AVN.L Regulatory News (AVN)

Avanti Communications Group plc

Year end results

London - 10 September 2013. Avanti Communications Group plc (AIM: AVN, "Avanti" or "the Company"), the satellite operator, has published today its results for the year ended 30 June 2013.

Operational Highlights

· Successful launch of HYLAS 2, service available in 50 countries

· Market adoption now strong with increasingly "blue chip" customer base

· Strong progress in key high value markets such as cellular backhaul

· Valuable spectrum filings completed

Financial Highlights

· Revenues increased by 65% to £20.6 million (2012: £12.5 million)

· £290 million Backlog (2012: £245 million)

· £42 million of that Backlog expected to convert to revenues in 2014

· Cashflow positive for the first time in June 2013

· £38.6 million cash at year end

Commenting, John Brackenbury, CBE, Avanti Chairman said:

"Avanti achieved major milestones this year in launching the HYLAS 2 satellite, expanding service to 50 countries and becoming operating cash flow positive. Market adoption is maturing and the Company has an increasingly "blue chip" customer base.

"Whilst at times the pace of progress has been unpredictable, the Company has good products with clear competitive advantages, good customers and the right people to make Avanti a success."

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Chairman's Statement

I am pleased to announce the results for the year ended 30 June 2013. Avanti achieved major milestones this year, with the launch of HYLAS 2, expansion of services to 50 primary countries and the completion of important spectrum rights. All these helped us to grow revenues to £20.6 million and to reach operating cashflow positive in June. The backlog of £42 million which is expected to be taken to revenue in FYE 2014 points to a positive year of growth ahead. Total backlog was £290 million. 

Following the year end, the Board has conducted a detailed appraisal of our strategy and backlog, and we are confident that we have the right strategy in place and a strong base of business from which to grow profitability.

The Board believes that a move to the Full List in due course is in the best interest of shareholders but does not expect this to happen in the current financial year given other priorities.

Market adoption of Avanti's technology is progressing strongly and the Company has an increasingly blue chip customer base. The Company has best in class products with clear competitive advantages, good customers and the right people to make the investments a success.

Chief Executive's Report

Summary

During the financial year ended June 30 2013, Avanti launched its HYLAS 2 satellite. Revenues therefore included HYLAS 2 for the first time, with sales growing by 65% to £20.6 million. The Company became operating cashflow positive for the first time in the final quarter, and had £39 million cash at year end. The backlog for FY June 2014 (which is expected to be taken to revenue in FYE 2014) is £42 million. 

In 2013, progress was made in all geographies and market sectors which demonstrated that Avanti's business model is resilient and that its products have key competitive advantages. In particular, we prioritised the generation of near term revenues from large multinational telecoms and media companies. These efforts are producing good results in generating an increasingly "blue chip" customer base.

Avanti has pioneered the use of Ka band satellites for data communications in Europe, the Middle East and Africa. Because of the innovative nature of our business and products, schedules have not been easy to predict and revenues have been impacted by timing issues. HYLAS 2 was delivered seven months late. It also took longer than we expected to get some customers up and running due to delays in their own logistical planning until HYLAS 2 testing was completed. In some cases, we allowed customers to delay their service start date by several months, which affected 2013 revenues. 

However, market adoption of our technology is now progressing well in all of our four markets and in all geographies. The satellite specialist companies such as Speedcast, TTcomm and Bentley Walker, who adopted Avanti's technology early, have generated significant advantages in deploying their products. In all regions our customers are increasing their utilisation.

In 2013, major global telecoms and media companies began to adopt Ka band for the first time across all four of our markets. We believe this to have been a major catalyst which should accelerate revenue growth and are now seeing a shortening of the sales cycle with larger customers like Vodafone, Technicolor and CNN. We are creating new markets where the technology is an enabler, but also customers are churning from legacy Ku band technology to Ka band because of price and efficiency improvements, especially in Africa where there is only limited competition to Avanti's best in class services.

Avanti is succeeding in application areas where customers value the quality and flexibility of its systems and Avanti has key advantages. We made major progress in turning pilots into long term contracts in strategically important areas. Recent milestones include:

· The world's first fully operational and commercial Ka band 3G cellular backhaul service, on HYLAS 1. A second backhaul contract is in planning and two further networks are at pilot stage;

· Several contracts to provide our Satellite News Gathering service in Africa, Middle East and Europe;

· An exclusive pan-European contract for video distribution;

· An exclusive contract for consumer broadband provision with a Eurostoxx50 customer;

· Several contracts via service providers or directly to build networks for government customers in Europe, as well as Africa and Middle East; and

· Progress in the defence market as service providers supplying the sector seek more flexible and cheaper solutions.

