AdEPT Telecom plc
(“AdEPT”, the “Company” or together with its subsidiaries the “Group”)
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Final results for the year ended 31 March 2018
AdEPT (AIM: ADT), a leading UK independent provider of award-winning managed services for IT, unified communications, connectivity and voice solutions, announces its results for the year ended 31 March 2018.
- 15th consecutive year of increased underlying EBITDA up 24.8% to £9.8m (2017: £7.8m)
- Revenue increased by 34.8% to £46.4m (2017: £34.4m)
- Gross margin % increased by 5.4% to 47.7% (2017: 42.3%)**
- Underlying EBITDA margin % of 21.0% (2017: 22.7%)
- Profit before tax increased by 32.8% to £4.5m (2017: £3.4m)
- 26.2% increase to adjusted fully diluted earnings per share to 27.69p (2017: 21.94p)
- 12.9% increase to dividends declared to 8.75p (Interim 4.25p, Final 4.50p) (2017: 7.75p)
- Year-end net senior debt* of £17.6m (2017: £15.5m)
- Capital expenditure 0.8% of revenue (2017: 0.3%)
- Managed services accounted for 69.8% of total revenue (2017: 55.4%)
- Acquisition of entire issued share capital of Atomwide Limited completed in August 2017
* Net senior debt is defined as cash and cash equivalents less short-term and long-term bank borrowings and prepaid bank fees
** Excluding £0.755m Openreach compensation credits
“AdEPT has delivered a 25% increase to underlying EBITDA for the year ended 31 March 2018 and the Group continues to deliver consistently high levels of free cash flow generation with more than 80% of reported EBITDA turned into net cash from operating activities after tax. The continued strong cash generation has funded a 13% increase to dividends declared during the year and the Board is confident that continued focus on underlying profitability and cash generation will support a progressive dividend policy.
For further information on AdEPT please visit www.adept-telecom.co.uk or contact:
This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.
Free cash flow generated combined with the drawdown of part of the accordion debt facility, put in place in February 2017, and the convertible loan from BGF, was used by the Company to complete the earnings enhancing acquisition of Atomwide Limited during the current period. The acquisition completed during the year combined with organic sales have increased the rate of transition of the Group towards a complete managed service provider, with revenue from managed services accounting for 70% of the total in the year ended 31 March 2018.”
Commenting upon these results Chairman Roger Wilson said:
|AdEPT Telecom Plc
Roger Wilson, Chairman
Ian Fishwick, Chief Executive
John Swaite, Finance Director
07786 111 535
01892 550 225
01892 550 243
|Northland Capital Partners Limited
Nominated Adviser – Tom Price / Edward Hutton
Broking – Rob Rees
|020 3861 6625|
Review of operations
I am pleased to report that in the year ended 31 March 2018 the Group has made considerable progress on a wide range of fronts. In early 2015 we embarked on a journey to transform AdEPT from our original telecoms background into unified communications and then into IT. Our logic was simple: it is becoming increasingly difficult to tell where telecoms ends and IT starts in a world where ‘work is something that we do, rather than necessarily, a place that you go to’.
The strategy of the Group has been focussed on increasing the proportion of revenue from managed services, combined with targeting customers in London and the South East and the public sector. We believe that the economy in London and the South East will continue to grow faster than the other regions in the UK and that there is an increasing drive in the public sector to put business with Small and Medium-sized Enterprises (SME’s).
The Group has been focussed on the growth of managed service revenues and the acquisition of Atomwide, combined with organic sales, has increased the rate of transition of the Group towards managed services, which accounted for 69.6% of total revenue in the year ended 31 March 2018 (2017: 55.4%). The team at Atomwide has proved to be an excellent fit with AdEPT and has been successful in jointly working on delivering an infrastructure and support service which can be used across all companies in the Group.
London and the South East
In London we are Chief Technology Partner to London Grid for Learning supplying over 3,000 schools, we have nearly 50 hospitals and specialist medical facilities, over 200 business centres, thousands of commercial customers, and a range of specialist data and cloud services being supplied to central government departments.
