AdEPT Telecom plc (“AdEPT” or the “Company”)
Final results for the year ended 31 March 2011
AdEPT (AIM: ADT), a leading UK independent provider of award-winning telecommunications services for fixed line, mobile and data connectivity, announces its results for the year ended 31 March 2011.
- Underlying EBITDA maintained at £3.6m (2010: £3.6m)
- Underlying EBITDA margin % increasing by 1.3% to 15.3% (2010: 14.0%)
- Strong cash generation with free cash flow, after interest and before non-recurring costs, of £2.1m (2010: £1.9m)
- 99% of reported EBITA (£3.3m) converted into cash generated from operating activities (£3.3m) (2010: 86%)
- Net debt reduction of £1.8m year-on-year (2010: £1.6m) to £7.4m (2010: £9.2m)
- £0.9m increase to profit before tax to £0.8m (2010: loss of £0.1m)
- 9.5% increase to adjusted Earnings Per Share to 10.15p (2010: 9.27p)
- Substantially increased product range
- 11% increase in ARPU as at March 2011 to £86.71 (2010: £77.97)
- Further progress in increasing revenue from fixed monthly charges to 54% of revenue for the year ended March 2011 (2010: 48%)
- Greater than 50% increase to mobile revenues year-on-year
- Greater than 25% increase to data revenues year-on-year
- 89% of revenue generated from customers taking more than one product or service (2010: 86%)
- 28% of revenue generated from customers taking 3 or more products (2010: 23%)
- Overhead costs (excluding one-off restructuring costs) decreased to 21% of revenue (2010: 23%)
- Credit collection processes and debt management improved with year end debtor days of 29 (2010: 30 days)
Commenting upon these results Chairman Roger Wilson said:
“AdEPT has delivered on its strategy of paying down debt from the continued strong operating cash generation of the business. The business is in a much stronger position with its increasing ability to provide complex multi-site, multi-product solutions to larger customers.”
For further information on AdEPT Telecom please visit www.adept-telecom.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
Shane Gallwey 020 7796 8800
Review of Operations
Despite the revenue and gross margin pressure from the challenging economic climate and price pressure over the last 12 months, underlying EBITDA has been maintained. The focus on larger customers, generally businesses of 25 to 1,000 employees, has continued to be beneficial and has enhanced our ability to benefit from scale efficiencies and cross selling. The AdEPT Premier Customer division, comprising the 200 largest customers, accounts for approximately one-third of total revenue. Average contract length has been enhanced through an increased focus on providing multi-product solutions. At March 2011, customers taking 3 or more AdEPT products now account for 28% of monthly revenue (23% in March 2010).
During the year AdEPT was named by Ja.net (the Joint Academic Network) as one of only 20 companies approved to sell data products to Universities, Colleges, higher education and research establishments connected to the Ja.net network in the UK. This accreditation has contributed to some important contract wins.
Call volume reductions during the year have resulted in revenue becoming more stable as reliance on variable monthly call charges is reduced. The proportion of revenue derived from fixed monthly charges now represents 54% of total revenue (2010: 48%).
The strong cash flow generation continued during the year with £2.1m of free cash flow after interest. This was used to fund £0.3m of non-recurring costs and £1.8m reduction in net borrowings, to £7.4m at 31 March 2011.
AdEPT was originally established as a fixed-line telecom provider but is increasingly expanding and diversifying its product range and has become one of the UK’s leading communication integrators offering best of breed products from all major UK networks.
AdEPT has broadened its product range further during the year, particularly with regard to data connectivity, which has seen greater than 25% year-on-year revenue growth. Data services, such as Ethernet high speed access (up to 1Gigabit speeds) and MPLS networks have been added to the product portfolio. We are currently in the process of launching 40Mb fibre broadband utilising BT’s 21st century network upgrade that offers fibre-to-the-cabinet in the street.
AdEPT has launched what we believe to be the UK’s most advanced VoIP for BUSINESS product range, and has built a new National VoIP Demonstration Centre at our headquarters in Tunbridge Wells. The service, powered by BT Wholesale, includes 7 different ways of deploying VoIP for businesses. SIP trunking and hosted voice inter-work on a single BT network with dual resilience offered by 2 data centres in London. All VoIP services are managed via a single web portal. The VoIP products offer comprehensive solutions for every size of business: large and small sites as well as homeworkers.
