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Interim results Sep 10

RNS Number : 2092W

AdEPT Telecom plc

16 November 2010

 

AdEPT Telecom Plc (“AdEPT” or the “Company”)

Interim results for the 6 months ended 30 September 2010

AdEPT, a leading independent provider of award-winning telecommunications voice and data services for fixed line and mobile networks, announces its results for the 6 months ended 30 September 2010.

 

Highlights

 

Financial

  • Underlying EBITDA increased by 2.7% to £1.93 million (2009: £1.88 million)
  • Underlying EBITDA margin increased to 16.0% (2009: 14.5%)
  • Free cash flow before interest of £1.11 million generated (2009: £0.67 million)
  • 93.9% of reported EBITA converted into cash generated from operating activities (2009: 76.3%)
  • Net debt reduced by £2.08 million in the last 12 months to £8.16 million (2009: £10.23 million)
  • Net debt reduced by £1.05 million since year end (March 2010: £9.21 million)
  • Profit before tax of £0.14 million (2009: loss of £0.22 million)
  • Reported operating profit increased by 68.2% to £0.74 million (2009: £0.44 million)
  • Adjusted EPS increased by 11.5% to 5.41p (2009: 4.85p)

 

Operational

  • Data product revenues increased by 21.4% to £0.61 million (2009: £0.50 million)
  • Non-fixed line division now accounts for 8.6% of total revenue (2009: 5.7%)
  • Underlying operating costs reduced to 20.1% of revenue (2009: 22.6%)
  • Customer cash collection periods maintained at 29 days (2009: 29 days)

 

Chairman’s Statement

A key strength of AdEPT is its consistent and proven ability to generate strong operational cash flow.  Despite the challenging economic conditions the Company has continued to be highly cash generative, with £1.11 million of free cash flow, funding £1.05 million reduction in net debt since March 2010.  AdEPT has reduced net borrowings by £3.84 million since the peak net debt following the Telecom Direct acquisition.  The net debt reduction is underpinned by focus on underlying profitability, improving margins on customer contracts, operational efficiencies and tight credit control.

 

Lower economic activity continues to be reflected in reduced call volumes and this period revenues reflect a lower entry point against the comparative period. Our exposure to variable call volumes has been reduced with the proportion of revenue generated from calls reduced to 46.0% from 52.9% in the comparative period.

 

Business review

AdEPT is increasingly seen as one of the UK’s leading suppliers to multi-site customers and this has been further demonstrated by the following notable contract wins in the last 6 months:

  • a new 36 month contract to supply a national electronic games operator with a voice and data network of 450 sites with a contract value estimated in excess of £800,000. The contract involves the deployment of a nationwide data network with Ethernet central connectivity and a complex inbound and outbound solution based on our 21st Century Network feature set.
  • a new 36 month contract to supply a nationwide chain of c750 pubs with Wi-Fi connectivity, with an estimated contract value of over £700,000.
  • a new 24 month contract to supply a district council with a complex 10 site voice and data solution, with an estimated contract value in excess of £200,000.
  • a new 24 month contract to supply the leading publisher of journals and magazines to the public sector, with an estimated contract value in excess of £200,000.
  • a new 36 month contract to supply 150 shops of a nationwide charity with a multi-site multi-product solution.

 

Additionally, in the March 2010 statement we announced that under a framework agreement with one of the UK’s largest data network providers, the Joint Academic Network (JaNET), AdEPT had been authorised as one of only 20 companies to sell data products to UK universities and colleges.  I am pleased to report that AdEPT has had several contract successes under this framework agreement during the period since March 2010.

 

Our position as an independent, best of breed supplier means that we can take advantage of the roll-out of 21st century networks by a range of carriers in the UK. We continue to expand our product portfolio particularly in the data and VoIP arenas:

 

  • We have added data services such as Ethernet high speed access (up to 1Gigabit speeds) and MPLS networks; and
  • We have signed a supply agreement with BT Wholesale to sell what we believe are the most advanced business-grade VoIP services in the UK. Hosted IP for smaller sites and SIP trunks for larger sites are integrated into a single platform managed via a web portal. The second half year will see the start of customer trials.

