Good afternoon, ladies and gentlemen. Welcome to the Keystone Law Group four-year results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged to be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Please simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the call itself. However, the company can review your questions submitted today, and we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and I'm sure the company would be most grateful for your participation. I'd now like to hand over to Ashley Miller, Finance Director, and James Knight, Founder and CEO. Good afternoon to you both.
Thank you very much, and welcome to everybody. Welcome to Keystone's results for the full year ending 31st of January 2025. I'd like to, before going into a little bit of a summary of the results, I'd like to just recap on what Keystone is about, the fundamentals of who we are and what we do, just in case there are those unfamiliar with the firm and the model. The firm is a regulated law firm. It is a firm that we commenced, we launched in 2002, designed to do commercial law in a very different way, and that is what it does. Despite the fact that the product is conventional legal services, we do so in a way that is fundamentally different to the conventional firm. Our lawyers work remotely from their own offices, although possibly from the central London Keystone offices should they wish to do so.
They are technically self-employed, but very much part of Keystone. They earn a performance-based remuneration, a percentage of their fees, as much as 75% of fees if they bring in the work and undertake that work. In so doing, they have all of the freedom and flexibility of self-employment, but they also benefit from the infrastructure of what is now a sizable U.K.-based law firm. By infrastructure, I mean the compliance, the finance, the marketing, the IT, everything that they need, and particularly each other. That is one of the fundamental benefits of Keystone. Our lawyers benefit from the flexibility, the freedom, the infrastructure, and also each other. Our lawyers know each other extremely well. They cross-refer work to each other. They collaborate together. They actually operate far more cohesively than the conventional law firm.
That is something that we work extremely hard on making sure that they can work together, that they do know each other. We grow the firm by recruiting good quality lawyers with clients for themselves and their new Keystone colleagues. It is an extremely effective way. Much like the conventional law firm, about 95% of work that is introduced into the firm is brought in by the senior lawyers. Despite the fact that Keystone now has an extremely strong brand in the conventional market space, law work is brought in by the senior lawyers. We are a relatively fast-moving, fast-growing firm. This is the first year that we will turn over GBP 100 million. The market we operate in is worth approximately GBP 12 billion. The legal market in the U.K. is the second largest in the world.
12 billion represents the mid-market sector, which is almost entirely addressable by Keystone and the Keystone model. I would like to now focus on a little bit about the year just gone. I'm pleased to report that it was another strong year for Keystone, with revenue growing by 11.1% and adjusted PBT up 12.8%. We have always got a good operating cash conversion, and we are debt-free. We maintain a good buffer in the bank accounts, even once we have paid interim dividend earlier this year of 6.2% to GBP 0.062. The final ordinary dividend we were paying GBP 0.14 and a special dividend of GBP 0.15 per share. I'm pleased to say that recruitment remained strong during the period, and I'd like to look at that over the page. Recruitment is an extremely important part of the Keystone growth story.
As I mentioned, it is the number one way that we grow the firm. It is a process that is undertaken in some ways like the conventional law firm. We interview, we assess very closely, we scrutinize the lawyers. We're looking for people that have worked at the top law firms. We're looking for people who have good clients to bring, and we're looking for people who have a good cultural personality fit with Keystone, who we are, what we are like. We do have a culture. We have a personality, as many businesses do. At Keystone, it's very defined, and we are very keen to welcome new people who will add to the firm by undertaking work that has been brought in by their colleagues and bringing in their own work themselves. In terms of the figures, this year we have taken on an extra 50 new partners.
Principals is another word we use for them. They're pod members. They're pod owners, I should say, principals. They will also be free to hire their own junior lawyers. These are called pod members. These are individuals that we also interview as well and assess to make sure that the quality and the calibre of the lawyers and the pod members remains very high. Total fee earner numbers at Keystone finished the year at 576. That's including the principals, about 15 lawyers who are employed by central office, and the over 100 pod members. Aspiring to excellence. Next slide. We are no longer the only dispersed platform model law firm out there. We invented the concept. We ran with it without any emulators, copiers, et cetera, for quite a number of years, which was great because we managed to find our feet.