AdEPT has had continued success with new ’cloud’ or network-based inbound call handling solutions being provided to a number of major customers, including a new contact centre for a major UK airline.
Cross selling of products
A key strategy for the Company remains to sell more products to new and existing customers. The product penetration has increased during the year; at March 2011 28% of revenue was generated from customers taking more than three or more products (2010: 23%).
In the larger customer base (those spending more than £1,000 per month) we have seen further improvement in product penetration. At March 2011 customers taking more than one product accounted for 98% of revenue generated (2010: 97%). The proportion taking 3 or more products increased to 64% at March 2011 (2010: 58%).
The improved profitability this year was made possible by the continued hard work and focus of all employees at AdEPT Telecom. As a Company we are immensely proud of the track record we have created in a relatively short period of time and on behalf of the Board I would like to take this opportunity to thank all of our employees for their hard work.
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.
The Company has been under top line pressure from the challenging economic climate and market price pressure over the last 12 months. Despite the top line and gross margin reduction, EBITDA has been maintained and net debt reduction of £1.8m was underpinned by focus on underlying profitability through improving margins on customer contracts, operational efficiencies and tight credit control. The further broadening of the product offering, particularly with regard to data connectivity, will ensure that AdEPT can continue to provide complete communication solutions for customers.
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. We will therefore continue to grow our organic sales channels, invest in new products and complement this with continued investment in retention activities to retain customers.
FINANCIAL AND BUSINESS REVIEW
SUMMARY of three year financial performance:
|Year ending March|
|2011£’000||Year-on-Year %||2010£’000||Year-on-Year %||2009£’000|
* before non-recurring costs
Revenue by product area
Group revenue decreased by 7.8% to £23.7m (2010: £25.7m).
- Fixed line revenues were 11.0% lower at £21.3m (2010: £24.0m), with this reduction driven largely by call volume reductions which is primarily a reflection of lower economic activity. The Company’s previous reliance on call revenues has been much reduced with call revenue providing only 43% of total revenue in March 2011 (2010: 47%).
- Data and broadband product revenues were up 27.4% to £1.8m (2010: £1.4m), with increases to the number of data circuits in place, and the March 2011 revenue run rate for data and broadband was £2.0m. At March 2011 the contract revenue from data product orders placed awaiting connection was £0.8m due to longer connection timescales.
- Mobile revenues were ahead 52.2% to £0.5m (2010: £0.3m). We have only been selling mobile for three years and handset volumes increased during the year by 476 to 1,845 (2010: 1,369). The revenue per connection has increased to £263 (2010: £232) driven by the increased take up of smartphones.
Total revenue generated from data, mobile and other services represented 11.8% of total revenue in March 2011 (March 2010: 8.7%).
Fixed monthly revenue streams
The Company continues to focus on fixed monthly revenue streams so as to reduce revenue volatility. The proportion of revenue, which is fixed monthly values, increased to 53% of total revenue for the year ended March 2011 (2010: 48%) following the continued focus on multi-product sales (calls, line rental and data products) and the introduction of a broad range of data connectivity products in 2008.
The proportion of revenue generated from customers taking more than one product or service has increased to 89.3% for the year ended March 2011 (2010: 85.6%) 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 63.7% at March 2011 (2010: 58.1%).
Average spend per customer
The Company is continuing to focus on larger customers and AdEPT’s largest 200 customers account for approximately one third of March 2011 revenue.
Average customer monthly spend for business customers increased year-on-year by 11.2% to £86.71 in March 2011 reflecting the Group’s success in gaining contracts with higher spending customers and an increasing proportion of higher spending business customers.
Gross margins have been under pressure during the year as the product mix has moved towards the lower margin data and broadband revenue streams. Particular gross margin pressure has been experienced in fixed line calls following the significant month on month changes to wholesale mobile termination rates passed through by the mobile networks. The recent OFCOM price regulation is expected to improve future wholesale price stability.
Future gross margin pressure is anticipated as our product mix moves increasingly towards the lower margin line rental, data connectivity and broadband revenue streams.
Operational efficiencies achieved
Cost savings have been delivered as planned from operational efficiencies associated with managing larger customers, and savings derived from in-sourcing of wholesale line rental management and a further reduction to bad debt provisions.
As a result, the Company has seen a £1.0m reduction in underlying operating costs during the year ended March 2011 to £4.9m which is 20.7% of revenue (2010: 23.2%).
