AdEPT Telecom : Interim Results September 2017

AdEPT Telecom plc

('AdEPT' or the 'Company', together with its subsidiaries the 'Group')

Interim results for the 6 months ended 30 September 2017

To read a full copy of the interim RNS announcement please click here.

AdEPT (AIM: ADT), one of the UK's leading independent providers of managed services for IT, unified communications, connectivity and voice solutions, announces its unaudited results for the 6 months ended 30 September 2017.

Highlights

Revenue and EBITDA

• Total revenue increased by 36% to £22.6 million (2016: £16.5 million)
• EBITDA increased by 34% to £4.7 million (2016: £3.5 million)
• EBITDA margin 21.0% (2016: 21.4%)
• Managed services revenue accounted for 68% of total revenue (2016: 53%)
• Managed services revenue increased by 75% to £15.3 million (2016: £8.8 million)

PBT, EPS and Dividends

• Profit before tax increased by 36% to £2.1 million (2016: £1.5 million)
• Adjusted profit before tax increased by 29% to £3.9 million (2016: £3.0 million)
• Adjusted EPS increased by 20% to 13.3p (2016: 11.1p)
• Interim dividend increased by 13% to 4.25p per share (2016: 3.75p)

Cash Flow and Debt

• Operating cash flow before tax of £3.8 million (2016: £3.2 million)
• Reported EBITDA to pre-tax cash from operating activities 86% (2016: 99%)
• Net senior debt of £20.8 million (2016: £10.8 million)
• BGF convertible loan note of £7.3 million used to fund Atomwide Limited acquisition

Acquisitions

• CAT Communications earnout settled in June 2017
• Comms Group earnout settled in full in July 2017
• Acquisition of Atomwide Limited completed in August 2017

BUSINESS REVIEW

I am pleased to report that in the 6 months to the 30 September 2017 the Group has made considerable progress on a wide range of fronts. In early 2015 we embarked on a journey to transform AdEPT from our original telecoms background into unified communications and then into IT, with a particular focus on London and the South East and the Public Sector. Our logic was simple: it is becoming increasingly difficult to tell where telecoms ends and IT starts in a world where 'work is something that we do, rather than necessarily, a place that you go to'.

We believe that the economy in London and the South East will continue to grow faster than the other regions in the UK and that there is an increasing drive in the Public Sector to put business with Small and Medium-sized Enterprises (SME's).

London and the South East

In London we are Chief Technology Partner to London Grid for Learning supplying over 3,000 schools, we have 47 hospitals and specialist medical facilities, over 200 business centres, hundreds of commercial customers, and a range of specialist data and cloud services being supplied to central government departments.

Public Sector and Healthcare

In March 2016, the Government set a target that 33% of public sector spend would be with SME's by 2022. 39% of total Group revenue is now from public sector and healthcare customers (2016: 29%) and as customers we currently have over 100 Councils, 15 NHS Trusts, more than 30 private hospitals, 15 universities, over 3,000 schools and some central government departments.

Both Atomwide and OurIT have been awarded approved supplier status on the new RM3804 Technology Services 2 Framework by Crown Commercial Services. This framework is designed to make it far easier for public sector customers to buy IT products and services. AdEPT Tunbridge Wells has been awarded HSCN (Health and Social Care Network) Compliance and is now authorised to sell data networks to the NHS.

Total revenue increased by 36% to £22.6 million with the increase being a reflection of:

• 6 month revenue contribution from OurIT Department Limited ('OurIT) following the acquisition in February 2017;
• 2 month revenue contribution from Atomwide following the acquisition in August 2017; and
• Flat overall organic revenue, with fixed line revenues reducing by 7% as expected and managed services organically increasing by 7%.

The continued progress of the Group's transition to a complete IT, unified communications, connectivity and voice solutions provider can be demonstrated with the 75% increase in revenue from managed services, including IT, unified communications and data connectivity to £15.3 million, which accounted for 68% of total revenue for the six months ended 30 September 2017 (2016: 53%).

ACQUISITION UPDATE

Centrix, Fleet (now rebranded as AdEPT Fleet)

Our first move into Unified Communications was the acquisition of Centrix in May 2015. Centrix has now been rebranded as AdEPT Fleet. The business continues to perform well, winning business both from existing and new customers; the most notable new client in the first half of the year being an international cruise line. In November 2016 we acquired CAT Communications, another Avaya Aura specialist and integrated the customer base and support into AdEPT Fleet. The integration has been successfully completed.

Comms Group, Northampton

In February 2017, we acquired OurIT Department; our first IT business. OurIT brings us a wide range of IT products and services focused on London and South East customers. The integration into the Group has been successfully completed and sales are strong with a notable client win being a large construction business with 600 employees.

OurIT Department, Chingford, St Neots and London

In May 2016 we acquired Comms Group in Northampton; an Avaya IP Office specialist for smaller customers. The 12 month performance-based earn-out period ended on 31 May 2017. We are delighted to announce that Comms Group met its performance targets and as a result the maximum earn-out payment of £3.5 million was paid in July 2017.

Contingent deferred consideration of between £Nil and £3.75m will be payable in April 2018 in cash, dependent upon the performance of OurIT Group post-acquisition. We anticipate that the amount payable will be towards the top end of the range.

