Date: | 17 June 2014 |
Onbehalfof: | Daisy Group plc ("the Group", "the Company" or "Daisy Group") |
Embargoed until 0700hrs |
Daisy Group plc
§ Audited preliminary results for the 12 months to 31 March 2014
Daisy Group plc (AIM: DAY), a leading provider of IT services and unified communications to businesses , is pleased to announce its audited preliminary results for the year ended 31 March 2014.
Audited | Audited | |
Year ended | Year ended | |
31 March 2014 | 31 March 2013 | |
Summary | £million | £million |
Results from continuing operations | ||
Revenue | 352.7 | 351.5 |
Adjusted EBITDA* | 57.9 | 56.3 |
Basic adjusted EPS** (pence) | 13.85 | 13.05 |
Operating loss | (17.9) | (16.8) |
Basic loss per share (pence) | (6.06) | (6.38) |
Cash generated from operations | 44.2 | 47.6 |
Operating free cash flow*** | 49.9 | 47.2 |
Free cash flow**** | 34.9 | 38.6 |
Net debt | (114.0) | (81.2) |
Financial highlights
· Growth in revenue and adjusted EBITDA* in line with market expectations
· Further expansion in gross profit margin to 39.5% (FY13: 36.9%) reflecting the continued improvements to the product portfolio mix
· Growth in basic adjusted EPS of 6% to 13.85p
· Free cash flow materially ahead of market expectations
· Final dividend of 3.1p proposed, taking the full year dividend to 4.6p, a 15% increase (FY13: 4.0p)
· Favourable changes to bank facilities agreed, allowing more leverage and increasing flexibility for buybacks and dividends
Operational highlights
· As reported in the first half, the Retail business has had success with a number of long-term managed services contract wins
· During the year we signed a new mobile carrier agreement with improved margins
· Continued progress in cross-selling with the number of products per Retail customer increasing to 1.87 (2013: 1.85) and an increase in the proportion of Retail customers taking three or more products to 26% (2013: 24%)
· Mix of fixed line call revenues further reduced to 11% of Group revenues (2013: 14%)
· Acquisitions of DDCS, MoCo and Indecs all performing ahead of expectations
Outlook
· Partner Services business and data products expected to deliver growth in Wholesale division
· Distribution division expected to be robust with cross-sell opportunities available
· Continued market decline in Retail fixed line revenues but growth in other product areas
· Strong Group cash generation is expected to continue
Strategic update
· Continue to build a substantial IT services and unified communications business focused on the mid-market
· Organic and inorganic growth strategy
· EPS accretive and cash generative acquisitions targeted
· Comfortable with higher levels of leverage for the right acquisitions
· Progressive dividend policy maintained
· Share buybacks will be considered to maintain an efficient capital structure
* - adjusted EBITDA is operating loss from continuing operations before amortisation, depreciation, net exceptional operating costs and share-based payment (credits)/costs.
** - basic adjusted EPS is basic loss per share adjusted for the after-tax effect of amortisation of acquisition-related intangible assets, share-based payment (credits)/costs and net exceptional operating costs.
*** - operating free cash flow is adjusted EBITDA after the purchase of both tangible and intangible assets
**** - free cash flow is cash generated from operations after the purchase of both tangible and intangible assets, and adjusting for tax, net interest and specific items including exceptional items and working capital movements directly linked with acquisitions.
Matthew Riley, Chief Executive Officer of Daisy Group, commented:
"We have made good progress during the year from both an organic and inorganic perspective.
"The acquisitions we have made are performing ahead of expectations and help to provide a better balanced product portfolio mix, which positions us well for the continued convergence of IT and communications. In addition to those in the period, post year end we completed the acquisition of Layer 3, the WiFi and LAN specialist which will complement the product offering in both our Retail and Wholesale divisions.
"Looking forward, we expect to continue with our inorganic strategy alongside our key organic objective of cross-selling. Changes to our bank facilities have increased the headroom available for further accretive acquisitions and notwithstanding our desire to pursue these acquisitions, the board will consider the return of capital by way of share buybacks to maintain an efficient capital structure.
"We view the year ahead with optimism and, with confidence in the cash-generating capability of our business, we remain committed to growing the dividend by 15% in the current year."
Enquiries:
Daisy Group plc | Tel: 01282 607785 |
Katharine McNamara, Head of PR | |
Liberum Capital Limited | Tel: 020 3100 2220 |
Steve Pearce/Tom Fyson | |
Redleaf Polhill | daisy@redleafpr.com |
Emma Kane/Rebecca Sanders-Hewett/Jenny Bahr | Tel: 020 7382 4730 |
Notes to Editors:
About Daisy Group plc
Daisy Group plc (AIM: DAY) is a leading provider of IT services and unified communications to businesses.
The Group provides IT services and unified communications across a product portfolio including data, mobile, systems, maintenance and voice, offering an end to end solution for all business communications needs.
For more information on the Group please visit www.daisygroupplc.com.
Chairman's statement
Overview
This year has seen Daisy Group plc ("Daisy Group" or "the Group") further bolster its position as an industry-leading provider of IT services and unified communications to the SME and mid-market business sector in the UK.
We are proud to have built a long-term, sustainable business and I would like to thank our staff for their continued support and hard work in making this possible. During the year the Group has continued to develop and enhance its product range through its corporate acquisition strategy. Revenue has grown by 0.3%, from £351.5 million to £352.7 million and adjusted EBITDA has been increased from £56.3 million to £57.9 million. Basic adjusted earnings per share have increased by 6.1% from 13.05 pence to 13.85 pence. As a result of increased exceptional costs associated with the acquisition and integration activity, operating losses calculated after charging amortisation of intangible assets, depreciation, exceptional items and taking into account share-based payment costs/(credits) have increased to £17.9 million from £16.8 million. Basic loss per share has reduced from 6.38 pence to 6.06 pence.
Whilst lower than in the previous year, cash generation continues to be robust and representative of the strength of the Group's business model. Cash generated from operations in the year was £44.2 million (2013: £47.6 million), lower as a result of investment in working capital associated with large managed service contracts and also higher exceptional costs associated with acquisitions, integration activity and property rationalisation.
Acquisitions
During the year the Group acquired Daisy Data Centre Solutions Limited ("DDCS"), MoCo Holdings Limited ("MoCo"), Indecs Computer Services Limited and Indecs Computers Limited (together "Indecs") and ABSE Limited ("ABSE"). These acquisitions significantly increase our capabilities and the range of products available to our customers, whilst reducing reliance on legacy fixed line business. Of particular note is the addition of IT support services to the Daisy product portfolio following the acquisition of Indecs, as well as the increased Data Centre capacity now offered following the acquisition of DDCS . A total of £35.3 million in cash has been paid on the four acquisitions completed during the year, with the potential of a further £4.4 million to be paid over the next two years dependent upon the trading performance of ABSE customers.
Since the year end we have acquired Layer 3 Advanced Business Solutions LTD ("Layer 3"), for an initial consideration of £1.8 million. The acquisition will further compliment Daisy's existing LAN and WiFi capability and we look forward to reporting on progress in the future.
Funding
We would like to thank our group of six banks for their continued support throughout the year. Net bank debt at 31 March 2014 was £111.3 million (2013: £81.2 million) and at the year end the Group had unutilised bank facilities of £40.0 million (2013: £80.0 million).
Operational development
The Group's strategic acquisition programme, executed over the past five years, has substantially broadened the product range offered to our customers and reduced the dependence on legacy fixed line network services.
We strive for continuous improvement and make operational improvements as we integrate businesses acquired and invest in development of our proprietary software platform to provide greater business efficiency and benefits to customers. We will continue to invest internally in addition to implementing further acquisitions where we see strategic opportunities to enhance value for our shareholders.
Chairman's statement (continued)
DIVIDENDS AND BUYBACKS
Consistent with the policy announced last year, the board is proposing a final dividend of 3.1 pence per share, taking the full-year dividend to 4.6 pence per share (2013: 4.0 pence per share). Subject to shareholder approval at our Annual General Meeting on 16 September 2014, the final dividend will be payable on 17 October 2014 to shareholders registered at the close of business on 26 September 2014. I am pleased to confirm our intention to grow the dividend at a rate of 15% for the next financial year.
The board will also periodically consider the return of surplus capital by way of share buybacks. The board's aim is to maintain an efficient capital structure whilst also retaining access to available funds to support accretive acquisitions. The board will seek a renewal of the shareholder permission to carry out share buybacks at the forthcoming Annual General Meeting.
Outlook
We remain focused on our approach of adding long-term shareholder value through a strategy of both organic growth and growth by acquisition, whilst taking advantage of opportunities to add more services for our existing customers. Our strategy is delivering results and we have built a strong business and have a solid foundation from which to develop even further.
Peter Dubens
Executive Chairman
16 June 2014
Chief Executive's review
OVERVIEW
Once again, our performance this year has been robust and we have made further progress with our strategic aim of being the provider of choice for IT services and unified communications to the UK SME and mid-market sector.