We now have customers active in all beams on both HYLAS 1 and HYLAS 2, and are working with Tier 2 carriers in most countries.

During the year, our success in selling highly complex products to multinational telecoms and media companies who are new to satellite products was stimulated in part by our ability to be flexible. These companies have typically made initial orders under framework contracts which allow them to buy enough for their needs on a pay as you go basis and easily increase their usage with new purchase orders, rather than having to renegotiate contracts. Thus whilst long term demand from these large customers may not be fully evident in backlog yet, we expect these customers to lock in price and availability as their usage grows.

Backlog at 30 June 2013 was £290 million (which covers orders extending to the full lifetime of our satellites). In an addition to KPI reporting, Avanti will now also report backlog, for each of the next three years. Backlog for these three periods at 30 June 2013 stood at:

FYE June 2014: £42 million

FYE June 2015: £46 million

FYE June 2016: £40 million

2017 Onwards: £162 million

We expect orders under framework contracts (not included in backlog), new contracts (pipeline) and expected renewals (of contracts expiring between 2014 and 2016) to increase these numbers.

40 new contracts were signed in total in the second half of FY 2013 (2012 Second Half: 17) showing that market adoption is accelerating well. The total number of customers was 96 at year end. Whilst HYLAS 2 accounts for 79% of our current orbit capacity and thus accounts for a similar proportion of new orders, it is satisfying that major break-throughs in high end applications such as cellular backhaul, outside broadcasting and digital cinema were made in Europe using HYLAS 1.

At 30 June 2013, peak utilisation (which accounts for contracted increases) was 45% on HYLAS 1 and 15% on HYLAS 2.

Backlog is an important measure of the forward business Avanti has booked and we are pleased to have booked £7 million per month of new orders in 2013. There was a surge in orders in the six months leading to HYLAS 2 launch, then a slower rate in the second half. We expect three factors to impact backlog growth in the coming year.

Firstly, the satellite specialists who made significant commitments to HYLAS 2 pre-launch are now digesting their orders. We expect that as their own plans mature many of these customers will increase their orders; several have already. Secondly, we expect volumes under existing framework contracts to grow. Thirdly, many HYLAS 1 contracts are entering their third year, and we expect most of these contracts to renew, adding to backlog.

Operational performance of our networks continues to be outstanding. We delivered a 12 month Service Level Agreement performance across the fleet exceeding 99.9%.

The successful launch of HYLAS 2 during the financial year enabled Avanti to complete its regulatory spectrum filings at the ITU. As a result, our filings for spectrum use at 31.0° East (supporting HYLAS 2 and HYLAS 3) as well as 33.5° West (HYLAS 1) are now recorded in the ITU Master Frequency Register. This means that Avanti has perpetual rights to use the allocated spectrum, and this can be applied to multiple satellites in the future.

It also means that other operators who wish to use Ka band near Avanti have to seek co-ordination agreements from Avanti, and none is in a position to constrain Avanti's operations. Thus, achieving "priority" has removed all material spectrum risks in our business, and is a major step forward in protecting and enhancing the value of our assets and in creating a strong platform for future growth.

The HYLAS 3 project is a partnership project with ESA, whereby Avanti gained a 4GHz payload at low cost by paying for its payload to be flown on-board a scientific satellite called EDRS-C. Avanti expects to position its payload to cover West Africa, but in a unique innovation, the entire capacity is 100% steerable, so it could be used anywhere in EMEA. Avanti expects to launch service to customers with this satellite in 2016.

Avanti remains conservatively financed, with a long term repayment profile on its debts and remains in full compliance with all covenants. We ended the year with a cash balance of £39 million and gross debt of £206 million.

Current Trading and Outlook

Sales momentum is growing well with 40 contracts signed in the second half of the year producing revenues in the current financial year. Several major tenders have either been awarded subject to contract or are due to complete soon and we currently have 17 pilot projects live with potential customers. 