Atomwide, Orpington

Our latest acquisition was Atomwide based at Orpington in August 2017. Atomwide is the UK's leading specialist in IT for Education with more than 3,000 schools and over 2 million users. We now have over 1 million Office 365 users; this is one of the largest single Office 365 deployments in the world. Included in the acquisition is a data centre at Orpington and a specialist app development team. Since the acquisition in August 2017 the sales and finance functions of Atomwide have been integrated into the Group reporting procedures.

Contingent deferred consideration of between £Nil and £8.0 million may be payable in cash, dependent upon the performance of Atomwide post-acquisition.

PROFIT BEFORE TAX AND EARNINGS PER SHARE

Profit before tax increased by 36% to £2.1 million (2016: £1.5 million).

Adjusted (basic) earnings per share increased by 20% to 13.3p for the six months ended 30 September 2017 (2016: 11.1p). The issue of 1,204,717 ordinary shares following the exercise of the share warrant by Barclays in March 2017 increased the weighted average number of shares in the current period, which has had a dilutive impact on the basic earnings per share when compared to the prior period. The Barclays shareholding was subsequently placed in August 2017 with a combination of existing institutional shareholders and the vendors of the recent acquisitions, OurIT and Comms Group.

FINANCING AND CASH FLOW

Cash generated from operating activities before tax increased by 20% to £3.8 million (2016: £3.2 million), which equates to an 86% reported EBITDA conversion (after £0.2 million acquisition fees). The increase to absolute cash flow conversion was driven by the improved profit before tax.

Dividends paid in the period absorbed £0.9 million of funds (2016: £0.7 million), this increase reflects the progressive dividend policy of the Board.

The Company operates a capex-light model and therefore capital expenditure on tangible fixed assets remained low at 0.3% of revenue.

£10.5 million of available funds (net of cash acquired) was used to fund the initial cash consideration for the acquisition of the entire issued share capital of Atomwide on 2 August 2017. Deferred consideration of £3.5 million in respect of the Comms Group acquisition (in May 2016) and £0.4 million in respect of the CAT Communications acquisition was paid during the period.

The Senior Debt:EBITDA (annualised) ratio remained comfortable at 2.2x at 30 September 2017. Total senior debt has increased to £20.8 million at 30 September 2017 and has been used to fund the acquisition consideration paid in the period.

In August 2017 the Group raised £7.3 million in the form of a convertible loan instrument from BGF to part fund the acquisition of Atomwide. The convertible loan instrument is excluded from the leverage calculations by the senior debt partners, Barclays and RBS. The Group has applied the principles of IAS 32 and IAS 39 in the recognition and measurement of the convertible loan. The net present value of the loan of £7.1 million has been split between the debt and equity components and an amount of £1.3 million has been recorded in equity, with £5.8 million being included within long term debt. The discount charge of £0.2m is being recognised in the interest charge in the income statement across the term of the convertible instrument.

DIVIDENDS

As announced on 4 October 2017, the Directors have declared an interim dividend of 4.25p per Ordinary Share in respect of the period ended 30 September 2017, an increase of 13% over the interim dividend for the comparative period (2016: 3.75p). This will absorb approximately £1.0 million of shareholders' funds (2016: £0.8 million). It is proposed by the Directors that this dividend will be paid on 9 April 2018 to shareholders who are on the register of members on the record date of 16 March 2018. Subject to the audited results for the year ending 31 March 2018, it is the intention of the Board to propose a final dividend with the March 2018 final results.Dividend cover for the interim period was 3.1x (2016: 3.0x). Strong free cash flow generation has continued since the end of the period, and there continues to be scope for the Board to continue its progressive dividend policy.

BOARD APPOINTMENT

On 8 November 2017 we announced the appointment of Christopher Kingsman as a Non-Executive Director. Christopher brings a broad range of experience from investing in and being involved with a number of public and private companies across different sectors. A graduate of Cambridge University, he started his career with Fidelity Investments and has managed a hedge fund and family office. He is the principal of a private Swiss investment group, executive chairman of Aranca, a global research, analytics and advisory firm based in India, and is a director of a number of private companies.

Through Greenwood Investments Ltd, he has been the second largest shareholder of AdEPT since 2011, having increased his stake in August 2017 from 15.1% to 16.9% of the current issued share capital of the Company.

OUTLOOK

Without an outstanding team at all levels of the business, a transformation on this scale could not have been achieved so quickly and, on behalf of the Board, I would like to thank them for an amazing 6 months.

We are now approximately 200 staff with several thousand years of industry experience in an increasingly wide range of technologies that provide an excellent platform for our future growth. AdEPT provides a full suite of managed services and is now in an excellent position to take advantage of the continuing convergence between IT and Telecoms. We continue to be highly cash generative with adequate funding facilities in place to enable the Board to continue to identify earnings-enhancing acquisitions whilst retaining scope for a progressive dividend policy.

Roger Wilson

Chairman

14 November 2017

This announcement contains inside information.

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About AdEPT Telecom plc:

AdEPT Telecom plc is one of the UK's leading independent providers of managed services for IT, unified communications, connectivity and voice solutions. AdEPT's tailored services are used by thousands of customers across the UK and are brought together through the strategic relationships with tier-1 suppliers such as BT Openreach, Vodafone, Virgin Media, Avaya, Microsoft, Dell and Apple.

AdEPT is listed on the London Stock Exchange (Ticker: ADT). For further information please visit: www.adept-telecom.co.uk