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Final results March 2013

AdEPT Telecom plc 

(“AdEPT” or the “Company”)

 Final results for the year ended 31 March 2013

Please click here to read the full RNS announcement

 AdEPT (AIM: ADT), a leading UK independent provider of award-winning telecommunications services for fixed line, mobile, data connectivity and VoIP, announces its results for the year ended 31 March 2013.

Financial Highlights

  • Tenth consecutive year of increased underlying EBITDA up 2.2% to £3.73m (2012: £3.65m)
  • Underlying EBITDA margin % increased by 1.1% to 17.8% (2012: 16.7%)
  • 37% increase to Profit Before Tax to £1.6m (2012: £1.2m)
  • 68% increase to Profit After Tax to £1.0m (2012: £0.6m)
  • 200% increase to dividends declared to 1.5p (Interim 0.75p, Final 0.75p) (2012: 0.5p)
  • Excellent cash generation with free cash flow, after interest, of £3.0m (2012: £2.2m)
  • EBITDA conversion to cash generated from operating activities increased to 92.6% (2012: 79.6%)
  • Net debt reduction of £2.0m year-on-year (2012: £2.1m) to £3.3m (2012: £5.3m)
  • Total interest costs reduced by 39.2% to £0.37m (2012: £0.61m)
  • Adjusted Earnings Per Share of 11.20p (2012: 11.35p)

Operational Highlights

  • 9% increase to data connectivity and broadband revenues year-on-year
  • 15% increase to inbound call revenue year-on-year
  • 94% of revenue generated from customers taking more than one product or service (2012: 92%)
  • 46% of revenue generated from customers taking 3 or more products (2012: 41%)
  • 7% increase in business customer ARPU to £167 as at March 2013 (2012: £156)

Commenting upon these results Chairman Roger Wilson said:

 “AdEPT has delivered a tenth consecutive year of increased EBITDA and continued to deliver consistent free cash flow generation, resulting in further deleveraging and a 200% increase to dividends declared during the year.  The Board is confident that continued focus on underlying profitability and strong cash generation will support a progressive dividend policy.”

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

AdEPT Telecom Plc

Roger Wilson, Chairman                                      07786 111 535

Ian Fishwick, Chief Executive                              01892 550 225

John Swaite, Finance Director                            01892 550 243

Northland Capital Partners Limited

Edward Hutton                                                      020 7796 8800

 

CHAIRMAN’S STATEMENT

Review of Operations

AdEPT has continued to make progress in building a strong operational and financial platform for future growth.  Despite the continued challenging economic conditions, I am pleased to report a 10th consecutive increase to underlying EBITDA, up 2.2% to £3.73m.  EBITDA margin has improved further from 16.7% to 17.8%.

AdEPT’s continued strong cash flow generation resulted in £3.0m of free cash flow after interest and £2.0m reduction to net borrowings.  Free cash flow was used principally to fund £2.0m reduction in net borrowings to £3.3m at 31 March 2013, £0.6m acquisition consideration, £0.1m capital expenditure and £0.1m dividend payment.

In line with its progressive policy, AdEPT has trebled the dividend year-on-year, declaring a final dividend of 0.75p per Ordinary Share (2012: nil), making total dividends declared during the year ending 31 March 2013 of 1.50p per Ordinary Share (2012: 0.50p). The Board is confident that the continued strong cash generation will support a progressive dividend policy.

New products

AdEPT is continuing to successfully make the transition from a traditional fixed-line service provider to a complete communications integrator offering best of breed products from all major UK networks.  Continued deployment of 21CN data connectivity products, for example under the JaNet framework, has led to data and broadband revenues increasing by 9% in the year ended 31 March 2013.  As the demand for faster data connectivity speeds continues AdEPT has continued to broaden its product offering, which now includes 10Gb Optical Spectrum Services (OSA and OSEA).  During the year we have installed 10Gb services at customers such as University of Warwick, University of Birmingham and Coventry University.