Public sector and healthcare
In March 2016, the Government set a target that 33% of public sector spend would be with SME’s by 2022. Following the impact of the Atomwide acquisition, in March 2018 31% of total Group revenue was generated from public sector and healthcare customers (2017: 20%) and as customers we currently have over 100 Councils, 13 NHS Trusts, more than 30 private hospitals, twelve universities, over 3,000 schools and services being provided to central government departments.
Both Atomwide and OurIT have been awarded approved supplier status on the new RM3804 Technology Services 2 Framework by Crown Commercial Services. This framework is designed to make it far easier for public sector customers to buy IT products and services. AdEPT Tunbridge Wells has been awarded HSCN (Health and Social Care Network) Compliance and is now authorised to sell data networks to the NHS.
In line with its progressive policy, AdEPT has increased the dividend proposed year-on-year by 12.9%, proposing a final dividend of 4.50p per ordinary share (2017: 4.00p), making total dividends proposed in respect of the year ended 31 March 2018 of 8.75p per ordinary share (2017: 7.75p).
As a result of the acquisitions completed in the year ended 31 March 2018, the Group now has just over 200 full-time employees. The improved profitability and free cash flow generation this year was made possible by the continued hard work and focus of all employees at AdEPT. As a Group we are immensely proud of the track record we have created over the last 15 years and, on behalf of the Board, I would like to take this opportunity to thank all of our employees for their continued hard work.
On 8 November 2017 we announced the appointment of Christopher Kingsman as a non-executive director. Christopher brings a broad range of experience from investing in and being involved with a number of public and private companies across different sectors. A graduate of Cambridge University, he started his career with Fidelity Investments and has managed a hedge fund and family office. He is the principal of a private Swiss investment group, executive chairman of Aranca, a global research, analytics and advisory firm based in India, and is a director of a number of private companies.
Through Greenwood Investments Ltd, he has been the second largest shareholder of AdEPT since 2011. Having increased his stake in February 2018 from 16.9% to 21.3% of the current issued share capital of the Company Christopher Kingsman is now the largest shareholder.
Company name change
The Board considered that the name of Company should be changed to better reflect the business of the Group as a managed service provider for IT and unified communications. On 16 January 2018 the Company announced that at the General Meeting held on 16 January 2018 it received approval for the change of company name and that it would make a further announcement when the change became effective. The proposed company name has not yet been able to be secured by the Company and therefore an alternative change of name will be proposed as part of the resolutions for the forthcoming AGM in September 2018.
The excellent result for this year was delivered through a combination of strategic acquisition and organic contract wins, maintaining margins on customer contracts and maintaining high levels of operational efficiency. The Board is confident that continued strong cash conversion of operating profit will support its intention of a progressive dividend policy.
The focus for the coming year remains on developing organic sales through leveraging AdEPT’s approved supplier status on the various public sector telecom frameworks, maintaining profitability and cash flow conversion, which will be used to reduce net borrowings and/or fund suitable earnings-enhancing acquisitions.
Principal activities and review of business
The principal activity of the Group is the provision of unified communication and IT services to both domestic and business customers. A review of the business is contained in the Chairman’s statement and the highlights are summarised in this strategic report.
Summary of three year financial performance:
|Year ended March|
|Net senior debt||17,621||15,456||5,982|
During the year AdEPT has continued its transition from a traditional fixed line service provider towards a managed services provider. Total revenue generated from managed services represented 69.8% of total revenue in the year ended 31 March 2018 (2017: 55.4%).
Total revenue increased by 34.8% to £46.4m (2017: £34.4m):
- Managed services product revenues increased by £13.3m to £32.4m (2017: £19.1m). This reflects the impact of the 8 month contribution from the acquisition of Atomwide combined with an increased level of organic contract wins and a lower relative churn rate within the managed service customer base. AdEPT has continued to make progress in expanding the number of circuits and connections from new customer additions and through cross-selling into the existing customer base. As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 10Gb services.
- Traditional fixed line revenues decreased to £14.0m (2017: £15.4m), which is a reflection of the organic sales focus of the Group on managed services and IT combined with the substitution impact of existing customers transitioning to new technologies, such as SIP and hosted services. The Group’s reliance on fluctuating call revenues continues to reduce, with call revenue providing only 10.0% of total revenue in the year ended 31 March 2018 (2017: 15.4%).