 

We firmly believe in increasing the number of products sold to each customer and our concentration on cross-sell has seen the proportion of our revenue generated by customers taking three or more of our products rise from 20.1% last year to 27.2% in this period.

 

The Company continues to focus on winning and retaining larger customers.  The Premier Customer division, comprising the largest 200 customers with recurring monthly spend greater than £1,000, now accounts for more than 36.8% of total revenue (2009: 30.3%).  Within the Premier Customer division customers taking three or more products account for 66.3% (2009: 49.6%).

 

Strong cost control and operational efficiency associated with managing the larger customers has resulted in operating expenditures falling from 22.9% of revenue at September 2009 to 20.1% in the current period.

 

Financing

Shortly after the end of the interim period the Company signed a new credit agreement with Barclays Bank plc.  The new credit agreement provides a longer-term financing package, combined with lower interest charges of approximately £115,000 per annum, greater operational flexibility and bank covenants which are appropriate for the future development of the Company.  The maximum amount of the credit facility is reduced to £11.125 million, of which approximately £2.0 million was undrawn at 31 October 2010.

 

Outlook

The past year has seen the Company rightly focus on efficiency improvement, underlying profitability and cash flow conversion which has enabled £2.08 million reduction in net borrowings during the last 12 months.  These remain key objectives for the Company during the second half of the year.  In addition, the expansion of the product portfolio is anticipated to provide the Company with further opportunities in the future period.

 

Roger Wilson

16 November 2010

 

Enquiries:

 

AdEPT Telecom

Roger Wilson, Chairman             07786 111535

Ian Fishwick, Chief Executive       01892 500225

John Swaite, Finance Director      01892 550243

 

Northland Capital Partners Limited

Shane Gallwey:                          020 7492 4750

Katie Shelton:                            020 7492 4750

Charles Vaughan:                       020 7492 4750

 

 

UNAUDITED STATEMENT OF COMPREHENSIVE INCOME

Six months ended
30 September 30 September
2010 2009
Note £’000 £’000
REVENUE 12,090 13,008
Cost of sales (7,751) (8,195)
GROSS PROFIT 4,339 4,813
Administrative expenses (3,598) (4,371)
OPERATING PROFIT 741 442
Total operating profit – analysed:
Operating profit before non-recurring costs, amortisation
depreciation and amortisation 1,932 1,881
Non-recurring costs (255) (266)
Share based payments (11) (11)
Depreciation of tangible fixed assets (36) (54)
Amortisation of intangible fixed assets (889) (1,108)
Total operating profit 741 442
Finance costs (598) (664)
Finance income - -
PROFIT/(LOSS) BEFORE INCOME TAX 143 (222)
Income tax expense (137) (130)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 6 (352)
Attributable to:
Equity holders 6 (352)
Earnings per share
Basic earnings per share (pence) 3 0.03p (1.67)p
Diluted earnings per share (pence) 3 0.03p N/a
Adjusted earnings per share, after adding back
amortisation and non-recurring costs
Basic earnings per share (pence) 3 5.46p 4.85p
Diluted earnings per share (pence) 3 4.77p 4.25p

 

 

 

UNAUDITED STATEMENT OF FINANCIAL POSITION

30 September 30 September 31 March
2010 2009 2010
£’000 £’000 £’000
ASSETS
Non-current assets
Intangible assets 17,773 19,517 18,663
Property, plant and equipment 59 93 72
Deferred income tax 576 738 612
18,408 20,348 19,347
Current assets
Trade and other receivables 2,746 2,994 2,901
Income tax receivable - - -
Cash and cash equivalents 1,029 607 885
3,775 3,601 3,786
Total assets 22,183 23,949 23,133
LIABILITIES
Current liabilities
Trade and other payables 4,550 4,774 4,702
Short term borrowings 1,478 1,579 1,478
Income tax 160 76 60
6,188 6,429 6,240
Non-current liabilities
Long term borrowings 7,707 9,259 8,622
Total liabilities 13,895 15,688 14,862
Net assets 8,288 8,261 8,271
SHAREHOLDERS’ EQUITY
Share capital 2,107 2,107 2,107
Share premium 7,965 7,965 7,965
Retained earnings (1,784) (1,811) (1,801)
Total equity 8,288 8,261 8,271