2014 | 2013 | |
Group | £m | £m |
Revenue | 352.7 | 351.5 |
Gross profit | 139.3 | 129.7 |
Gross margin % | 39.5% | 36.9% |
Adjusted EBITDA | 57.9 | 56.3 |
Adjusted EBITDA % | 16.4% | 16.0% |
Operating loss | (17.9) | (16.8) |
Cash generated from operations | 44.2 | 47.6 |
Free cash flow | 34.9 | 38.6 |
Revenue has grown with the contribution from acquisitions offsetting the well understood market trends of reducing fixed line revenues and the impact of regulation on mobile tariffs.
This year we have enhanced our product portfolio and we have continued to reduce our reliance on our traditional voice business. New acquisitions have brought further strengths in data and systems. In particular, the acquisition of DDCS has added significant capacity and capability to the existing hosting and managed services operations.
The Group has delivered a solid performance this year in a difficult economic climate. I would like to thank our employees across the Group for the effort and commitment that has made this possible.
GROWTH AND DEVELOPMENT
Our primary market is the SME and mid-market business sector within the UK and our aim is to develop the business through a strategy of organic and acquisitive growth.
The acquisitions completed during the year are set out below.
On 1 May 2013 the Group acquired the entire issued share capital of DDCS, the data specialist. This acquisition has added significant breadth to our existing data business and has added the infrastructure and data capacity for further growth. DDCS has been integrated with our existing data business in Daisy Retail.
On 26 June 2013 the Group acquired the entire issued share capital of MoCo, the distributor and reseller of business mobile and telecommunications. This business has been successfully integrated into our Daisy Distribution division.
On 26 October 2013 the Group completed the acquisition of Indecs, the market-leading provider of technical maintenance and support services for business critical, IT server and cloud storage facilities. This business has been integrated with our existing partner services business in the Daisy Wholesale division.
On 16 February 2014, the Group acquired the entire issued share capital of ABSE, the business partner in the public sector division of the Daisy Retail business, with a particular specialism in network products. Following the acquisition, the business has been fully integrated into the Daisy Retail division.
Chief Executive's review (continued)
DIVISIONAL REPORTING
Daisy Retail
Daisy Retail provides communications services to a directly-owned or managed customer base across four broad product areas:
Networks fixed line calls, fixed line rentals, inbound telephony services and select services
Data hosting, broadband, leased lines, bonded DSL, IP VPN/MPLS networks and VoIP
Systems maintenance, engineering and equipment
Mobile mobile phones, smart phones, airtime and data provision via service provider and managed contract arrangements
Daisy Retail is the largest of our trading divisions and a summary of its results for the year ended 31 March 2014 can be seen below, together with the comparative results for 2013.
Daisy | |||||
2014 | Networks | Data | Systems | Mobile | Retail |
£m | £m | £m | £m | £m | |
Revenue | 113.5 | 59.1 | 23.2 | 33.8 | 229.6 |
Gross profit | 47.0 | 26.5 | 13.1 | 13.7 | 100.3 |
Gross margin % | 41.4% | 44.8% | 56.5% | 40.5% | 43.7% |
Adjusted EBITDA | 43.0 | ||||
Adjusted EBITDA % | 18.7% | ||||
Daisy | |||||
2013 | Networks | Data | Systems | Mobile | Retail |
£m | £m | £m | £m | £m | |
Revenue | 130.3 | 47.2 | 27.0 | 40.0 | 244.5 |
Gross profit | 52.7 | 19.4 | 15.2 | 13.0 | 100.3 |
Gross margin % | 40.4% | 41.1% | 56.3% | 32.5% | 41.0% |
Adjusted EBITDA | 45.4 | ||||
Adjusted EBITDA % | 18.6% |
Networks margin has increased to 41.4% (2013: 40.4%). The underlying gross margin from fixed lines and calls has been improved through improved commercial terms and pricing arbitrage in respect of lower-cost voice traffic for mobile-terminated calls.
In line with our expectations the market for traditional fixed line access and calls has continued to decline. These legacy products have diminishing significance as we diversify our product range and increasingly provide new technologies and mobile and data-led solutions to our customers. Nonetheless, we are working hard to ensure margins are maintained via continued enhancement activity such as consolidation of supply, improved volume discounts and product bundling to provide improved customer value.
Our data revenue has increased with the acquisition of DDCS within the year, which has also led to improved gross margin to 44.8% (2013: 41.1%) as a result of a higher mix of hosting and managed service products.
Chief Executive's review (continued)
DIVISIONAL REPORTING (CONTINUED)
Daisy Retail (continued)
Investment in our existing data centres and the acquisition of DDCS has increased available capacity and improved our facilities, providing a significant opportunity for further growth in the market.
Overall revenues in systems have fallen with increased focus on recurring revenue streams over one-off sales, with gross margins similar to the prior year at 56.5% (2013: 56.3%).
During the year, within our Daisy Surgery Line business we have developed some new system solutions in response to a change in customer requirements. This has had the effect of reducing revenues in systems by £2.0 million and in networks by £3.0 million.
The revenue in mobile has fallen to £33.8 million (2013: £40.0 million) whilst gross profit has increased to £13.7 million (2013: 13.0 million) reflecting improved commercial terms with one of the major mobile networks. As a result of the change in commercial terms, buying rates have improved but there has been a reduction in the overall level of connection bonuses received .
Our success in Daisy Retail is driven by our ability to increase the number of products and services taken by our customer base, retention of the base through excellent customer service and our ability to drive further efficiencies and improvements in our processes.
Below is an analysis of the percentage split of the average number of products per customer for the directly-owned base within Daisy Retail. Products are defined as calls, lines, inbound telephony services, mobile, internet services, hosted solutions and maintenance:
31 March | 31 March | |
2014 | 2013 | |
Number of products | % | % |
1 | 46 | 47 |
2 | 28 | 29 |
3 | 20 | 18 |
4+ | 6 | 6 |
100 | 100 | |
Products per customer | 1.87 | 1.85 |
The division has continued to focus on cross-selling and increasing product penetration. The number of customers now taking at least three products has increased to 26% (2013: 24%).
Efficient administrative functions continue to be important to us and I am pleased to report that at 31 March 2014 the Retail customer base enjoyed direct debit penetration of 77% (2013: 77%) and e-billing penetration of 60% (2013: 54%).
Daisy Wholesale
Daisy Wholesale provides communications services to smaller telecoms resellers. These resellers comprise small to medium Internet Service Providers ("ISPs"), telecoms networks and resellers and IT service providers. These supply arrangements exist as a result of the Group's ability to obtain better pricing from network carriers and ISPs, combined with the provision of user-friendly portals, which facilitate efficient provisioning for the resellers.
Chief Executive's review (continued)
DIVISIONAL REPORTING (continued)
Daisy Wholesale (continued)
Products offered by Daisy Wholesale comprise:
Networks fixed line calls, fixed line rentals, inbound telephony services, select services and managed billing
Data IP VPN, broadband, ethernet and hosting
Systems maintenance, engineering and equipment
Mobile a white-label offering from O2 and Vodafone
A summary of the division's results for the year ended 31 March 2014 can be seen below, together with the comparative results for 2013.
Daisy | |||||
2014 | Networks | Data | Systems | Mobile | Wholesale |
£m | £m | £m | £m | £m | |
Revenue | 28.0 | 17.9 | 15.0 | 11.8 | 72.7 |
Gross profit | 4.3 | 5.8 | 10.7 | 4.2 | 25.0 |
Gross margin % | 15.4% | 32.4% | 71.3% | 35.6% | 34.4% |
Adjusted EBITDA | 9.7 | ||||
Adjusted EBITDA % | 13.3% | ||||
Daisy | |||||
2013 | Networks | Data | Systems | Mobile | Wholesale |
£m | £m | £m | £m | £m | |
Revenue | 28.9 | 17.1 | 5.5 | 10.1 | 61.6 |
Gross profit | 4.3 | 5.3 | 4.2 | 3.7 | 17.5 |
Gross margin % | 14.9% | 31.0% | 76.4% | 36.6% | 28.4% |
Adjusted EBITDA | 6.7 | ||||
Adjusted EBITDA % | 10.9% |
Our Wholesale data business (principally aggregated broadband services) continues to enjoy higher gross margins than those traditionally seen in networks.
The post-acquisition results of Indecs have been included within systems.
The main area of growth during the year has been in the systems product which has benefitted from the full-year effect of TNC, acquired in January 2013, together with the post-acquisition results of Indecs. This, together with some operating cost efficiencies, has resulted in a significant improvement in adjusted EBITDA to £9.7 million (2013: £6.7 million). We anticipate further progression during the next financial year as we see the full-year benefit of the acquisition.
