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Interim results Sep 2011

RNS Number : 4949S
AdEPT Telecom plc
22 November 2011

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

Interim results for the 6 months ended 30 September 2011

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 2011.

Highlights

Financial

·      Underlying EBITDA maintained at £1.95 million (2010: £1.93 million)

·      Underlying EBITDA margin increased by 1.5% to 17.5% (2010: 16.0%)

·      Free cash flow of £0.96 million generated (2010: £1.11 million)

·      Net debt reduced by £1.69 million in the last 12 months to £6.47 million (2010: £8.16 million)

·      Net debt reduced by £0.90 million since year end (March 2011: £7.37 million)

·      Profit before tax increased by £0.51 million to £0.65 million (2010: £0.14 million)

·      Reported operating profit increased by £0.29 million to £1.03 million (2010: £0.74 million)

·      Adjusted EPS increased by 3.3% to 5.64p (2010: 5.46p)

·      Maiden dividend of 0.5p per share approved (2010: £nil)

Operational

·      Data & mobile product revenues increased by 25.4% to £1.30 million (2010: £1.04 million)

·      Data & mobile division now accounts for 11.7% of total revenue (2010: 8.6%)

·      Non-Geographic Number revenue increased by 21.8% to £0.49 million (2010: £0.40 million)

·      Revenue from customers taking 3 or more products increased to 32.3% (2010: 27.2%)

·      Customer cash collection periods reduced to 27 days (2010: 29 days)

Business review

AdEPT has continued to generate healthy profits despite revenue pressure; this has been achieved from product margin and operational efficiency improvements.  The ongoing focus on larger customers, generally businesses with 50 to 1,000 employees, has enhanced scale efficiencies and cross selling opportunities.  Cross selling into the existing customer base continues to be successful with revenue from customers taking 3 or more products increasing to 32.3% of total revenue (2010: 27.2%).

The Company has continued to move away from its early dependence on traditional outbound calls and lines, which in the interim period to 30 September 2011 represented 83.9% of total revenue (2010: 88.1%).  Data and mobile products represent an increasing proportion of the Company’s revenue, which at 30 September 2011 accounted for 11.7% of total revenue (2010: 8.6%).

The product range is constantly growing, and the Company continues to expand its supplier base to ensure it is at the forefront of technology.  We work in partnership with a wide range of specialist data connectivity providers including BT Wholesale, Griffin, Maxima, Network Flow and Virgin Media.  The AdEPT data product portfolio now includes:

·      MPLS networks

·      Ethernet from 8 Mbps to 1Gbps

·      Cloud-based VoIP

·      Cloud-based inbound solutions

In the last 6 months, AdEPT launched what we believe to be the UK’s most advanced VoIP for Business product range and built a National VoIP Demonstration Centre at our headquarters in Tunbridge Wells.  Our strategic partnership with BT Wholesale to provide cloud-based VoIP for Business has seen AdEPT already successfully secure two of the largest VoIP orders placed in the UK to date.  The 3-year contract won since the period end with a leading provider of software, services and systems to UK education, worth £200,000, is to supply their main contact centre with 300 SIP trunks, the next generation replacement for ISDN30 channels.  The migration is scheduled to take place during the second half of the March 2012 financial year.  The 3-year contract with the UK’s largest electrical wholesaler, worth an estimated £2.5m, covers their entire 400 site estate.  The contract commences with a 90-site VoIP trial commencing in the second half of the March 2012 financial year, with a view to a complete roll-out over the life of the contract.  Our ability to provide both conventional calls and lines, and VoIP for Business, means that AdEPT is ideally placed to manage a gradual migration to next generation technology.

We have also recently completed the implementation of our cloud-based contact centre technology for one of the UK’s leading airlines.  As a result AdEPT has seen more than 20% growth in revenue from non-geographic numbers in the 6 months ended 30 September 2011.

Financing

Cash generation has been maintained during the interim period by focus on underlying profitability of customer contracts, on operational efficiency and maintaining tight customer credit control.  During the 6 months to 30 September 2011 the Company has generated £0.96 million free cash flow, of which £0.8 million has been used to reduce net borrowings, which at 30 September 2011 were £6.47 million (September 2010: £8.16 million).

