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Final Results March 2010

RNS Number : 8529O
AdEPT Telecom plc
06 July 2010
AdEPT Telecom plc (“AdEPT” or the “Company”)
Final results for the year ended 31 March 2010
AdEPT, a leading independent provider of award-winning telecommunications services for fixed line, mobile and data connectivity, announces its results for the year ended 31 March 2010.

Financial Highlights

·      Increased underlying EBITDA for seventh consecutive year

·      EBITDA excluding non-recurring costs up by 3%  to £3.6m (2009: £3.5m)

·      Underlying EBITDA margin % up by 1.7% to 14.0% (2009: 12.3%)

·      Excellent cash generation with free cash flow, after interest and before non-recurring costs, of £1.9m (2009: £2.1m)

·      86% of reported EBITA (£3.1m) converted into cash generated from operating activities (£2.7m) (2009: 103%)

·      Net debt reduction of £1.6m year-on-year (2009: £0.5m) to £9.2m (2009: £10.8m)

Operational Highlights

·      Substantially increased product range

·      10% increase in ARPU as at March 2010 to £77.97 (2009: £71.16)

·      Further progress in increasing revenue from fixed monthly charges to 48% of revenue for the year ended March 2010 (2009: 43%). In the month of March 2010 fixed charges were 53% of revenue.

·      Greater than 70% increase to mobile and data revenues year-on-year

·      86% of revenue generated from customers taking more than one product or service (2009: 81%)

·      23% of revenue generated from customers taking 3 or more products (2009: 15%)

·      Overhead costs (excluding one-off restructuring costs) decreased to 23% of revenue (2009: 24%)

·      Prior year improvement to credit collection processes and debt management maintained with year end debtor days of 30 (2009: 29 days)

Commenting upon these results Chairman Roger Wilson said:

“The business has been resilient through challenging economic conditions, generating increased profitability, developing new product sets and continues to be highly cash generative.  AdEPT has delivered on its strategy of deleveraging from the continued strong operating cash generation.”

For further information on AdEPT Telecom please visit www.adept-telecom-investorrelations.co.uk or contact:

 

AdEPT Telecom Plc

Roger Wilson, Chairman

Ian Fishwick, Chief Executive

John Swaite, Finance Director

 

 

07786 111 535

01892 550 225

01892 550 243

 

Astaire Securities Plc

Shane Gallwey

 

 

020 7492 4775

CHAIRMAN’S STATEMENT

It is with great pleasure that I announce our annual results.

For the year ended 31 March 2010 AdEPT Telecom plc (“AdEPT” or the “Company”) delivered another strong trading performance.

Review of Operations

During the past year the Company has focussed on larger customer contracts, with target market businesses of 25 to 1,000 employees, which has enhanced our ability to benefit from scale efficiencies and cross selling.  Following a number of multi-product, multi-site contract wins during the year AdEPT Telecom is increasingly being recognised as one of the UK’s leading communications integration specialists, with over 700 multi-site customers.  Important customer wins during the year were Nationwide Autocentres with 216 sites, and a further 120 sites from Rexel.

This strategy of targeting larger customers has continued and since the year end the Company has signed a new 36 month contract to supply a national electronic games operator with a voice and data network of 450 sites, with an estimated contract value in excess of £800,000. In addition AdEPT has been named by Ja.net (the Joint Academic Network) as one of only 20 companies approved to sell data products to Universities, Colleges, higher education and research establishments connected to the Ja.net network in the UK.

Our revenue is becoming more stable as we reduce our reliance on variable monthly call charges, replacing them with fixed monthly line rentals.  The proportion of revenue derived from fixed monthly charges now represents 48% of total revenue (2009: 43%).

In an exceptionally tough economic climate during the last 12 months, it is testament to the resilience of the business model and the skills of the directors and management team in place at AdEPT that the business has been successful in recording it’s seventh consecutive year on underlying EBITDA growth.

The strong cash flow generation continued during the year with £1.9m of free cash flow after interest.  This was used to fund £0.3m of non-recurring costs and £1.6m net debt reduction.  The Company ended the period with £1.6m lower net borrowings, which at March 2010 was £9.2m.  Since the year end the Company has paid down a further £0.6m of debt, reducing net debt at 30 June 2010 to £8.6m.

New products

AdEPT was originally a fixed-line telecom provider but is increasingly expanding and diversifying its’ product range and has become one of the UK’s leading communication integrators offering best of breed products from all major UK networks.

A large number of data connectivity products were launched in the year including:-

·      EB-SA – up to 2Mb assured symmetrical broadband

·      Ethernet First Mile

·      Direct Internet Access

·      MPLS IP-VPN

A new range of 21st Century Network-based Inbound Call Handling products has enabled us to win some significant call centre contracts.

Key suppliers

AdEPT provides products from the following tier-1 networks in the UK:-

·      BT

·      Kcom

·      Virgin Business

·      Vodafone

·      Cable and Wireless Worldwide

·      O2

·      Opal (CarphoneWarehouse)

·      Orange

·      Griffin

·      T-Mobile

Cross selling of products

A key strategy for the Company remains to sell more products to new and existing customers.  The product penetration has increased during the year; at March 2010 86% of revenue was generated from customers taking more than one product (2009: 81%). 