The proportion of AdEPT revenue being generated from recurring products and services (being all revenue excluding one-offs projects, hardware and software) remains high at 78.4% of total revenue. All of Centrix, Comms Group, OurIT and Atomwide product sets include hardware supply and installation services, which, by their nature, are project based and not fixed recurring revenue streams; however, a high proportion of hardware supply and installations are further products and services being supplied to the existing customer base.
AdEPT continued to be highly successful in gaining further traction in the public sector space during the last year through leveraging its approved status on various frameworks. AdEPT Tunbridge Wells was awarded HSCN (Health and Social Care Network) Compliance during the year, which is the replacement for the legacy N3 data network used by the NHS, and AdEPT has already contracted data connectivity services to the NHS. AdEPT is an approved supplier to the Crown Commercial Service under the RM1045 Network Services Framework, RM3825 HSCN Access Services Framework and the RM3804 Technology Services 2 Framework and the Group has been successful in winning new business through this framework. This is in addition to AdEPT’s existing framework agreement with JISC, under which AdEPT is one of only a small number of companies approved to sell data connectivity to UK Colleges and Universities. The proportion of total revenue generated from public sector and healthcare customers has increased to 30.6% at March 2018 which partly arises due to the contribution from the Atomwide acquisition as the whole of the acquired revenue stream is generated from their public sector customer base.
The Group is continuing to focus its organic sales efforts on adding and retaining larger customers whilst complementing this with an acquisitive strategy. AdEPT is managing the customer risk with a wide spread of business sectors and no particular customer concentration, with the top ten customers accounting for 22.3% of total revenue (2017: 24.3%).
Gross margins for managed services and IT, such as installations, support and maintenance, are higher than fixed line; this is a reflection of the headcount costs of supporting the project installations, helpdesk support and maintenance services being included within operating expenditure.
Gross margins for fixed line services have decreased to 38.8% (2017: 39.5%) which is a reflection of focus on winning and retaining larger customer accounts which by their nature have larger absolute revenue and gross profit but lower than average gross margin percentage.
Gross margin percentage has improved to 49.4% during the year (2017: 42.3%). The current year gross margin includes £0.76m of compensation credits received from Openreach following the settlement in relation to the deemed consent process in relation to installation of data circuits. This compensation relates to service credits for a large number of data circuits across a number of financial periods and is not a true reflection of ongoing margin. Excluding the compensation credits gross margin has increased to 47.7% for the year, this increase over the prior year largely arises due to the business mix moving in greater proportion to IT services.
Underlying EBITDA is defined as operating profit after adding back depreciation, amortisation, acquisition fees, revaluation of deferred consideration and share-based payment charges. The Group uses underlying EBITDA as a measure of performance in line with the telecommunications sector’s general approach to relative performance measurement. As the Group operates a capex-light model, the Board considers that underlying EBITDA is the best indication of the underlying cash generation of the business. Below is a reconciliation of underlying EBITDA to the reported profit after tax:
|Openreach compensation credit||755||–|
|Share option charges||(40)||(31)|
|Revaluation of deferred consideration||(28)||–|
|Profit before tax||4,520||3,404|
During the year the Group received £0.76m compensation from Openreach following the settlement in relation to the deemed consent process in relation to installation of data circuits. The value of the compensation received by the Group has been excluded from the calculation of underlying EBITDA as it does not relate to the current year and it is not a reflection of the underlying profitability of the Group.
Underlying EBITDA has increased for the 15th consecutive year since AdEPT’s inception in 2003. The Group has focussed on the underlying profitability of customers and revenue streams combined with tight overhead control, industry leading debt collection and wholesale supply chain negotiation.
Total interest costs have increased to £1.56m (2017: £0.93m), arising largely from the increase in the average level of net borrowings, including the interest payable on the convertible loan note, which was used to fund the acquisition of Atomwide. Included within interest costs is a £0.3m charge, which is non-cash, in relation to the discounted cash flow impact of the contingent deferred consideration payable in relation to the Comms Group, CAT, OurIT and Atomwide acquisitions. A further £0.1m of non-cash interest from the application of IAS 32 and IAS 39 has been recognised in interest costs in relation to the discounting of the convertible loan liability. Increases to interest costs have been partially mitigated through treasury management of surplus cash balances to minimise the amount of drawn funds.
