Iomart Regulatory News (IOM)

2 December 2015

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 2015.

FINANCIAL HIGHLIGHTS

· Revenue growth of 16% to £36.4m (H1 2015: £31.5m)

o Hosting organic growth of 10% (H1 2015: 8%)

· Adjusted EBITDA1 growth of 11% to £15.5m (H1 2015: £14.0m)

· Adjusted profit before tax2 growth of 8% to £8.7m (H1 2015: £8.0m)

· Adjusted diluted earnings per share3 from operations increased by 11% to 6.75p (H1 2015: 6.09p)

OPERATIONAL HIGHLIGHTS

· Acquisition of SystemsUp for an expected maximum consideration of £10m

· Acquisition of United Hosting after the period end for a maximum consideration of £11m

· Significantly increased capability in Hybrid and Public Cloud

· Investment in senior resources to provide platform for future growth

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 3% to £5.7m (H1 2015: £5.5m)

· Basic earnings per share from operations increased by 8% to 4.57p (H1 2015: 4.25p)

Angus MacSween, CEO commented,

"This has been another good trading period for the Group, driven by both organic and acquisitive growth.

"The cloud market landscape that we occupy continues to evolve and with that, the long term recurring revenue opportunities for iomart. We are well established as a major player in providing the flexible cloud solutions that businesses require, whether that be the private cloud, public or hybrid cloud spheres, and we are investing in expanding our teams of highly skilled staff to help our customers navigate and deploy a wider choice of solutions. We believe we are well positioned in the market and remain confident in the Group's growth 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, acquisition costs and the accelerated write off of arrangement fees on the bank borrowing facility which was restructured during the period.

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, acquisition costs and the accelerated write off of arrangement fees on the bank borrowing facility which was restructured during the period including the taxation effect of these.

For further information:

About iomart Group plc

Award winning cloud company iomart Group PLC (AIM:IOM) enables businesses and organisations to operate their online data and IT environments safely and securely. Headquartered in Glasgow, Scotland, iomart partners with leading vendors such as VMware, Amazon, EMC, Microsoft, Asigra, Arbor and Dell to offer customers a centrally managed, controlled and completely agnostic set of hybrid, private and public cloud platforms. By owning a global network and datacentre infrastructure, iomart can support any customer who wishes to move seamlessly between any and all of these platforms with a consultative level of knowledge and expertise, delivering cloud services to meet exact business needs. For more information visit www.iomart.com

Chief Executive's Statement

Introduction

We have again enjoyed a very good trading period with Group revenue having grown by 16% to £36.4m (H1 2015: £31.5m). Our adjusted EBITDA has grown by 11% to £15.5m (H1 2015: 14.0m).

Market

The cloud market landscape that we occupy continues to change, develop and grow and the opportunity for iomart increases within that ever changing environment.

Public versus Private cloud - or a hybrid approach?

The traditional way of moving to the cloud, being a private or hybrid approach, is here for the foreseeable future and the long term recurring revenue opportunity for iomart remains compelling. We are well established as a major player in providing the flexible cloud solutions that businesses require, whether that be the private cloud, public or hybrid cloud spheres.

A recent report from The 451 Group showed that whilst Enterprise workloads are going to the cloud, it is not quite happening as people would imagine. There is a perception that nobody can match the efficiencies of the hyperscale cloud providers and that all workloads will gravitate to the public cloud execution model. However, there is clear evidence that this is a premature conclusion. When asked, just 19% of enterprises cited the intention to move any of their workload to the public cloud in the next two years, and indeed citing that 58% of workload will remain on premise with the balance met by a mix of hosted private and hybrid cloud. Over the next few years, private cloud will continue to grow as well as enterprises increasingly adopting hybrid cloud. Hybrid offers enterprises the best of both worlds - the cost optimisation, agility, flexibility, scalability and elasticity benefits of public cloud in conjunction with the control, compliance, security and reliability of private cloud.

We are also seeing a trend of 'repatriation' from public cloud back to private, again confirming that there is no single right answer. The fact is that most applications and workloads are just not ready or suitable to be lifted and shifted directly to cloud. It is a journey that requires thorough planning, preparation and project management.

There is a large market opportunity in preparing and managing enterprises for transformation to cloud, starting with an on premise reorganisation and virtualisation programme followed by some private cloud on premise and in hosted environments and moving through a hybrid model and perhaps on to public cloud.

Opportunity to support the Public cloud vendors

Both AWS and Microsoft have announced infrastructure rollouts in the UK over the coming years which we view as an opportunity. It is becoming clear that the public cloud vendors will require an ecosystem of businesses orbiting them to provide services and support. The public cloud has introduced another level of complexity to the choices that businesses have in their future IT buying decisions and we believe with that increase in choice and complexity comes opportunity. As underlying infrastructure becomes more mature and efficient the future success of cloud companies will be addressed further towards the application layer and not on the hardware. For example, EMC see themselves as a software company now, not a hardware provider.

Our challenge is to navigate through these early days of the further evolution of cloud adoption to ensure we have the skills and resources necessary to be successful in that space. The addition of SystemsUp to the Group during the period has enhanced our ability to provide solutions involving public cloud.

Investing in our operations to address this growing market opportunity

iomart is investing more in expanding the teams of highly skilled staff with the accreditations required to help our customers access and deploy a wider choice of solutions. We have grown substantially over the last 3 or 4 years with essentially the same management resource now as we had when we set out on our current strategy. It is time to inject more management bandwidth across the company and that investment is currently underway. This will have the impact of modestly increasing our overheads which will stand us in good stead for accelerating our future growth.

Operational review

Cloud Hosting

The cloud hosting operation continues to perform well, delivering an overall revenue growth rate of 21% with an encouraging 10% organic growth rate.

Having had a period of slightly higher customer churn in our complex hosting operation last year we are pleased to report an improvement in this period which has contributed to our growth as we continue to develop trusted adviser status with our existing customer base.

With the acquisition of our professional services business SystemsUp we are being exposed to larger opportunities which again is driving us to invest in better quality people both in sales and technology to help us deliver increased revenue growth. Additionally, we are now seeing opportunities with our existing customer base across the Group to engage in discussions at an earlier level and provide advice on cloud strategy.

We are investing more in our key vendor relationships as well and we are now seen as a very credible conduit to market. We have deepened our relationships with Microsoft, Dell, EMC, AWS and VMware over the period.

We have also widened our credentials in the public sector and this should bear fruit in the coming months, particularly alongside the consultancy and cloud transformation work being uncovered by SystemsUp.

Our revenues have grown to £31.5m (H1 2015: £26.1m) as a result of our acquisitive and organic growth and we continue to expect cloud hosting to be the driver of growth going forward.

Easyspace

The Easyspace segment has performed as expected but without the predicted growth of Office 365 into the base which underlines again that the shift to cloud is going to take longer than many predicted.

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

As expected our revenues have reduced to £4.9m (H1 2015: £5.5m) partly due to the cyclical nature of the operation and the impact of Office 365.

M&A Activity

During the period we have made what we consider to be a very important acquisition as we position ourselves to continue to address the evolving and complex Hybrid Cloud market opportunity. On 5 June 2015 the Company acquired the entire share capital of SystemsUp on a no debt, no cash, normalised working capital basis. At completion an initial payment of £9m in cash was made and in addition an amount of £0.5m in cash was paid as an interim settlement of the expected amount due in respect of the no debt, no cash, normalised working capital adjustment. In August a further sum of £0.3m in cash was made in settlement of the amount due in respect of the no debt no cash, normalised working capital adjustment. A further sum is contingent on a measure of revenue for the year to 31 March 2016 which is expected to be paid in either May or June 2016. The potential contingent consideration payable in cash has been estimated to be £1.0m. This acquisition brings substantial Public Cloud and public sector expertise into the Group and we are pleased with the level of integration achieved to date.

In addition on 30 November we acquired the entire share capital of United Communications Limited (which trades as "United Hosting") on a no debt, no cash, normalised working capital basis. United Hosting offers a similar product range to iomart, including managed, dedicated and shared hosting services and domains to approximately 6,500 customers, the majority of which are small businesses. The initial payment to acquire United Hosting was £7.5m in cash and in addition an amount of £2.0m in cash was paid as an interim settlement of the expected amount due in respect of the no debt, no cash, normalised working capital adjustment. Two further contingent sums are due based on the profitability of the operation through to April 2016 and then April 2017. The maximum consideration has been fixed at £11.0m. United Hosting enjoys good profit margins partly through the outsourcing of some of its support function overseas.

We remain committed to continuing to complement our organic growth through further acquisitions and our increased bank facility we put in place during the period will help to finance this activity.

Financial Performance

Revenue

Overall revenues from our operations grew 16% to £36.4m (H1 2015: £31.5m).

Our Hosting segment grew revenues by 21% to £31.5m (H1 2015: £26.1m). The increase has been reasonably evenly split between acquisitions and organic growth. Organic growth in the period was 10% added to which were contributions for the full six month period from the acquisition of ServerSpace in December 2014 and from SystemsUp since June 2015.