 

 

 

UNAUDITED STATEMENT OF CHANGES IN EQUITY

Attributable to equity holders of parent
Share
Share Share capital to Retained Total
capital premium be issued earnings equity
£’000 £’000 £’000 £’000 £’000
Equity at 1 April 2009 2,107 7,965 87 (1,557) 8,602
Loss for six months ended 30 September 2009 - - (352) (352)
Share based payments - - 11 11
Share options lapsed during the year (8) 8 -
Total comprehensive income for the six
months to 30 September 2009 - - 3 (344) (341)
Balance at 30 September 2009 2,107 7,965 90 (1,901) 8,261
Loss for six months ended 31 March 2010 - - (3) (3)
Share based payments - - 13 13
Share options lapsed during the year (2) 2 -
Total comprehensive income for the six
months to 31 March 2010 - - 11 (1) 10
Balance at 31 March 2010 2,107 7,965 101 (1,902) 8,271
Profit for six months ended 30 September 2010 - - 6 6
Share based payments - - 11 11
Total comprehensive income for the six
months to 30 September 2010 - - 11 6 17
Balance at 30 September 2010 2,107 7,965 112 (1,896) 8,288

 

 

 

UNAUDITED STATEMENT OF CASH FLOWS

Six months ended Year ended
30 September 30 September 31 March
2010 2009 2010
£’000 £’000 £’000
Cash flows from operating activities
Adjusted profit before income tax 398 44 212
Non-recurring costs (255) (266) (326)
Depreciation and amortisation 925 1,162 2,082
Share based payments 11 12 24
Net finance costs 598 664 1,293
(Decrease)/increase in trade and other receivables (45) 26 (81)
Decrease in trade and other payables (102) (460) (478)
Cash generated from operations 1,530 1,182 2,726
Income taxes received - 58 57
Net cash from operating activities 1,530 1,240 2,783
Cash flows from investing activities
Interest paid (398) (466) (895)
Purchase of intangible assets - (94) (112)
Purchase of property, plant and equipment (23) (12) (39)
Net cash used in investing activities (421) (572) (1,046)
Cash flows from financing activities
Repayment of finance leases - (5) (6)
Repayment of borrowings (965) (789) (1,579)
Net cash used in financing activities (965) (794) (1,585)
Net increase/(decrease) in cash and cash equivalents 144 (126) 152
Cash and cash equivalents at beginning of period/year 885 733 733
Cash and cash equivalents at end of period/year 1,029 607 885
Cash at bank and in hand 1,029 607 885
Bank overdrafts - - -
Cash and cash equivalents 1,029 607 885

 

 

ACCOUNTING POLICIES

1        Nature of operations and general information

AdEPT Telecom plc is one of the UK’s leading independent comms integrators with award winning customer service.  The Company supplies best of breed products from every major network in the UK, tailored to suit the customer. The Company is focused on delivering a complete telecommunications service for small and medium sized business customers with a targeted product range including landline calls, line rental, broadband, mobile and data connectivity services, which are supplied to thousands of business and residential customers across the UK.

AdEPT Telecom plc is incorporated and domiciled in the UK. The Company’s shares are listed on AIM of the London Stock Exchange.

The financial information set out in this interim report which has not been audited, does not constitute statutory accounts as defined in Part 15 of the Companies Act 2006.  The Company’s statutory financial statements for the year ended 31 March 2010, prepared under International Financial Reporting Standards, have been filed with the Registrar of Companies.  The auditor’s report on those financial statements was unqualified and did not contain a statement under Section 495 (4) of the Companies Act 2006.

2        Basis of preparation and summary of significant accounting policies

Basis of preparation

The interim consolidated financial statements have been prepared in accordance with applicable International Financial Reporting Standards (IFRS) as adopted by the EU as issued by the International Accounting Standards Board and in particular Interim Financial Reporting.

The interim consolidated financial statements have been prepared under the historical cost convention and on the same basis as the most recent annual financial statements prepared to 31 March 2010.  The measurement bases and principal accounting policies of the Company are set out below.

