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Final results March 2014

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

Final results for the year ended 31 March 2014

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 2014.

Financial Highlights

  • Eleventh consecutive year of increased underlying EBITDA up 8.3% to £4.04m (2013: £3.73m)
  • Underlying EBITDA margin % increased by 1.6% to 19.4% (2013: 17.8%)
  • 12.8% increase to Profit Before Tax to £1.85m (2013: £1.64m)
  • 35.2% increase to Profit After Tax to £1.33m (2013: £0.98m)
  • 18.0% increase to Adjusted Basic Earnings Per Share of 14.99p (2013: 12.70p)
  • 100% increase to dividends declared to 3.0p (Interim 1.50p, Final 1.50p) (2013: 1.50p)
  • Cash generation with free cash flow, after interest, of £2.6m (2013: £3.0m)
  • Net debt reduction of £0.3m year-on-year to £3.0m (2013: £3.3m)
  • Total interest costs reduced by 30.4% to £0.26m (2013: £0.37m)

Operational Highlights

  • 26.9% increase to data connectivity and broadband revenues year-on-year
  • Acquisition of customer base from Bluebell Telecom Limited completed in August 2013

Commenting upon these results Chairman Roger Wilson said:

“AdEPT has delivered its eleventh consecutive year of increased EBITDA and continues to deliver consistent free cash flow generation.  The Company has achieved a reduction to net borrowings despite undertaking a customer base acquisition during the year, with a further acquisition completed and fully integrated post year-end.  The continued strong cash generation has funded a 100% 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.  Organically the Company has strengthened its position through successfully leveraging its various frameworks to increase the scale of its public sector customer base.”

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/Lauren Kettle                 020 73821100

CHAIRMAN’S STATEMENT

Review of Operations

I am pleased to report an 11th consecutive increase to underlying EBITDA, up 8.3% to £4.04m.  EBITDA margin has improved further from 17.8% to 19.4%.  In August 2013 AdEPT completed its 18th acquisition, a customer base from Bluebell Telecom Limited which has been fully integrated into the customer management system in Tunbridge Wells, Kent.

AdEPT’s continued strong cash flow generation resulted in £2.6m of free cash flow after interest.  This free cash flow is after making corporation tax payments of £1.1m, which increased by £0.5m compared to the previous year following our transition to large company status for corporation tax purposes.  During the 12 months ended 31 March 2014 the Company has made payment of both the 2013 corporation tax liability and advance instalments of three quarters of the current year’s tax liability.  £2.2m of free cash has been used to fund the deferred consideration of the customer base acquisition from Expanse (UK) Communications Limited in 2012 and the initial consideration for the customer base acquisition from Bluebell Telecom Limited.  £0.3m of free cash was used to meet dividend payments to shareholders.  The issue of new equity during the year to directors increasing their shareholdings following the exercise of share options resulted in a cash inflow of £0.3m.

In line with its progressive policy, AdEPT has doubled the dividend year-on-year, declaring a final dividend of 1.50p per Ordinary Share (2013: 0.75p), making total dividends declared during the year ended 31 March 2014 of 3.00p per Ordinary Share (2013: 1.50p). The board is confident that the continued strong cash generation will support a progressive dividend policy.

New products

AdEPT continues to provide voice and data services to its customers by offering best of breed products from all major UK networks.  Continued deployment of 21CN data connectivity products has led to data and broadband revenues increasing by 27% in the year ended 31 March 2014. As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 10Gb Optical Spectrum Services (OSA) and is currently underway with the launch of 40Gb and 100Gb Optical Spectrum Services (OSEA).

Growth strategy

The strategy of the Company remains that of increasing EBITDA and free cash generation by concentrating organic sales efforts on winning direct new business with larger customers, particularly in the public sector, and complementing this with value adding acquisitions.  Rather than operate a telesales operation aimed at acquiring smaller business customers organically we instead use our free cash generation to acquire customer bases from other telesales operations in the industry.