Profit before tax
This year profit before tax has increased by £1.12m with a reported £4.52m (2017: £3.40m). The increase to profit before tax arises from the £1.94m underlying EBITDA improvement plus the compensation credits received from Openreach of £0.76m, which has been partially absorbed by the £0.63m increase in finance costs, the acquisition costs of £0.23m, and the associated increase in depreciation and amortisation arising from the acquisitions undertaken during the current and prior year.
Profit after tax and earnings per share
Profit after tax for the year amounted to £3.93m (2017: £2.75m). Basic earnings per share was 16.61p (2017: 12.17p). Adjusted fully diluted earnings per share, based on the profit for the year attributable to equity holders adding back amortisation, share option charges, revaluation of deferred consideration and acquisition costs and excluding the compensation credits (see Note 28), increased by 26.2% to 27.69p per share (2017: 21.94p).
Dividends and dividend per share
On the back of strong cash flow generation AdEPT announced an interim dividend of 4.25p per share, which was paid to shareholders on 7 April 2018. The Company announced in the pre-trading update on 5 April 2018 that, subject to shareholder approval at the annual general meeting later in the year, it is proposing a final dividend of 4.50p per ordinary share (2017: 4.00p). This dividend is expected to be paid on or around 8 October 2018 to shareholders on the register at 28 September 2018.
Total dividends approved and proposed during the year ended 31 March 2018 of 8.75p per ordinary share represent a 12.9% increase year-on-year (2017: 7.75p). The Board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.
The Group benefits from an excellent cash-generating operating model. Low capital expenditure results in a high proportion of underlying EBITDA turning into cash. The proportion of reported EBITDA which turned into net cash from operating activities before income tax was 95.2% (2017: 82.2%). On an after income tax basis, the proportion of reported EBITDA turned into net cash from operating activities was 80.5% (2017: 68.1%). The Group continues to manage its credit risk and the collections of trade receivables has improved, leading to a reduction to 26 days at year end (2017: 35 days). This reduction is partly a reflection of an increased value of customer payments in advance received for telecom and IT maintenance and support services.
Cash interest paid has increased during the year to £0.91m (2017: £0.40m), which arises from the increase in net borrowings to fund the acquisition of Atomwide.
Cash outflows in the year ended 31 March 2018 in relation to acquisitions amounted to £14.52m (net of cash acquired). The contingent consideration in respect of the acquisition of Comms Group was paid in July 2017 and for CAT Communications in November 2017 with no further amounts due. The initial cash consideration for the acquisition of Atomwide of £12.0m (net of cash acquired) was paid in August 2017.
Dividends paid during the year ended 31 March 2018 absorbed £1.84m of cash (2017: £1.46m). This increase over the prior period arises from the continued application of the progressive dividend policy.
In August 2017 the Group raised £7.29m in the form of a convertible loan instrument from BGF to part fund the acquisition of Atomwide. The convertible loan instrument is excluded from the leverage calculations by the senior debt partners, Barclays and RBS. The Group has applied the principles of IAS 32 and IAS 39 in the recognition and measurement of the convertible loan. The net present value of the loan of £7.09m has been split between the debt and equity components and an amount of £1.16m has been recorded in equity, with £5.93m being included within long-term debt. The transaction cost of £0.20m is being recognised in the interest charge in the income statement across the term of the convertible instrument.
There was a significant increase to cash and cash equivalents during the year of £6.59m. This arises from a net increase in the drawn element of the revolving credit facility at March 2018 which was used to fund the deferred consideration for the acquisition of Our IT, with an amount of £3.65m paid in early April 2018. The Group will continue to apply its treasury management policies to minimise the cost of finance whilst retaining flexibility to meet its growth strategies.
The Group continues to operate an asset light strategy and has low capital requirements; therefore, expenditure on fixed assets is low at 0.8% of revenue (2017: 0.3%).
