ADT.L Regulatory News (ADT)

12 July 2022

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. It forms part of United Kingdom domestic law by virtue of the European Union (Withdrawal) Act 2018. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

ADEPT TECHNOLOGY GROUP PLC

("AdEPT" or the "Company" or the "Group")

FINAL RESULTS 2022

Successful acquisition, growing revenues, consistent margins and reinstatement of dividend

AdEPT, one of the UK's leading independent providers of managed services for IT, connectivity, unified communications solutions, and cloud services, is pleased to announce its final results for the full year ended 31 March 2022 ("FY22").

Financial highlights

Operational highlights

Outlook

Phil Race, Chief Executive Officer of AdEPT, said: "The Board is pleased with the progress achieved during the year under review and the Group's performance in the face of the many, well-documented macro challenges. Given our focus on this aspect of our business the pro-forma organic growth in Cloud Centric Strategic Services is a particular highlight of the period.

"The acquisition of Datrix, in April 2021, significantly extended the Group's capabilities and enabled AdEPT to increase its potential 'wallet share' in the ever-expanding ICT space. The introduction of new partnerships and services that allow AdEPT to tap into the fast-growing markets of Software Defined Wide Area Networking (SD-WAN) and Secure Access Service Edge (SASE) is leading to significant sales successes. During the Period this team secured significant projects with organisations, including Nottinghamshire County Council, the Royal Surrey County Hospital, Public Health England and Trident IP.

"Our newly developed ONE AdEPT platform enabled the rapid integration of the Datrix business, ahead of plan, and has created a efficient business with a strong infrastructure for growth.

"The technology market is vibrant and growing, underpinned by the evolution of our working patterns, during and after the pandemic, and the need for business-critical cyber security across all digital services. The new financial year has started well, with the Group building on the momentum gained in Q4. This, combined with our comprehensive portfolio of capabilities, our extensive and strong industry partnership and numerous flagship references from across the public and private sectors, gives us confidence in prospects for the Group both in the year ahead and beyond."

The person responsible for the disclosure of this announcement for the purposes of EU Regulation 596/2014 is John Swaite, Finance Director.

For more information please contact:

About AdEPT:

AdEPT Technology Group 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 Microsoft, CATO, Extreme, Openreach, BT Wholesale, Virgin Media, Fortinet, Avaya, Gamma, 8X8, and Dell.

AdEPT is quoted on AIM, operated by the London Stock Exchange (Ticker: ADT). For further information please visit: www.adept.co.uk.

CHAIRMAN'S STATEMENT

It is with great pleasure that I announce the Group's annual results for the year ended 31 March 2022. I am very encouraged by the resilient performance of AdEPT during FY22, with a successful acquisition, growing revenues and consistent margins, organic advances in our Cloud Centric activities and an increase in adjusted earnings per share.

Our strategy of consolidation has created a powerful business, with the recent Datrix acquisition significantly extending our capability into leading edge software-defined networks and related security products. The Group is now well positioned to capture increasing 'wallet share' in the ever-expanding Information, Communication and Technology ('ICT') space. We have also completed Project Fusion - an initiative to bring all of the Group's businesses onto a single operating platform: ONE AdEPT, delivering enhanced operational agility, business insight and organisational effectiveness. 

The ability to deliver an extensive portfolio, coupled with the completion of Project Fusion, underpins the Group's decision to focus on organic growth and debt reduction.

Results

We achieved a pleasing 21% uplift in our underlying EBITDA, to £11.9m (FY21: £9.8m), despite being constrained by project delays due to the ongoing worldwide microchip shortage. It is worth noting that our sales and delivery teams secured over £30m of total contract value orders in FY22, with an uptick in the last quarter laying strong foundations for FY23 and driving proforma organic growth of 2% in underlying EBITDA in the year under review.

The 18% rise in revenues to £68.1m (FY21: £57.9m), mirrored by the 17% rise in gross profit (from £27.6m in FY21 to £32.4m in FY22) includes the full year contribution of the acquired Datrix business.

Our 'Cloud first' sales strategy continues to drive growth, with Cloud Centric Strategic Services revenues up 18% year on year to £29.5m (FY21: £25.1m) representing 43% of revenues and growing organically (discounting for the Datrix acquisition) at 7%. The move to the cloud, the requirement for hosted applications, cloud hosted telephony solutions and the rise in demand for a broad range of Microsoft propositions continues unabated. AdEPT's own cloud platform, AdEPT Nebula, forms a successful part of this and now supports more than 650 customers.

Support services revenues increased by £5.3m to £17.1m (FY21: £11.8m), the majority of which resulted from the acquisition of Datrix.

Our concerted drive to assist customers with the transition to cloud telephony and managed services continues. We have been successful in migrating many customers away from the traditional on-desk telephone to alternative solutions, in particular Voice over IP (VoIP)1, Session Internet Protocol (SIP) 1 and Teams collaboration from Microsoft. Overall cloud telephony revenues increased by 49% year on year to £4.0m (FY21: £2.7m) and there was a 35% rise in AdEPT Nebula cloud telephony seats to 2,812 in the period.

As a result of this focus, Managed Services now accounts for 87% of both total revenue and EBITDA (2021: 81%).

Re-instatement of Dividend

Cash generation remained strong with 108% pre-tax cash conversion of EBITDA. AdEPT paid down £5.5m of its loan facility after payment of the initial consideration for Datrix, a clear indication of sound cash and cost management. Our Capex-light strategy continues, with Capex expenditure at 2% of revenue in the year. 

As a result of the Group's continued strong cash generation, the Board is proposing a final dividend of 1.0p per share (FY21: nil), payable on 6 October 2022 to shareholders on the register on 16 September 2022 (ex-dividend date being 15 September 2022). The Group is confident that a progressive policy can be maintained.

Strategy

On 7 April 2022, we announced an updated strategy (RNS Number 5511H), which followed an in-depth strategic review, supported by EY Parthenon, exploring; market requirements, customer sentiment, our ability to capture market opportunity, operational capability, and the richness of the AdEPT portfolio.