Chief Executive's review (continued)
DIVISIONAL REPORTING (continued)
Daisy Distribution
Daisy Distribution provides a full range of mobile handsets and airtime tariffs from O2, Vodafone and EE via a dealer network. A summary of the division's results for the year ended 31 March 2014 can be seen below, together with the comparative results for 2013.
Daisy | |||
2014 | Mobile | Distribution | |
£m | £m | ||
Revenue | 50.4 | 50.4 | |
Gross profit | 14.0 | 14.0 | |
Gross margin % | 27.8% | 27.8% | |
Adjusted EBITDA | 8.9 | ||
Adjusted EBITDA % | 17.7% | ||
Daisy | |||
2013 | Mobile | Distribution | |
£m | £m | ||
Revenue | 45.4 | 45.4 | |
Gross profit | 11.9 | 11.9 | |
Gross margin % | 26.2% | 26.2% | |
Adjusted EBITDA | 7.4 | ||
Adjusted EBITDA % | 16.3% |
The post-acquisition results for MoCo have been included from June 2013.
The division has agreements in place with the mobile networks on market-leading commercial terms.
This year the division has grown following the acquisition of MoCo. Furthermore, gross margins have improved to 27.8% (2013: 26.2%) following changes to the commercial terms with one of the major mobile networks.
As previously disclosed, there have been issues in the past with the delay of mid-term contract renewals. We were able to re-initiate mid-term renewals during the year and are now positioned well for the year ahead.
Revenue by product - Group
Across the Group as a whole, our revenue can be viewed as follows:
2014 | 2013 | |||
% of | % of | |||
Product | £m | total | £m | total |
Networks | 141.6 | 40% | 159.2 | 46% |
Data | 76.9 | 22% | 64.3 | 18% |
Systems | 38.3 | 11% | 32.5 | 9% |
Mobile | 95.9 | 27% | 95.5 | 27% |
352.7 | 100% | 351.5 | 100% |
This demonstrates the diverse product mix, covering the broad spectrum of communications services that Daisy Group delivers to its customers. There has been an increase in the proportion of revenue coming from systems following the acquisition of Indecs and the full-year effect of TNC, acquired last year. Traditional fixed line calls (excluding inbound telephony services) continue to decline and now contribute only 11% of total Group revenue (2013: 14%).
Chief Executive's review (continued)
opportunities FOR FURTHER GROWTH
We have a highly skilled executive team capable of building on the Group's position as the main consolidator and the leading independent provider of IT services and unified communications to the SME and mid-market business segment. We will continue to evaluate and execute acquisitions that help build strategic advantage and where we can see value for our shareholders.
We have invested £2.4 million in software development this year (2013: £2.1 million). This investment has ensured that we have the required customer relationship management and billing systems that will enable us to service a growing customer base taking multiple products, over the medium term. In addition, we have enhanced our network infrastructure and data centres in preparation for future growth. Property, plant and equipment additions totalled £4.3 million during the year (2013: £3.1 million), with the bulk of this expenditure relating to new network infrastructure equipment at our various locations.
We will continue to further develop our processes and systems and we will continue to invest to ensure that we have the right infrastructure to support our growth strategy.
summary
The last 12 months have seen Daisy Group make good progress with both organic and acquisitive growth, reinforcing the Group's position in the market place.
We have in place the platform, the systems, the people and the product set to allow us to grow both organically and via strategic acquisitions.
Against a difficult economic backdrop, we believe we are well positioned to make further progress towards our aim of being the IT services and unified communications provider of choice to the SME and mid-market sectors.
Matthew Riley
Chief Executive Officer
16 June 2014
Financial review
The trading results of the Group for the year ended 31 March 2014, comprising the trading results of the three operating divisions, Daisy Retail, Daisy Wholesale and Daisy Distribution, together with central costs, have been included within continuing operations.
ACQUISITIONS
Acquisition of Daisy Data Centre Solutions Limited ("DDCS")
On 1 May 2013 the Group acquired the entire issued share capital of DDCS for a cash consideration of £7.5 million. DDCS is a data specialist, providing managed services from two data centres in Reading and Gateshead.
In the accounts for DDCS for the 7 months to 31 March 2013, which include the trade acquired from 2e2 on 14 February 2013, revenue of £1.2 million was reported with an adjusted loss before interest, tax, depreciation and amortisation of £0.6 million. In the year DDCS contributed revenue and adjusted EBITDA of £13.6 million and £1.4 million respectively.
This business has been integrated with our existing data business in Daisy Retail.
Acquisition of MoCo Holdings Limited ("MoCo")
On 26 June 2013 the Group acquired the entire issued share capital of MoCo for a cash consideration of £1.9 million. MoCo is an independent distributor and reseller of business mobile and telecommunications and trades through a network of channel partners. In addition to its business mobile services, MoCo also offers a range of fixed line, data and IT solutions to partners and end-user customers.
In the year MoCo contributed revenue and adjusted EBITDA of £4.5 million and £0.4 million respectively.
Acquisition of Indecs Computer Services Limited and Indecs Computers Limited (together "Indecs")
On 26 October 2013 the Group completed the acquisition of Indecs for a cash consideration of £18.0 million. Indecs is a market-leading provider of technical maintenance and support services for business critical, IT server and cloud storage facilities.
In the year Indecs contributed revenue and adjusted EBITDA of £5.5 million and £1.3 million respectively.
This business has been integrated with our existing partner services business in the Daisy Wholesale division.
Acquisition of ABSE Limited ("ABSE")
On 16 February 2014, the Group acquired the entire issued share capital of ABSE for an initial cash consideration of £7.9 million. ABSE acts as a business partner in the public sector division of the Daisy Retail division, with a particular specialism in network products. Following acquisition, the business has been fully integrated into the Daisy Retail division.
An earn-out agreement is in place to reward the vendors based on performance of the acquired assets which runs to February 2016. The resulting contingent consideration payment is currently expected to be up to £4.4 million.
Acquisition of Layer 3 Advanced Business Solutions Ltd ("Layer 3")
Subsequent to the year end, on 31 May 2014 the Group acquired the entire share capital of Layer 3 for an initial cash consideration of £1.8 million. Layer 3 is a highly skilled technical business, specialising in delivering networking audits, Local Area Networks (LAN) and WiFi services.
The business will be integrated with our existing Daisy Retail division and we expect to commence this activity over the summer months.
Financial review (continued)
FUNDING
At 31 March 2014 the Group had £195.0 million of bank facilities in place with its group of six banks comprising Barclays Bank plc, HSBC Bank plc, Lloyds Banking Group plc, The Royal Bank of Scotland plc, Yorkshire Bank and ING Bank N.V.
Net debt at 31 March 2014 was £114.0 million (2013: £81.2 million) reflecting the dividends paid, the acquisition, integration and change activity undertaken in the year, offset by free cash flow of £34.9 million (2013: £38.6 million) and including finance leases of £2.6 million (2013: £nil).
Since the year end a number of changes have been made to the bank facilities, the principal change being the removal of term loan amortisation, which provides further capacity for acquisitions, and the increase in permitted leverage in certain circumstances to 3.0 x annualised adjusted EBITDA. These changes reflect the confidence of management and the lenders in the cash-generating capabilities of the business.
CONTINUING OPERATIONS
Continuing operations for the year ended 31 March 2014 include the results of all businesses that were owned and designated as continuing at the start of the financial year (including the Group's holding company), together with the post-acquisition results of businesses acquired during the year.
The Group's revenue and adjusted EBITDA were £352.7 million (2013: £351.5 million) and £57.9 million (2013: £56.3 million) respectively.
Amortisation of intangible assets in the year was £63.8 million (2013: £66.2 million) and relates primarily to the customer relationships acquired during the current and prior periods. These customer relationships have been valued based on expected discounted future cash flows and are amortised over periods from two to seven years.
Depreciation for the year totalled £4.1 million (2013: £2.9 million) and consists largely of charges for computers, office equipment and network infrastructure.
Net exceptional operating costs were £7.1 million (2013: £4.6 million). These include employee and other restructuring costs of £6.4 million (2013: £5.4 million) and costs directly relating to acquisitions of £3.0 million (2013: £1.0 million). Exceptional credits included within net exceptional operating costs include provision releases of £1.1 million (2013: £nil) and negative goodwill of £1.4 million (2013: £nil) following the acquisition of DDCS.
A new long term management incentive plan was initiated during the year which, along with the existing SAYE schemes, resulted in a charge to the income statement of £0.8 million (2013: credit of £0.7 million).
The operating loss from continuing operations was £17.9 million (2013: £ 16.8 million).
Net finance costs were £6.5 million (2013: £6.8 million) and predominantly consist of finance costs of £6.1 million (2013: £6.2 million) relating to the bank facilities and discounting of provisions and contingent consideration of £0.6 million (2013: £0.7 million).
The Group reported a net loss before tax from continuing operations for the year of £24.4 million (2013: £23.5 million). As noted above, the increase over the prior year is predominantly due to the increase in exceptional operating costs due to the increased acquisition and integration activity.