There are now a number of other firms starting up, quite a number. Now, we say this is a fantastic thing. This is a great thing because the contention that the conventional partnership model is now moving across to the platform model makes sense when there are others. We're not able to move a whole profession by ourselves. No one company is. The important thing here is that we remain the market leader. We are the market leader. We're the oldest, the biggest, the best, with the strongest brand. That is where you want to be. If you're moving a market, you need there to be others, but you need to be out front.
One of the ways that we do this is by just really focusing on excellence, focusing on the excellence of the lawyers that we recruit, focusing on the excellence of everything that we do, driving the community, understanding lawyers' needs, onboarding them efficiently, making sure that every touch that our clients have with Keystone is one of quality. Last year, we renovated our offices to bring them up to a really top standard that is not just a high standard, but also one that reflects our own personality. Very good-looking aesthetics, very good efficiencies, services, logistics, technology. We continue to upgrade the firm. We continue to improve. I like to think that we're improving quicker than we are growing. We are anything but complacent. We are really moving forward. We are improving, building, and questioning. I think it's very important. We're now 22 years old, 23 years old.
You need to question if you've been doing something for that amount of time, and it's been working, but is that still the right way to do it? Times, cultures, rules move on during that time. It is very important to be, well, not complacent and very important to keep self-analysing, checking whether we are doing the right thing, whether we should. Again, it's not just enough to be innovative and say, "Well, we're an innovative law firm." You've got to completely innovate along the way as you go. As I mentioned earlier, the community of Keystone, that is really what makes us such a strong force. We realized early on in the process that being a disparate network of remote individuals is not the way forward. The power is not just in numbers, but is in community.
Not just because it helps with the referral of work, but just because it helps with people's performance happiness. This is what the majority, not all, our lawyers want. They want to feel part of something. They want to feel part of something successful. They want to feel part of a community that supports them, that they can have fun with them, whether that's skiing holidays or riding holidays or golf holidays, things that people organize individually and collectively. I mean, we will support it, even though individual lawyers may arrange it. It's not something that we pay for everything, but we will contribute. The effect of all of this is a community of lawyers that are really incredibly happy. The number one sort of regret in some ways from lawyers is that they, after they've been with us for a while, is that they didn't do it earlier.
Over 30% of work is cross-referred. That is a net product of people knowing and trusting each other. It is also something that helps with our growth and becomes cyclical because they are very happy to recommend their colleagues, ex-colleagues, friends, associates to join the firm themselves. I'll pass over to Ashley now, who will take you through some of the financial highlights of the last 12 months.
It has been a strong performance for us this year, delivering results in line with our recently upgraded market expectations, with revenue up 11.1% to GBP 97.7 million, adjusted PBT up 11.8% to GBP 11.6 million, and adjusted PBT up 12.8% to GBP 12.7 million, which represents a margin of 13%. We have referred to the strong operating cash conversion in the business, which was 94.5% this year.
This really reflects the high calibre of the earnings that we generate with GBP 11.5 million of operating cash generated in this way. That left a closing cash of GBP 9.7 million. We had adjusted EPS of 30.4 pence, which was up 10.9 pence. The reason for that being a slightly slower increase than the headline PBT is the full year impact of the increase in corporation tax last financial year, which came into effect mid-year. On the dividends front, we will pay between the interim and the final ordinary dividends of 20.2 pence in total and a special of 15 pence. That means that overall, the total value of dividends returned to shareholders since IPO is over GBP 45 million. Just moving to some of the more detail on the income statement.
The revenue growth of 11.5% has been driven by a combination of the growth in the lawyer numbers, which were up 6.9% on average, and the increase in revenue per principal, which increased 4% to GBP 220,000 or just over GBP 220,300. In terms of the gross profit margin, we retained a gross profit margin largely in line with last year, marginally up at 26.1%. In the cost base, the staff cost in the period increased 15.1%, which represented the continued investment we have made in headcount. We have referred to the calibre and the quality of the services we need to deliver to our lawyers in order to attract and retain those. Investment in our people is also essential. That increased our average headcount by six, which was 9.5% from 63 to 69.