As a result of this review the Board concluded that the Group was ideally placed to capitalise on its market position and capabilities, and in turn focus on the organic growth opportunities now available, while using its strong cash generation to reduce debt.

The strategy, resulting from this review, is to build upon three pillars: Pillar one - focus on organic growth; Pillar two - structure for success; and Pillar three - reduce gearing, all with the express intent of delivering stakeholder value. Further details are given in the Chief Executive Officer's Review.

Board change

On 7 April 2022, AdEPT announced the retirement of Roger Wilson as a Non-Executive Director from the Board. Roger was a founder investor and has been an inspirational member of the AdEPT Board for 19 years, including 16 years as Chairman and three years as Deputy Chairman. Roger delayed his retirement due to the Covid pandemic. 

It has been an absolute delight to work with Roger for so many years. He has been an integral part of the Company and a mentor to many during his time with AdEPT. The Board would like to wish Roger every success in his retirement and thank him for his wise counsel and outstanding contribution.

With two experienced independent Non-Executive Director's on the Board no replacement is required at this time. 

Environmental, Social and Governance ("ESG") 

AdEPT has a social conscience, with the executive team focused on making the world a better place both for current and future generations. AdEPT has updated the inaugural 17-point plan published during the Summer of 2021 and has made positive progress in advancing its position across each of the three pillars of i) Environmental Responsibility, ii) Social Responsibility, and iii) Governance. This updated plan can be found on AdEPT's investor relations website: www.adept-technology-group.co.uk/. 

As part of carbon reduction activities, in our journey to Net Zero, we have undertaken our first cross company carbon measurement activity, to determine our Baseline Emissions Footprint. 

It is critical that AdEPT is an exemplary employer to ensure we retain, inspire, and nurture our talent. As part of this goal AdEPT is committed to ensuring diversity, equity, and inclusivity. We have a team from diverse backgrounds and genders, and we continue to foster balance and promote equal opportunities. This mix of skill sets, experience, and backgrounds enables us to perform better.

We are investing in our staff with, for example, concerted training programmes, and we are launching a new flexible benefits platform for our staff this year as part of this critical goal.

We have also undertaken our second Gender Pay Gap Report which showed modest positive progress. However, like many businesses in our sector, this highlights the challenges of hiring women into senior roles. We will use the findings of this report and work with our staff and stakeholders to shape policies that ensure an appropriate gender balance. 

Outlook

We cannot ignore the potential impact from the ongoing macro-economic challenges facing the UK, the semiconductor shortages, the spectre of higher inflation, and the war in Ukraine. However, with 74% of our revenues from recurring contracts and a significant amount of re-occurring one-off revenues from existing customers the Board is confident in the strength of its talented team and operations, which have shown resilience and continued to deliver growth.

We are buoyed by the completion of Project Fusion, the strong sales finish to the year, and the performance of the Group in Q4. These bode well for the Group's future performance and demonstrate that our updated strategy will bear fruit in a marketplace that, despite the wider challenges beyond our control, continues to require our skills, solutions and exemplary customer service.

Ian Fishwick

Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

AdEPT has a clear mission of 'uniting technology and inspiring people'. This year has seen further advances against this mission - delivering successful projects for public and private sector customers alike, resulting in substantial overall growth. Pleasingly, organic growth in Cloud Centric services was 7%. 

During the year, we streamlined the Group's operating structure, moving from five divisions to two, enhanced our relationship with key suppliers who we increasingly treat as partners and delivered several significant projects. Our progress is being driven by a motivated team, achieving high levels of customer satisfaction. 

The Datrix acquisition at the start of the period added to our range of leading-edge software-defined network and related security expertise, building on AdEPT's world class Managed Service capabilities, addressing the converging ICT marketplace in which customers are increasingly demanding communications, network infrastructure and IT expertise. 

Our success in the year was achieved despite the ongoing macro challenges, primarily electronic chip shortages, which continue to impact Technology Product revenues and the completion of some projects dependent on hardware. We are a resilient business, underpinned by a focus on recurring revenue, which comprises a high percentage of total revenues at 74% (FY21: 74%).

I am particularly heartened by the performance of our sales team, who added over one hundred new customers during the year. Customer demand is steadily gaining momentum across multiple vertical markets and delivered markedly stronger one-off order intake in the last quarter, up over 10% against the preceding nine months. New customer wins including, Multi-Academy Trust the Co-op, the TUC and the contact centre outsourcer, Kura, demonstrate AdEPT's ability to attract respected organisations.

In short, the demand for digitisation continues and is fuelling the growth of AdEPT's Cloud Centric services, with increasing revenues from the provision of managed networks, Microsoft solutions, cloud communications and services relating to cyber security.

A successful acquisition

At the start of this financial year (April 2021), we completed the acquisition of Datrix and declared it a 'game changer'; since then the Datrix team has not disappointed.

Datrix has enabled AdEPT to increase its potential 'wallet share' in the ever-expanding ICT space. The introduction of new partnerships and services that allow AdEPT to tap into the fast-growing markets of Software Defined Wide Area Networking (SD-WAN) and Secure Access Service Edge (SASE) is leading to significant sales successes. During the Period, this team secured significant projects with organisations, including Nottinghamshire County Council, the Royal Surrey County Hospital, Public Health England and Trident IP.

The ONE AdEPT platform enabled the rapid integration of the Datrix business ahead of plan and Datrix is now fully integrated into the AdEPT South & Healthcare division. 

A simplifying structure

At the outset of FY22, the AdEPT business was structured as five business divisions: Comms North, Comms South, Education, ITS and Datrix. These each had their own management structures and resultant costs, albeit utilising the same underlying ONE AdEPT platform.

We are constantly looking to optimise AdEPT. As a result of the accelerated progress of Project Fusion, we were able to consolidate the business ahead of plan and, during the final quarter of the year, announced to the AdEPT workforce the formation of a simplified organisational structure centred around two operating divisions - AdEPT North & Education alongside AdEPT South & Healthcare.