AdEPT has been highly successful in gaining traction in the public sector space during the year with a number of organic contract wins with public sector clients, including several County Councils. AdEPT was awarded approved supplier status to the Crown Commercial Service under the Telephony Service Framework RM1035 during the year.  This is in addition to AdEPT’s existing framework agreements with Ja.net and ESPO Telecom Framework 7.

On 1 August 2013 the Company acquired a customer base from Bluebell Telecom Limited.  The acquisition was funded from operating cash flow.  After the balance sheet date, on 8 April 2014 the Company acquired the entire issued share capital of Bluecherry Telecom Limited.

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 11 years and on behalf of the Board I would like to take this opportunity to thank all of our employees for their continued hard work.

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 £154 per annum for as long as they remain eligible shareholders.

Outlook

The improved EBITDA this year was underpinned by focus on underlying profitability through improving margins on customer contracts, operational efficiencies, tight credit control and strategic acquisition of complementary customer bases.  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 through leveraging AdEPT’s approved supplier status on the various telecom frameworks, maintaining profitability and cash flow generation, which will be used to reduce net borrowings and/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

 

STRATEGIC REPORT

PRINCIPAL ACTIVITIES AND REVIEW OF BUSINESS

The principal activity of the Company is the provision of voice and data communication services to both domestic and business customers. A review of the business is contained in the chairman’s statement and the highlights are summarised in the strategic report.

SUMMARY of three year financial performance:

  Year ended March
  2014£’000  Year-on-Year % 2013£’000  Year-on-Year % 2012£’000
Revenue 20,852 (0.8%) 21,023 (4.1%) 21,913
Gross margin 7,584 4.4% 7,261 2.8% 7,062
EBITDA 4,043 8.3% 3,732 2.2% 3,652
Net debt 2,963 3,270 5,339

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 24.7% of total revenue in the year ended 31 March 2014 (2013: 20.2%).

Total revenue decreased by 0.8% to £20.9m (2013: £21.0m):

  • Traditional fixed line revenues reduced to £15.7m (2013: £16.8m), with this reduction largely being driven by the impact of OFCOM regulation reducing call spend from landline to mobile networks. We have now reached the end of the regulatory price control for mobile termination costs and therefore a large proportion of the regulatory price changes are reflected in current end user pricing. In addition, call volume reductions, which is a reflection of the continuing uncertain economic environment, and continued substitution with email and mobile based telephony have applied further top line pressure to call revenues. The Company’s reliance on call revenues has been reduced further with call revenue providing only 29.3% of total revenue in the year ended 31 March 2014 (2013: 34.8%).
  • Data and broadband product revenues were up 26.9% to £3.3m (2013: £2.6m). AdEPT has continued to make progress in expanding the number of circuits and connections from new customer additions and through cross-selling into the existing customer base. As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 10Gb Optical Spectrum Services (OSA) and is currently underway with the launch of 40Gb and 100Gb Optical Spectrum Services (OSEA).

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 63.3% of total revenue for the year ended March 2014 (2013: 59.8%) following the continued focus on multi-product sales (calls, line rental, broadband and data products) and the enhancement of the data connectivity product portfolio.

AdEPT has been highly successful in gaining traction in the public sector space during the year through leveraging its approved status on various frameworks; some of this contract success is included in the 2014 revenue figures. AdEPT was awarded approved supplier status to the Crown Commercial Service under the Telephony Service Framework RM1035 during the year. This is in addition to existing framework agreements with Ja.net, under which AdEPT is one of only a small number of companies approved to sell data connectivity and networks to UK Universities and Colleges, and the ESPO Telecom Framework 7, under which AdEPT is the sole recommended supplier to public service bodies and registered charities for calls, lines, broadband, super-fast broadband (fibre) and SIP trunks.

