ADT.L Regulatory News (ADT)

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

15 November 2022

AdEPT Technology Group plc

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

Interim results for the six months ended 30 September 2022

AdEPT (AIM: ADT), one of the UK's leading independent providers of managed services for IT, unified communications, connectivity, voice and cloud services, is pleased to announce its unaudited results for the six months ended 30 September 2022 ("H1 FY23" or the "Period").

The H1 FY23 results demonstrate the Group's resilience, with organic growth in Managed Services continuing to replace Traditional Telephony, strong cash generation enabling net debt and earnout liability reduction of 16% in the last 12 months, and a return of the interim dividend, alongside 115 new contract wins.

Financial highlights:

Revenue and EBITDA

Adjusted PAT and EPS

Cash flow and debt

Dividend

Operational highlights:

Outlook

Commenting on the results and outlook for the Group, Chairman, Ian Fishwick, said:

"With many of the challenges affecting the Group being outside of our control, we have focused on the areas which we are able to influence, making good progress on our three strategic pillars:

Organic Growth

The Group's strategic focus on growth in Cloud Centric Services is progressing. Having achieved 3% organic growth in the Period, these services now represent 44% of Group revenue (H1 FY22: 42%). Managed Services (recurring revenue) grew organically by 3% in the Period, with total Managed Services revenue now representing 89% of Group revenue, up from 87% in H1 FY22. Traditional Telephony continued to decline as anticipated, and this segment of the business has reduced to 11% of Group revenue (H1 FY22: 13%).

Reduce Gearing

In July 2022, the Group's strong operating cash flows were used to fund the final deferred consideration payment for the acquisition of Datrix Limited, amounting to £4.3 million, with no further amounts outstanding. Senior net debt (excluding IFRS 16 liabilities) at 30 September 2022 was £30.7 million, compared to £29.4 million at 31 March 2022. The Group continues to operate well within its Bank Covenants and whilst there have been significant increases to interest rates in the period the £0.1 million increase in interest charges this is offset by a reduction in the absolute value of borrowings.

The Board regularly monitors expected future interest rate predictions and the potential impact on the interest charges for the Group. The Group's £7.3 million convertible loan note is at a fixed interest and senior net debt is anticipated to reduce significantly over the coming 12 months. Based on the current base rate forecast (source: ICAEW.com) through to December 2024 of an increase to 4.5%, the interest cost variance against previous management expectation is £0.2 million, which is less than two-weeks operating cash flow.

There has been £0.1 million increase in interest charges in the income statement to £1.5 million (£1.1 million cash interest), with the significant increases to the base rate over the last six months being offset by a reduction in the absolute value of borrowings.

Structure for Success

One AdEPT, which lies at the heart of the Group's growth strategy, providing high levels of operational visibility and a scalable platform for cross-selling, is now used by 100% of our staff members, with its tooling enabling the Group to balance work force skills, share knowledge and distribute tasks across unified teams. 

Outlook

Whilst headwinds remain, constraining organic growth, the Group has made good strategic progress and there remains a strong pipeline of opportunities across the public and private sectors, driven by macro technology market trends, and helped by specific government initiatives relating to education. The long-term prospects for AdEPT remain as strong as ever."

Enquiries

This announcement has been released by John Swaite, Finance Director, on behalf of the Company.

About AdEPT Technology Group plc:

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 Openreach, Vodafone, Virgin Media, Avaya, Microsoft, Dell and Apple.

AdEPT is listed on the London Stock Exchange (Ticker: ADT). For further information please visit:

www.adept.co.uk

CEO STATEMENT

Overview

I am pleased to report on the Group's progress, in what has been a challenging six months.

Flat growth in Group revenue in the Period belies the continued growth achieved in Managed Services, which increased by £0.8 million in H1 FY23 with a further £1.1 million of secured project revenue deferred into H2 FY23 and FY24 purely as a result of global supply chain delays. This growth offset the continued and anticipated decline in Traditional Telephony of £0.8 million.