This refinement allowed AdEPT to reduce ongoing operating costs by c. £0.6m. Our plan in FY23 is to further enhance customer service and product penetration as a consequence of this change.

Objectives for FY23

Following the review of our strategy as outlined in the Chairman's statement, we are now focused on three pillars:

The market we serve

As part of the in-depth strategic review we explored market requirements, customer sentiment, our ability to capture market opportunity, operational capability, and the richness of the AdEPT portfolio. This extensive research revealed several reassuring data points, in particular that we have a large market to attack (the UK Core Addressable Market2 for AdEPT services being £11bn), with fast growth aspects, in particular cloud services (c. 15% CAGR).

We are already witnessing positive trends in respect of AdEPT's 'cloud first' focus including:

In addition, the ongoing programme to retire the BT 'copper telephony network' by 2025, otherwise known as the "PSTN3 switch off", will only serve to accelerate the migration to Voice over IP (VoIP) products, as well as drive higher demand for broadband connections as businesses move to unified communications. These changes encourage conversation with providers like AdEPT and in turn create an opportunity to up-sell other services.

On the back of these trends, we are finding that our consulting services such as Cloud Readiness Assessments, IT Health-checks and Security Risk Assessments are proving useful gateways for clients to explore our extended range of services. These take customers on a journey to investigate our overarching propositions which are to help customers;

All of which have great references, powered by our strategic partners and present exciting opportunities.

Investment for growth

The AdEPT strategy is to remain 'Capex light' spending less than 2% of revenues on capital projects. However, AdEPT continues to judiciously invest in AdEPT Nebula, its hybrid cloud platform, as this is proving attractive to those customers on the journey to the cloud. 

This platform provides private cloud hosting (60 customers), back-up services (300 customers backing up over 1PetaByte of data), a resilient and cost-effective managed network (227 customers transferring c. 80Gbps over 184Gb bearers), 'as a service' security capability (52 school customers taking filtered connectivity) and a range of complementary services. It is the home for hosted communications, hosted Enterprise Resource Planning (ERP) and hosted School Management Information Systems (MIS) solutions - all in a secure environment. 

I am particularly pleased to see our relationships with key strategic partners going from strength to strength, as they are crucial to our success. Our portfolio is impressive - with expertise and references working with globally respected players such as; Microsoft, Cato, Extreme, Avaya, Gamma, LG Ericsson, 8x8, Fortinet and BT.

We are building on this portfolio with an enhanced relationship with Sage, a provider of Enterprise resource planning (ERP) software. ERP software is used by organisations to manage day-to-day business activities, such as accounting, procurement, project management, risk management and compliance, and supply chain operations. AdEPT has become a Sage Intacct reseller, a cloud offering. This is all part of our journey to become a significant 'one stop shop' for our customers.

People

On 31 March 2022, the AdEPT team totalled 340. This talented and diverse team, strengthened by the acquisition of Datrix, is enabling us to achieve increasingly high levels of customer satisfaction and product penetration. We will continue with our aim to be an exemplary employer and I would like to thank everyone across AdEPT for their exceptional commitment in the year.

Current trading and outlook

With our comprehensive portfolio of capabilities, our extensive and strong industry partnerships, many flagship references from the public and private sectors, underpinned by the ONE AdEPT platform, which ensures that the Group operates efficiently, AdEPT is well placed to benefit from the acceleration in strategic IT investment, as clients continue to assess their long-term ICT requirements.

As a result, I remain confident in the long-term market opportunity for AdEPT, which has been enhanced by the dramatic changes to working patterns, coupled with the rising demand for secure digital services in all its guises.

Our mission remains 'uniting technology, inspiring people'. We are optimistic for the future of the technology market, and in turn for the prospects of AdEPT and our highly talented team. 

Phil Race

Chief Executive Officer

STRATEGIC REPORT

Principal activities and review of business

The principal activity of the Group is the provision of managed services for cloud, digital platforms, unified communications and connectivity solutions to both domestic and business customers. A review of the business is contained in the Chairman's and CEO's statements on and the highlights are summarised in this strategic report.

Summary of three-year financial performance

Revenue and gross margin

Total revenue increased by 17.7% to £68.1m (FY21: £57.9m). The business is split into two primary segments, fixed line (encompassing call revenues and related fixed telephony line provision) and managed services. In respect of managed services versus fixed line revenues, during the year AdEPT has continued to grow its managed services business through a combination of organic contract wins and company acquisition. 

The Datrix business was fully integrated into the AdEPT systems and processes with immediate effect following the acquisition in April 2021, and this has yielded not only operational efficiencies with the acquired customer base being supported by a mix of existing and acquired team members but has also delivered customer contract renewals, new organic contract wins and successful cross-sell post-acquisition.

The revenue and gross margin breakdown is viewed through four strategic revenue streams, where managed services is split into three sub-segments - Cloud Centric Strategic Services, Support Services and Technology Products:

Cloud Centric Strategic Services - Our strategy is to focus on Cloud Centric Strategic Services (a segment including; data connectivity, hosting services, hybrid & public cloud, cloud telephony and professional services). This clear focus with a combination of organic growth plus the acquired contribution from Datrix delivered a £4.4m Year on Year increase in revenues to £29.5m (FY21: £25.1m). On a pro-forma basis Cloud Centric Strategic Services revenues have increased by 6.6% organically. 

Revenues from cloud telephony increased by 49.0% year on year to £4.0m (FY21: £2.7m), of which 29.6% is organic uplift and £0.4m is the pro-forma acquisition contribution from Datrix. The organic growth is a result of our successful activities to migrate customers from traditional fixed line products to new IP based solutions combined with success in gaining contracts with new logo customers. This is a trend which has been aided by the increased demands for flexible and remote working resulting from the Covid-19 lockdowns.