The Company is continuing to focus its organic sales efforts on adding and retaining larger customers whilst complementing this with an acquisitive strategy for smaller business customers. AdEPT’s largest 1,000 customers account for approximately 50% of total revenue, with the top 10 customers accounting for 13.8% of total revenue (March 2013: 15.3%).

GROSS MARGIN

The price of calls to mobiles continued to decrease during the year ended March 2014 as a result of the OFCOM regulatory impact of reduced mobile termination rates. However, gross margins have been maintained at an absolute and per cent. level through close monitoring of customer profitability and supply chain management of wholesale contracts.

As the product mix has moved further towards the relatively lower margin data and broadband revenue streams, this has provided some downward pressure on blended total gross margin although this has been offset by improvements to data and broadband gross margins during the year and higher relative margin inbound service charges acquired with the Bluebell customer base. 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. In the prior 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 eleventh 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 30.4% to £0.26m (2013: £0.37m) arising from further deleveraging combined with treasury management of surplus cash balances and the termination of the relatively high cost historic interest rate swap arrangement.

Finance costs for the year ended 31 March 2014 include a credit of £0.06m (2013: credit of £0.075m) 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 provided a fixed rate of interest on borrowings. This historic interest rate swap arrangement ended during the current year and the Company has decided not to replace it for the time being.

PROFIT BEFORE TAX

This year the Company has recorded a £208,765 improvement to profit before tax with a reported £1,845,802 (2013: £1,637,037). The 2013 comparative profit before tax includes the gain on bargain purchase of £215,080 in respect of the acquisition of a customer base from Expanse Communications (UK) Limited, this is purely an accounting adjustment and therefore underlying profit before tax improvement is considered to be significantly better than the reported figures. The improvement to profit before tax arises from the EBITDA improvement combined with the reduction in finance costs.

RESULTS AND EARNINGS PER SHARE

The profit for the year, after taxation, amounted to £1,330,256 (2013: £984,005).

Adjusted earnings per share, based on the profit for the period attributable to equity holders adding back amortisation and non-recurring costs (see Note 24), increased by 18.0% to 14.99p per share (2013: 12.70p).

DIVIDENDS AND DIVIDEND PER SHARE

On the back of strong cash flow generation AdEPT announced an interim dividend of 1.50p per share, which was paid to shareholders on 11 April 2014. The Board of AdEPT Telecom announced on 8 April 2014 that, subject to Shareholder approval at the Annual General Meeting later in the year, it is declaring a final dividend of 1.50p per Ordinary Share (2013: 0.75p). This dividend is expected to be paid on 10 October 2014 to shareholders on the register at 19 September 2014. Total dividends approved and declared during the year ended 31 March 2014 of 3.00p per Ordinary Share represent a 100% increase year-on-year (2013: 1.50p). The dividends approved and declared during the year absorbed £661,710 of shareholder funds (2013: £316,012). 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 69.8% (2013: 83.9%), this has reduced during the year due to the transition to large company status for corporation tax purposes which has resulted in the company paying both the prior year corporation tax liability and three quarters of the current year’s tax liability by advance instalments during the 12 months ended 31 March 2014. Excluding the cash impact of the double corporation tax the EBITDA turned to net cash from operating activities was 82.2%. The Company 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 28 days (2013: 26 days).

Cash outflows of £2.2m have been incurred in the year ended 31 March 2014 in relation to customer base acquisitions. The deferred consideration in respect of the customer base of Expanse (UK) Communications Limited was paid in April 2013 with no further amounts due. The initial consideration of £1.9m was paid in August 2013 in relation to the customer base acquired from Bluebell Telecom Limited.

Cash inflows of £0.3m were generated from the issue of new equity during the year. Two of the executive director team increased their shareholdings in the Company following the exercise of share options.

There was an increase to cash and cash equivalents during the year of £2.1m. An amount of £2.0m was drawn down on the Barclays revolving credit facility just prior to year end in order to make funds available for the acquisition of the share capital of Bluecherry Telecom Limited, which was completed on 8 April 2014. 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 fixed assets is low at 0.4% of revenue (2013: 0.5%).