With £39 million of cash on the balance sheet at year end and operating cashflow positive reached in June, we have the comfort of sufficient cash to cover debt repayments for two years. We plan to meet those obligations from cash generated from operations and with Backlog in FYE 2014 of £42 million, we expect to generate strong positive cash flow from operations this year.

The Company continues to investigate some significant new business opportunities, and believes that the flexibility to grow offered by a bond financing structure might be more suited to its medium term needs. Avanti has accordingly retained advisers to consider bond finance options, with a view to enabling it to respond quickly and positively to these opportunities as they arise.

Business Overview

Avanti sells managed satellite data communications services using Ka band satellites on a wholesale basis to service providers. Service is available in 50 countries, plus we have partial coverage (where our marketing strategy is different) in a further 38 countries. Because the use of Ka band in EMEA is new, we have created new business models as well as new technologies. It is obvious that the very large (often greater than 50%) customer savings that Ka band systems create are leading service providers to churn from Ku band systems to Ka band.

However, this is not solely where Avanti's advantages are to be found. With the benefit of two years of talking to customers with live service, it has become apparent that Avanti has some key competitive advantages in its approach which differentiate it from competitors, which are found in our approach to quality and flexibility. The advantages are described in detail in a White Paper published on our website today (http://www.avantiplc.com/WP4), called "Not All Ka Satellites Are The Same".

Our advantages arise from the planning we did on our design and business model, tailoring them very specifically at addressing the technical and business needs of sophisticated service providers in four different market sectors, rather than designing a one size fits all system to address just the consumer broadband resale sectors.

In quality for example, we designed our beams in Africa so that, in each primary country we serve, the service provider can be guaranteed equal quality of service regardless of location - this is currently a unique advantage. So too is our operation of resilient gateway earth station systems, which means that ground control of network traffic can be automatically transferred to a backup in the event of a problem. This is a major factor in Avanti's consistent delivery of an SLA of over 99.9%. These factors have persuaded customers who care about quality to choose Avanti, particularly large corporations who do not want to take a risk with their brand.

In flexibility, Avanti is unique in the Ka band market in being able to offer the Select, Custom and Pure methods of purchase, which means that customers can either buy bundled service packages, managed megabits or pure Megahertz. These packages appeal to different types of customers depending on their risk appetite of relative desire for control and security. But also our technology is incredibly flexible, meaning that we can respond to the extremely varied specifications which sophisticated telecoms service providers require. This has helped us to win complex projects this year in the cellular backhaul, digital cinema and defence and security sectors without competition. 

Broadband

In Africa and the Middle East, competition is limited and service providers show clear desire to service the end users, apparently unconstrained by the economic backdrop of the West. Thus we now have consumer broadband programmes up and running in all of our HYLAS 2 beams. In these markets Ku band systems were used for broadband by consumers willing to pay high charges, and a lot of service providers are churning from those systems to come to Ka band. 

In Europe, the broadband market has been negatively affected by limited capital for growth in the telecom service provider market and aggressive price competition from other satellite operators. Avanti has focussed with some success on supporting a small number of committed service providers who either have government backing for deployments or aggressive growth plans, and have secured reasonable market share in Northern Europe. However, our competitors are unable to offer the higher value added services that Avanti offers in Carrier, Enterprise and Government and so we have chosen not to follow pricing down everywhere to chase unattractive business, preferring to sell on our strengths in other markets. Broadband accounts for 53% of backlog.

Enterprise

In Enterprise, we have achieved success in selling to some of the most respected names in the VSAT industry, such as Bentley Walker, Speedcast and TTComm for corporate connectivity and private network services. We have also achieved success in the video distribution business, launching services in digital cinema with Technicolor and selling outside broadcasting services directly or via service providers to CNN, Sky, the BBC and ITV.

We successfully launched a product to provide leased line connectivity to building sites and have deployed services to a number of utility providers for telemetry and monitoring of power generation and environmental monitoring.

Avanti's flexibility to provide a high degree of customisation of technology to its Enterprise customers has been a key success criterion. Enterprise accounts for 30% of backlog.

Carrier Services

Carrier Services means principally two things to Avanti: cellular backhaul and trunking.

Cellular backhaul addresses Mobile phone operators' need for satellites to connect base stations back to the core network if they are in relatively remote locations, and also in some more urban locations where they need to use satellite to back up fibres. Avanti commercially deployed the World's first Ka band cellular backhaul network for 3G in Europe in the second half of FY 2013. We have three other network pilots now live in Europe and Africa. Our success in breaking new ground in 3G backhaul with an important first customer, and the publishing of a White paper on the subject (available on our website), has greatly increased traction in the sector and we expect success to escalate rapidly. This is important because Carrier Services is the most bandwidth intensive of our segments, and because the high spectral efficiency of our satellites and ground systems also supports reasonable pricing.