Within this segment Professional Services has grown to £5.1m (FY21: £4.5m) which represents 7.7% organic reduction when taking into account the pro-forma Datrix acquisition contribution. This reduction arises mainly due to the inability to deliver project management and installation services associated with the backlog of equipment orders which have been delayed by the global supply chain issues arising firstly from Covid and latterly by the war in Ukraine. The inability to secure equipment supply within normal lead times has delayed the go live and revenue recognition for many projects, which also has a knock-on impact for revenues associated with the recurring services attached to the equipment, such as data connectivity and support services.

Revenues from data connectivity services have increased by 10.6% to £15.7m (FY21: £14.2m), which is 1.0% organic growth with a 9.6% pro-forma acquisition contribution from Datrix. The demand for faster connectivity and greater bandwidth continues, however during the Covid lockdown period lead times for some new service installations were extended. Despite this challenge, the Group has been successful in continuing to win new logo connectivity customers, whilst also cross-selling and upgrade existing customers to faster and more resilient services.

Support Services - Support Services revenues demonstrated resilience, increasing by £5.3m to £17.1m (FY21: £11.8m) principally through the acquisition contribution from Datrix. Early FY22 was a challenging period for securing new support contracts with businesses being reluctant to change support provider and sign into new term contracts in the aftermath of the pandemic. However, Q4 FY22 saw some change to this situation for telephony and IT services with several notable contract wins including Trident IP, Nottingham County Council and Royal Surrey NHS, all of which should yield benefit in FY23.

Technology Products - An increase of £2.7m revenue from Technology Products (hardware and software sales) was wholly driven by the acquisition contribution from Datrix, with a pro-forma organic reduction of 10.5%. Organic Technology Product revenues were heavily impacted by the supply chain issues arising from the global chip shortage resulting in a substantially increased year end backlog of secured sales orders for which the equipment has an extended lead time (up to 12 months in some cases). In addition, we have seen some continued latency of demand as customers delay investment in strategic infrastructure initiatives. However, whilst Technology Product sales were less resilient the product mix returned to a more normalised mix, which has resulted in an improvement in gross margins (FY22: 24.1% vs. FY21: 18.2%).

Traditional Telephony - The structural decline in Traditional Telephony (fixed line services) has been further accelerated in FY22 with a 20.1% reduction from FY21. This is largely as anticipated given that Openreach is continuing with its strategy to switch off the copper telephone network and there is a clear shift to messaging and IP based services over traditional fixed line and calls services. Additionally, the last 12 months fixed line revenues have been impacted by substantial reductions in call revenue as a result of access restrictions to business premises during the multiple Covid-19 lockdowns resulting in businesses using other means of communication rather than the desk-based telephone. Although the UK lockdowns appear to have now ended, there continues to be low take up for the return to office, and, therefore we do not anticipate a return in call volumes. 

The ongoing reduction in the proportion of AdEPT revenues linked to Traditional Telephony is a result of our strategy to diversify away from Traditional Telephony into Cloud Centric Strategic Services. Following the acquisition of Datrix, which had no revenues from Traditional Telephony, and the organic decline Traditional Telephony now accounts for only 13% of Group revenues (FY21: 19%).

Recurring revenues versus one off revenues

In respect of recurring revenues versus one off revenues, the proportion of AdEPT revenue being generated from recurring products and services (being all revenue excluding one-off projects, hardware and software) remains high at 73.6% of total revenue (FY21: 74.1%). All of the managed service product sets include an element of hardware supply and installation services, which, by their nature, are project based and not fixed recurring revenue streams; however, a high proportion of hardware supply and installations are further products and services being supplied to the existing customer base, sometimes classified as 're-occurring revenues'.

Market sector analysis

AdEPT continued to be successful in gaining further traction in the public sector space during the last year through leveraging its approved status on various frameworks. AdEPT is an approved supplier to the Crown Commercial Service under the following frameworks RM3808 Network Services, RM3825 HSCN Access Services, RM1557 G-Cloud, RM6103 Education Technology and RM3804 Technology Services 2. The Group has been successful in winning further new business through a number of these frameworks. 

The proportion of total revenue generated from public sector and healthcare customers was 56.5% in the year ended 31 March 2022 (FY21: 55.5%). The proportion has been maintained as the organic customer contract awards have been split between public sector and commercial customers; and takes into account the acquired Datrix customer base.

The Group is continuing to focus its organic sales efforts on a) selling a wider portfolio to existing customers, b) adding and retaining larger customers whilst complementing this with a new customer acquisition strategy. AdEPT is managing the customer risk with a wide spread of business sectors and low customer concentration, with the top ten customers accounting for 28.0% of total revenue (FY21: 23.0%) and no customer accounting for more than 10% of the total.

Gross margin

Gross margin percentage was stable at 47.6% (2021: 47.8%). The gross margin percentage from managed services reduced to 50.2%, due to third-party support service contracts with the Datrix acquisition blending down the gross margin on Support Services, although noting that these services do not require the same level of in-house support and therefore the operating cost (headcount effort) in relation to these contracts is reduced. 

Recurring gross margin was 51.0% (FY21: 51.3%). The marginal reduction reflects the decrease in relative higher margin online back-up services combined with a reduction to software margins from an increased take-up of lower relative margin product, such as Microsoft 365, with this software representing a growing recurring revenue stream.

The gross margin generated from non-recurring products and services reduced to 39.6% (FY21: 40.6%) with the decrease over the prior year driven by an increase in the volume of third-party professional services costs. 

The gross margin for fixed line services was flat at 37.3% (FY21: 37.3%) with management of the impact of changes to wholesale input costs through end-user pricing.

Underlying EBITDA

Underlying EBITDA is defined as operating profit after adding back depreciation, amortisation, acquisition fees, restructuring costs, adjustment to deferred consideration and share-based payment charges. The Group uses underlying EBITDA as a measure of performance in line with the IT and unified communications sector's general approach to relative performance measurement. As the Group operates a capex-light model, the Board considers that a good indication of the underlying cash generation of the business for comparison against operating cash flow before tax is underlying EBITDA. 