The strategy of the Company is to concentrate organic sales efforts on attracting larger customers, particularly in the public sector. Rather than operate a telesales operation aimed at acquiring smaller business customers organically we instead use our free cash generation to acquire customer bases from other telesales operations in the industry.

On 1 August 2013 the Company acquired a customer base from Bluebell Telecom Limited, a supplier of fixed line calls, line rental and data connectivity products to small and medium-sized businesses. Total consideration is estimated at approximately £2.3m. Consideration of £1.9m was paid in cash on completion by the Company during the year ended 31 March 2014 with the payment of the balance of the estimated consideration being deferred until after August 2014. Acquisition related costs have been recognised as an expense in the statement of comprehensive income for the period ended 31 March 2014. The assets acquired from Bluebell Telecom Limited contributed revenue and profit of £1.3m and £0.4m respectively in the statement of comprehensive income for the year ended 31 March 2014.

A fair value of £2.3m in relation to the customer base for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2014. No other assets or liabilities were acquired. Included in the fair value calculations above is an intangible asset, representing the estimate of future cash flows of the acquired customer base in the hands of the Company.

NET DEBT

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow, which is supported by more than £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 £2.6m was generated during the year ended March 2014; excluding the cash impact of the transition to corporation tax instalments this figure is £3.1m free cash flow.

£2.2m of free cash flow has been used to fund acquisitions of customer bases, £0.3m being applied to net debt reduction during the year, £0.3m dividends paid and £0.1m capital expenditure. Net cash inflows of £0.3m have arisen from the issue of new equity following the exercise of share options by executive directors. Net debt, which comprises cash balances and bank borrowings, has improved to £3.0m at the year-end (2013: £3.3m).

The Company’s available banking facilities are described in Note 25 to the financial statements.

KEY PERFORMANCE INDICATORS (KPIs)

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

  Data,  
 Fixed inbound, mobile  
line and other  
services services Total
£’000 £’000 £’000
     
Year ended 31 March 2014      
Revenue 15,705 5,147 20,852
Gross profit 6,016 1,568 7,584
Gross margin % 38.3% 30.5% 36.4%
     
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%
     

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties, which could have a material impact on the Company’s long-term performance and could cause actual results to differ materially from expected results.

Liquidity risk

The Company seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. External funding facilities are managed to ensure that both short-term and longer-term funding is available to provide short-term flexibility whilst providing sufficient funding to the Company’s forecast working capital requirements.

Credit risk

The Company extends credit to customers of various durations depending on customer creditworthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Company will suffer adverse consequences. To manage this, the Company continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, 67% of our customer receipts are by monthly direct debit. The risk is further reduced by the customer base being spread across all industry and service sectors. The top ten customers account for approximately 14% of revenues.

Competitor risk

The Company operates in a highly competitive market with rapidly changing product and pricing innovations. We are subject to the threat of our competitors launching new products in our markets (including updating product lines) before we make corresponding updates and development to our own product range. This could render our products and services out-of-date and could result in loss of market share. To reduce this risk, we undertake new product development and maintain strong supplier relationships to ensure that we have products at various stages of the life cycle.

Competitor risk also manifests itself in price pressures which are usually experienced in more mature markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value for money. The Company therefore monitors market prices on an ongoing basis.

Acquisition integration execution

The Company has set out that its strategy includes the acquisition of businesses where they are earnings enhancing. The Board acknowledges that there is a risk of operational disturbance in the course of integrating the acquired businesses with existing operations. The Company mitigates this risk by careful planning and rigorous due diligence.

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 14% of revenues;
  • trade suppliers and partners are all top-tier suppliers, providing confidence in the continuity and reliability of service to customers;
  • 67% 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 2015 and 2016.

John Swaite

Finance Director