We've also continued to see a period last year where wage inflation was slightly higher than it has been historically, albeit it's come off its major peak. To compete for the talent we need, we continue to have to pay competitive wages as well. In terms of the other admin base, we've seen an increase there driven with the largest factors being the investment in our IT, with the project last year migrating from a private cloud environment to the public cloud, as well as an implementation of a SIEM solution, which is providing the business with enhanced security oversight. That represented an increase of 0.2, whilst professional indemnity insurance also increased by 0.2. That's priced against revenue. Therefore, the growth in revenue drives that, as well as us taking an increased level of cover from GBP 50 million, increasing it to GBP 60 million this financial year.
With the adjusted PBT margin, I've already referred increasing by that 0.1%, essentially driven by the increase at GM gross margin level. Finance income, we've continued to benefit from the higher interest rates during the period, with the step-down only starting very much at the end of the year. The adjusted PBT rising 12.8%. The balance sheet of this business is exceedingly clean and simple. We are a cash-positive business, which is debt-free. We have very strong working capital positions, and that really reflects the alignment of interests of our lawyers with ourselves. Them being on a pay-when-paid basis really does focus the mind. The debt today was GBP 34,000, which was in line with last year, GBP 34,000 again.
Because the lawyers are on a pay-when-paid basis, there's a corresponding liability to them for all of the trade debtors and accrued income, which equates to approximately 75% being the payaway we have. Our fixed assets, excuse me, the fixed assets represent really the increase we saw last year in terms of the movement of the leases, where we re-signed our leases taking effect from the start of this financial year. The intangibles on the balance sheet represent the structure of a P/E investment, which happened in 2014. It is nothing to do with the operation of the business. On the cash flow, the model is fundamentally cash-generative, and that's demonstrated, as I've said, by the cash generating from operations and the operating cash conversion. This year, just a few points to highlight differentials year on year.
In terms of corporation tax this year, Keystone was classified this year as super large. That's with reference to the profit level, the benefit of which is entirely for HMRC. As a result of that change, we have to pay all of our tax on profits in year, as opposed to previously, it was half in the year and half following the year. That meant there was an additional outflow this year of approximately GBP 1.5 million as we had to pay six quarters' worth of corporation tax, in essence. In terms of the CapEx, we've referred already to the fit-out of the Chancery Lane offices, which we did, and that generated an additional spend of circa GBP 0.7 million and consequently the one-off bounce on CapEx this year. The lease payments in the period were slightly lower than normal as we had rent-free periods in the new leases we signed.
The dividends, again, this financial year appear lower to last year because at the interim stage last year, we paid a special dividend as well, impacting on cash flow.
Thank you, Ashley. In summary, it's been a good year for the firm. I'm pleased to say that we've reached a sort of equilibrium where the strong client demand has also been accompanied by reasonably good, strong, robust recruitment. Sometimes when client demand becomes extremely heavy, as it did after the pandemic, you can see that recruitment becoming very competitive as all the law firms are trying to recruit additional lawyers. It's been a good market for us. 50 new recruits is a good number. I'm very pleased to be able to be paying a good dividend with the special dividend and the ordinary dividend.
In terms of the outlook, the first quarter of this year has started well. We are confident that this is going to be another strong year for Keystone. Obviously, uncertainty within the wider macro markets, uncertainty within the AIM markets, uncertainty in the way of life in many ways. I would say that in some ways, Keystone is very well placed to deal with the uncertainty in the modern world. We are sort of lean, fit, nimble. We're an entrepreneurial organization. We make quick decisions. We can adapt according to circumstances, favorable or unfavorable, and continue to deliver good results for our shareholders. Moving now to some questions. I believe that some of you have written in some questions, and Ashley and I will go through some of those now. I'll pick up on a first one.
Lawrence was asking about the recruitment stage, whether any service lines that we favor or ones that we look to avoid. It's an interesting question because it gives me a little opportunity to describe a little bit about the background of Keystone in terms of the way that we operate and the way that we recruit. We cover 26 practice areas and operate in a lot of different sectors. We're mostly a corporate commercial firm, but we also do high-end family, high-end residential conveyancing, and high-end residential wills, trusts, and probate. These are the areas that are commensurate with a mid-sector law firm. These are the areas that we're comfortable in. We do, as I say, operate in many corporate commercial areas. We don't deal with low-grade consumer-orientated work, so we wouldn't take on any lawyers that did that sort of work.