Below is a reconciliation of underlying EBITDA to the reported loss before tax:

Underlying EBITDA increased by 21.0% to £11.9m (FY21: £9.8m), of which 1.6% is organic and 19.4% is the pro-forma acquisition contribution from Datrix. The organic underlying EBITDA growth has been achieved through both organic revenue growth in recurring managed services and operational efficiency from further Project Fusion business process automation and the internal restructuring of the Group from five to two operating divisions.

The Group incurred £2.0m of restructuring costs from the ongoing headcount efficiencies generated from Project Fusion combined with some realignment of the operating cost base of the Group as a result of the streamlining of the senior management team as the business is repositioned to two core operating divisions, AdEPT South & Healthcare and AdEPT North & Education. These represent redundancy, settlement and salary costs creating a permanent ongoing reduction to the operating costs of the Group and will benefit future periods.

Acquisition fees include the cost of legal and financial due diligence, legal documentation and corporate finance fees in relation to the Datrix acquisition. These also include the one-off cost of the in-depth strategic review conducted by EY Parthenon, exploring market requirements, customer sentiment, our ability to capture market opportunity, operational capability and the richness of the AdEPT portfolio.

Depreciation

The Group has continued to invest in strengthening AdEPT Nebula - Nebula is the AdEPT owned platform providing a capability that supports over 650 customers who take various services from our portfolio of cloud, security, business continuity and disaster recovery, hosted voice, software apps and data connectivity.

£0.7m of depreciation relates to the liability accounting under IFRS16 right of use assets (FY21: £0.8m). The Group has no ownership of these assets. The cash cost in respect of the right of use asset leases is included within the cash flow statement under the heading 'Payment of lease liabilities'.

Finance costs

Total interest costs have increased by £0.7m to £2.8m (FY21: £2.1m). This income statement cost includes the notional interest charge for the discounting of the Datrix deferred consideration, plus the amortisation of the bank arrangement fees. Cash paid interest increased by £0.3m (18.3%) to £1.9m largely from the increase in the average level of net borrowings to £31.3m in FY22 (from £26.1m in FY21). The Group has continued to focus on careful management of customer credit terms and working capital as we emerge from the Covid-19 pandemic as it was considered a lead indicator of customer trading and financing challenges. The Group has used treasury management of surplus cash balances to minimise the amount of drawn funds during the year to minimise interest costs.

Included within cash paid interest costs is £0.1m of interest charges in relation to IFRS16 which is a cash related item.

Loss before tax

This year reported loss before tax was £3.0m (FY21: £0.5m). The reduction of £2.5m is driven primarily by £1.4m of acquisition related fees following the acquisition of Datrix in April 2021, combined with £1.0m increase to the restructuring costs from the further headcount efficiencies generated from the Project Fusion initiative combined with some realignment of the operating cost base of the Group as a result of the streamlining of the senior management team as the business is repositioned to two core operating divisions, AdEPT South & Healthcare and AdEPT North & Education.

The operating loss of £0.2m was impacted by non-cash items, including:

Reported loss before tax for the year of £3.0m includes the following cash items:

Income tax

The income tax charge in the year has increased to £2.2m (2021: £0.2m credit). This significant movement is driven entirely by the change in the deferred tax provisioning rate from 19% to 25% (the UK Government 2021 Budget announcement of an increase in the tax rate to 25% from 1 April 2023) which has generated an income statement tax debit of £2.8m in relation to the opening deferred tax balance. This is purely an accounting entry which has no cash impact and the deferred tax liability will reverse out with credits to the income statement at the higher rate in future periods, unless there is a subsequent change by the UK Government Policy to the UK corporation tax rate. Excluding the one-off impact of the change in the deferred tax rate the income tax expense is a net credit of £0.6m (2021: £0.2m credit).

Earnings per share

Adjusted profit before tax, adding back amortisation, restructuring costs and interest costs discounting, removing deferred tax credits, increased 23.0% to £6.9m (FY21: £5.6m).

Basic earnings per share was negative 20.90p (FY21: 1.36p negative), with this figure including the non-cash impact of the £2.8m deferred tax debit for the change in the deferred tax provisioning rate from 19% to 25% Adjusted earnings per share is used to reflect the non-cash nature of items which are charged to the income statement and non-trading items, such as acquisition costs, to give a better indicator of the underlying cash generation of the Group. Adjusted fully diluted earnings per share, based on the profit for the year attributable to equity holders adding back amortisation, share option charges, restructuring and acquisition costs, increased 22.9% to 27.46p per share (FY21: 22.34p).

Dividends and dividend per share

On the back of strong operating cash flow generation AdEPT is declaring a final dividend of 1.0p per share, which is subject to shareholder approval at the annual general meeting later this year. This dividend is expected to be paid on 6 October 2022 to shareholders on the register on 16 September 2022 (ex-dividend date being 15 September 2022). The Board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.

Cash flow

The Group benefits from an excellent cash-generating operating model. Low capital expenditure results in a high proportion of underlying EBITDA turning into cash. The proportion of reported EBITDA which turned into net cash from operating activities before income tax was 108.4% (FY21: 89.3%).

The income statement includes many non-cash items, this is a summary of the operating cash flow and other cash movements in net debt:

Overall working capital efficiency has generated £0.6m of cash during the year, this is despite a £0.3m increase to year end inventories in relation to advance purchase of equipment to secure supply ahead of the busy school Easter holiday period in April 2022. Customer payment periods have been a focus for the Group since the start of the Covid-19 pandemic as they are considered a lead indicator of potential future trading and cash issues within the customer base. At the year end the reported trade receivables were abnormally inflated by £3.3m in relation to a pass-through contract where AdEPT is acting as agent and has no contractual liability and therefore will be recognising the revenue on an agency basis. Excluding this customer receivable (which has been paid in full post year-end), customer payment periods were 44 days (FY21: 44 days). The Group has consciously continued to meet supplier payments on time throughout the year. 