Underpinning this growth in Managed Services were strong contract wins and renewals, the success of Cloud Centric Services and AdEPT Nebula, the broadening of AdEPT's portfolio of experience, and the continued strengthening of the Group's public sector presence.

Sales progress

A Key Performance Indicator (KPI) for the business is the number of new customers secured by the sales team, defined as new ongoing customer relationships. In the Period, the team secured 115 new recurring revenue customers, an excellent performance of which they should be proud. New customers and significant renewals in the Period included Birmingham City Council; the Atomic Weapons Establishment (AWE); the Home Office; Newsquest; Herbert Smith Freehills; CPH2; Arts University of Bournemouth; and Construction Testing Solutions. The solutions deployed by AdEPT for these organisations encompass networking, IT Managed Services, cloud services, and communication. We also increased the number of AdEPT Cloud (Nebula) Services consumed by customers by 17% to 764 from 654.

These wins and renewals reflect AdEPT's broad portfolio of expertise, the strengthening brand profile AdEPT is building in its marketplace, the Group's focus on customer engagement, and its recognised ability to deliver effectively the technologies required to fulfill the demand for digitisation and cloud centric services in the UK. 

AdEPT continues to empower its customers to be secure, resilient, agile, and unified, whilst providing employees with a flexible workplace. 

New Initiatives

There are four specific initiatives that will help drive short term revenue growth:

People

The completion of Project Fusion and the full take-up of One AdEPT enabled the operational restructure of the Group from four to two divisions and resulted in the reduction of some senior management roles that were largely duplicated. This has enabled AdEPT to recruit more apprentices and junior members of staff to work alongside skilled individuals in larger teams aided by effective systems and tools. 

As well as rewarding staff with pay increases, we are also focused on being an excellent employer, with enhanced terms and improved access to training. In addition, we are helping our staff with the cost-of-living increases through the introduction of a flexible benefits platform, which provides access to discount schemes and other cost-effective benefits.

Headcount at the Period end was 333 (H1 FY22: 331).

Environmental, Social and Governance ("ESG")

AdEPT has a social conscience, and the Board is keen to ensure that the Group plays its part in making the world a better place both for current generations and those of the future.

Sustainability is of interest across the full spectrum of AdEPT stakeholders: customers, employees, suppliers, shareholders, and communities. As a result, we have set out our initiatives for engaging with this subject as a company. The three pillars for clarity are:

During the Period, AdEPT undertook a rigorous Carbon audit, measuring our impact on the planet from energy consumption, staff commuting, parcel movements and our own vehicle fleet. This audit underpinned a Carbon Reduction Plan submitted for approval to the Cabinet Office. Pleasingly, there was an 18% reduction in our carbon footprint against the 2021 baseline, largely due to flexible working and changing our energy providers to those with zero carbon offerings.

We will continue to adopt ways to reduce our carbon footprint as a company and have placed our carbon reduction report and plan on our web site.

FINANCIAL RESULTS

Revenue

Total revenue of £34.2 million was consistent with the comparative period (H1 FY221: £34.3 million). The Group delivered £0.8 million or 3% organic growth in total Managed Services revenue, which offset the continued structural decline in Traditional Telephony, which reduced by £0.8 million or 18%. The Group continues with its strategy to move away from Traditional Telephony.

Recurring revenues versus one-off revenues

The proportion of AdEPT's revenue generated from recurring products and services (being all revenue excluding one-off projects, hardware and software) remains high at 73% of total revenue (H1 FY22: 74%), with 3% organic growth in recurring managed service revenues in the Period.

Managed Services (89% of Group revenue)

Cloud Centric Strategic Services - Our strategy is to focus on Cloud Centric Strategic Services (including the AdEPT Nebula proposition, hosting services, hybrid and public cloud, Voice over IP, and Professional Services). This clear focus is delivering rewards, as Cloud Centric Strategic Services revenue increased organically by 3% to £15.1 million (H1 FY22: £14.7 million).