TAXATION
At the year end the Group has recognised a deferred tax asset on the balance sheet of £8.6 million (2013: £9.8 million), which is expected to unwind in future periods, effectively reducing the cash tax liability on future profits. During the year net corporation tax of £4.9 million was paid (2013: £3.0 million).
Financial review (continued)
EARNINGS PER SHARE
Basic and diluted loss per share from continuing operations reduced to 6.06 pence in the year (2013: 6.38 pence) principally due to the reduction in corporation tax charge for the year. Basic adjusted earnings per share from continuing operations increased to 13.85 pence (2013: 13.05 pence) mainly as a result of increased Adjusted EBITDA and reduced corporation tax charges. Fully diluted adjusted earnings per share from continuing operations is 13.53 pence (2013: 12.95 pence).
The adjusted earnings per share calculation excludes the after-tax effect of amortisation of acquisition-related intangible assets, share-based payment costs/(credits), share of profit/(loss) of joint venture and net exceptional operating costs, and we believe it is a better representation of the underlying trading performance of the Group
BALANCE SHEET
Net assets of the Group were £115.3 million at 31 March 2014, compared to £143.9 million at 31 March 2013.
Intangible assets excluding goodwill reduced to £126.8 million (2013: £160.8 million) as a result of £19.5 million of assets acquired through business combinations, a further £10.3 million of additions (including £7.6 million of customer lists and £2.4 million spent on computer software), less the amortisation charge for the year of £63.8 million (2013: £66.2 million). Goodwill arising on current and prior year acquisitions totalled £16.7 million, taking the year end position to £135.2 million (2013: £118.4 million).
The deferred tax asset of £8.6 million (2013: £9.8 million) primarily relates to tax losses and fixed asset timing differences for the former Vialtus business, which are expected to continue to be utilised against future profits.
Net current assets were £9.1 million (2013: £2.3 million). Total borrowings stood at £155.5 million (2013: £117.2 million). This balance consists of gross bank borrowings of £155.0 million (2013: £120.0 million), finance lease liabilities of £2.6 million (2013: £nil) less deferred finance fees of £2.1 million (£2.8 million), which will be released over the remaining period of the bank facilities. Of the total borrowings, £10.8 million is classed as current (2013: £4.1 million) and £144.7 million is classed as non-current (2013: £113.1 million). As noted earlier, subsequent to the year end, we have agreed with our banks to remove the requirement to amortise the term loan and hence the £10.8 million currently classed as a current liability will no longer be required to be settled in the coming year.
CASH FLOW AND NET DEBT
Cash generated from operations was robust at £44.2 million (2013: £47.6 million). The reduction on the previous year is primarily due to investment in working capital and increased exceptional costs associated with the acquisitions made in the period.
Net interest paid was £5.1 million (2013: £4.1 million). The Group made net taxation payments of £4.9 million (2013: £3.0 million). The Group makes tax payments on account in addition to meeting obligations of acquired entities.
Net capital expenditure outflows totalled £1.3 million in the year (2013: £3.0 million) and were largely attributable to network infrastructure. The cash flows associated with the acquisition of intangible assets totalled £9.3 million with £2.6 million relating to payments to acquire intellectual property and material customer databases (2013: £6.0 million) and were largely attributable to customer lists and software.
Financial review (continued)
CASH FLOW AND NET DEBT (CONTINUED)
Pre-exceptional free cash flow for the Group was £34.9 million (2013: £38.6 million).
2014 | 2013 | |
£m | £m | |
Cash generated from operations | 44.2 | 47.6 |
Net interest paid | (5.1) | (4.1) |
Taxation | (4.9) | (3.0) |
Capital expenditure, net of proceeds | (1.3) | (3.0) |
Acquisition of customer lists and software | (6.7) | (6.0) |
Net cash outflow from exceptional items | 8.7 | 7.1 |
Free cash flow | 34.9 | 38.6 |
Net investing outflow | (38.8) | (34.2) |
Net financing inflow | 31.7 | 6.9 |
Net cash outflow from exceptional items | (8.7) | (7.1) |
Dividends | (14.2) | - |
Net cash inflow | 4.9 | 4.2 |
At 31 March 2014 the Group had unutilised bank facilities of £40.0 million (2013: £80.0 million), cash balances of £43.7 million (2013: £38.8 million) and net bank debt of £111.3 million (2013: £81.2 million). Finance lease liabilities at the year end totalled £2.6 million but were negligible in the prior year.
Steve Smith
Chief Financial Officer
16 June 2014
Consolidated income statement
Year ended | Year ended | ||
31 March 2014 | 31 March 2013 | ||
Note | £'000 | £'000 | |
Revenue | 2 | 352,675 | 351,484 |
Cost of sales | (213,399) | (221,750) | |
Gross profit | 2 | 139,276 | 129,734 |
Operating costs | (157,140) | (146,484) | |
Operating loss | (17,864) | (16,750) | |
Adjusted EBITDA | 57,943 | 56,309 | |
Amortisation of intangible assets | 8 | (63,838) | (66,229) |
Depreciation | (4,057) | (2,935) | |
Exceptional operating costs - costs directly relating to | |||
acquisitions | 4 | (3,036) | (990) |
Net exceptional operating costs - other | 4 | (4,100) | (3,650) |
Share-based payment (costs)/credits | (776) | 745 | |
Operating loss | (17,864) | (16,750) | |
Finance income | 169 | 126 | |
Finance costs | (6,693) | (6,904) | |
Net finance expense | (6,524) | (6,778) | |
Share of profit/(loss) of joint venture | 13 | (7) | |
Loss before tax | (24,375) | (23,535) | |
Income tax credit | 5 | 8,743 | 7,078 |
Loss after tax | (15,632) | (16,457) | |
Loss for the year attributable to the owners of the parent | (15,632) | (16,457) | |
Attributable to: | |||
Owners of the parent | (15,632) | (16,457) | |
Non-controlling interests | - | - | |
Loss after tax | (15,632) | (16,457) | |
Loss per share (pence) | |||
Basic loss per share: | |||
6 | (6.06) | (6.38) | |
6 | (6.06) | (6.38) | |
Diluted loss per share: | |||
6 | (6.06) | (6.38) | |
6 | (6.06) | (6.38) |
A separate consolidated statement of comprehensive income has not been presented as there are no further items of comprehensive income other than as presented in the consolidated income statement above.