Trunking refers to the use of very high bandwidth systems (up to 360Mbps) to provide connectivity for ISPs into the Internet for primary or backup use, or sometimes for large corporate customers with unusually high bandwidth requirements. Our high spectral efficiency means that with relatively small dishes and modems costing a few thousand dollars, customers can access Mb prices that are the lowest in the market. Trunking systems have now launched in Northern, Eastern and Southern Africa. Carrier Services accounts for 1% of backlog, and this is expected to be the market which grows the fastest in 2014.

Government

We centralised the selling of all services to Government under one function. In addition to security and "blue light" customers, this heading now covers services sold to education, health and other ministries and also the consulting and system integration services we sell to government customers. 

Avanti successfully deployed networks via service providers for government customers in South Africa, Libya, Afghanistan, Iraq, the UK and elsewhere in 2013. Our satellites and ground systems were designed with government security needs in mind, and the Company has also complied with the ISO 27001 security standard. Our encryption, ITAR compliance, ISO standard and general level of security have proven to be strong advantages in selling beyond just defence customers. Police and border security are strong markets, as are education ministries in Africa. Government accounts for 16% of backlog.

Finance Director's Report

Revenues for the financial year rose to £20.6 million (2012: £12.5 million). Revenues from HYLAS 2 were below our expectations because of the delayed launch of the satellite. Despite a more efficient post-launch in orbit testing campaign enabling HYLAS 2 to be commercially operational by Q2 of the financial year, this was not matched by the logistical and technical readiness of some of our customers for service. Therefore, we allowed several customers to defer the start dates of their commitments which resulted in a delay in revenue generation. All customers on HYLAS 2 are now receiving services.

Our previous revenue guidance also included our expectation of the value of several new large contracts which may have completed in the last financial year. Several of these contracts are now expected to complete in the year ending 30 June 2014. These delays did not impact our backlog and are part of the ordinary course of business.

The costs of running the ground stations increased during the year as planned. We brought online two further stations in Germany and Cyprus to support HYLAS 2. Overheads increased to £18.2 million (2012: £14.0 million) as a result of further investment in staff and additional marketing expenditure to support the launch of HYLAS 2 and assisting HYLAS 2 customers in preparing for service.

Depreciation of the satellites became the largest expenditure in the income statement during the period as a result of the HYLAS 2 launch. All Avanti satellites are depreciated on a straight line basis over the warranted lives of 15 years irrespective of the capacity sold in any given period. Satellite depreciation increased from £9.6 million in 2012 to £24.6 million in 2013, the increase being accounted for by nine months charge on HYLAS 2.

During the year, other operating income fell from £2.6 million in 2012 to £1.0 million in 2013. The figures for 2012 included £1.8 million for the value of an arbitration settlement which was not repeated in 2013. The 2013 income relates to regional development grants for our investment in the infrastructure and employment in Cornwall. In addition, there was a late delivery settlement from a supplier.

Net interest payable has increased to £3.9 million (2012: £0.2 million), primarily due to the interest on the HYLAS facility being charged to the income statement from October 2012, whereas previously it has been capitalised as part of the construction of the satellite.

The loss before interest and taxation increased to £33.7 million (2012: £15.8 million) mainly as a result of the increased depreciation charge.

The group tax credit was £6.8 million (2012: £2.1 million credit), resulting in an effective tax rate of 18.1 % (2012: 13.9%). The rate has been negatively affected by the fall in the UK corporation tax rate.

Loss attributable to shareholders is £30.4 million resulting in a loss per share of 28.37 pence (2012: loss per share 14.86 pence).

Tangible fixed assets increased to £403.5 million (2012: £372.3 million) after a deprecation charge of £25.4 million (2012: £11.2 million). The increase represents the final payments in relation to the HYLAS 2 satellite and the supporting ground stations as well as accrued interest for the first three months of the fiscal year.

Total assets remained broadly constant at £480 million (2012: £478 million) although cash balances fell to £38.6 million from £76.7 million.