This growth has been achieved through organic revenue increases in software, VoIP and professional services. VoIP revenue increased organically by 9% year on year to £2.1 million (H1 FY22: £1.9 million), which is partly a result of our success in migrating customers from Traditional Telephony products to new IP based solutions combined with new customer acquisition.

The sales team's focus on the more complex project delivery requirements of enterprise and mid-market customers has resulted in a 17% increase in professional service and consultancy revenues to £2.8 million (H1 FY22: £2.4 million).

Support Services - Support Services revenues increased organically by 3% to £8.9 million (H1 FY22: £8.6 million). The Group has been successful in retaining managed IT support contracts, with a high level of customer satisfaction from the Net Promoter Score, alongside winning new managed support contracts, several of which will go live in H2 FY23. Network support and maintenance contract revenues increased organically by 4% to £8.0 million (H1 FY22: £7.6 million), driven by contract wins with Nottinghamshire County Council and IT support contracts for a number of large multi-academy trusts.

The global supply chain delays, affecting the delivery of more complex solutions, have a knock-on effect on to the recurring revenues for support services attached to those projects. These supply chain issues, which affected the Group significantly in Q1, began to ease in Q2. As the backlog of projects begin to be delivered during H2 FY23 and FY24 the recurring revenues attached to these contracts will start to be recognised.

Technology Products - The demand for capital projects continued with hardware and software revenues of £6.5 million (H1 FY22: £6.5 million), although there was a volume increase in hardware and software-only procurement of lower margin products, such as audio visual, iPads and laptops. The well-documented supply chain issues for equipment caused by the continued global chip shortage pushed out revenue recognition for a number of projects beyond normal lead times, amounting to £1.1 million revenue of secured orders moving into H2 FY23 and into the next financial year. These supply chain delays tend to impact the hardware required for more complex projects, resulting in wider delays. Some supply chain partners are still advising of lead times between 9-12 months for certain equipment. We continue to work closely with our partners to mitigate supply chain delays where possible or to transition customers to alternative technology solutions.

Traditional Telephony (11% Of Revenues)

The structural decline in legacy Traditional Telephony continued at the same level as the comparative period, with a 17% reduction to £3.7 million (H1 FY22: £4.4 million). This decline, as Openreach continues to switch off the copper wire telephone network for traditional fixed line and calls services and forcing the shift to messaging and VoIP based services, is in line with our expectations and our strategy to diversify revenues away from fixed line. In the last two years, this decline has accelerated due to the substantial reductions in desk-based telephone call revenue caused by multiple Covid lockdowns and the transition of most businesses to hybrid working patterns, resulting in a 35% reduction in call revenue from the comparative period. Traditional Telephony now represents just 11% of Group revenue (H1 FY22: 13%).

Gross margin

The total gross profit margin for H1 FY23 was 47%, which is a decrease from the 49% achieved in H1 FY22. This resulted largely from the volume increase in lower margin one-off hardware and software-only procurement, mentioned above.

£0.4 million of gross margin has been deferred into future periods, due to the order backlog resulting from the global supply chain issues outlined above. 

Managed Services gross profit margins were 47% (H1 FY22: 50%), impacted by the increased volume of lower margin equipment only procurement. Within Managed Services, Cloud Centric Strategic Services gross profit margin was flat at 44% (H1 FY22: 44%) with organic growth in lower margin software being offset by organic growth in higher margin professional services. Support Services gross profit margin was largely consistent at 75% (H1 FY22: 76%) with a similar blend of inhouse and third party contracts as the comparative period. Gross profit margins in Traditional Telephony experienced a reduction in H1 FY23, due to a lower proportion of higher margin call usage (which reduced by 35% from the comparative period). This segment now has a proportionately higher volume of lower margin line rental services.