AdEPT has had continued success with ’cloud’ or network-based contact centre solution revenue, which has seen a 15% year-on-year increase in revenue.  This has been achieved by new inbound customers coming on stream combined with the continued development of network and cloud-based solutions for existing customers.

Cross selling of products

A key strategy for the Company remains to sell more products to new and existing customers to enhance customer retention and stability.  Product penetration has increased during the year; at March 2013 46% of revenue was generated from customers taking three or more products (2012: 41%).

The continued focus on larger customers, generally businesses up to 1,000 employees, has enhanced our ability to benefit from scale efficiencies and cross selling. The AdEPT Premier Customer division, comprising the 200 largest customers spending more than £1,000 per month, has grown during the year and now accounts for approximately 42% of total revenue (2012: 41%).

In the Premier Customer division (those customers spending more than £1,000 per month) we have seen further improvement in product penetration. At March 2013 customers taking three or more products increased to 71% (2012: 68%).

Growth strategy

The strategy of the Company remains that of increasing EBITDA and cash generation by combining direct new business with value adding acquisitions.  On 1 May 2012 the Company acquired the trade and assets of the fixed line telecommunications division of Expanse (UK) Communications Limited.  The acquisition was funded from operating cash flow.  The Board continues to identify and evaluate strategic acquisitions that are considered to meet the criteria of complementing existing business whilst adding value to our shareholders.  The organic growth strategy continues to be winning larger customers and existing client retention.  We also continue to target greater cross-sell penetration and development of new products.

Employees

The improved profitability this year was made possible by the continued hard work and focus of all employees at AdEPT.  As a Company we are immensely proud of the track record we have created over the last 10 years and on behalf of the Board I would like to take this opportunity to thank all of our employees for their hard work.

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 improved EBITDA and net debt reduction of £2.0m was underpinned by focus on underlying profitability through improving margins on customer contracts, operational efficiencies and tight credit controlwith customer collection periods of 26 days (2012: 31 days).  The Board is confident that continued strong cash generation will support a progressive dividend policy.

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 or fund suitable earnings-enhancing acquisitions if identified.  We will therefore continue to invest in our organic sales channels, work with our network partners to develop new products and complement this with further investment in retention activities to retain customers.

Roger Wilson

Non-executive Chairman

FINANCIAL AND BUSINESS REVIEW

SUMMARY of three year financial performance:

 

Year ending March

 

2013

£’000

 

Year-on-Year %

2012

£’000

 

Year-on-Year %

2011

£’000

Revenue

21,023

(4%)

21,913

(8%)

23,734

Gross margin

7,261

4%

7,062

-

7,069

EBITDA*

3,732

2%

3,652

1%

3,624

Net debt

3,270

5,339

7,365

* before non-recurring costs

REVENUE

During the year AdEPT has continued its diversification from a traditional fixed line service provider towards next generation products.  Total revenue generated from data, mobile, inbound and other services represented 22.3% of total revenue in March 2013 (2012: 18.6%).

Total revenue decreased by 4.1% to £21.0m (2012: £21.9m):

  • Traditional fixed line revenues reduced to £16.8m (2012: £17.8m), with this reduction driven by the impact of regulation reducing call spend to mobiles combined with call volume reductions which is a reflection of the continuing uncertain economic environment and further movement towards email and mobile based telephony.  The Company’s reliance on call revenues has been reduced further with call revenue providing 34.8% of total revenue in the year ended 31 March 2013 (2012: 38.2%).
  • Inbound and cloud based call revenue increased by 15.1% during the year to £1.1m (2012: £1.0m).  This arises from network-based solutions developed for contact centres within the Premier Customer division during the year and new customer additions.  In addition, revenues were helped by improved revenue share received from network partners.  Customers include contact centres such as airlines, cinema chains and insurance companies.
  • Data and broadband product revenues were up 9.3% to £2.6m (2012: £2.5m).  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 the first customer orders for 10Gb Optical Spectrum Services (OSA and OSEA). During the year we have installed 10Gb services at customers such as University of Warwick, University of Birmingham and Coventry University.