Consolidated balance sheet
31 March 2014 | 31 March 2013 | ||
Note | £'000 | £'000 | |
Assets | |||
Non-current assets | |||
Goodwill | 7 | 135,189 | 118,445 |
Other intangible assets | 8 | 126,763 | 160,763 |
Property, plant and equipment | 10,816 | 5,429 | |
Investment in joint venture | 6 | - | |
Deferred tax asset | 8,584 | 9,809 | |
281,358 | 294,446 | ||
Current assets | |||
Inventories | 5,629 | 3,795 | |
Trade and other receivables | 97,155 | 83,119 | |
Cash and cash equivalents | 43,666 | 38,808 | |
146,450 | 125,722 | ||
Liabilities | |||
Current liabilities | |||
Trade and other payables | (123,982) | (115,097) | |
Current tax liability | (1,679) | (2,937) | |
Borrowings | 9 | (10,846) | (4,078) |
Provisions | (878) | (1,304) | |
(137,385) | (123,416) | ||
Net current assets | 9,065 | 2,306 | |
Non-current liabilities | |||
Borrowings | 9 | (144,688) | (113,147) |
Provisions | (772) | (2,410) | |
Deferred tax liability | (18,601) | (27,768) | |
Other non-current liabilities | (11,097) | (9,491) | |
(175,158) | (152,816) | ||
Net assets | 115,265 | 143,936 | |
Equity attributable to the owners of the parent | |||
Share capital | 5,339 | 5,339 | |
Share premium | - | 89,868 | |
Merger reserve | 83,500 | 83,500 | |
Other reserves | 91,358 | 1,490 | |
Retained loss | (64,932) | (36,261) | |
115,265 | 143,936 | ||
Non-controlling interests | - | - | |
Total equity | 115,265 | 143,936 |
Consolidated statement of changes in equity
Attributable | ||||||||
Share | Share | Merger | Other | Retained | to owners | Non- | Total | |
capital | premium | reserve | Reserves | loss | of the | controlling | equity | |
parent | interests | |||||||
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 1 April 2012 | 5,339 | 89,868 | 83,500 | 1,490 | (18,851) | 161,346 | - | 161,346 |
Share-based payments | - | - | - | - | (974) | (974) | - | (974) |
Shares exercised from | ||||||||
employee benefit trust | - | - | - | - | 21 | 21 | - | 21 |
Loss and total comprehensive expense for the year | - | - | - | - | (16,457) | (16,457) | - | (16,457) |
At 31 March 2013 | 5,339 | 89,868 | 83,500 | 1,490 | (36,261) | 143,936 | - | 143,936 |
At 1 April 2013 | 5,339 | 89,868 | 83,500 | 1,490 | (36,261) | 143,936 | - | 143,936 |
Share-based payments | - | - | - | - | 770 | 770 | - | 770 |
Deferred tax on share-based payments | - | - | - | - | 100 | 100 | - | 100 |
Cancellation of reserve | - | (89,868) | - | 89,868 | - | - | - | - |
Shares exercised from | ||||||||
employee benefit trust | - | - | - | - | 261 | 261 | - | 261 |
Dividends | - | - | - | - | (14,170) | (14,170) | - | (14,170) |
Loss and total comprehensive expense for the year | - | - | - | - | (15,632) | (15,632) | - | (15,632) |
At 31 March 2014 | 5,339 | - | 83,500 | 91,358 | (64,932) | 115,265 | - | 115,265 |
Consolidated cash flow statement
Year ended | Year ended | ||
31 March 2014 | 31 March 2013 | ||
Note | £'000 | £'000 | |
Cash generated from operations | 10 | 44,179 | 47,642 |
Net income taxes paid | (4,943) | (2,977) | |
Net cash generated from operating activities | 39,236 | 44,665 | |
Cash flows from investing activities | |||
Business combinations, net of cash acquired | 3a | (36,191) | (34,054) |
Payment to acquire intangible assets | 8 | (9,303) | (6,067) |
Investment in discontinued operations | (77) | (73) | |
Purchase of property, plant and equipment | (1,937) | (3,072) | |
Proceeds from sale of property, plant and equipment | 597 | 46 | |
Interest received | 169 | 126 | |
Net cash used in investing activities | (46,742) | (43,094) | |
Cash flows from financing activities | |||
Proceeds from the exercise of share options | 261 | 21 | |
Proceeds from bank borrowings | 40,000 | 154,500 | |
Fees associated with bank borrowings | (2,951) | (598) | |
Repayment of borrowings | (5,000) | (147,000) | |
Dividends paid | (14,170) | - | |
Interest paid | (5,277) | (4,215) | |
Payment of finance lease liabilities | (499) | (64) | |
Net cash generated from financing activities | 12,364 | 2,644 | |
Net increase in cash and cash equivalents | 4,858 | 4,215 | |
Cash and cash equivalents at the start of the year | 38,808 | 34,593 | |
Cash and cash equivalents at the end of the year | 43,666 | 38,808 |
Notes to the preliminary financial statements
1. BASIS OF PREPARATION
Daisy Group plc ("the Company") is a holding company. The Company and its subsidiaries (together "the Group") provide telecommunication and managed services to UK SME and mid-market businesses. The Company is a public limited company which is listed on the Alternative Investment Market (AIM) of the London Stock Exchange and is incorporated and domiciled in the UK. The address of its registered office is Daisy House, Lindred Road Business Park, Nelson, Lancashire BB9 5SR.
The financial information presented in this preliminary announcement is extracted from, and is consistent with, the Group's audited financial statements for the year ended 31 March 2014. The financial information set out above does not constitute the Company's statutory financial statements for the years ended 31 March 2014 or 31 March 2013 but is derived from those financial statements. Statutory financial statements for the year ended 31 March 2014 will be delivered following the Company's annual general meeting. The auditors have reported on those financial statements; their report was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
The Group's results have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The preliminary announcement has been agreed with the Company's auditors for release.
2. SEGMENT INFORMATION
The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Group board of directors. Operating segments, for the year ended 31 March 2014, were determined on the basis of the reports reviewed by the Group board of directors. The segments at 31 March 2014 comprised:
Daisy Retail
Daisy Retail provides services across four product areas to SME and mid-market business customers:
Networks fixed line calls, fixed line rentals, inbound telephony services and select services
Data hosting, broadband, leased lines, bonded DSL, IP VPN/MPLS networks and VoIP
Systems maintenance, engineering and equipment
Mobile mobile phones, smart phones, airtime and data provision via service provider and managed contract arrangements
Daisy Wholesale
Daisy Wholesale provides services to the reseller channel in the following product categories:
Networks fixed line calls, fixed line rentals, inbound telephony services, select services and managed billing
Data IP VPN, broadband, ethernet and hosting
Systems maintenance, engineering and equipment
Mobile a white-label offering from O2 and Vodafone
Daisy Distribution
Daisy Distribution provides mobile handsets and airtime tariffs from O2, Vodafone and EE via a dealer network.
Central costs
Central costs consist of central activities that are not directly attributable to the operating segments.
Segmental revenue represents the total revenue of each business within a reporting segment and includes inter-segment revenue. Segmental profit is the measure used to assess performance internally and is calculated as earnings before interest, taxation, depreciation, amortisation, share-based payment costs/credits and net exceptional operating costs ("adjusted EBITDA"), excluding central costs recharged from the Company.
The Group has opted to disclose additional information on revenue and gross profit in respect of the product categories described above.
All businesses are based in the UK. Inter-segmental transactions are carried out on an arm's length basis. The Group does not have any customers who contribute more than 10% of total revenue.
Notes to the preliminary financial statements (continued)
2. SEGMENT INFORMATION (CONTINUED)
The segment information for the year ended 31 March 2014 is as follows
Daisy | Daisy | Daisy | Central | Continuing | |
Retail | Wholesale | Distribution | costs | Operations | |
£'000 | £'000 | £'000 | £'000 | £'000 | |
Networks | 113,518 | 28,049 | - | - | 141,567 |
Data | 60,735 | 24,471 | - | - | 85,206 |
Systems | 23,231 | 15,038 | - | - | 38,269 |
Mobile | 33,825 | 11,712 | 55,302 | - | 100,839 |
Total segment revenue | 231,309 | 79,270 | 55,302 | - | 365,881 |
Inter-segment revenue | (1,719) | (6,573) | (4,914) | - | (13,206) |
External revenue | 229,590 | 72,697 | 50,388 | - | 352,675 |
Networks | 47,066 | 4,322 | - | - | 51,388 |
Data | 26,516 | 5,813 | - | - | 32,329 |
Systems | 13,064 | 10,634 | - | - | 23,698 |
Mobile | 13,695 | 4,198 | 13,968 | - | 31,861 |
Total segment gross profit | 100,341 | 24,967 | 13,968 | - | 139,276 |
Adjusted EBITDA | 43,024 | 9,748 | 8,908 | (3,737) | 57,943 |
Allocation of central costs | (2,506) | (532) | (513) | 3,551 | - |
Amortisation | (54,491) | (6,942) | (2,405) | - | (63,838) |
Depreciation | (3,706) | (268) | (83) | - | (4,057) |
Net exceptional operating costs | (1,953) | (927) | (30) | (4,226) | (7,136) |
Share-based payments | - | - | - | (776) | (776) |
Operating (loss)/profit | (19,632) | 1,079 | 5,877 | (5,188) | (17,864) |
Total assets | 274,108 | 63,043 | 44,761 | 45,896 | 427,808 |
This year, central costs of £3.6 million (2013: £2.6 million) relating to the Company were recharged to its subsidiary companies, via the intercompany accounts. In addition, the components of each operating segment have been re-assessed by the chief operating decision-maker and re-aligned with the current management reporting structure. Prior period results have been adjusted to ensure the divisional operating (loss)/profit results are stated on a comparable basis.
Notes to the preliminary financial statements (continued)
2. SEGMENT INFORMATION (CONTINUED)
The restated segment information for the year ended 31 March 2013 is as follows:
Daisy | Daisy | Daisy | Central | Continuing | |
Retail | Wholesale | Distribution | costs | operations | |
£'000 | £'000 | £'000 | £'000 | £'000 | |
Networks | 130,310 | 28,909 | - | - | 159,219 |
Data | 47,826 | 24,212 | - | - | 72,038 |
Systems | 27,006 | 5,503 | - | - | 32,509 |
Mobile | 40,003 | 10,102 | 52,991 | - | 103,096 |
Total segment revenue | 245,145 | 68,726 | 52,991 | - | 366,862 |
Inter-segment revenue | (647) | (7,114) | (7,617) | - | (15,378) |
External revenue | 244,498 | 61,612 | 45,374 | - | 351,484 |
Networks | 52,628 | 4,299 | - | - | 56,927 |
Data | 19,412 | 5,246 | - | - | 24,658 |
Systems | 15,242 | 4,222 | - | - | 19,464 |
Mobile | 13,025 | 3,717 | 11,943 | - | 28,685 |
Total segment gross profit | 100,307 | 17,484 | 11,943 | - | 129,734 |
Adjusted EBITDA | 45,436 | 6,680 | 7,394 | (3,201) | 56,309 |
Allocation of central costs | (2,091) | (203) | (347) | 2,641 | - |
Amortisation | (56,358) | (6,673) | (3,198) | - | (66,229) |
Depreciation | (2,631) | (248) | (56) | - | (2,935) |
Net exceptional operating (costs)/income | (6,153) | (735) | - | 2,248 | (4,640) |
Share-based payments credit | - | - | - | 745 | 745 |
Operating (loss)/profit | (21,797) | (1,179) | 3,793 | 2,433 | (16,750) |
Total assets | 293,399 | 47,550 | 38,217 | 41,002 | 420,168 |
A reconciliation of operating loss to loss before tax is provided below:
Year ended | Year ended | |
31 March 2014 | 31 March 2013 | |
£'000 | £'000 | |
Operating loss | (17,864) | (16,750) |
Net finance expense | (6,524) | (6,778) |
Share of profit/(loss) of joint venture | 13 | (7) |
Loss before tax | (24,375) | (23,535) |
Segment assets are reconciled to total assets as follows:
31 March 2014 | 31 March 2013 | |
£'000 | £'000 | |
Non-current assets | 281,358 | 294,446 |
Current assets | 146,450 | 125,722 |
Segment assets | 427,808 | 420,168 |
Notes to the preliminary financial statements (continued)
2. SEGMENT INFORMATION (CONTINUED)
Geographic information
The Group is domiciled in the UK and it generates the majority of its revenue from external customers in the UK. The geographic analysis of revenue is based on the country in which the external customer is invoiced.