The value of revenue from professional services and consultancy was higher in the Period. However, the proportion of third party supported professional services increased, due to exceptionally high seasonal demand during the summer/school holiday period in the Group's Education customer base. This, combined with a higher blend of lower relative margin hardware and equipment, resulted in one-off gross profit margins reducing to 38% (H1 FY22: 41%).

Underlying EBITDA

Operating costs were reduced to £10.5 million (H1 FY22: £11.0 million), despite inflationary increases t certain overhead costs such as energy, the increase in costs from the incremental 1.25% NHS NIC levy and the performance driven increase in salary costs for staff. The operating structure of the Group was reduced during the Period from four functional reporting divisions at March 2022 to a simplified two divisional structure during H1 FY23. This internal restructure reduced the number of senior management roles and resulted in settlement and redundancy costs of £0.5 million in the Period. The restructure was achievable due to our new One AdEPT platform, which enables the Group to run effectively of a reduced operating cost base.

Underlying EBITDA in the Period was £5.4 million (H1 FY22: £5.7 million), impacted by the supply chain disrupted projects, amounting to £1.1 million revenue and equating to £0.4 million of margin deferral.

The underlying EBITDA margin achieved was 15.7% (H1 FY22: 16.7%), with the marginal reduction due to the gross margin pressure being partially offset by the operating cost efficiency.

Interest costs

There has been £0.1 million increase in interest charges in the income statement to £1.5 million, with the significant increases to the base rate over the last six months being offset by a reduction in the absolute value of borrowings. The Board regularly monitors expected future interest rate predictions and the potential impact on the interest charges for the Group. The convertible loan note is at a fixed interest and our senior debt is anticipated to reduce significantly over the coming 12 months. Based on the current base rate forecast (source: ICAEW.com) through to December 2024 of an increase to 4.5%, the interest cost variance against management expectation is £0.2 million, which is less than two weeks operating cash flow.

It should be noted that the interest cost in the statement of comprehensive income of £1.5 million includes several non-cash items, such as the amortisation of bank facility fees, which have been previously paid in cash. The interest cost of £1.1 million in the cash flow statement is considered a better measure of the cash costs of financing, which is in line with the comparative period.

Profit/loss before and after tax and EPS

Reported operating profit increased by £0.5 million to £1.0 million (H1 FY22: £0.5 million), which is a reflection of no acquisition related transaction costs and a reduction to amortisation charges due to improved expected economic lives of the intangible assets.

Reported loss before tax was £0.5 million (H1 FY22: £0.9 million). This improvement of £0.4 million in the Period is after including one-off costs of £0.5 million of restructuring costs in relation to the streamlining and restructuring the headcount to two reporting divisions during the Period.

Adjusted profit after tax before one off restructuring costs and non-cash amortisation was £3.0 million (H1 FY22: £3.1 million). Adjusted diluted earnings per share, taking into account the share options in issue and the potential dilutive effect of the BGF convertible instrument under the treasury stock accounting method was 12.1p (H1 FY22: 12.5p). The movement in adjusted earnings per share reflects the £0.1 million movement in adjusted profit after tax with a virtually flat weighted average number of shares.

Dividend

The focus on securing recurring customer contracts continues, with these currently representing 73% of total revenue (H1 FY22: 74%) and a further significant percentage being generated from re-occurring one-off revenues from existing customers. The strong underlying recurring revenue and margin stream, combined with continued operational efficiency, generated strong organic cash flow in the Period. 

As a result, the Board is pleased to announce a return to interim dividend payments, with an interim dividend of 2.50p per Ordinary Share in respect of the six months ended 30 September 2022. This represents an increase of 150% over the final dividend of 1.0p paid for the year ended 31 March 2022 and dividend cover of 4.8x. The interim dividend will absorb approximately £0.6 million of shareholders' funds (H1 FY22: £Nil). It is proposed that the dividend will be paid on 7 April 2023 to shareholders who are on the register of members on the record date of 10 March 2023.