The Company continues to focus on products delivering fixed monthly revenue streams to reduce revenue volatility. The proportion of revenue, which is fixed monthly values, increased to 59.8% of total revenue for the year ended March 2013 (2012: 57.0%) following the continued focus on multi-product sales (calls, line rental, broadband and data products) and the enhancement of the data connectivity product portfolio.

The proportion of revenue generated from customers taking more than one product or service has increased to 94.3% at March 2013 (2012: 92.0%) 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 71.2% at March 2013 (2012: 68.3%) which is driven by the revenue growth in next generation and data connectivity products.

The Company is continuing to focus on adding and retaining larger customers and AdEPT’s largest 200 customers account for 42% of total revenue with the top 10 customers accounting for 15.3% of total revenue (March 2012: 15.0%).  Average customer monthly spend for customers increased year-on-year by 7.0% to £167 in March 2013, reflecting the Company’s success in gaining contracts with an increasing proportion of higher spending multi-product and multi-site business customers.

GROSS MARGIN

The price of calls to mobiles has continued to fall as a result of the regulatory impact of reduced mobile termination rates. However, gross margins have been maintained at an absolute level through close monitoring of customer profitability and supply chain management of wholesale contracts.  

As the product mix has moved further towards the relative lower margin data and broadband revenue streams, this has provided some downward pressure on blended total gross margin. Future gross margin pressure is anticipated as our product mix moves increasingly towards the relative lower margin line rental, data connectivity and broadband revenue streams.

EBITDA

Underlying EBITDA is defined as operating profit add back depreciation, amortisation and impairment charges and share based payment charges.  Additionally, in the current year the gain on the bargain purchase in relation to Expanse (UK) Communications Limited has been excluded from underlying EBITDA as it is purely an accounting adjustment and is not considered to be a recurring item.

EBITDA has increased for the tenth consecutive year since AdEPT’s inception in 2003 despite top line pressure.  The Company 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.

FINANCE COSTS

Total interest costs have reduced by 39.2% to £369,022 (2012: £606,882) arising from continued deleveraging combined with treasury management of surplus cash balances.

Finance costs for the year ended 31 March 2013 include a credit of £75,398 (2012: charge of £31,198) in relation to the movement in the fair value of the interest rate swap as required by IAS 39 ‘Financial Instruments’.  This is not a reflection of a decrease in the real cost of borrowing as the interest rate swap provides a fixed rate of interest on borrowings.

PROFIT BEFORE TAX

This year the Company has recorded an £447,532 improvement to profit before tax with a reported £1,637,037 (2012: £1,189,505).  This arises from the EBITDA improvement combined with the reduction in finance costs.

EARNINGS AND DIVIDEND PER SHARE

Adjusted earnings per share, based on retained earnings adding back amortisation and non-recurring costs (see Note 24 to the financial statements), was 11.20p per share (2012: 11.35p).

On the back of strong cash flow generation AdEPT announced an interim dividend of 0.75p per share in its September 2012 interim statement, which was paid to shareholders on 12 April 2013.  The Board of AdEPT Telecom announced on 25 March 2013 that, subject to Shareholder approval at the Annual General Meeting later in the year, it is declaring a final dividend of 0.75p per Ordinary Share to be paid in October 2013. Total dividends approved and declared during the year ending 31 March 2013 of 1.50p per Ordinary Share represent a 200% increase year-on-year (2012: 0.50p).  The dividends approved and declared during the year absorbed £316,012 of shareholder funds (2012: £105,337).  The board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.

CASH FLOW

The Company benefits from an excellent cash generating operating model. Low capital expenditure results in EBITDA turning into cash.  Reported EBITDA turned into net cash from operating activities is 92.6% (2012: 79.6%), which is higher than the comparative period due to lower cash interest costs from deleveraging and an improved working capital position at the year end.  The Company has continued to manage its credit risk in the current economic climate and the collections of trade receivables have been improved during the year with customer collection periods of 26 days (2012: 31 days).

