Gamma Communications Regulatory News (GAMA)

5 June 2020

Gamma Communications plc

AGM trading update

Trading steadily and generating cash

At the Annual General Meeting ("AGM") to be held later today at The Barn, Hobbs Hole Farm, Ledwell Road, Great Tew OX7 4DN, Richard Last, Chairman of Gamma Communcations PLC ("Gamma" or the "Group") will read the following statement:-

Group overview

Gamma saw strong growth in the first quarter of the year, with that positive momentum continuing into the second quarter. Although we have seen some impact on the rate of growth as a result of COVID-19 we remain positive about the prospects for the group both in 2020 and in the longer term. 

Highlights from 1 January 2020 to date include:

· Gamma has successfully moved its operating model to home working, and been able to provide a full service to its channel partners and direct customers in all countries. 

· In the lead up to "lock down" on 24 March in the UK, Gamma saw heightened demand for its Collaborate UCaaS product and also for the soft client for its Cloud PBX product (Horizon) which allows users to access the service remotely. 

· Since the period of lock down began : -

o Gamma's business model has continued to be robust as the large majority of its revenue (93%) is recurring and billed each month.

o Growth in SIP Trunks and Cloud PBX seats has continued to be positive, albeit at a lower level than seen in the first quarter and the prior year.

o Cancellations of existing contracts are at normal (minimal) levels and we have seen no increase in the level of bad debt.

o New customer sales cycles have increased in the second quarter albeit prospect levels remain positive

o As part of our commitment to being a socially responsible business we recognise that some customers, who are in contract, are temporarily not trading. We have allowed customers that are not able to trade to "hibernate" their voice services until 30 June such that, if they are not using the service, they do not pay for it. We hope that this will provide support to businesses who are not able to trade at this time. Less than 5% of our end users have been in hibernation at any one time and on this basis the lost EBITDA for Gamma to 30 June is expected to be approximately £1.2m. 

· On 28 February 2020 we acquired Exactive Holdings Limited ("Exactive") a specialist in Microsoft Teams; Gamma has partnered with Exactive for the last five years. Despite the current situation we have continued to integrate that business into the Group and are pleased with our progress to date. Exactive has seen an increase in activity and received an increased level of enquries from Enterprise and Public Sector customers. In addition to the knowledge and capability that Exactive brings to Gamma, we launched our Microsoft Teams Direct Routing service making Gamma's market-leading SIP trunks available to Microsoft Teams users.

· Our Dutch business continues to trade positively and as expected. It has seen similar trends to the UK - an increased interest in Cloud PBX products from new customers and low levels of cancellation from existing customers.

· On 7 April, we acquired VOZTELECOM OIGAA360, S.A ("Voz") a specialist Cloud Communications company in Spain. Voz also has seen very similar trends in the Spanish markets to those we have experienced elsewhere with new sales prospects being at a lower level than in the first quarter. We believe, however, that Voz is well placed to benefit from the continuing interest in Cloud Communications in Spain where the adoption of cloud telephony services is only c.5%. 

· During the lock down period, at times, activity has been reduced and hence we have, on occasion, placed some staff on temporary "leave of absence". As a committed employer, staff who have been on "leave of absence" have continued to receive their full pay. Whilst we have met the criteria to make a claim under the UK Government's COVID-19 Job Retention Scheme, we have decided not to make such a claim on the grounds that that scheme was designed to protect jobs rather than to boost profits for companies who have been able to continue to trade. We have also decided not to take advantage of a similar scheme operated by the Spanish government. The Board wishes to express its gratitude to all Gamma staff for their commitment, support and flexibility in these challenging times.

· As a result of the current market environment, we have taken appropriate action to reduce our operational and capital spend. Notwithstanding this, we remain committed to executing our long term growth strategy, which includes:

o Continued investment in developing UCaaS skills and capabilities within our product development and product management teams. This includes the launch of our Cloud Contact Centre solution towards the end of 2020.

o Continued appraisal of acquisition opportunities in Western Europe, where cloud penetration has been very low to date, and where the longer-term growth opportunity for Gamma is significant.

o Continued implementation of our digital strategy which is starting to transform our customer delivery and service management processes. 

Balance Sheet

Our balance sheet remains strong. Gamma had £53.9m in cash at 31 December 2019. Since that time we have paid £4.1m in connection with our acquisition of Exactive and £17.8m in connection with our acquisition of Voz. Underlying trading continues to generate cash and our gross cash balance at 31 May 2020 was £46.8m. We are committed to maintaining a strong and robust balance sheet.

Dividend

In our Annual Report we proposed the payment of a final dividend, in respect of the year ended 31 December 2019, of 7.0 pence per share (2018: 6.2 pence), being £6.5 million in cash terms. When added to the 3.5 pence interim dividend (2018: 3.1 pence) this will make a total dividend declared of 10.5 pence for the year as a whole (2018: 9.3 pence). The Board continues to recommend the payment of this dividend which will be proposed as a resolution at the AGM later this morning.

Outlook

Despite the uncertainty around the depth and length of the coming recession, the Board remains positive about the prospects for the business. We are seeing high levels of interest in Cloud PBX and UCaaS products in all of our geographic markets albeit the restrictions on travel and physical meetings have extended sales cycles - particularly in the Enterprise market. We believe that growth levels will return to pre Covid -19 levels, but there will be a lag to this, the extent of which is difficult to forecast.

To date the SME market (our primary market) has proved to be robust. In the event of a prolonged recession, there may be an increase in small business failure which would result in increased levels of cancellation and bad debt. Based on the current trends, we expect the business to continue to add net new units of SIP and Cloud PBX throughout the rest of 2020. We will be monitoring these areas continuously and where necessary take action to preserve the profitability and prospects for the Group. The Group continues to be cash generative and the balance sheet remains strong. 

We remain committed to growing our business both organically and, where opportunities arise, by acquisition, particulary where this adds to our European coverage or facilitates the development and deployment of our UCaaS and Cloud PBX products.

The Board will provide its next trading update (which will further comment on the trends noted above) prior to the publication of the half year results.