Income taxes paid in cash during the year increased to £1.0m (FY21: £0.6m). There is a £0.1m repayment due from HMRC which has taken longer than expected to be processed due to the decision by the Company to end the HMRC Group Payment Arrangement to reduce the costs of administering the scheme.

Cash interest paid has increased during the year to £1.9m (FY21: £1.6m), which arises from the £5.2m increase in average net borrowings against the prior year in relation to the acquisition consideration paid for Datrix.

Cash outflows FY21 in relation to acquisitions amounted to £8.2m, all of which related to Datrix. The initial consideration of £6.5m was paid upon acquisition, with a further £0.5m paid upon finalisation of the completion net debt, £0.3m paid following the successful completion of the integration of Datrix on to the Project Fusion platform and £0.9m of the escrow funds released upon successful renewal of two key customer contracts.

Capital expenditure

The Group continues to operate an asset-light strategy and has low capital requirements; therefore, expenditure on fixed assets is low at 1.9% of revenue (FY21: 1.8%). The capital expenditure in the current year arises from AdEPT investing a further £0.3m in the development of the network connecting three data centres (which, combined with other capabilities and services, is known as 'AdEPT Nebula'). AdEPT Nebula is built around the core data centre in Orpington, which is owned by AdEPT. The network allows AdEPT to provide its own cloud hosting capability, security, business continuity and disaster recovery, cloud hosted voice, software apps and data connectivity.

AdEPT Nebula is live and already delivering benefits to hundreds of customers by providing Avaya IP cloud telephony services, hosted IT services and a range of data connectivity services. The network underpinning AdEPT Nebula has been developed using the in-house skills and capabilities of the AdEPT technical team. The Company will continue to review development opportunities for the addition of new products and services to AdEPT Nebula as customer demand dictates.

Over the last 12 months the AdEPT team has continued to work hard on the 'ONE AdEPT' project, christened 'Project Fusion', including initiatives in relation to sales, marketing, CRM systems, human resources, finance and branding. A further investment of £0.5m has been made over the last twelve months, which includes the cost of third-party consultancy and some capitalisation of the internal development teams time spent dedicated to the project. Despite the continued challenges of lockdown and remote working, all operating divisions have been migrated to the centralised CRM and finance platforms, with over 95% of Group employees now using and benefitting the platform.

Payments of lease liabilities

As required under IFRS 16, the balance sheet value of tangible fixed assets includes the discounted value of the remaining lease rentals for any material agreements which have a lease term greater than twelve months. The net present value of any new leases is included in tangible fixed assets. These are not upfront cash purchases as the rentals are paid on a monthly or quarterly basis and therefore the cost is not included within capital expenditure, instead the cash outflows from the lease agreements are included in the cash flow statement under the heading 'Payments of lease liabilities' and amounted to £0.7m in the current year (FY21: £0.9m).

Business combinations

On 12 April 2021 the Company acquired the entire issued share capital of Datrix Limited ('Datrix') a well-established, award-winning supplier of advanced cloud-based networking, communications, and cyber security solutions, headquartered in London, with expertise in the growing Software Defined Wide Area Networking ("SD-WAN") market focused on the public and healthcare sector. The vendors and the senior management team responsible for the strategic direction, technical development and day-to-day operations of Datrix have been retained within the business post-acquisition. Initial consideration of £9.0m, on a debt free cash free basis, was paid in cash. Pursuant to the terms of the share purchase agreement, the effective date of the acquisition was 1 April 2021. Further contingent deferred consideration of up to £7.0m is payable in cash dependent upon the trading performance of Datrix in the 12 month period ended 31 March 2022. The contingent deferred consideration will be determined by reference to the gross margin of the acquired business and applying the contingent deferred consideration calculation as specified in the share purchase agreement. The final amount of deferred consideration of £4.3m was paid on 1 July 2022.

The fair value of the assets and further details on the acquisition are described in Note 21 of the financial statements.

Net debt and bank facilities

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow and therefore support net borrowings. As a result of the Group's focus on underlying profitability and cash conversion, net operating cash flow after taxes but before bank interest paid of £8.1m was generated during the year ended 31 March 2022 (FY21: £7.4m). This cash flow generation represents 96.2% conversion of reported EBITDA (FY21: 82.7%).

Opening cash plus the free cash flow generated in the year and borrowing drawdowns from the senior debt facility have been used to fund £8.2m acquisition consideration and £1.3m of capital expenditure on tangible and intangible assets. Net senior debt, which comprises cash balances and senior bank borrowings (excluding IFRS 16 liabilities), has increased to £29.4m at the year-end (FY21: £25.6m).

Segmental key performance indicators (KPIs)

The segmental KPIs outlined below are intended to provide useful information when interpreting the accounts. 87% of revenue and EBITDA is generated from Managed Services (FY21: 81% revenue and EBITDA).

There are no non-financial KPIs which are reviewed regularly by the senior management team.

Section 172 requirements of the Companies Act

The section 172 requirements of the Companies Act in respect of the directors' duty to promote the success of the Company is covered in the Corporate Governance Statement included in these accounts.

Principal risks and uncertainties

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

Customer loss risk

The impact of this is partially mitigated with no customer accounting for more than 10% of the Group revenue. The top ten customers account for approximately 28.0% of revenues. The customer base of the Company is also spread across a wide geographical area and across a wide range of business sectors. We continue to monitor customer churn, develop our customer offering and service delivery. We acknowledge that some of our customers may experience financial pressure as a result of continuing Covid-19 disruption and more recent disruption from the war in Ukraine. To manage this risk, we maintain regular contact with our customers to identify and respond to any risks as early as possible.

Catastrophic event risk

All employees are able to work remotely, and the Group's operational and administrative servers are located and managed such that damage from an outage is minimised. A business continuity plan is in place which is reviewed regularly and enhanced from the results of testing. The Group is increasingly moving to cloud based systems, which are more readily available for a timely response to a catastrophic event. A testimony of the Group's ability to deal with a catastrophic event is the response to the Covid-19 pandemic which saw virtually all of the Group's workforce transition to remote working in the space of a couple of days in March 2020.