In order to reduce interest costs £1.1m was repaid on the Barclays revolving credit facility at the year end.  As a result, after servicing its debt, the Company saw a decrease in cash and cash equivalents of £0.2m during the year.  The Company will continue to apply its treasury management policies to minimise the cost of finance whilst retaining flexibility to meet its growth strategies.

CAPITAL EXPENDITURE AND BUSINESS COMBINATIONS

The Company has low capital requirements and therefore expenditure on tangible assets is low at 0.5% of revenue (2012: 0.1%).

On 1May 2012 the Company acquired certain trading assets from Expanse (UK) Communications Limited, a supplier of fixed line calls, line rental and data connectivity products to small and medium-sized businesses.  Total consideration is £0.9m.  Consideration of £0.6m was paid in cash by the Company during the year ended 31 March 2013 with the payment of the balance of consideration being deferred until April 2013.  Acquisition related costs have been recognised as an expense in the statement of comprehensive income for the period ended 31 March 2013.  Expanse (UK) Communications Limited contributed revenue and profit of £0.9m and £0.2m respectively in the statement of comprehensive income for the year ended 31 March 2013.

A fair value of £1.1m in relation to the customer contracts for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2013.  No other assets or liabilities were acquired.  Included in the fair value calculations above is an intangible asset, representing the future cash flows of the acquired customer base in the hands of the Company.  The increase in fair value of assets acquired over book value resulted in a gain on acquisition of £215,080, which has been offset against operating expenses in the statement of comprehensive income for the year ended 31 March 2013.  This is purely an accounting adjustment and has no bearing on cash.  Additionally, we consider that this gain is non-recurring and should be excluded when calculating the underlying profitability of the Company and as such has been excluded from the underlying EBITDA.

NET DEBT

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow, which is supported by £9m reduction to net borrowings since the peak of £12.3m in June 2008.  As a result of the Company’s focus on underlying profitability and cash conversion, free cash flow after bank interest of £3.0m was generated during the year ended March 2013; with £2.0m being applied to net debt reduction during the year, £0.1m dividends paid, £0.1m capital expenditure and £0.6m acquisition consideration in respect of Expanse (UK) Communications Limited.  Net debt, which comprises cash balances and bank borrowings, has improved to £3.3m at the year-end (2012: £5.3m).

The Company’s available banking facilities are described in Note 25 to the financial statements.  A tranche of the existing bank facility is due for renewal in October 2013; the Company is already in appropriate discussion with its bankers regarding the renewal of this facility.  The element of the existing facility which is due for renewal within the next 12 months is included within short term liabilities in the statement of financial position.  The Company continues to manage its exposure to interest rate risks arising from financing activities through interest rate swap contracts.

KEY PERFORMANCE INDICATORS (KPIs)

The KPIs outlined below are intended to provide useful information when interpreting the accounts.

 

Data,

 

Fixed

mobile

 

line

and other

 

services

services

Total

£’000

£’000

£’000

 

 

 

Year ended 31 March 2013

 

 

 

Revenue

16,774

4,250

21,023

Gross profit

6,018

1,244

7,261

Gross margin %

35.9%

29.3%

34.5%

 

 

 

Year ended 31 March 2012

 

 

 

Revenue

17,828

4,085

21,913

Gross profit

5,735

1,327

7,062

Gross margin %

32.2%

32.5%

32.2%

 

 

 

RESILIENT BUSINESS MODEL

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 the product range, particularly with regard to data connectivity;
  • customers are spread across all industries; the top ten customers account for approximately 15% of revenues;
  • trade suppliers and partners are all top-tier suppliers, providing confidence in the continuity and reliability of service to customers;
  • 69% of the Company’s customers pay by monthly direct debit, reducing the Company’s credit risk;
  • highly fragmented telecom reseller market provides acquisition opportunities for further consolidation; and
  • the Company has agreed banking facilities through to October 2013 and 2015.

John Swaite

Finance Director