Often, we will take on lawyers that have worked in the magic circle because their skills may be the size of the transaction that they wish to work at. At Keystone, it will not be in the billions. It may be in the millions, but their skills are equally suited to Keystone. Generally speaking, the areas that we recruit in, they are the areas that we operate in, and the areas we operate in are commensurate with the mid-sector corporate commercial law firms.
If I'll take the next question. Raymond G's asked about the essentially noticed that we'd added 50, but obviously there were 23 net. What happened to the difference? In the business, we have what we call two churn rates each year, one of which is approximately 1 in 10 of those who join us won't make it work.
There will be candidates who've come across thinking they'll be able to bring with them a client base or client relationships and, for one reason or another, unable to do so, or people who have come perhaps from an in-house role believing they can build a client base, but again, are therefore unsuccessful. Now, we're absolutely right to make those offers to those people entrepreneurially because on paper, they have the skills needed to do it. In interview, they have the right attitude, and they're the right calibre. We'll only ever bring people on who are the right calibre. If they don't make it work, the cost of us bringing on board is minimal. Clearly, if they do make it work, the upside is there for us.
Over and above that, we have about 5% of the base each year will churn, and the largest factor there are retirees. In conjunction, that between the two equates to about 6% on this year. The rate this year is broadly in line with that. There are, over time, little bumps up and down in that, but broadly, that's the long-term average.
A question from David. Do you expect to continue adding around 50 new principals per year? Is this sustainable for the next three to five years? As mentioned, this year, we recruited 50 new principals. We could recruit more. In other words, we have the ability. We're very lucky as an organization to scale quickly. We are unrestricted by cash flow considerations. We operate a pay-when-paid model. We're unrestricted by office space considerations.
Most important for us is to make sure that the calibre and the quality of the lawyers that we recruit remains at a certain high level. We could take on more lawyers if they were sort of available and willing to join us. That is a level that we're very comfortable. In terms of the capacity of the market, let's say, what I would mention is it's easier to look at the size of the financial size of the market, this GBP 12 billion market. We're turning over GBP 100 million this year. We're a very small little scratch on that market as yet. It's a very significant market. In many ways, the market is moving more favourably towards the platform model. More people, day by day, regard this as a real viable alternative for their career. We do believe that there is plenty room for growth and expansion.
David B's asked whether the revenue per principal will benefit from rate card increases in this coming financial year. We review rate cards each year in line with maintaining our position in the markets and commensurate with what is going on in the market. There will be a review of rates this year. Consequently, there will be some impact of that on revenue per principal. Not all of the flow through. It is not as simple in our business as saying X plus Y, and therefore, that gets you the new revenue per principal because clearly, a lot of work is done with different commercial terms, whether it is fixed fees, whether it is capped fees. Also, the lawyers have the ability to negotiate special rates for either clients or special projects. It is not as necessarily direct as that.
Yes, there will be some impact through a rate rise this year.
Lawrence has posed a question concerning our appetite for mergers, acquisitions. In other words, the acquisition of other smaller law firms and other platform firms operating the same model. We do have a stated non-acquisitive policy, one that was implemented some time ago. Whilst there are now many smaller law firms operating in this model on the market, it is not part of our policy to grow by acquisition. We prefer to grow by the organic recruitment of very closely vetted lawyers. The one significant downside of acquiring other law firms, well, there are a number. One, of course, is the cultural aspects. Others are the technological aspects. Others are the calibre of the lawyers can be mixed. This idea of one size fits all is not one that we adopt.
It is far better for us because the opportunities are there to focus on organic recruitment. It is cheaper, and it is particularly less risky and much more controlled and much likely to lead to sustainable, strong, pleasant growth.
Damien T's asked about whether the board considers different options in terms of capital allocation. The answer to that is yes, we do consider. Whether it was special dividends or share buybacks, etc., we have made those considerations. As a board, we've concluded at this point in time, special dividends is the right way for us as a business to go. Clearly, we'll keep those under review as we move forward to consider what is right at each point in the business's evolution.