Credit risk

The Group extends credit of various durations to customers depending on customer credit worthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Group will suffer adverse consequences. To manage this, the Group continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, a large proportion of our customer receipts are collected by monthly direct debit. The risk is further reduced by the customer base being spread across a wide variety of industry and service sectors.

Liquidity risk

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

Competitor risk

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

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

Cyber-attack on Company, customer or supplier systems

The Group has extensive experience in cyber security and continues to invest of training, systems and tools to protect the Company and its customers. Customer networks are securely segregated from those of the Company and systems are replicated/backed up in more than one location. AdEPT holds several security accreditations including ISO27001, ISO9001, Cyber Essentials and PCI DSS. The Company's security systems and processes are subject to extensive third-party external auditing. In addition, the Company has in place a cyber insurance protection.

Acquisition integration execution

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

John Swaite

Finance director

Consolidated statement of comprehensive income

For the year ended 31 March 2022

All amounts relate to continuing operations.

Consolidated statement of financial position

As at 31 March 2022

Consolidated statement of changes in equity

For the year ended 31 March 2022

Consolidated statement of cash flows

For the year ended 31 March 2022

Note to the Preliminary Results announcement of Adept Technology Group Plc for the year ended 31 March 2022

The financial information set out below does not constitute the Group's financial statements for the years ended 31 March 2022 or 2021, but is derived from those financial statements. Statutory financial statements for 2021 have been delivered to the Registrar of Companies and those for 2022 will be delivered following the Group's annual general meeting. The auditors have reported on the 2021 financial statements which carried an unqualified audit report, did not include a reference to any matters to which the auditor drew attention by way of emphasis and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006. The audit report on the 2022 financial statements is not yet signed, however an unqualified opinion is expected.

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not in itself contain sufficient information to comply with IFRS. The accounting policies used in preparation of this preliminary announcement are consistent with those in the full financial statements that have yet to be published.

Availability of Financial Statements

The annual report containing the full financial statements for the year to 31 March 2022 is expected to be posted to shareholders in August 2022, a soft copy of which will be available to download from the Company's website www.adept.co.uk.

1. Nature of operations and general information

AdEPT is one of the UK's leading independent providers of managed services for IT, unified communications, connectivity and voice solutions focused on enterprise business, public sector and healthcare customers. The Company provides a complete communications portfolio of unified communications, IP telephony, IT services, equipment installation, managed services, Wi-Fi, IT and communications hardware and data connectivity products.

AdEPT is incorporated under the Companies Act 2006 and domiciled in the UK and the registered office is located at One Fleet Place, London EC4M 7WS. The Company's shares are listed on AIM of the London Stock Exchange.

2. Accounting policies

Basis of preparation of financial statements

The financial statements have been prepared in accordance with UK adopted International Accounting Standards in conformity with the requirements of the Companies Act 2006.

Accounting standards require the directors to consider the appropriateness of the going concern basis when preparing the financial statements. The directors confirm that they consider that the going concern basis remains appropriate. The statement of financial position reports an excess of current liabilities above current assets which arises from efficient utilisation of working capital and treasury management to maximise operating cash flow and minimise interest costs, along with the short-term classification of the deferred consideration for the Datrix acquisition. The Group has adequate financing arrangements which can be utilised by the Group as required to fund any temporary working capital requirement and to meet the deferred consideration liability, thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements. The Group's available banking facilities are described in Note 21.

At the date of authorisation of these financial statements, the directors have considered the standards and interpretations which have not been applied in these financial statements that were in issue but not yet effective and none were considered to be materially relevant.

Adoption of the other standards and interpretations is not expected to have a material impact on the results of the Group. Application of these standards may result in some changes in the presentation of information within the Group's financial statements.

The financial statements are presented in sterling, which is the Group's functional and presentation currency. The figures shown in the financial statements are rounded to the nearest thousand pounds.

Prior year restatement

Following a detailed review of the bad debt provision, a historic error in the calculation was identified in prior periods. Under IAS8, given that this is an error rather than a change to a judgement or estimate, an adjustment has been made to correct the reserves brought forward. The adjustment increases the provision for potential bad debts by £378,838 with a corresponding entry to the brought forward reserves at 1 April 2020, being the earliest period presented in these financial statements. There is no impact on either the income statement, the cashflow statement and the earnings per share in either the current or comparative period as a result of this correction.

3. Segmental information

IFRS 8 'Operating Segments' requires identification on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance.

The chief operating decision maker has been identified as the Board. The Board reviews the Group's internal reporting in order to assess performance and allocate resources. The operating segments are fixed line services (being calls and line rental services) and managed services (which are data connectivity, hardware, IP telephony, support and maintenance services), which are reported in a manner consistent with the internal reporting to the Board. The Board assesses the performance of the operating segments based on revenue, gross profit and underlying EBITDA.

The assets and liabilities relating to the above segments have not been disclosed as they are not separately identifiable and are not used by the chief operating decision maker to allocate resources. All segments are in the UK and all revenue relates to the UK.

Transactions with the largest customer of the Group are less than 10% of total turnover and do not require disclosure for either FY21 or FY22.

4. Revenue

In the following table, revenue is disaggregated by major product/service lines and timing of revenue recognition. All revenue is derived from the UK.

The following table provides information about receivables, contract assets and contract liabilities with customers:

Contract assets relate to the deferred direct costs in respect of data circuit installations which have been completed and are being recognised across the customer's contractual term to which the installation relates. The contract liabilities relate to the deferred revenue in respect of data installations which have been completed and the revenue is being recognised across the term of the customer contract.

Significant changes in the contract assets and contract liabilities balances during the period are as follows:

The performance obligations of the underlying contracts to which the contract assets relate are expected to be met over periods of up to five years. However, the performance obligations for all revenues and costs that have been deferred into future periods have been satisfied at the year end, as these relate to the installation and equipment of data networks which have been completed and the service is being used by the customer.