The strategy of the Group is to concentrate organic sales efforts on attracting larger customers, particularly in the public and healthcare sector. Rather than operate a telesales operation aimed at acquiring smaller business customers organically, we use our free cash generation in combination with debt and equity instruments to acquire customer bases and businesses in the IT and telecommunications industry.
On 2 August 2017 the Company acquired the entire issued share capital of Atomwide. Atomwide, founded in 1987, is an IT services provider with over 30 years’ experience, offering specialised IT support services and technology solutions to approximately 2 million users in over 3,000 schools. Atomwide is the chief technology partner for London Grid for Learning, supplying IT services to around 2,500 schools in London. The bespoke services have been created by the in-house development team and are supported by an experienced team of IT professionals based at Atomwide’s premises in Orpington, Kent. All of the senior management team which are responsible for the strategic direction, technical development and the day-to-day operations of Atomwide are to be retained within the business post-acquisition. The acquisition was for an initial consideration of £12.0m plus the value of the surplus cash balance of Atomwide at completion (approximately £6.5m), payable in cash. Further contingent deferred consideration of up to £8.0m will be payable, also in cash, dependent upon the performance of Atomwide post-acquisition. The estimated deferred consideration payable at 31 March 2018 was £0.7m.
A fair value of £7.22m in relation to the customer contracts for the acquired business and £3.53m in relation to the Atomwide developed software applications have been recognised as intangible asset additions in the year ended 31 March 2018. Further details on the acquisition during the year are described in Note 29 of the financial statements.
Net debt and bank facilities
A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow and therefore support net borrowings. As a result of the Group’s focus on underlying profitability and cash conversion, free cash flow after taxes but before bank interest paid of £8.27m was generated during the year ended 31 March 2018 (2017: £4.33m).
Opening cash plus the free cash flow generated in the year, the proceeds of the convertible loan note issued and borrowing drawdowns form the senior debt facility have been used to fund £14.52m acquisition consideration, £1.84m dividends paid and £0.45m of capital expenditure on tangible and intangible assets. Net senior debt, which comprises cash balances and bank borrowings, has increased to £17.62m at the year-end (2017: £15.46m) as a result of the acquisition consideration outflows.
The Group’s available banking facilities are described in Note 29 of the financial statements.
Segmental key performance indicators (KPIs)
The segmental KPIs outlined below are intended to provide useful information when interpreting the accounts.
|Year ended 31 March 2018|
|Gross margin %||38.8%||53.9%||49.4%|
|Year ended 31 March 2017|
|Gross margin %||39.5%||44.6%||42.3%|
There are no non-financial KPIs which are reviewed regularly by the senior management team.
Principal risks and uncertainties
There are a number of potential risks and uncertainties which could have a material impact on the Group’s long-term performance and could cause actual results to differ materially from expected results.
The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. External funding facilities are managed to ensure that both short-term and longer-term funding is available to provide short-term flexibility whilst providing sufficient funding to the Group’s forecast working capital requirements.
The Group extends credit of various durations to customers depending on customer credit worthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Group will suffer adverse consequences. To manage this, the Group continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, a large proportion of our customer receipts are collected by monthly direct debit. The risk is further reduced by the customer base being spread across a wide variety of industry and service sectors. The top ten customers account for approximately 22.5% of revenues.
The Group operates in a highly competitive market with rapidly changing product and pricing innovations. We are subject to the threat of our competitors launching new products in our markets (including updating product lines) before we make corresponding updates and developments to our own product range. This could render our products and services out-of-date and could result in loss of market share. To reduce this risk, we undertake new product development and maintain strong supplier relationships to ensure that we have products at various stages of the life cycle.
Competitor risk also manifests itself in price pressures which are usually experienced in more mature markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value for money. The Group therefore monitors market prices on an ongoing basis.
Acquisition integration execution
The Group has set out that its strategy includes the acquisition of businesses where they are earnings enhancing. The Board acknowledges that there is a risk of operational disturbance in the course of integrating the acquired businesses with existing operations. The Group mitigates this risk by careful planning and rigorous due diligence.