Year ended | Year ended | |
31 March 2014 | 31 March 2013 | |
£'000 | £'000 | |
UK | 345,460 | 343,692 |
Europe | 5,262 | 5,920 |
Americas | 1,142 | 701 |
Asia Pacific | 811 | 1,171 |
External revenue | 352,675 | 351,484 |
3. BUSINESS COMBINATIONS
a) Business combinations in the year ended 31 March 2014
On 1 May 2013 the Group acquired the entire issued share capital of Daisy Data Centre Solutions Limited ("DDCS") for a cash consideration of £7.5 million. DDCS is a data centre business, providing managed services from two data centres in Reading and Gateshead.
On 26 June 2013 the Group acquired the entire issued share capital of MoCo Holdings Limited ("MoCo") for a cash consideration of £1.9 million. MoCo is an independent distributor and reseller of business mobile and telecommunications and trades through a network of channel partners. In addition to its business mobile services, MoCo also offers a range of fixed line, data and IT solutions to partners and end-user customers.
On 26 October 2013 the Group acquired the entire issued share capital of Indecs Computers Limited, Indecs Computer Services Limited and its three subsidiaries, 9k Limited, Single Source Computer Services UK Limited and Purity IT Limited (together "Indecs") for a cash consideration of £18.0 million. Indecs provides IT maintenance and support for business critical, server and storage facilities, specialising in tailoring maintenance contracts to individual customers' needs and supporting legacy hardware systems.
On 16 February 2014, the Group acquired the entire issued share capital of ABSE Limited ("ABSE") for an initial cash consideration of £7.9 million. ABSE is a business partner in the public sector division of the Retail business, with a particular specialism in network products. Further consideration of up to £4.4 million may become payable based on challenging adjusted EBITDA targets over an agreed earn-out period. As such, a financial liability of £4.4 million has been recognised in the balance sheet.
The purchase consideration for each acquisition was as follows:
£'000 | DDCS | MoCo | Indecs | ABSE | Total | ||
Cash paid | 7,450 | 1,901 | 17,987 | 7,927 | 35,265 | ||
Contingent cash consideration | - | - | - | 4,400 | 4,400 | ||
Total consideration | 7,450 | 1,901 | 17,987 | 12,327 | 39,665 | ||
Notes to the preliminary financial statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
a) Business combinations in the year ended 31 March 2014 (continued)
The carrying amount of assets and liabilities in the books of the acquiree were as follows:
£'000 | DDCS | MoCo | Indecs | ABSE | Total | |
Intangible assets | 658 | 37 | - | - | 695 | |
Property, plant and equipment | 5,302 | 18 | 41 | - | 5,361 | |
Deferred tax asset | 193 | 4 | - | - | 197 | |
Inventories | - | 27 | 474 | - | 501 | |
Trade and other receivables | 4,953 | 1,576 | 2,971 | 283 | 9,783 | |
Cash and cash equivalents | 1,107 | 680 | 1,800 | 1,611 | 5,198 | |
Trade and other payables | (4,959) | (1,566) | (5,083) | (601) | (12,209) | |
Provisions | - | - | (127) | - | (127) | |
Deferred tax liability | - | - | - | (67) | (67) | |
Total carrying amount | 7,254 | 776 | 76 | 1,226 | 9,332 |
The following fair value adjustments have been made:
£'000 | DDCS | MoCo | Indecs | ABSE | Total | |
Intangible assets - customer | ||||||
lists | 2,017 | 1,193 | 4,145 | 11,447 | 18,802 | |
Deferred tax | (464) | (274) | (829) | (2,289) | (3,856) | |
Total fair value adjustments | 1,553 | 919 | 3,316 | 9,158 | 14,946 |
The provisional fair values of the assets and liabilities and the associated goodwill arising from the acquisitions are as follows:
£'000 | DDCS | MoCo | Indecs | ABSE | Total | |
Intangible assets | 2,675 | 1,230 | 4,145 | 11,447 | 19,497 | |
Property, plant and equipment | 5,302 | 18 | 41 | - | 5,361 | |
Deferred tax asset | 193 | 4 | - | - | 197 | |
Inventories | - | 27 | 474 | - | 501 | |
Trade and other receivables | 4,953 | 1,576 | 2,971 | 283 | 9,783 | |
Cash and cash equivalents | 1,107 | 680 | 1,800 | 1,611 | 5,198 | |
Trade and other payables | (4,959) | (1,566) | (5,083) | (601) | (12,209) | |
Provisions | - | - | (127) | - | (127) | |
Deferred tax liability | (464) | (274) | (829) | (2,356) | (3,923) | |
Net assets acquired | 8,807 | 1,695 | 3,392 | 10,384 | 24,278 | |
Goodwill | 7 | (1,357) | 206 | 14,595 | 1,943 | 15,387 |
Purchase consideration | 7,450 | 1,901 | 17,987 | 12,327 | 39,665 |
The goodwill is attributable to the cost synergies and cross-selling opportunities that are expected to be achieved from combining the acquired customer bases and trade. The acquisition of DDCS has resulted in the recognition of negative goodwill as the fair value of the net assets acquired exceeded the purchase consideration. The associated negative goodwill generated from the acquisition of DDCS has been recognised in net exceptional operating costs in accordance with IFRS 3 (revised) (see note 4).
Notes to the preliminary financial statements (continued)
3. BUSINESS COMBINATIONS (CONTINUED)
a) Business combinations in the year ended 31 March 2014 (continued)
Included within trade and other receivables are trade receivables as follows:
£'000 | DDCS | MoCo | Indecs | ABSE | Total | |
Gross contractual amounts receivable | 2,600 | 271 | 2,202 | - | 5,073 | |
Provision for non-collection | (122) | (37) | (12) | - | (171) | |
2,478 | 234 | 2,190 | - | 4,902 |
Cash flows arising from the acquisitions were as follows:
£'000 | Note | DDCS | MoCo | Indecs | ABSE | Total |
Purchase consideration settled in cash | 7,450 | 1,900 | 17,987 | 7,928 | 35,265 | |
Direct acquisition costs | 4 | 1,902 | 18 | 287 | 62 | 2,269 |
Cash and cash equivalents | (1,107) | (680) | (1,800) | (1,611) | (5,198) | |
Cash outflow | 8,245 | 1,238 | 16,474 | 6,379 | 32,336 |
The direct acquisition costs have been recognised in net exceptional operating costs (see note 4). The cash outflow is reconciled to the cash flow statement below:
Note | £'000 | ||
Current year business combinations | 32,336 | ||
Prior period business combinations | 3c | 3,855 | |
Cash flow statement | 36,191 |
From the date of acquisition to 31 March 2014, the acquired businesses contributed the following revenue, adjusted EBITDA and net profit before tax:
£'000 | DDCS | MoCo | Indecs | ABSE | Total | |
Revenue | 13,574 | 4,534 | 5,509 | - | 23,617 | |
Adjusted EBITDA | 1,399 | 364 | 1,318 | - | 3,081 | |
Net profit before tax | 355 | 343 | 1,228 | - | 1,926 |
If the acquisitions had occurred on 1 April 2013, the Group's revenue, adjusted EBITDA and loss for the year would be as follows:
£'000 | Total | |||
Revenue | 361,272 | |||
Adjusted EBITDA | 58,831 | |||
Net loss before tax | (24,926) |
b) Business combinations after the balance sheet date
On 31 May 2014 the Group acquired the entire share capital of Layer 3 Advanced Business Solutions Ltd ("Layer 3") for an initial cash consideration of £1.8 million. An earn-out arrangement is in place which may lead to additional consideration becoming payable, dependent on the performance of the business over a three-year period post-acquisition. Layer 3 is a highly skilled technical, Nottingham based business, specialising in delivery networking audits, Local Area Networks (LAN) and WiFi services.
