793 Accident Compensation Corporation 1,569,983 Philip Rodger Ball TEA Custodians Limited Joanne Maree Phipps Donna Bailey Sherie Robyn Hammond Citibank Nominees (NZ) Ltd Michael John Thorburn 1,537,594 1,255,787 1,240,972 1,217,594 1,200,544 1,031,167 1,021,711 Robert Alan Hawker & Elizabeth Anne Hawker 999,750 HSBC Nominees (New Zealand) Limited 925,396 Tracey Ann Shorter Timothy Mark Bluett Cogent Nominees Limited 823,041 814,404 669,280 17.20 16.91 12.08 3.99 2.72 2.44 2.41 2.10 2.05 1.68 1.66 1.63 1.60 1.38 1.36 1.33 1.24 1.10 1.09 0.89 1 The shareholding of New Zealand Central Securities Depository Limited (custodian for members trading through NZClear) has been re-allocated to the applicable members. 74 75 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT According to notices given to Serko under the Financial Markets Conduct Act 2013 (and Securities Markets Act 1978), the REGULATORY MATTERS following persons were substantial product holders as at 31 March 2018. As at the balance date (31 March 2018) there were 74,894,342 Serko ordinary shares on issue: On 22 July 2015, NZX regulation granted Serko a waiver from NZX Listing Rule 7.6.4(b)(iii) to the extent required to allow Serko to provide financial assistance to executive directors, and an associated person of one of the executive directors, to enable them to participate in Serko’s Restricted Share Plan. The full waiver is available on Serko’s website. Go to: www.serko.com/investor-centre/. Substantial product holder Geoffrey Hosking Darrin Grafton Bob Shaw and Sarah Shaw Milford Asset Management Limited Harbour Asset Management SUBSIDIARY COMPANY DIRECTORS Number of ordinary shares in % Of class held at date of last which relevant interest is held notice 25,573,925 14,209,033 12,884,296 6,095,817 4,611,356 35.084% 19.493% 17.675% 8.380% 6.157% DONATIONS Serko did not make any donations during the financial year. CREDIT RATING Serko does not presently have an external credit rating status. Directors of Serko’s subsidiaries do not receive any remuneration or other benefits in respect of their appointments. The remuneration and other benefits of any such directors who are employees of the group totalling $100,000 or more during the year ended 31 March 2018 are included in the relevant bandings for remuneration disclosed on page 69 of this Annual Report. The following persons held office as directors of subsidiary companies as at 31 March 2018: Subsidiary Serko Australia Pty Limited (Australia) Serko Investments Limited (New Zealand) Serko India Private Limited (India) Serko Inc (US)² Serko Trustee Limited (New Zealand) Directors1 Darrin Grafton Bob Shaw John Challis Darrin Grafton Bob Shaw Darrin Grafton Bob Shaw Yogita Chadha Darrin Grafton4 Claudia Batten4 Susan Putt Fiona Rockel Foshan Sige Information Technology Limited (China)³ Gerard Neilsen4 1 No subsidiary directors retired during the financial year. 2 Serko Inc was incorporated on 30 October 2017. 3 Foshan Sige Information Technology Limited was incorporated on 7 August 2017. Serko also has a representative office in China. 4 Appointed during the financial year. 76 77 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT GLOSSARY COMPANY DIRECTORY ARPB Average Revenue Per Booking Asia Pacific ASX ATMR Vietnam, Thailand, Taiwan, Sri Lanka, South Korea, South Africa, Singapore, Philippines, Pakistan, New Zealand, Malaysia, Japan, Indonesia, India, Hong Kong, China, Bangladesh and Australia for the purposes of this Annual Report ASX Limited, also known as the Australian Securities Exchange ATMR (Annualised Transactional Monthly Revenue) is a Non-GAAP measure.  Serko uses this as a useful indicator of recurring revenue from Serko products based on the monthly transaction AUD or A$ Australian dollar Australasia New Zealand and Australia for the purposes of this Annual Report Board or Board of Directors Cloud or cloud- based The board of directors of Serko Cloud computing is when the software and associated data is hosted outside the customer’s premises and delivered over a network or the Internet as a service, which allows immediate access to the software Company or Serko Serko Limited, a New Zealand incorporated company EBITDA ESG FTE FX FY GST IFRS EBITDA is a Non-GAAP measure representing Earnings Before the deduction of costs relating to Interest, Taxation, Depreciation and Amortisation Environmental Social Governance Full-time equivalent Foreign exchange Financial year ended, or ending, on 31 March (unless otherwise stated) Goods and Services Tax International Financial Reporting Standards Independent Directors Simon Botherway, Claudia Batten and Clyde McConaghy IPO Initial Public Offering Listing The date Serko shares started trading on the NZX Main Board, 24 June 2014 NZ New Zealand NZD or NZ$ New Zealand dollar NZ GAAP or GAAP New Zealand Generally Accepted Accounting Practice NZ IAS New Zealand equivalents to International Accounting Standards Serko is a company incorporated with limited liability under the New Zealand Company Act 1993 New Zealand Companies Office registration number 1927488 Australian Registered Body Number (ARBN) 611 613 980 For investor relations queries contact: InvestorRelations@serko.com NZ IFRS or IFRS New Zealand equivalents to International REGISTERED OFFICE Saatchi Building Financial Reporting Standards NZX NZX Limited, also known as the New Zealand Stock Exchange NZX Listing Rules or Listing Rules The Listing Rules applying to the NZX Main Board as amended from time to time NZX Main Board The New Zealand main board equity security market operated by NZX R&D SAAS Research and Development expenditure Software-as-a-service Serko Expense Management business Serko’s online expense management solution that enables the capture and processing of corporate credit cards and out-of-pocket claims Serko Mobile Serko’s mobile app for iPhones and Android devices that gives users access to information and travel booking functionality on their mobile devices Serko Online Serko’s cloud-based online travel booking solution for large organisations serko.travel Serko’s cloud-based online travel booking solution for small to medium enterprises (SMEs) SME Small and medium enterprise TMC, Travel Agency or Travel Management Company A travel management company that provides specialised travel-related services to corporate customers USD or US$ United States dollar Zeno $ Serko’s premium cloud-based online travel booking solution All figures are in New Zealand dollars, unless otherwise stated Unit 14D 125 The Strand Parnell, Auckland New Zealand +64 9 309 4754 SHARE REGISTRAR Link Market Services Limited Level 11, Deloitte House 80 Queen Street Auckland New Zealand +64 9 375 5998 serko@linkmarketservices.co.nz DIRECTORS Simon Botherway (Chairman) Claudia Batten Robert (Clyde) McConaghy Darrin Grafton Robert (Bob) Shaw AUDITOR Deloitte Limited KEY DATES 22 AUGUST 2018 Annual Shareholders’ Meeting 30 SEPTEMBER 2018 Half-year End 20 NOVEMBER 2018 Half-year Results Announced 31 MARCH 2019 Financial-year End Serko’s ESG Report, which includes its Corporate Governance Statement, can be found at www.serko.com/investor-centre 78 79 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H I P 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 66 D I S C L O S U R E S G O V E R N A N C E & 79 I D R E C T O R Y SERKO ANNUAL REPORTSERKO ANNUAL REPORT Serko Limited Annual Report 2018 www.serko.com 80 SERKO ANNUAL REPORT

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