Pre-pandemic, our dividend policy was to return 30% of our Adjusted Earnings Per Share to shareholders in dividends and while the macro-economic landscape remains uncertain, we are on a journey back to 'normality'. Our reinstatement of interim dividends reflects this change in circumstance and remains conservative. 

As announced in the AGM trading statement in September 2022, we anticipate returning approximately 20% of our Earnings Per Share in financial year ending 31 March 2023, compared to the pre-pandemic percentage of 30%. This leaves scope for the Board to execute on its progressive dividend policy over the coming years.

Considering this dividend policy and our assumptions on forecast rises in interest rates, we anticipate the Group's EBITDA: Senior net debt ratio to be less than 2x within 12 months and is, therefore, in line with our declared strategy to reduce leverage.

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 after income tax was 91% (H1 FY22: 82%).

H1 FY23 working capital was impacted by £0.4 million, of which £0.2 million relates to inventories for the advance purchase of equipment for October 2022 half-term customer projects in the Education division. The Group had an extension of customer credit during the Period of £0.8 million, driven by public sector and healthcare customers who paid overdue balances very shortly after the end of the Period, which resulted in an extension of customer credit collection periods to 43 days (H1 FY22: 39 days). This was partially offset by extended supply chain credit terms.

In July 2022, the Group paid the performance-based element of the deferred consideration of £4.3 million, which was due in respect of the trading results of the Datrix customer base for FY22. There are no further amounts outstanding in respect of the Datrix or any other acquisitions.

Cash interest paid in the Period was in line with the comparative period at £1.1 million, which reflects an 8% reduction to average net borrowings in H1 FY23, but at an increased cost of capital due to the increase in the base rate.

As required under IFRS 16, the balance sheet value of tangible fixed assets includes the discounted value of the remaining operating lease rentals for any material agreements which have a lease term greater than 12 months. The net present value of any new operating 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 operating lease agreements are included in the cash flow statement under the heading 'Payments of lease liabilities'.

Capital Expenditure

The Group continues to operate an asset-light strategy and has low capital requirements; therefore, expenditure on fixed assets is low at less than 2% of revenue.

The Group used £0.3 million of cash on capital expenditure of tangible fixed assets - £0.2 million was used for investment in the maintenance and expansion of the AdEPT Nebula platform, to increase the data storage capacity driven by increasing customer demand, and £0.1 million for a refurbishment of the Orpington office and installation of energy efficient LED lighting as part of the Group's ESG plan.

A further £0.3 million was spent in the Period on intangible assets. This included £0.1 million in relation to investment in Project, which includes the cost of third-party consultancy time dedicated to delivering the final stages of the project. The Group-wide CRM and other platforms are now live in all of the AdEPT operating sites. Shortly after the end of the Period, the Group launched its flexible benefits platform, which will enable all employees of the Group to choose how they wish to receive and use their remuneration, including taking advantage of salary sacrifice and competitive benefits costs from scale purchasing. £0.2 million was spent on the Webscreen X and Nimbus Sync software developments, both of which are expected to deliver ongoing benefits to the Education customer base and the Group.

Net Debt and Bank Facilities

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow and support its net borrowings. As a result of its focus on underlying profitability and cash conversion, the Group generated net operating cash flow after taxes but before bank interest paid of £4.4 million (H1 FY22: £3.6 million). The £0.8 million improvement in operating cash flow generation arose from a £0.5 million reduction to working capital and £0.3 million reduction to cash paid income taxes.

Senior net debt at 30 September 2022 was £30.7 million, which is after payment £4.3 million deferred consideration liabilities for Datrix during H1 FY23 with no further amounts outstanding in respect of any acquisitions. The comparative net debt, including deferred consideration liabilities, was £36.6 million at 30 September 2021, which is an effective decrease of senior debt and acquisition liabilities of £5.9 million (16%) in the last 12 months.