Revenue

Revenue is measured by reference to the fair value of consideration received or receivable by the Company for goods supplied and services provided, excluding VAT and trade discounts. Revenue is recognised upon the performance of services or transfer of the risks and rewards of ownership to the customer.

Revenue comprises of both invoiced and un-invoiced amounts for performance of network services supplied by the Company during the year. The network services, which include call revenues (billing for call minutes) and fixed charges such as line rental or broadband, are generally billed monthly in arrears.  The revenue is recognised in the month to which the usage relates.  Revenue from mobile commissions is recognised when the customers are connected to the relevant network.

Intangible assets acquired as part of a business combination and amortisation

In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Company of its fair value at the acquisition date.  The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Company.

Intangible fixed assets continue to be subject to an impairment review on the first anniversary after acquisition, when appropriate lives are selected.

The intangible asset “customer base” is amortised to the income statement over its estimated economic life.  The average estimated useful economic life of all the acquisitions has been estimated at 17 years (2009: 14 years). The amortisation charge in the income statement for the 6 months ended 30 September 2010 includes impairment charges of £137,737.

Other intangible assets

Also included within intangible fixed assets are the development costs of the Company’s billing and customer management system plus an individual licence.  These other intangible assets are stated at cost, less amortisation and any provision for impairment.  Amortisation is provided at rates calculated to write off the cost, less estimated residual value of each intangible asset, over its expected useful life on the following bases:

Customer management system - three years straight line
Other licences - contract licence period

Property plant and equipment

Property plant and equipment are stated at cost, less depreciation and any provision for impairment.  Depreciation is provided on all property plant and equipment at rates calculated to write off the cost, less estimated residual value of each asset, over its expected useful life on the following bases:

Short term leasehold improvements - five years straight line
Fixtures and fittings - three years straight line
Office equipment - three years straight line
Computer software - three years straight line

Leasing and hire purchase commitments

Assets held under finance leases and hire purchase contracts, which are those where substantially all the risks and rewards of ownership of the asset have passed to the company, are capitalised in the balance sheet and depreciated over their useful lives. The corresponding lease or hire purchase obligation is treated in the balance sheet as a liability.

The interest element of the rental obligations is charged to the income statement over the period of the lease and represents a constant proportion of the balance of capital repayments outstanding.

Rentals under operating leases, where substantially all of the benefits and risks of ownership remain with the lessor, are charged to the profit and loss on a straight line basis, even if payments are not made on such a basis.

Pensions

The Company contributes to personal pension plans. The amount charged to the income statement in respect of pension costs is the contribution payable in the year.

Capital instruments

The costs incurred directly in connection with the issue of debt instruments are charged to the income statement on a straight line basis over the life of the debt instrument.

Income tax

Income tax is the tax currently payable based on taxable profit for the year.

Deferred income tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases.  However, deferred income tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

Deferred income tax liabilities are provided in full, with no discounting. Deferred income tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income.  Current and deferred income tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

Changes in deferred income tax assets or liabilities are recognised as a component of income tax expense in the income statement, except where they relate to items that are charged or credited directly to equity in which case the related deferred income tax is also charged or credited directly to equity.

Share based payments

The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date at which the relevant employees become fully entitled to the award.  Fair value is appraised at the grant date and excludes the impact on non-market vesting conditions such as profitability and sales growth targets, using an appropriate pricing model for which the assumptions are approved by the Directors. In valuing equity-settled transactions, only vesting conditions linked to the market price of the shares of the Company are considered.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

At each balance sheet date, the cumulative expense (as above) is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non market conditions, the number of equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting described above. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Non-recurring items

Material and non-recurring items of income and expense are separated out in the income statement. Examples of items which may give rise to disclosure as non-recurring items include costs of restructuring and reorganisation of existing businesses, integration of newly acquired businesses and asset impairments. Non-recurring costs include the current year expense charged to the income statement in relation to restructuring which has taken place since the year end to derive the underlying profitability of the Company.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Financial instruments

Financial assets and liabilities are recognised on the Company’s balance sheet when the Company becomes a party to the contractual provisions of the instrument.