There are no impairment losses in relation to the contract assets recognised under IFRS 15.

5. Other income

6. Operating profit

The operating profit is stated after charging:

Acquisition costs relate to the legal and professional fees incurred as a direct result of acquisitions completed during the year. Restructuring costs relate to the acquisition operating costs (from the date of acquisition) and other operating costs which have been either terminated or notice to terminate has been served and therefore these items will not form part of the future operating costs of the Group.

7. Finance costs

The finance costs on contingent consideration arise from the release of the discounted contingent consideration liability across the term of the deferred consideration period in relation to each acquisition. This is a non-cash item.

8. Income tax expense

Factors affecting tax charge for the year

The relationship between expected tax expense based on the effective tax rate of AdEPT at 19% (FY21: 19%) and the tax expense actually recognised in the income statement can be reconciled as follows:

Future changes to tax rates are anticipated in line with the UK Government announcement in the 2021 Budget of an increase in the tax rate to 25% from 1 April 2023. The change in the deferred tax provisioning rate from 19% to 25% has generated an non-cash income statement tax debit of £2.8m in relation to the opening deferred tax balance. 

9. Dividends

On 6 July 2022 the directors proposed a final dividend, subject to shareholder approval at the 2022 annual general meeting, of 1.0p per ordinary share (FY21: nil). Total dividends proposed in respect of the year ended 31 March 2022 will absorb £250,299 of shareholders' funds in future periods.

Total dividends paid in the year ended 31 March 2022 was £Nil (FY21: £Nil).

10. Goodwill

Group

We performed an annual goodwill impairment review as at 31 March 2022.

Goodwill is recognised when a business combination does not generate cash flows independently of other assets or groups of assets. As a result, the recoverable amount, being the value in use, is determined at a cash-generating unit (CGU) level. These CGUs represent the smallest identifiable group of assets that generate cash flows. Our CGUs are deemed to be the assets within the operating units. Each CGU to which goodwill is allocated represents the lowest level within the Group at which the goodwill is monitored for internal management purposes.

The total intangible value in use for each CGU, incorporating goodwill and the intangible asset value, is determined using discounted cash flow projections derived from the total historical revenue profile of each identifiable CGU. The assumptions which are applied to each CGU in respect of churn rate, discount rate, margin and useful economic life are set out in Note 11.

The Group's goodwill is split by CGU as follows:

The net present value of the future cash flows for the CGUs is sensitive to the weighted average cost of capital. The rate used to discount the future cash flows is the Group's pre-tax weighted average cost of capital of 8.4%. An increase in the Group's weighted average cost of capital to above 19.1% would materially impair the carrying value of the Group's goodwill by more than £400,000. Further details of the sensitivity of the variables used in the impairment testing are included in Note 11.

11. Intangible fixed assets

Group

Included within the Group's intangible assets is:

Critical accounting estimates and key judgements made in reviewing intangible assets and goodwill for impairment

The key assumptions concerning the future and other key sources of estimation and uncertainty at the reporting date, which have a significant risk of causing a material adjustment to the carrying amounts of intangible assets and goodwill, are discussed below.

Measuring the fair value of intangible assets on acquisition

The main estimates used to measure the fair value of the intangible assets on acquisition are:

• churn rate;

• discount rate; and

• gross margins.

Intangible assets are reviewed annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The net present value of cash flows for each cash-generating unit is reviewed against the carrying value at the balance sheet date. At the final reporting date of 31 March 2022 the net present value of future cash flows of certain cash-generating units was above the carrying value and therefore no impairment charge has been recorded (FY21: £Nil).

We tested our intangible assets, investments and goodwill for impairment as at 31 March 2022. The carrying value of the intangible assets and the key assumptions used in performing the annual impairment assessment and sensitivities are disclosed below:

What discount rate have we used?

The rate used to discount the future cash flows is the Group's pre-tax weighted average cost of capital (WACC) of 8.4% (2021: 8.9%). The directors have chosen to use WACC as it is a calculated figure using actual input variables where available and applying estimates for those which are not, such as the equity market premium. An increase in the Group's weighted average cost of capital to above 19.1% would materially impair the carrying value of the Group's intangible assets by more than £400,000.

What churn rate have we used?

The churn rate is calculated based on the rate of attrition of the revenue generated from customers as at the date of acquisition and is calculated by reference to the closing revenue as a percentage of the opening revenue in the latest 12 months period.

For the customer bases which have been fully integrated into the AdEPT Technology Group plc trading business in Tunbridge Wells, the churn rate of 6.3% per annum is based upon the actual historical churn rate of the revenue stream from the customer bases.

For Centrix, Comms Group, Our IT Department, CAT Communications, Atomwide, Shift F7, ETS Communications and ACS the net present value of the discounted future cash flows is based on the actual revenues of the acquired customer bases. The actual historical churn rates for the acquired customer bases vary between nil and 7.9% per annum. Where an acquired customer base has shown growth, a default churn assumption of 3% per annum has been applied.

For the software and apps which have been developed by Atomwide the net present value of the discounted future cash flows is based on the actual revenues being derived from the customer base to which the software licences and charges relate. The actual historical churn rates for the software and app revenue stream is nil per annum, but a default churn rate of 3% per annum has been applied for the purpose of impairment testing.

What margin have we used?

Gross margins applied are based upon actual margins achieved by the customer bases in the current and previous years. A proportion of overheads are applied to the gross margin to represent the actual operating cost required to support the acquired customer revenue stream, resulting in a net margin which is used for the discounted net present valuation.

What is the estimated useful life of customer bases?

The method used to estimate the useful life of each customer base to conduct the impairment review is the revenue churn rate. The average useful economic life of all the customer bases has been estimated at 13 years (FY21: 14 years) with a range of 10 to 17 years.

What sensitivities have we applied?

The calculations are sensitive to movements in the discount rate, margin or churn rate and may therefore result in an impairment charge to the income statement. The following movements would result in an impairment charge:

12. Property, plant and equipment

Group

The right of use asset is made up as follows: