Iomart Regulatory News (IOM)

5 December 2017

iomart Group plc

("iomart" or the "Group" or the "Company")

Half Yearly Results

iomart (AIM:IOM), the cloud computing company, is pleased to report its consolidated half yearly results for the period ended 30 September 2017.

FINANCIAL HIGHLIGHTS

· Revenue growth of 12% to £47.0m (H1 2017: £42.1m)

o Cloud Services growth of 13% (H1 2017: 13%)

· Adjusted EBITDA1 growth of 9% to £19.2m (H1 2017: £17.6m)

· Adjusted profit before tax2 growth of 9% to £11.6m (H1 2017: £10.6m)

· Adjusted diluted earnings per share3 from operations increased by 10% to 8.82p (H1 2017: 8.03p)

· Maiden interim dividend of 2.25p per share

OPERATIONAL HIGHLIGHTS

· Ongoing investment in cloud skills

· Further improvements and investment in automation of server deployment

· Significant investment in software defined network

· Development of skills in major niche verticals, particularly in the eCommerce sector

· Acquisition of two eCommerce cloud businesses, one during period and one post period end

Statutory Equivalents

The above highlights are based on adjusted results. A full reconciliation between adjusted and statutory results is contained within this statement. The statutory equivalents of the above results are as follows:

· Profit before tax growth of 9% to £7.8m (H1 2017: £7.1m)

· Basic earnings per share from operations increased by 10% to 5.96p (H1 2017: 5.43p)

Angus MacSween, CEO commented,

"The Group has enjoyed another good period of trading in the first half of the year, with growing recurring revenues in line with our business model. The market opportunity remains significant and we continue to invest in our skills, infrastructure and capabilities to meet the evolving demands of the market. We are firmly on track to deliver another year of material growth and we remain confident in our prospects."

1 Throughout this statement adjusted EBITDA is earnings before interest, tax, depreciation and amortisation (EBITDA) before share based payment charges and acquisition costs. Throughout this statement acquisition costs are defined as acquisition related costs and non-recurring acquisition integration costs.

2 Throughout this statement adjusted profit before tax is profit before tax, amortisation charges on acquired intangible assets, share based payment charges, mark to market adjustments in respect of interest rate swaps, interest charges in respect of contingent consideration due and acquisition costs.

3 Throughout this statement adjusted earnings per share is earnings per share before amortisation charges on acquired intangible

assets, share based payment charges, mark to market adjustments in respect of interest rate swaps, interest charges in respect of contingent consideration due and acquisition costs including the taxation effect of these.

This interim announcement contains forward-looking statements, which have been made by the directors in good faith based on the information available to them up to the time of the approval of this report and such information should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking information.

For further information:

About iomart Group plc

iomart Group Plc (AIM: IOM) helps organisations maximise the flexibility, cost effectiveness and security of the cloud. From strategy to delivery, our 300+ consultants and solutions architects provide the cloud expertise to transform your business. With a dynamic range of managed cloud services that integrate with the public clouds of AWS and Azure, our agnostic approach delivers solutions tailored to your exact needs. iomart is a long term supplier to G-Cloud and our infrastructure and cloud and backup services are designed to meet the requirements of the UK public sector.

For further information about the Group, please visit www.iomart.com

Chief Executive's Statement

Introduction

We have again enjoyed a very good trading period with Group revenue having grown by 12% to £47.0m (H1 2017: £42.1m). Our adjusted EBITDA has grown by 9% to £19.2m (H1 2016: £17.6m) and our adjusted profit before tax also by 9% to £11.6m (H1 2017: £10.6m).

Market

There is still a long term and large market opportunity in preparing and managing enterprises for transformation and deployment to cloud platforms.

iomart continues to invest in the skills required to architect, migrate, manage, monitor, secure and scale private cloud, public cloud, and any combination of the two in order to capitalise on this significant opportunity.