Interest costs for the 6 month period to 30 September 2011 include a charge of £52,924 in relation to the fair value of the interest rate swap as required by IAS 39 ‘Financial Instruments’.  This is not a reflection of an increase in the cost of borrowing as the interest rate swap in place provides a fixed rate of interest.

On 20 July 2011 the Company received court approval for a conversion of the share premium account into a distributable reserve.  The conversion has no effect on the number of ordinary shares or the rights attached to the ordinary shares and the market price of the shares has not been adjusted as a result.  The share premium account conversion was approved in order to maximise the capital structure of the Company by creating distributable reserves with a view to facilitating a potential future dividend policy.

On 27 October 2011 the Directors approved by an Ordinary Resolution for a maiden dividend of 0.5p per Ordinary Share in respect of the results for the 6 months to 30 September 2011.  This will absorb approximately £105,337 of shareholders’ funds (2010: £nil).  It is proposed by the Directors that this dividend will be paid on 20 April 2012 to shareholders who are on the register of members on the record date of 30 March 2012.

Outlook

The Company continues to be under top line pressure in the competitive fixed line market place.  Despite this, it has maintained EBITDA and achieved a reduction in net borrowings through a focus on profitability and cash generation which remains a priority.  On-going regulatory changes to mobile interconnect rates will continue to drive down our wholesale costs, helping to support margins despite falling retail prices.

AdEPT will continue to broaden its revenue base, with particular emphasis on data, managed services and inbound solutions which represent the growth areas of the market. The recent contract successes, particularly with regard to VoIP for Business, illustrate the Company’s ability to compete successfully in these areas.

Roger Wilson

22 November 2011

 

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 7796 8823

UNAUDITED STATEMENT OF COMPREHENSIVE INCOME

Six months ended
30 September 30 September
2011 2010
Note £’000 £’000
REVENUE 11,095 12,090
Cost of sales (7,444) (8,488)
NET PROFIT 3,650 3,602
Administrative expenses (2,621) (2,861)
OPERATING PROFIT 1,029 741
Total operating profit – analysed:
Operating profit before non-recurring costs,
depreciation and amortisation 1,947 1,932
Non-recurring costs - (255)
Share based payments (13) (11)
Depreciation of tangible fixed assets (14) (36)
Amortisation of intangible fixed assets (891) (889)
Total operating profit 1,029 741
Finance costs (377) (598)
Finance income - -
PROFIT BEFORE INCOME TAX 652 143
Income tax expense (354) (137)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 298 6
Attributable to:
Equity holders 298 6
Earnings per share
Basic earnings per share (pence) 3 1.42p 0.03p
Diluted earnings per share (pence) 3 1.23p 0.03p
Adjusted earnings per share, after adding back
amortisation and non-recurring costs
Basic earnings per share (pence) 3 5.64p 5.46p
Diluted earnings per share (pence) 3 4.90p 4.77p

UNAUDITED STATEMENT OF FINANCIAL POSITION

30 September 30 September 31 March
2011 2010 2011
£’000 £’000 £’000
ASSETS
Non-current assets
Intangible assets 16,202 17,773 17,054
Property, plant and equipment 38 59 50
Deferred income tax 320 576 354
16,560 18,408 17,458
Current assets
Trade and other receivables 2,478 2,746 2,758
Income tax receivable - - -
Cash and cash equivalents 1,486 1,029 1,361
3,964 3,775 4,119
Total assets 20,524 22,183 21,577
LIABILITIES
Current liabilities
Trade and other payables 2,991 4,550 3,957
Short term borrowings 1,331 1,478 1,456
Income tax 544 160 225
4,866 6,188 5,638
Non-current liabilities
Long term borrowings 6,624 7,707 7,270
Provisions for liabilities and charges 160 - 106
Total liabilities 11,650 13,895 13,014
Net assets 8,874 8,288 8,563
SHAREHOLDERS’ EQUITY
Share capital 2,107 2,107 2,107
Share premium - 7,965 7,965
Retained earnings 6,767 (1,784) (1,509)
Total equity 8,874 8,288 8,563