Notes to the preliminary financial statements (continued)
3. Business combinations (continued)
c) Business combinations in the year ended 31 March 2013
The cash flow arising from the business combinations is as follows:
£'000 | O-Bit | WWG | TNC | Murphx | Total |
Contingent consideration | 242 | - | 1,777 | 1,548 | 3,567 |
Direct acquisition costs | - | 228 | 60 | - | 288 |
Cash outflow | 242 | 228 | 1,837 | 1,548 | 3,855 |
The contingent consideration relates to earn-out agreements created to compensate the vendors for the actual performance of the acquired assets, over and above challenging targets set by the Group.
The balance sheet at 31 March 2013 included contingent consideration payable of £0.2 million in respect of O-Bit Telecom Limited ("O-Bit") and £1.5 million in respect of Murphx Innovative Solutions Limited ("Murphx"). The entire outstanding balances were paid during the year.
Direct acquisition costs of £0.2 million were paid during the year in respect of the acquisition of Worldwide Group Holdings Limited ("WWG"). Additional contingent consideration of £1.8 million was also paid in the year in relation to the acquisition of The Net Crowd Limited ("TNC").
4. NET EXCEPTIONAL OPERATING COSTS
Items that are material in size, individually or in aggregate, and non-operating or non-recurring in nature are presented as exceptional items in the income statement, within the relevant account heading. The directors are of the opinion that the separate recording of exceptional items provides helpful information about the Group's underlying business performance. Net exceptional operating costs are summarised below:
Year ended | Year ended | ||
31 March 2014 | 31 March 2013 | ||
£'000 | £'000 | ||
Employee-related restructuring costs (i) | 1,243 | 1,951 | |
Other restructuring costs (ii) | 5,182 | 3,450 | |
Re-measurement of contingent consideration (iii) | 124 | (2,915) | |
Release of provision no longer required (iv) | (1,092) | - | |
Impairment of property, plant and equipment (v) | - | 1,164 | |
Negative goodwill (vi) | 3a | (1,357) | - |
Costs directly relating to acquisitions (vii) | 3,036 | 990 | |
7,136 | 4,640 |
The net exceptional operating costs for the year ended 31 March 2014 generated an aggregate income tax benefit of £1.7 million (2013: £1.5 million).
(i) Employee-related restructuring costs principally relate to redundancy costs. The balance also includes £0.9 million of integration bonuses payable to certain directors (2013: £nil of integration bonuses).
(ii) Other restructuring costs include £2.9 million of costs relating to operating leases for sites in Harbour Exchange and Prudhoe that are largely unoccupied and where there are no plans to use the space before the expiration of the leases. Also included within this category are IT integration costs of £1.4 million and £0.4 million of costs relating to aborted projects.
Notes to the preliminary financial statements (continued)
4. NET EXCEPTIONAL OPERATING COSTS (CONTINUED)
(iii) During the year the contingent consideration in respect of WWG was revalued in light of the final settlement to be made to the vendors, based on the performance of the business relative to the earn-out target. This resulted in a charge to the income statement of £0.1 million.
(iv) Following the acquisition of DDCS, a site rationalisation process was undertaken, leading to staff being relocated from Gateshead to parts of our Prudhoe site which were previously unoccupied. This has resulted in a release of the onerous property provision of £1.1 million in the year.
(v) There were no asset impairment charges in the year. The leasehold improvement assets in our Stockley Park site were fully impaired during the prior year as the site became unoccupied during the prior year.
(vi) Negative goodwill of £1.4 million associated with the acquisition of DDCS has been written off to the income statement in accordance with IFRS 3 (revised). Refer to note 3 for further details.
(vii) Costs directly relating to acquisitions include £2.6 million of acquisition bonuses payable to directors and senior members of staff, including associated national insurance costs, as approved by the remuneration committee (2013: £0.6 million). Stamp duty costs and legal and professional fees in the year amounted to £0.4 million.
The charge for costs directly relating to acquisitions can be reconciled to note 3, business combinations, as follows:
Year ended | Year ended | ||
31 March 2014 | 31 March 2013 | ||
Note | £'000 | £'000 | |
Business combinations | |||
Current period | 3a | 2,269 | 702 |
Prior period | 288 | - | |
Post year end | 767 | 288 | |
3,324 | 990 |
5. INCOME TAX
Year ended | Year ended | ||
31 March 2014 | 31 March 2013 | ||
£'000 | £'000 | ||
Current tax | |||
UK corporation tax | 3,823 | 4,723 | |
Adjustments in respect of prior periods | (998) | (651) | |
2,825 | 4,072 | ||
Deferred tax | |||
Origination and reversal of temporary differences - current year | (9,196) | (10,094) | |
Origination and reversal of temporary differences - prior year | 204 | (107) | |
Changes in tax rates | (2,576) | (949) | |
(11,568) | (11,150) | ||
Total tax credit | (8,743) | (7,078) |
Notes to the preliminary financial statements (continued)
5. INCOME TAX (CONTINUED)
The credit for the year can be reconciled to the loss from the income statement as follows:
Year ended | Year ended | ||
31 March 2014 | 31 March 2013 | ||
£'000 | £'000 | ||
Loss before tax:- | |||
Continuing operations | (24,375) | (23,535) | |
Loss before tax at 23% (2013: 24%) | (5,606) | (5,648) | |
Adjustment to opening deferred tax on change of tax rates | (2,576) | (949) | |
Adjustment for tax rate differences between current and deferred tax | 1,303 | 426 | |
Tax effect of non-deductible (income)/expenses | (425) | 137 | |
Adjustments to current tax charge in respect of prior periods | (998) | (651) | |
Adjustments to deferred tax credit in respect of prior periods | 204 | (107) | |
Movement on unrecognised deferred tax | (645) | (286) | |
Total tax credit | (8,743) | (7,078) |
The Finance Act 2013 ("the Act") was substantively enacted on 2 July 2013. The Act further reduced the main rate of corporation tax to 21% with effect from 1 April 2014 and 20% with effect from 1 April 2015. The change in the main rate of corporation tax from 23% to 20% has resulted in a reduction in the Group's net deferred tax liability at 31 March 2014 of £2.6 million, all of which has been reflected as a credit in the income statement.
6. (LOSS)/EARNINGS PER SHARE
Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year. The calculation of the statutory and adjusted basic and diluted (loss)/earnings per share is as follows:
Year ended | Year ended | |
31 March 2014 | 31 March 2013 | |
Number | Number | |
Number of shares: | million | million |
Weighted average number of ordinary shares for | ||
the purpose of basic loss per share | 258 | 258 |
Dilution impact of share warrants and options | 6 | 2 |
Diluted number of ordinary shares for the purpose of | ||
diluted loss per share | 264 | 260 |
Losses: | £'000 | £'000 |
Loss after tax from continuing operations | (15,632) | (16,457) |
Non-controlling interest | - | - |
Loss for the period attributable to owners | ||
of the parent in respect of continuing operations | (15,632) | (16,457) |
Profit for the period attributable to owners | ||
of the parent in respect of discontinued operations | - | - |
Basic loss per share: | pence | pence |
From continuing operations | (6.06) | (6.38) |
Diluted loss per share: | ||
From continuing operations | (6.06) | (6.38) |
For periods where the Group was loss-making, dilution has no effect on loss per share.
Notes to the preliminary financial statements (continued)
6. (LOSS)/EARNINGS PER SHARE (CONTINUED)
The adjusted basic and diluted earnings per share from continuing operations is calculated on the same share base after taking into account the adjustments as described below:
Restated | ||
Year ended | Year ended | |
31 March 2014 | 31 March 2013 | |
Adjusted earnings | £'000 | £'000 |
Loss for the year attributable to equity holders of | ||
the parent in respect of continuing operations | (15,632) | (16,457) |
Add: | ||
Net exceptional operating costs | 7,136 | 4,640 |
Share-based payment costs/(credits) | 776 | (745) |
Amortisation of intangible assets (excluding software) | 61,377 | 64,023 |
Share of loss of joint venture | - | 7 |
Less: | ||
Share of profit of joint venture | (13) | - |
Income tax credit | (8,743) | (7,078) |
Adjusted earnings before tax | 44,901 | 44,390 |
Tax on the above | (9,170) | (10,708) |
Adjusted earnings for the year after tax | 35,731 | 33,682 |
Adjusted earnings per share | Pence | Pence |
Basic earnings per share based on adjusted earnings | 13.85 | 13.05 |
Diluted earnings per share based on adjusted earnings | 13.53 | 12.95 |
Adjusted earnings per share represents the adjusted profit after taxation for the year attributable to our shareholders divided by the weighted average number of shares in issue. As it excludes the impact of net exceptional operating costs it provides an important measure of our underlying financial performance in a consistent manner.