In the larger customer base (those spending more than £1,000 per month) we have seen further improvement in product penetration. At March 2010 customers taking more than one product accounted for 97% of revenue generated (2009: 94%).  The proportion taking 3 or more products increased to 58% at March 2010 (2009: 45%).

Employees

The improved profitability this year was made possible by the continued hard work and focus of all employees at AdEPT Telecom.  As a Company we are immensely proud of the track record we have created in a relatively short period of time and on behalf of the Board I would like to take this opportunity to thank all of our employees for their hard work.

I would also like to take this opportunity to thank the former directors and non-executive directors who stepped down during the year for their substantial contributions to AdEPT and to wish them all the best for the future.

Shareholder Benefits Scheme

The AdEPT shareholder benefits scheme has continued to attract new members during the year.  The scheme, which is available to all shareholders owning a minimum of 1,000 shares, provides eligible shareholders with free residential line rental worth approximately £120 per annum for as long as they remain eligible shareholders.

Outlook

The management actions taken in the prior year to reduce overheads and tighten credit management have enabled the Company to increase EBITDA levels despite top line pressure.  The business focus for the coming year remains on continued development of organic sales, maintaining profitability and cash flow generation, which will be used to reduce net borrowings.  This has been demonstrated by the £0.6m net debt reduction already achieved since March 2010.  We will therefore continue to grow our organic sales channels, invest in new products and complement this with continued investment in retention activities to retain more customers.

Despite the continued uncertainty of the economic outlook, I am confident that the Company is in a much stronger position with it’s increasing ability to provide complex multi-site, multi-product solutions to larger customer’s.  This should provide more stability through longer customer contract durations and a more stable customer base.  We will also continue to focus on our customer cash collection to ensure payment terms do not get extended.

Roger Wilson

Non-executive Chairman

FINANCIAL AND BUSINESS REVIEW

SUMMARY of three year financial performance:


Year ending March


2010

£’000

 

Year-on-Year %

2009

£’000

 

Year-on-Year %

2008

£’000







Revenue

25,725

(10)%

28,567

21%

23,618

Gross margin

9,561

(8)%

10,341

18%

8,754

EBITDA*

3,612

3%

3,517

7%

3,280

Net debt

9,215


10,843


11,295

* excluding non-recurring costs

REVENUE

Group revenue decreased by 10% to £25.7m (2009: £28.6m)

·      Fixed line revenues were 13.1% lower at £24.0m (2009: £27.6m), with this reduction driven by call volume reductions which is primarily a reflection of lower economic activity.  The Company’s previous reliance on call revenues has been much reduced with call revenue providing only 47% of total revenue in March 2010 (2009: 56%).

·      Mobile revenues were ahead 86.1% to £0.32m (2009: £0.18m). We have only been selling mobile for two years and handset volumes increased during the year by 548 to 1,369 (2009: 821). The revenue per connection has increased to £232 (2009: £208) driven by the increased take up of smartphones.

·      Data product revenues were up 72.5% to £1.1m (2009: £0.6m), with increases to the number of data circuits in place.  At March 2010 the contract revenue from data product orders placed awaiting connection was £0.4m due to longer connection timescales.

Total revenue generated from the data and mobile divisions represented 8.7% of total revenue in March 2010 (March 2009: 5.7%).

The proportion of revenue derived from business customers has remained at 95% (2009: 95%).

Fixed monthly revenue streams

The Company continues to focus on fixed monthly revenue streams so as to reduce revenue volatility. The proportion of revenue, which is fixed monthly values, increased to 48% of total revenue for the year ended March 2010 (2009: 44%) following the continued focus on multi-product sales (calls, line rental and data products) and the introduction of a broad range of data connectivity products in 2008.

Cross selling

The proportion of revenue generated from customers taking more than one product or service has increased to 86% for the year ended March 2010 (2008: 81%) which should provide a more stable future revenue stream. 

The proportion of higher spending customers (recurring revenues of more than £1,000 per month) taking 3 or more products increased to 58% at March 2010 (2009: 45%).

Average spend per customer

The Company is now increasingly focusing on larger customers and AdEPT’s largest 200 customers account for approximately one third of March 2010 revenue.

Average customer monthly spend for business customers increased year-on-year by 9.6% to £77.97 in March 2010 reflecting the Group’s success in gaining contracts with higher spending customers and an increasing proportion of higher spending business customers. 

GROSS MARGIN

Gross margins for calls, lines, data connectivity and broadband have experienced marginal increases during the year ended March 2010, despite pressures arising from a highly competitive market.  As a result, gross margin has improved during the year ended March 2010 to 37.2% (2009: 36.2%). 

Future gross margin pressure is anticipated as our product mix moves increasingly towards the lower margin line rental, data connectivity and broadband revenue streams.