There have been a number of questions concerning AI, obviously a significant subject, one that is receiving a great deal of attention from ourselves and from all businesses, really, particularly in the professional services area. In law, there are two types of AI really at play, certainly in private practice law. One is the tools for lawyers, and the other is the way that AI can be used in the infrastructure of the law firms. With regards to the first, the tools for lawyers, these are being created. In fact, in many ways, elements of AI have been introduced for some time in the tools that our lawyers use. These are obviously third-party software producers. No law firm creates tools for their own lawyers. Just the economies of scale are not there. It's too expensive. It's too time-consuming. They're not software houses, nor are we.
We have a lot of organizations that we buy tools in from: LexisNexis, Westlaw, Thomson Reuters. They are building in. They are the ones that are creating using the AI. We are very much focused. We are looking very closely on assessing what is coming onto the market. There are a lot of different products. A lot of them do the same thing. A lot of them do it a little bit differently. Some do it better than others. It is our job as Keystone Central Office to really get under the skin, analyze, license the good ones that are really going to make a difference to our lawyers and make them available to our team. The other side of it, as I mentioned, are the tools that really they are not tools as such.
They are the infrastructure AI devices whereby those are things that we actually do need to engineer ourselves, either using our own software developers, of which we have three full-time, or bringing in on a project-by-project basis. There are areas where efficiencies will be accessible, that we can enhance the operations of the firm: conflict checking, onboarding lawyers, onboarding clients, general sorts of added efficiencies. In many ways, that's what we do anyway in terms of that is our job: constantly improving, constantly adding to the firm, making the operation slicker, more efficient. That's what we'll continue to do. AI is definitely an important part of those enhancements.
Andrew V's asked about how many of our principals hold equity and how does the platform model compete on riches on offer a big partnership models.
In terms of the number of equity holders amongst our principals, we do not really track that. The principals come to Keystone really on an equity play, and they are able to earn substantially more money in this model for the work they do than they will be able to in most conventional law firms. The offering we have and the basis on which we compete is far broader than just the financial. Certainly, the question of equity and how much equity value there is in a mid-market law firm anyway is somewhat dubious, perhaps.
Just coming back to Tibbott on the questions of the leavers, the 27 leavers on the year just gone. Obviously, I am not going to get completely specific, and Ashley has already covered over the reasons generally for churn.
With regards to one of the things I would say and like to make very clear is that the lawyers that come to Keystone are extremely happy at the firm. It is certainly not a case that anybody ever leaves Keystone to go to another platform firm or ever has. That would be very concerning if that ever happened. By and large, those that leave are retiring, have not made it work, and are unlikely to make any contribution or making much of a contribution to the bottom line. On the contrary, those that we bring in, the 50 that we brought in over the course of the year, their average earnings will be significantly more than the average earnings of the 27 just gone. Yes, okay, one in 10 may not make it work, which is about five individuals or so.
All in all, this is very much of a good story in as much as we move forward.
There are a couple of questions here, both really relating to the impact on recruitment of the evolution of the platform model, really. The extension of the platform model and the acceptability of the platform model as very much a normal part of the legal environment is a real positive, and we see it as very much a positive for ourselves. Clearly, we've been talking for a period of time now about the legal market in the mid-market shifting from the conventional to the new platform. Clearly, that wouldn't happen if it was just us doing that.
The fact that there are now a number of others, and there have been reports recently speaking about three and a half thousand lawyers operating in this way, and there are a number of firms of various size doing that, certainly 50-plus businesses out there now doing that. We see it all as a positive and a natural evolution in that space. We really have differentiated ourselves as being the leader in this space. Whilst we are the premier standout on calibre and quality, really, the lawyers who we wish to attract will only really be attracted to come to us because we position ourselves in the marketplace. Really, no one ever questions the differences between a Clifford Chance and a high-street firm in the conventional world. Really, the platform model is in the same way. Not all platform models are going to be the same.
Thank you, Ashley. We seem to have managed to get through all of the questions. That really leaves it just to me to say thank you for joining and see you in six months' time.
That is great, James. Ashley, thank you very much indeed for updating investors. If I can please ask investors not to close the session, as we will now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete, but I am sure it will be greatly valued by the company. On behalf of the management team of Keystone Law Group, we would like to thank you for attending today's presentation. Good afternoon to you all.