The Company makes use of derivative financial instruments to hedge its exposure to interest rate risks arising from financing activities.

In accordance with its treasury policy, the Company does not hold or issue derivative financial instruments for trading purposes.

Derivative financial instruments are recognised initially at fair value, i.e. cost. Subsequent to initial recognition derivative financial instruments are measured at fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement as a component of financing income or cost.

The fair value of the derivative financial instrument is the estimated amount that the Company would receive or pay to terminate the instrument at the balance sheet date, taking into account current interest rates and the current creditworthiness of the instrument counterparties.

Interest rate risk

The Company’s policy is to manage its interest cost using a mix of fixed and variable rate debts. The Company’s policy is to keep at least 75% of its borrowings at fixed rates of interest. At 30 September 2010, after taking into account the effect of interest rate swaps, 100% of the Company’s borrowings are at a fixed rate of interest (2009:  100%).

Credit risk

Credit risk associated with cash balances and derivative financial instruments is managed by transacting with financial institutions with high quality credit ratings. Accordingly the Company’s associated credit risk is deemed to be limited.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at 30 September 2010 was £3,296,377 (2009: £3,601,121).

Liquidity risk

The Company has an appropriate liquidity risk management framework for the management of the Company’s short, medium and long-term funding and liquidity risk management requirements. The Company manages liquidity risk by maintaining adequate banking facilities and reserve borrowing facilities through cash flow forecasting, acquisition planning and monitoring working capital and capital expenditure requirements on an ongoing basis.

Currency risk

AdEPT’s operations are handled entirely in sterling.

Significant accounting judgements and estimates

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities with the next financial year are discussed below.

  • Impairment of intangible assets

The Company determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the ‘value in use’ of the cash-generating units to which the intangible value is allocated. Estimating a value in use amount requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

  • Deferred tax assets

Deferred tax assets are recognised for all unused tax losses and other timing differences to the extent that it is more likely than not that taxable profit will be available against which the losses and other timing differences can be utilised. Management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

  • Share-based payment

The estimation of the fair value of share options and other equity instruments at the date of grant requires management to make estimates concerning the number of employees likely to exercise their options together with the expected volatility and dividends payable on the underlying shares.

  • Receivables

Debts are recognised to the extent that they are judged recoverable. Management reviews are performed to estimate the level of provision required for irrecoverable debt. Provisions are made specifically against invoices where recoverability is uncertain.

 

3             Earnings per share

 

Six months ended Year ended
30 September 30 September 31 March
2010 2009 2010
£’000 £’000 £’000
Earnings for the purposes of basic and diluted
earnings per share
Profit/(loss) for the period attributable to equity holders
of the parent 6 (352) (355)
Amortisation 889 1,108 1,981
Non-recurring costs 255 266 326
Adjusted profit attributable to equity holders of the
parent, adding back amortisation and non-recurring costs 1,150 1,022 1,952
Number of shares
Weighted average number of shares used for earnings
per share 21,067,443 21,067,443 21,067,443
Dilutive effect of share plans 3,037,433 2,955,084 3,037,433
Diluted weighted average number of shares used to
calculate fully diluted earnings per share 24,104,876 24,022,527 24,104,876
Earnings per share
Basic earnings per share (pence) 0.03p (1.67)p (1.68)p
Fully diluted earnings per share (pence) 0.03p N/a N/a
Adjusted earnings per share, after adding back
amortisation and non-recurring costs
Adjusted basic earnings per share (pence) 5.46p 4.85p 9.27p
Adjusted fully diluted earnings per share (pence) 4.77p 4.25p 8.10p

 

Earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue.

Adjusted earnings per share is calculated by dividing the profit attributable to equity holders of the Company (after adding back amortisation) by the weighted average number of ordinary shares in issue.

Fully diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares by existing share options, assuming dilution through conversion of all existing options.  The adjustment for the dilutive effect of share options in the six months ended 30 September 2009 and year to 31 March 2010 has not been reflected in the calculation of the diluted loss per shares as the effect would be anti-dilutive.