The adjusted earnings per share figures for the year ended 31 March 2013 have been restated to reflect a more comparable effective tax rate, after having adjusted for the impact of the change in deferred tax rates and prior year adjustments. In addition, profits/(losses) from joint ventures have been excluded from the calculation.
7. GOODWILL
Note | £'000 | |
Cost and net book amount | ||
At 1 April 2012 | 98,172 | |
Business combinations: | ||
Current period | 20,247 | |
Prior period | 26 | |
At 31 March 2013 | 118,445 | |
At 1 April 2013 | 118,445 | |
Business combinations: | ||
Current period | 3a | 16,744 |
At 31 March 2014 | 135,189 |
In accordance with IAS 36, goodwill is not amortised, but is reviewed annually for indications of impairment or more frequently if there are indications that it may be impaired. In accordance with IFRS 3 (revised), during the year, negative goodwill associated with the acquisition of DDCS of £1.4 million was written off.
Notes to the preliminary financial statements (continued)
7. GOODWILL (CONTINUED)
Goodwill has been allocated to cash generating units ("CGU") as follows for impairment testing:
31 March 2014 | 31 March 2013 | ||
£'000 | £'000 | ||
Daisy Retail | 95,280 | 93,337 | |
Daisy Wholesale | 32,977 | 18,382 | |
Daisy Distribution | 6,932 | 6,726 | |
135,189 | 118,445 |
Daisy Retail includes the acquisition of DDCS and ABSE, Daisy Wholesale includes the acquisition of Indecs and Daisy Distribution includes the acquisition of MoCo.
The carrying value of the Group's goodwill is not subject to annual amortisation and was tested for impairment at 31 March 2014. The recoverable amount has been determined on a value-in-use basis on each cash-generating unit using the management approved 12-month forecasts for each cash-generating unit. The base 12-month projection is held constant with no growth to year 3 and then kept constant thereafter to perpetuity. These cash flows are then discounted at the Group's pre-tax weighted average cost of capital of 8.4%.
Based on the results of the current period impairment review, no impairment charges have been recognised by the Group in the year ended 31 March 2014 (2013: £nil). Management have considered various sensitivity analyses in order to appropriately evaluate the carrying value of goodwill. Having assessed the anticipated future cash flows the directors do not consider there to be any reasonably possible changes in assumptions that would lead to such an impairment charge in the year ended 31 March 2014.
Notes to the preliminary financial statements (continued)
8. OTHER INTANGIBLE ASSETS
Customer | Computer | Supplier | Intellectual | ||||
lists | software | relationships | Licences | property | Total | ||
Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Cost | |||||||
At 1 April 2012 | 305,438 | 5,893 | 3,570 | 249 | 3,396 | 318,546 | |
Acquisitions through | |||||||
business combinations | 26,966 | 5 | - | - | - | 26,971 | |
Additions | 4,059 | 2,129 | - | 109 | - | 6,297 | |
At 31 March 2013 | 336,463 | 8,027 | 3,570 | 358 | 3,396 | 351,814 | |
At 1 April 2013 | 336,463 | 8,027 | 3,570 | 358 | 3,396 | 351,814 | |
Acquisitions through | |||||||
business combinations | 3a | 18,802 | 37 | - | 658 | - | 19,497 |
Additions | 7,549 | 2,352 | - | 440 | - | 10,341 | |
At 31 March 2014 | 362,814 | 10,416 | 3,570 | 1,456 | 3,396 | 381,652 | |
Accumulated amortisation and impairment | |||||||
At 1 April 2012 | 117,705 | 3,289 | 3,570 | 117 | 141 | 124,822 | |
Amortisation for the year | 63,609 | 2,206 | - | 74 | 340 | 66,229 | |
At 31 March 2013 | 181,314 | 5,495 | 3,570 | 191 | 481 | 191,051 | |
At 1 April 2013 | 181,314 | 5,495 | 3,570 | 191 | 481 | 191,051 | |
Amortisation for the year | 60,766 | 2,461 | - | 271 | 340 | 63,838 | |
At 31 March 2014 | 242,080 | 7,956 | 3,570 | 462 | 821 | 254,889 | |
Net book amount | |||||||
At 1 April 2012 | 187,733 | 2,604 | - | 132 | 3,255 | 193,724 | |
At 31 March 2013 | 155,149 | 2,532 | - | 167 | 2,915 | 160,763 | |
At 31 March 2014 | 120,734 | 2,460 | - | 994 | 2,575 | 126,763 | |
Average remaining | |||||||
amortisation period (years) | 2 | 2 | - | 2 | 8 |
Other intangible additions can be reconciled to the cash flow statement as follows:
Year ended | Year ended | ||
31 March 2013 | 31 March 2013 | ||
£'000 | £'000 | ||
Additions | 10,342 | 6,297 | |
Deferred consideration | |||
Current year additions | (2,382) | (230) | |
Prior period pre-acquisition | 1,343 | - | |
9,303 | 6,067 |
All amortisation above is included within operating costs and is disclosed separately on the face of the income statement. Employee costs totalling £ 0.8 million (2013: £0.9 million) have been capitalised within the computer software additions above.
Notes to the preliminary financial statements (continued)
9. BORROWINGS
31 March 2014 | 31 March 2013 | ||
£'000 | £'000 | ||
Non-current | |||
Bank borrowings | 144,500 | 115,000 | |
Unamortised fees associated with bank borrowings | (1,164) | (1,853) | |
Finance lease liabilities | 1,352 | - | |
144,688 | 113,147 | ||
Current | |||
Bank borrowings | 10,500 | 5,000 | |
Unamortised fees associated with bank borrowings | (930) | (953) | |
Finance lease liabilities | 1,276 | 31 | |
10,846 | 4,078 |
The carrying value of the Group's external borrowings, which consist of floating rate and fixed rate borrowings, approximates to fair value. All of the Group's borrowings are denominated in sterling.
a) Bank Facilities
The facilities are secured by way of a charge over shares in some of the Group's subsidiary undertakings. The facilities have principally been arranged to refinance the existing indebtedness of the Group, provide working capital and finance for further acquisitions. Interest on the facilities is being charged at floating rates of interest of 2.0%-3.0% above LIBOR as that rate fluctuates.
Covenants based on net debt to adjusted EBITDA and interest cover are tested on a quarterly basis. The Group has passed all covenant tests to date.
The Group has entered into derivative transactions in the form of interest rate cap arrangements. The purpose of this is to manage the interest rate risk arising from the Group's operations and its sources of finance.
The Group had £40.0 million of unutilised bank borrowing facilities at 31 March 2014 (2013: £80.0 million). At the balance sheet date the Group had no overdraft facility (2013: £nil).
Notes to the preliminary financial statements (continued)
9. BORROWINGS (CONTINUED)
b) Finance lease liabilities
Amounts due under finance leases and hire purchase contracts are payable as follows:
31 March 2014 | 31 March 2013 | ||
£'000 | £'000 | ||
Gross finance lease liabilities - minimum lease payments | |||
Within 1 year | 1,411 | 36 | |
Between 1 and 5 years | 1,394 | - | |
2,805 | 36 | ||
Future finance charges on finance leases | (177) | (5) | |
Present value of finance lease liabilities | 2,628 | 31 | |
The present value of finance lease liabilities is as follows: | |||
Within 1 year | 1,276 | 31 | |
Between 1 and 5 years | 1,352 | - | |
2,628 | 31 |
Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default.
10. NET CASH GENERATED FROM OPERATING ACTIVITIES
Year ended | Year ended | ||
31 March 2014 | 31 March 2013 | ||
Note | £'000 | £'000 | |
Loss for the period | (15,632) | (16,457) | |
Share of (profit)/loss of joint venture | (13) | 7 | |
Income tax credit | (8,743) | (7,078) | |
Interest receivable | (169) | (126) | |
Interest payable | 6,693 | 6,904 | |
Operating loss | (17,864) | (16,750) | |
Adjustments for: | |||
Depreciation charge | 4,057 | 2,935 | |
Impairment of property, plant and equipment | 4 | - | 1,164 |
Direct acquisition costs | 4 | 3,036 | 990 |
Discount on acquisition | 4 | (1,357) | - |
Re-measurement of contingent consideration | 4 | 124 | (2,915) |
Amortisation of intangible assets | 8 | 63,838 | 66,229 |
Profit on sale of property, plant and equipment | (36) | (41) | |
Share-based payment costs/(credits) | 770 | (974) | |
Operating cash flows before movements in working capital | 52,568 | 50,638 | |
Increase in inventories | (1,331) | (464) | |
Increase in receivables | (4,452) | (5,569) | |
(Decrease)/increase in payables | (284) | 4,200 | |
Decrease in provisions | (2,322) | (1,163) | |
Cash generated from operations | 44,179 | 47,642 |
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