ADMINISTRATION COSTS

Operational efficiencies achieved

Cost savings have been delivered as planned from:-

·      operational efficiencies associated with managing larger customers, and

·      savings derived from the restructuring undertaken towards the end of the 2009 financial year

As a result, the Company has seen a £0.9m reduction in underlying operating costs during the year ended March 2010 to £5.9m which is 23% of revenue (2009: 24%). 

We believe that we remain one of the lowest cost operators in the industry.

Non-recurring costs

The non-recurring costs identified are restructuring costs which will not recur next year. These costs are represented by staff and the close out of leases acquired with the Telecom Direct acquisition.

Impact of corporate failures

Whilst corporate failure has increased in the year it is still so small as to have a minimal impact on overall results.  In the year ended March 2010 there was 207 such failures in our customer base (2009: 149).  These were mostly smaller companies with average debt per failed customer during the year ended March 2010 being £435 (2009: £898).  We anticipate the relatively high corporate failure rate may continue some time after the economic recovery, but that as a result of the improvements made in the prior year to collection processes the Company’s exposure and risk has been reduced.

EBITDA

I am pleased to report the seventh consecutive year of underlying EBITDA growth since AdEPT’s inception in 2003. 

Excluding non-recurring costs EBITDA has increased by £0.1m during the year despite top line pressure.  The Company has focussed on the underlying profitability or customers and revenue streams; as a result revenue reduction has been more than absorbed by gross margin improvement combined with the operational efficiencies and costs savings from the earlier restructuring.

EARNINGS PER SHARE

Adjusted earnings per share, based on retained earnings adding back amortisation and non-recurring costs (see note 22), has reduced to 9.27p per share (2009: 10.44p).  This arises largely due to the year-on-year movement in the tax charge.

CASH FLOW

Cash conversion

The Group benefits from an excellent operating cash model, with EBITA turning into cash.  Reported EBITA turned into net cash from operating activities is 86% (2009: 103%).  There was a net working capital outflow of £0.5m during the year arising from the reduction in trade payables following the reduction in direct costs due to top line reductions. 

Strong management of credit risk

The Group has continued to manage its credit risk in the current economic climate and the collections of trade receivables have been maintained during the year with customer collection periods of 30 days (2009: 29 days).

Increase in cash balances

After servicing its debt the Group achieved an increase in cash and cash equivalents of £0.2m during the year. All acquisitions have been paid for and no further earn-out payments are due.

CAPITAL EXPENDITURE 

The Group has low capital requirements and therefore expenditure on tangible assets is low at 0.2% of revenue (2009: 0.1%). Intangible asset additions were £0.1m (2009: £0.1m).

NET DEBT

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow.  As a result of the Company’s focus on underlying profitability and cash conversion free cash flow after bank interest of £1.9m was generated during the year ended March 2010; £0.3m of this was used to fund non-recurring costs with £1.6m being applied to net reduction.  Net debt, which comprises cash balances and bank borrowings, has therefore improved to £9.2m (2009: £10.8m). 

Net debt has been reduced from a peak of more than £12m in November 2007 to £9.2m at 31 March 2010.  Free cash flow of £5.8m has been generated since AdEPT acquired Telecom Direct in November 2007 and in addition to the debt reduction of £2.8m a further £3m has been paid in restructuring costs largely associated with the assimilation of Telecom Direct’s business.

The Company’s available banking facilities are described in Note 23 to the financial statements.  The existing facilities are renewable in December 2011, and the Company is already in appropriate discussion with its bankers.  The Company continues to manage its exposure to interest rate risks arising from financing activities.

KEY PERFORMANCE INDICATORS (KPIs)

The KPIs outlined below are intended to provide useful information when interpreting the accounts. The KPIs outline the Group’s position as at the final month of the year, March, which provides an indication of the starting point for the following financial year.



Data,



Fixed

mobile



line

and other



services

services

Total





Year ended 31 March 2010




Revenue

23,953

1,772

25,725

Gross profit

8,861

699

9,561

Gross margin %

37.0%

39.4%

37.2%





Year ended 31 March 2009




Revenue

27,554

1,013

28,567

Gross profit

9,968

373

10,341

Gross margin %

36.2%

36.8%

36.2%





RESILIENT BUSINESS MODEL

Despite the unprecedented conditions in the UK economy over the last 18-24 months the Board believes that AdEPT operates a resilient business model and has a strong customer proposition which it is believed will present opportunities in the coming year.  These features include:

·      highly cash generative with strong underlying profitability;

·      supplies are nearly all business critical – an essential part of the customer’s daily operational requirements;

·      highly automated systems provides sector leading labour costs : turnover productivity;

·      low capital investment requirements relative to turnover;

·      continued focus on broadening its product range, particularly with regard to data connectivity;

·      customers are spread across all industries, the top ten customers account for approximately 13.5% of revenues;

·      trade suppliers and partners are all top tier suppliers, providing confidence in the continuity and reliability of service to customers;

·      64.0% of the Company’s customers pay by monthly direct debit, reducing the Company’s credit risk; and

·      the Company has agreed banking facilities through to December 2011

·      with the reorganisation and the level of cash generation forecast, the Board expects the Company’s net borrowing position to improve significantly over the next twelve months.

John Swaite

Finance Director