We believe that we remain one of the lowest cost operators in the industry.
The non-recurring costs identified are restructuring costs which will not recur next year. These costs are represented by staff costs associated with restructuring and the close out of leases acquired with the Telecom Direct acquisition.
Impact of corporate failures
Whilst corporate failure has had a minimal impact on the overall results it still remains higher than normal. In the year ended March 2011 there was 143 such failures in our customer base (2010: 207). These were mostly smaller companies with average debt per failed customer during the year ended March 2011 being £486 (2010: £435). We anticipate the relatively high corporate failure rate may continue for some time, but that as a result of the collection processes the Company’s exposure and risk has been reduced.
I am pleased to report underlying EBITDA has been maintained in line with the previous year.
Excluding non-recurring costs EBITDA has increased marginally during the year despite top line pressure. The Company has focussed on the underlying profitability or customers and revenue streams; as a result revenue reduction has been more than absorbed by gross margin improvement and the operational efficiencies and costs savings from managing larger customer and the earlier restructuring.
PROFIT BEFORE TAX
This year the Company has recorded an £865,788 improvement with a reported profit before tax of £752,399 (2010: loss of £113,389). This arises from operational efficiency combined with the reduction in finance costs following the renewal of the banking facility on more favourable terms.
EARNINGS PER SHARE
Adjusted earnings per share, based on retained earnings adding back amortisation and non-recurring costs (see Note 22), has increased by 9.5% to 10.15p per share (2010: 9.27p).
The Group benefits from a strong operating cash model, with EBITA turning into cash. Reported EBITA turned into net cash from operating activities is 98.6% (2010: 86.3%). There was a net working capital outflow of £0.1m during the year arising from the reduction in trade payables following the reduction in direct costs due to top line reductions.
Strong management of credit risk
The Group has continued to manage its credit risk in the current economic climate and the collections of trade receivables have been maintained during the year with customer collection periods of 29 days (2010: 30 days).
Increase in cash balances
After servicing its debt the Group achieved an increase in cash and cash equivalents of £0.5m during the year. All acquisitions have been paid for and no further earn-out payments are due.
The Group has low capital requirements and therefore expenditure on tangible assets is low at 0.1% of revenue (2010: 0.2%). Intangible asset additions were negligible during the year (2010: £0.1m).
A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow. As a result of the Company’s focus on underlying profitability and cash conversion free cash flow after bank interest of £2.1m was generated during the year ended March 2011; £0.3m of this was used to fund non-recurring costs with £1.8m being applied to net reduction. Net debt, which comprises cash balances and bank borrowings, has therefore improved to £7.4m (2010: £9.2m).
The Company’s banking facilities were renewed during the year and the available banking facilities are described in Note 23 to the financial statements. The Company continues to manage its exposure to interest rate risks arising from financing activities.
KEY PERFORMANCE INDICATORS (KPIs)
The KPIs outlined below are intended to provide useful information when interpreting the accounts.
|Year ended 31 March 2011||Year ended 31 March 2010|
|line||and other||line||and other|
|Gross margin %||35.3%||40.3%||35.9%||37.0%||39.4%||37.2%|
The Company has non-financial KPIs that it monitors on a regular basis at board level and where relevant management meetings, which include:
|Year ended 31 March 2011||Year ended 31 March 2010|
|Customer credit collection||29 days||30 days|
|Direct debit penetration||67.0%||64.0%|
POST BALANCE SHEET EVENTS
After the year end a resolution was passed and the Company received court approval for a reduction in its share capital. The share capital reduction has had no effect on the number of ordinary shares or the rights attaching to the ordinary shares and the market price of the shares has not been adjusted as a result of the capital reduction. The share capital reduction has been approved in order to maximise the share capital structure of the Company by creating distributable reserves with a view to facilitating a potential future dividend policy.
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 its product range, particularly with regard to data connectivity;
- customers are spread across all industries, the top ten customers account for approximately 15.5% of revenues;
- trade suppliers and partners are all top tier suppliers, providing confidence in the continuity and reliability of service to customers;
- 67.0% of the Company’s customers pay by monthly direct debit, reducing the Company’s credit risk;
- the Company has agreed banking facilities through to September 2013; and
- with the level of cash generation forecast, the Board expects the Company’s net borrowing position to further improve over the next twelve months.