IT is increasingly evolving project by project, application by application, with a view to maximising value, not being locked into any one technology vendor, and being able to migrate services at will.

This plays into the strengths we have established around agility and flexibility alongside the right expertise and infrastructure, with an ability to manage the mix of public and private cloud and hybrids of both effectively.

Within the overall growth of cloud, eCommerce is one of the fastest growing areas. We have always had an exposure to the online retail market and we are building our expertise in this area to position ourselves as eCommerce cloud leaders.

Operational review

Cloud Services

The Cloud Services operation continues to perform well, delivering an overall revenue growth rate of 13%. The organic growth rate in the period was 4% which has been weighed down by a low margin public cloud consultancy project coming to an end. Adjusting for the effect of that project the organic growth rate was 8% which is greater than the comparable growth rate for the same period last year.

We have long since recognised that the management of compute power for our customers and prospects may involve elements of on premise infrastructure, private or dedicated infrastructure within our estate of datacentres, shared infrastructure within our datacentres and public cloud infrastructure from the hyper cloud vendors. The addition of Cristie Data ("Cristie") into the Group in August 2016 gave us more exposure to the support of on premise infrastructure and in our March 2017 accounts we showed the performance of that unit separately within a non-recurring revenue segment. As this period has progressed the operation of Cristie has become more integrated into our Cloud Services operation. We have provided consultancy services, through SystemsUp, to customers of Cristie, focusing on cloud strategy. In addition, Cristie has also won contracts to provide solutions from our datacentres on a dedicated cloud basis. Consequently, in this period, nearly half of the revenue generated and orders won by Cristie has been of a recurring nature. Therefore, we have concluded that it is no longer appropriate to include the results of Cristie separately, particularly in a non-recurring revenue segment, from the rest of our Cloud Services operations and we will report it within this segment from now on.

As expected and indeed as we indicated in our March 2017 results, the direct revenue generated through our consultancy operation SystemsUp, which is not as recurring in nature as the rest of our Cloud Services activities, has declined due to one low margin public cloud project coming to an end. Whilst, to some extent, this is the nature of consultancy services, the rationale behind the acquisition of a consultancy unit was to seek to engage at an earlier stage with customers and prospects on their cloud strategy and as a result to generate additional recurring revenue within the Group through the provision of cloud solutions. This strategy has worked and we are now providing solutions and generating recurring revenue as a consequence of consultancy assignments.

We are investing in our infrastructure to refresh and upgrade our network and other systems to provide further automation and efficiencies within our environment. This investment will help us streamline our own services for customers and prospects. We are also seeing growing interest from resellers who are being asked for cloud products by their customers but who don't have the capacity, appetite or ability to invest in the substantial infrastructure required.

The acquisition of Dediserve Limited ("Dediserve") in May 2017 provides us with an operation in the European Union post Brexit together with a much greater spread of cloud infrastructure in locations across the world. We now have a significant global footprint.

We also acquired Tier 9 Limited Limited (which trades as Simple Servers") in July 2017 and Sonassi Holding Company Limited ("Sonassi") in November 2017. Both specialise in the provision of infrastructure for eCommerce applications and in particular for the Magento eCommerce platform. We have always had exposure to the online retail sector which is a fast growing area of the market. We believe eCommerce is an area of the market which provides a good opportunity for future growth and we plan to use the acquisition of both of these operations to firmly establish the Group as a provider of choice in this significant market sector.

Our revenues have grown to £40.3m (H1 2017: £35.6m) as a result of our acquisitive and organic activities and we continue to expect Cloud Services to be the driver of growth going forward.

Easyspace

The Easyspace segment has performed well and continues to deliver a modest level of organic growth.

Easyspace provides a range of products to the small and micro business community including an ever wider range of domain names, shared hosting, emails and dedicated servers.

Our revenues have grown by 2.3% to £6.7m (H1 2017: £6.6m) all of which is organic.

M&A Activity

On 17 May 2017 we acquired the entire share capital of Dediserve on a no debt, no cash, normalised working capital basis for a total purchase price of €7.9m (£6.7m). An initial payment of €7.8m (£6.7m) in cash less the sum of €0.25m (£0.21m) in cash as an interim settlement of the expected amount due by the vendors in respect of the no debt, no cash, normalised working capital adjustment was made on acquisition. The initial payment was funded by a draw down from the Group's revolving credit facility. A further payment of €0.11m (£0.10m) was made in respect of the final no debt, no cash, normalised working capital adjustment. In November a final amount of deferred consideration of €0.1m (£0.09m) was paid.

On 26 July we acquired the entire share capital of Tier 9 Limited (which trades as "Simple Servers") on a no debt, no cash, normalised working capital basis. Simple Servers provides cloud solutions for the Magento eCommerce application. On completion an initial payment of £3.0m in cash was made. The initial payment was funded by a draw down from the Group's revolving credit facility. In October a further payment of £0.37m was made in respect of the no debt, no cash, normalised working capital position at the time of completion. There is also an earn out which runs through until March 2018 which may result in a maximum additional amount due of £3.0m depending on the profitability of Simple Servers. The maximum purchase price is therefore £6.0m, excluding any sums due in respect of the no debt no cash, normalised working capital adjustment.

After the period end, on 17 November 2017 we acquired the entire share capital of Sonassi Holding Company Limited ("Sonassi") on a no debt, no cash, normalised working capital basis using a locked box mechanism at 30 September 2017 and a daily contribution from then until completion with the benefit of trading during that period accruing to the vendors. Sonassi provides cloud solutions for the Magento eCommerce application. At completion, an initial payment of £10.0m in cash was made. In addition, an amount of £3.1m in cash was paid in settlement of the amount due in respect of the no debt, no cash, normalised working capital and daily contribution adjustment. The initial payment was funded by a draw down from the Group's revolving credit facility. A further sum of £1.0m is contingent on the completion of an element of software development and a final sum of no more than another £5.5m on the profitability of the business in the year ending 31 July 2018. The maximum purchase price is therefore £16.5m, excluding any sums due in respect of the no debt, no cash, normalised working capital, daily contribution adjustment.

The M&A market continues to provide opportunities and we remain committed to complementing our organic growth through further acquisitions.

Dividend

As we indicated in our trading update at the end of September we have decided to introduce an interim dividend payment as part of our overall dividend policy. We will pay a maiden interim dividend of 2.25p per share on 31 January 2018 to shareholders on the register on 22 December 2017, based on an ex-dividend date of 21 December 2017. We continue to offer shareholders the option to participate in a Dividend Reinvestment Plan (DRIP) as an alternative to receiving cash. Details of the DRIP scheme can be found by visiting our website at the following address www.iomart.com/investors and clicking on the Shareholder Services icon.

Financial Performance

Revenue

Overall revenues from our operations grew 12% to £47.0m (H1 2017: £42.1m).

Our Cloud Services segment, which now includes the operation of Cristie which was reported within the non-recurring revenue segment at March 2017, grew revenues by 13% to £40.3m (H1 2017: £35.6m). The increase includes the contribution for the full six-month period from the acquisition of Cristie in August 2016 and contributions from the acquisitions of Dediserve and Simple Servers during the period.

Our Easyspace segment grew revenues by 2% to £6.7m (H1 2017: £6.6m). This increase was solely due to organic growth and is around the same level as the comparable period last year.

Gross Margin

The gross profit in the period, which is calculated by deducting from revenue variable cost of sales such as domain costs, public cloud costs, the cost of hardware and software sold, power, sales commission and the relatively fixed costs of operating our datacentres, increased by 8% to £30.0m (H1 2017: £27.7m). This substantial increase in gross profit was a direct result of the contribution from the additional revenue generated over the period, including the impact of acquisitions.

In percentage terms the gross margin was 63.9% (H1 2017: 65.8%). The reduction in the percentage margin is largely within the Cloud Services segment. The operation of Cristie involves the sale of hardware and software which is then delivered to and installed on customers' premises. As a result, the cost of that hardware and software is included in cost of sales and thereby the overall percentage margin reduces. Offsetting that, due to the public cloud consultancy project coming to an end, we have seen a decline in the amount of public cloud costs and as a result an improvement in our percentage margin.

The Easyspace segment also saw a decrease in its gross margin percentage mainly due to an adverse impact of exchange rates on domain costs.

Adjusted EBITDA

The Group's adjusted EBITDA grew by 9% to £19.2m (H1 2017: £17.6m) reflecting a significantly improved performance. In percentage terms the adjusted EBITDA margin reduced to 40.7% (H1 2017: 41.8%) with both segments showing very modest reductions.

Cloud Services increased its adjusted EBITDA by 10% to £18.0m (H1 2017: £16.3m). The continued improvement in adjusted EBITDA is largely due to the additional gross margin contribution arising from our organic sales growth, a full period contribution from the acquisition of Cristie in August 2016 and the contribution of both Dediserve and Simple Servers since their respective acquisitions offset by continued investment in staffing levels. In percentage terms the margin reduced to 44.6% (H1 2017: 45.8%). The primary reasons for this modest percentage margin reduction were the reduction in the Cloud Services gross margin percentage previously discussed, the inclusion of Cristie for the full six-month period offset by relatively static organic staff costs and the favourable percentage margin impact of both Dediserve and Simple Servers since their respective acquisitions.

The adjusted EBITDA of Easyspace was maintained at £3.1m (H1 2017: £3.1m). In percentage terms the margin reduced slightly to 45.9% (H1 2017: 46.8%) due to the reduction in the Easyspace gross margin percentage previously discussed offset by administration costs continuing to be tightly controlled.

Group overheads, which are not allocated to segments, include the cost of the Board, all the running costs of the headquarters in Glasgow, and Group led functions such as human resources, marketing, finance and design. Group overheads of £1.9m have increased modestly in the period (H1 2017: £1.8m).

Adjusted profit before tax

Depreciation charges of £6.0m (H1 2017: £5.4m) have increased due to a combination of continued investment in our datacentre estate and the purchase of equipment to provide services to our new and existing customers, offset by assets bought in previous periods becoming fully depreciated in this period and therefore no longer contributing to the ongoing depreciation charge. The charge for the amortisation of intangible assets, excluding amortisation of intangible assets resulting from acquisitions ("amortisation of acquired intangible assets") has increased to £1.1m (H1 2017: £0.9m) as a result of increased charges for software licenses and the additional development activity within the enlarged Group.

Net finance costs, excluding the mark to market adjustment on interest swaps on the Company's loans and the interest charge on contingent consideration due, were £0.5m (H1 2017: £0.7m).

After deducting the charges for depreciation, amortisation, excluding the amortisation of acquired intangible assets, and finance costs, excluding the interest charges in respect of contingent consideration due and the mark to market adjustment on interest rate swaps, from adjusted EBITDA the adjusted profit for the period before tax increased by 9% to £11.6m (H1 2017: £10.6m).

The adjusted profit before tax margin for the period was 24.6% (H1 2017: 25.2%). The decrease in percentage margin of 0.6% is largely due to a combination of the reduction in the adjusted EBITDA margin over the period of 1.1% offset by the reduction in net finance costs as a percentage of revenue of 0.6%.

Profit before tax

The measure of adjusted profit before tax is a non-statutory measure which is commonly used to analyse the performance of companies where M&A activity forms a significant part of their activities.

A reconciliation of adjusted profit before tax to reported profit before tax is shown below:

The adjusting items are: share based payment charges in the period which decreased to £0.4m (H1 2017: £0.6m) as a result of options granted in previous periods not vesting, offset by the issue of additional share options; charges for the amortisation of acquired intangible assets of £2.8m (H1 2017: £2.7m) which have remained at similar levels to the previous period as a result of the net impact of a full period effect of acquisitions made in previous periods, acquisitions made in the current period and reduced charges for acquisitions made in previous periods; costs of £0.6m (H1 2017: £0.1m) as a result of acquisitions, including increased professional fees; a finance cost credit of £0.03m (H1 2017: £0.04m) in respect of mark to market adjustments relating to interest rate swaps on the Company's loans and interest charges on contingent consideration due of £0.1m (H1 2017: £0.2m).

After deducting the charges for share based payments, the amortisation of acquired intangible assets, acquisition costs, the mark to market adjustment on interest rate swaps and the interest charges in respect of contingent consideration, the reported profit before tax increased by 9% to £7.8m (H1 2017: £7.1m).

In percentage terms the profit before tax margin was 16.5% (H1 2017: 17.0%). This decrease in percentage margin of 0.5% is largely due to the reduction in the adjusted EBITDA margin over the period of 1.1% plus the impact of the increase in acquisition related costs offset by relative reductions in finance and share based payment charges.

Profit for the period from total operations

There is a tax charge in the period of £1.3m (H1 2017: £1.3m), which comprises a current taxation charge of £2.5m (H1 2017: £2.1m), and a deferred taxation credit of £1.1m (H1 2017: £0.8m). The tax charge for the period has increased because of the increase in profitability of the Group. This results in a profit for the period from total operations of £6.4m (H1 2017: £5.8m) an increase of 10%.

Earnings per share

Adjusted diluted earnings per share, which is based on profit for the period attributed to ordinary shareholders before share based payment charges, amortisation of acquired intangible assets, the mark to market adjustment on interest rate swaps, the interest charges in respect of contingent consideration due and acquisition costs and the tax effect of these items, was 8.82p (H1 2017: 8.03p) an increase of 10%.

The measure of adjusted earnings per share as described above is a non-statutory measure which is commonly used to analyse the performance of companies where M&A activity forms a significant part of their activities.

Basic earnings per share from continuing operations was 5.96p (H1 2017: 5.43p), an increase of 10%.

The calculation of both adjusted diluted earnings per share and basic earnings per share is included at note 3.

Cash flow

The Group generated cash from operations in the period of £17.0m (H1 2017: £16.7m), representing 89% of our adjusted EBITDA (H1 2017: 95%) which has been adversely affected by the advance payment for maintenance services on a major network upgrade. Expenditure on taxation in the period was £2.4m (H1 2017: £1.2m), the comparative figure having been reduced due to the receipt of a tax refund, resulting in net cash flow from operating activities in the period of £14.6m (H1 2017: £15.5m).

Expenditure on investing activities of £20.9m (H1 2017: £8.5m) was incurred in the period. £8.4m (H1 2017: £4.6m), net of related finance lease drawdown and trade creditors, was incurred on the acquisition of property, plant and equipment principally to provide services to our customers. This includes a substantial payment in respect of a major network upgrade which will provide network resources to the Group for several years into the future. We made purchases of intangible assets of £0.7m (H1 2017: £1.4m) in the period, with the decrease largely due to the advance purchase of additional software licences for storage and backup purposes which was incurred in the previous period. In respect of M&A activity, £2.0m (H1 2017: £1.2) was paid out for contingent consideration due on acquisitions made in previous periods and £8.9m (H1 2017: £0.7m) was incurred on the acquisitions of Dediserve and Simple Servers in the period, as described above, net of cash acquired of £0.7m. We also incurred £0.9m (H1 2017: £0.7m) in respect of the capitalisation of development costs during the period.

There was net cash generated from financing activities of £4.5m (H1 2017: £6.7m net cash used). We generated £0.1m (H1 2017: £0.6m) from the issue of shares as a result of the exercise of options by staff. We made drawdowns under our bank facility of £15.0m (H1 2017: £nil) and we made repayments of £3.0m (H1 2017: £3.0m) during the period. We repaid £0.2m (H1 2017: £0.3m) of finance leases and incurred £0.9m (H1 2017: £0.6m) of finance charges. We also made a dividend payment of £6.5m (H1 2017: £3.4m). As a result, cash and cash equivalent balances at the end of the period were £7.1m (H1 2017: £10.6m).

Net Debt

The net debt position of the Group at the end of the period was £24.5m (H1 2017: £22.2m). This represents a multiple of much less than one times our annual adjusted EBITDA which we believe is a very comfortable level of debt to carry.

Current trading and outlook

The Group has enjoyed another good period of trading in the first half of the year, with growing recurring revenues in line with our business model. The market opportunity remains significant and we continue to invest in our skills, infrastructure and capabilities to meet the evolving demands of the market. We are firmly on track to deliver another year of material growth and we remain confident in our prospects.

Angus MacSween

CEO

4 December 2017

Consolidated Interim Statement of Comprehensive Income

Six months ended 30 September 2017

Consolidated Interim Statement of Financial Position

As at 30 September 2017

Consolidated Interim Statement of Cash Flows

Six months ended 30 September 2017

Consolidated Interim Statement of Changes in Equity

Six months ended 30 September 2017

Notes to the Half Yearly Financial Information

Six months ended 30 September 2017

1. Accounting policies

The financial information for the year ended 31 March 2017 set out in this half yearly report does not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The figures for the year ended 31 March 2017 have been extracted from the Group financial statements for that year. Those financial statements have been delivered to the Registrar of Companies and included an independent auditor's report, which was unqualified and did not contain a statement under section 493 of the Companies Act 2006.

The half yearly financial information has been prepared using the same accounting policies and estimation techniques as will be adopted in the Group financial statements for the year ending 31 March 2018. The Group financial statements for the year ended 31 March 2017 were prepared under International Financial Reporting Standards as adopted by the European Union. These half yearly financial statements have been prepared on a consistent basis and format with the Group financial statements for the year ended 31 March 2017. The provisions of IAS 34 'Interim Financial Reporting' have not been applied in full.

2. Operating segments

Revenue by Operating Segment

In our September 2016 Half Year Report, which was published shortly after the acquisition of Cristie, the results of Cristie were incorporated into the Cloud Services segment. In that report we advised that the inclusion of Cristie within Cloud Services was under review and subsequently, in our March 2017 annual report, Cristie was included in a separate non-recurring revenue segment. In this Half Yearly report, for the reasons outlined in the Operational Review section of the Chief Executive Officer's Statement, the results of Cristie have been included in the Cloud Services segment and it is our intention to continue to report in this way in the future.

Geographical Information

In presenting the consolidated information on a geographical basis, revenue is based on the geographical location of customers. The United Kingdom is the place of domicile of the parent company, iomart Group plc. No individual country other than the United Kingdom contributes a material amount of revenue therefore revenue from outside the United Kingdom has been shown as from Rest of the World.

Analysis of Revenue by Destination

2. Operating segments (continued)

Profit by Operating Segment

Group overheads, share based payments, acquisition costs, interest and tax are not allocated to segments. 

3. Earnings per share

The calculations of earnings per share are based on the following results and numbers:

4. Acquisition costs

During the period costs of £573,000 (H1 2017: £98,000) were incurred in respect of professional fees on acquisitions and there were no costs (H1 2017: £4,000) directly related to the integration of acquisitions into the Group.

5. Finance costs

6. Taxation

7. Intangible assets

8. Property, plant and equipment

9. Contingent consideration due on acquisitions

10. Deferred consideration due on acquisitions

11. Analysis of change in net debt

12. Acquisitions