Trading update and outlook

Revenue generation improved by 15% in Q2 FY23, compared to Q1, as supply chain issues began to ease and the Group benefitted from seasonal demand in the Education sector. Technology Products' revenue rose by £1.8 million in Q2 FY23, having been more heavily impacted by supply chain challenges in Q1 which resulted in a £1.2 million drop in revenue compared to Q4 FY22.

Organic growth in Cloud Centric Strategic and Support Services revenue in Q2 FY23 was 6% above Q1, achieved through growth in software licensing, professional services, maintenance and support contract wins coming on stream. 

The growth in recurring Managed Services revenue is expected to continue to offset the structural decline in Traditional Telephony, which reduced by 5% between Q1 and Q2 FY23.

Inflationary pressures are expected to increase product and operational costs, predominantly wage inflation, recruitment and energy costs in FY23. The Group is working closely with its partners to mitigate the supply chain delays and to pass on cost increases, where possible, in particular those linked to connectivity and telephony charges. This cushions the business to some extent from the inflationary pressures within its supplier base.

AdEPT's focus will remain firmly on what is within its influence and further progressing on its three strategic pillars: to deliver organic growth through the Group's expanded portfolio of capabilities; repay of borrowings and reduce gearing through strong cash flow; and structure for success through the efficiencies driven by the new One AdEPT platform.

Over the longer term, the Board remains confident that the underlying demand for digitisation and cloud-based services, as both businesses and government continue to seek efficiency benefits, places AdEPT in a strong position when the macro conditions improve. We expect growth to return to previously anticipated levels once the supply chain challenges ease and the economy returns to more normal trading conditions.

Phil Race

Chief Executive Officer

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

ACCOUNTING POLICIES

1 Basis of preparation

The financial information set out in this interim report, which has not been audited, does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Company's statutory financial statements for the year ended 31 March 2022, prepared under International Financial Reporting Standards, were approved by the board of directors on 4 August 2022 and have been filed with the Registrar of Companies. The auditor's report on those financial statements was unqualified, did not contain any emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.

The interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting", as adopted by the EU. Comparatives for the year ended 31 March 2022 have been extracted directly from the audited statutory accounts.

2 Accounting policies

The same accounting policies, presentation and methods of computation are followed in this interim report as were applied in the preparation of the Group's annual financial statements for the year ended 31 March 2022.

Prior period adjustment

At the time of preparation of the interim statement for the 6 months ended 30 September 2021 the statutory audit of Datrix Limited for the year ended 31 March 2021 (which was acquired in April 2021) had not been completed. The acquisition balance sheet for Datrix Limited did not include the full recognition of the deferred tax assets in respect of the trading losses. Therefore, the income tax charge for the prior year results have been restated to include the deferred tax assets and the associated deferred tax release for the profits from the Datrix profit stream generated during the 6 months ended 30 September 2021. As a result, the net assets at 30 September 2021 increased by £232,483 and the income tax charge increased by £170,517 in the comparative period.

3 Earnings per share

Earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue.

Adjusted earnings per share is calculated by dividing the profit attributable to equity holders of the Company (after adding back amortisation, the taxation deduction on purchased customer contracts, the deferred tax credit on amortisation charges, share option charges and acquisition costs, as all of these are purely non-cash accounting adjustments) by the weighted average number of ordinary shares in issue.

Fully diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares by existing share options, assuming dilution through conversion of all existing options.

4 Segmental information

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 and managed services, which incorporates IT services, data connectivity, mobile, hardware and VoIP services. These 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 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. For the six months ended 30 September 2022, transactions with the largest customer of the Group accounted for 3.6% of revenue (2021: 4.7%).

5 Share options

Details of the share options outstanding during the period are as follows:

The mid-market price of the ordinary shares on 30 September 2022 was 110p and the range during the period was 82.5p.

The share option expense recognised during the period in the statement of comprehensive income was £12,072 (September 2021: £30,841).