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 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 - 11
Balance at 30 September 2010 2,107 7,965 112 (1,896) 8,288
Profit for six months ended 31 March 2011 - - - 257 257
Deferred tax asset adjustment - - - 6 6
Share based payments - - 12 - 12
Total comprehensive income for the six
months to 31 March 2011 - - 12 263 269
Balance at 31 March 2011 2,107 7,965 124 (1,633) 8,563
Profit for six months ended 30 September 2011 - - - 298 298
Share capital restructuring - (7,965) - 7,965 -
Share based payments - - 13 - 13
Total comprehensive income for the six
months to 30 September 2011 - (7,965) 13 8,263 311
Balance at 30 September 2011 2,107 - 137 6,630 8,874

UNAUDITED STATEMENT OF CASH FLOWS

Six months ended Year ended
30 September 30 September 31 March
2011 2010 2011
£’000 £’000 £’000
Cash flows from operating activities
Adjusted profit before income tax 652 398 1,008
Non-recurring costs - (255) (256)
Depreciation and amortisation 905 925 1,673
Share based payments 13 11 23
Net finance costs 377 598 920
(Decrease)/increase in trade and other receivables 263 (45) 29
Decrease in trade and other payables (966) (102) (153)
Cash generated from operations 1,244 1,530 3,244
Income taxes received - - (61)
Net cash from operating activities 1,244 1,530 3,183
Cash flows from investing activities
Interest paid (284) (398) (1,093)
Purchase of intangible assets (39) - (11)
Purchase of property, plant and equipment (3) (23) (31)
Net cash used in investing activities (326) (421) (1,135)
Cash flows from financing activities
Repayment of finance leases - - -
Repayment of borrowings (793) (965) (1,886)
Increase of bank loan - - 314
Net cash used in financing activities (793) (965) (1,572)
Net increase/(decrease) in cash and cash equivalents 125 144 476
Cash and cash equivalents at beginning of period/year 1,361 885 885
Cash and cash equivalents at end of period/year 1,486 1,029 1,361
Cash at bank and in hand 1,486 1,029 1,361
Bank overdrafts - - -
Cash and cash equivalents 1,486 1,029 1,361

ACCOUNTING POLICIES

1        Nature of operations and general information

AdEPT Telecom plc is one of the UK’s leading independent telecommunications providers.  The Company offers a complete communications portfolio of fixed line calls, line rental, data connectivity and mobile products.  The Company’s tailored services are provided to thousands of small and medium sized businesses and residential customers across the UK and are brought together through strategic relationships with tier-1 suppliers such as BT, Cable & Wireless and Talk Talk Business.

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 2011, 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 2011.  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 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 15 years (2010: 17 years). The amortisation charge in the income statement for the 6 months ended 30 September 2011 includes impairment charges of £41,307.

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 2011, after taking into account the effect of interest rate swaps, 100% of the Company’s borrowings are at a fixed rate of interest (2010:  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 2011 was £3,323,744 (2010: £3,296,377).

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
2011 2010 2011
£’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 298 6 263
Amortisation 891 889 1,620
Non-recurring costs - 255 256
Adjusted profit attributable to equity holders of the
parent, adding back amortisation and non-recurring costs 1,189 1,150 2,139
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 3,218,090 3,037,433 3,029,782
Diluted weighted average number of shares used to
calculate fully diluted earnings per share 24,285,533 24,104,876 24,097,225
Earnings per share
Basic earnings per share (pence) 1.42p 0.03p 1.25p
Fully diluted earnings per share (pence) 1.23p 0.03p 1.09p
Adjusted earnings per share, after adding back
amortisation and non-recurring costs
Adjusted basic earnings per share (pence) 5.64p 5.46p 10.15p
Adjusted fully diluted earnings per share (pence) 4.90p 4.77p 8.88p

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.