Trade payables increased slightly to £18.4 million (2012: £18.2 million) and included a large milestone invoice for HYLAS 3, which was payable after the year end.

Gross debt increased to £206 million (2012: £175 million) as the final drawdowns under the US Ex-Im Bank and COFACE facilities were made. The drawdown period for this facility is now complete. Debt service repayments commenced in December 2012 and a further repayment was made in June 2013.

AUDITED CONSOLIDATED INCOME STATEMENT

Year ended 30 June 2013

AUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 30 June 2013

AUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2013

AUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 June 2013

AUDITED STATEMENT OF CHANGES IN EQUITY

Year ended 30 June 2013

AUDITED NOTES TO THE PRELIMINARY ANNOUNCEMENT

1. Basis of preparation

The preliminary results for the year ended 30 June 2013 have been prepared in accordance with the accounting principles of International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the Companies Act 2006. However, this announcement does not contain sufficient information to comply with IFRS. The Group expects to publish full financial statements which will be delivered before the Company's annual general meeting on 14 November 2013. These full financial statements will be published on the Group's website at www.avantiplc.com.

The financial information set out in the preliminary announcement does not constitute the Group's statutory accounts for the year ended 30 June 2013 or 2012. Statutory accounts for 2012 have been delivered to the Registrar of Companies and those for 2013 will be delivered following the Company's annual general meeting. The auditor's reports on both the 2013 and 2012 accounts were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) of the Companies Act 2006.

This Preliminary Announcement was approved by the Board of Directors on 9 September 2013.

2. Principal accounting policies

Full disclosure of the group accounting policies can be found in the 2012 Annual Report and Accounts as presented on the Avanti plc website. These have been consistently applied throughout the 2013 financial year and the disclosures made in this statement.

Critical accounting policies

The presentation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(a) Revenue recognition

The group uses the percentage-of-completion method in accounting for its consultancy and space projects. Use of the percentage-of completion method requires the group to estimate the services performed to date as a proportion of the total services to be performed.

(b) Impairment of satellites

The carrying amount of the satellites is dependent on the Group's ability to sell sufficient capacity in the satellites over their useful economic lives. In management's view, at this early stage in the life of the HYLAS 1 and 2 satellites, the sale of capacity is progressing well and in line with plans. The Group will assess impairment annually.

(c) European Space Agency ("ESA") Funding and Sale of Capacity

In April 2006, the group entered into a contract with ESA to receive funding for the build of the satellite and also giving ESA the right to use up to 10% of capacity on HYLAS 1 for a period of 3 years if the capacity is available. An assessment of the fair value of the revenues for the sale of capacity has been performed in order to account for this as a multiple element arrangement. The fair value of the capacity sales will be recognised as revenue on a straight line basis over a 3 year period. This 3 year period commenced when HYLAS 1 became operational in the year ended June 2011. Management has made its best estimate of the fair value of the revenue element of the transaction based on market prices of the capacity at the inception of the arrangement. The residual fair value represents the value of the capital grant and this will be released to other operating income over a period of 15 years to match the useful economic life of the satellite. If the fair value of the capacity sale was altered by 10%, the impact on the revenue figure would be £450,000.

(d) Impairment of Goodwill arising as part of business combinations

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash generating units ("CGUs"), or groups of CGUs that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill impairment reviews will be undertaken annually. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment would be recognised immediately as an expense and would not subsequently be reversed.

3. Other operating income

4. Income tax credit

5. Loss per share

6. Loans and other borrowings

(i) Finance lease obligations are secured by retention of title to the related assets. The borrowings are on fixed interest rate debt with repayment periods not exceeding 5 years.

In December 2009, the Group announced that it had agreed debt financing for HYLAS 2 with US Ex-Im bank and COFACE. The total drawdown in these agreements is $328.2 million at an interest rate of 5.5%.

This borrowing is repayable over a period of 7 years from December 2012 and the lenders have a charge over the assets of the Company.

The Company has to meet certain covenant criteria which is reported to the bank every 6 months.

In accordance with IAS 23 - Borrowing Costs, qualifying borrowing costs have been capitalised as part of the cost to HYLAS 2, recognised as Satellite in Construction.

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

Consistent with covenant requirements in relation to the HYLAS 2 loan facility, the Group monitors capital on the basis of net tangible worth of certain subsidiary companies and debt service coverage ratios of the Group and certain subsidiary companies.

7. Cash absorbed by operations