The Easyspace segment revenues at £4.9m (H1 2015: £5.5m) showed a 9.5% reduction, most of which was expected and is partly due to the cyclical nature of the business. We did expect to have generated more new sales from our activity with Microsoft and Office 365 and whilst we still believe this is a good opportunity it is not producing revenue as quickly as predicted. The division remains a valuable profit and cash generator for the Group, with a strong customer base benefiting from below market average customer churn

Gross Margin

The gross profit in the period, which is calculated by deducting from revenue variable cost of sales such as domain costs, power and sales commission and the relatively fixed costs of operating our datacentres, increased by 15% to £24.7m (H1 2015: £21.4m). 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 maintained at 67.7% (H1 2015: 67.9%) with a modest adverse variance from the sales mix in Hosting being offset by the fixed nature of some of our cost of sales and the favourable impact of acquisitions.

Adjusted EBITDA

The Group's adjusted EBITDA grew by 11% to £15.5m (H1 2015: £14.0m) reflecting a significantly improved performance. In percentage terms the adjusted EBITDA margin reduced to 42.6% (H1 2015: 44.5%) with the reduction arising in the Hosting segment.

Hosting improved its adjusted EBITDA by 14% to £15.0m (H1 2015: £13.2m). The continued improvement in adjusted EBITDA is largely due to the additional gross margin contribution arising from our organic sales growth and the contribution from the acquisitions of ServerSpace and SystemsUp. In percentage terms the margin reduced to 47.8% (H1 2015: 50.7%). Around half of the margin reduction came from the impact of the acquisitions both of which modestly adversely affected the percentage adjusted EBITDA margin and in addition sales mix, additional headcount, including senior headcount, and marketing expenditure also had individually minor adverse percentage margin impacts.

The adjusted EBITDA of Easyspace fell to £2.22m (H1 2015: £2.43m) as a direct result of lower revenues whilst its percentage margin was slightly higher at 44.9% (H1 2015: 44.6%) as we continue to control costs in this area.

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 £1.7m have increased modestly in the period (H1 2015: £1.6m).

Adjusted profit before tax

Depreciation charges of £5.6m (H1 2015: £4.9m) have increased substantially as we continue to invest in our datacentre estate, purchase equipment to provide services to our new and existing customers, as a consequence of depreciation charges in the operations we acquired in previous periods and the cloud infrastructure and backup assets we acquired in the USA in a previous period. The charge for the amortisation of intangible assets, excluding amortisation of intangible assets resulting from acquisitions ("amortisation of acquired intangible assets") has increased to £0.6m (H1 2015: £0.5m) as a result of charges for backup 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 accelerated write off of arrangement fees on the bank borrowing facility which was restructured during the current period, were £0.6m (H1 2015: £0.7m).

After deducting the charges for depreciation, amortisation, excluding the amortisation of acquired intangible assets, and finance costs, excluding the accelerated write off of arrangement fees and the mark to market adjustment on interest rate swaps, from adjusted EBITDA the adjusted profits for the period before tax increased by 8% to £8.7m (H1 2015: £8.0m).

The adjusted profit before tax margin for the period was 23.8% (H1 2015: 25.5%). The reduction in percentage margin is largely due to the reduction in the adjusted EBITDA margin over the period of 1.9%. The acquisition of SystemsUp had a favourable impact on the adjusted profit before tax percentage margin as there is almost no depreciation charges in that operation. ServerSpace had no impact on the adjusted profit before tax percentage margin.

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 slightly to £0.3m (H1 2015: £0.4m) as a result of the charges for share options issued in previous years coming to an end; costs of £0.1m (H1 2015: £0.1m) as a result of acquisitions; charges for the amortisation of acquired intangible assets of £2.4m (H1 2015: £2.1m) which have increased substantially as a result of the full period effect of acquisitions made in previous periods and the acquisition made in the current period; finance charges of £0.2m (H1 2015: £nil) due to the accelerated release of arrangement fees on the bank borrowing facility which was restructured during the period and a finance cost credit of £0.07m (H1 2015: £0.03m charge) in respect of mark to market adjustments relating to interest rate swaps on the Company's loans.

During the period we restructured our bank borrowing facility. This restructuring comprised of an increase in the level of the facility from £35m to £60m, together with an arrangement fee of £250,000 on the increased size of the facility and a reduction in margin on the facility from 2% to 1.7%. In addition the length of the original facility was extended through to June 2019. This constituted an extinguishing of the previous facility and in accordance with IAS 39 the remaining arrangement fee on the previous facility has been written off in full during the period.

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 accelerated write off of arrangement fees on the bank borrowing facility which was restructured during the period from the adjusted profit before tax, the reported profit before tax increased by 3% to £5.7m (H1 2015: £5.5m).

In percentage terms the profit before tax margin was 15.6% (H1 2015: 17.5%) with the reduction due to the same reasons as the adjusted profit before tax margin together with the adverse impact of the accelerated write off of arrangement fees on the bank borrowing facility which was restructured during the period.

Profit for the period from total operations

There is a tax charge in the period of £0.8m (H1 2015: £1.0m), which comprises a current taxation charge of £1.7m (H1 2015: £1.4m), and a deferred taxation credit of £0.9m (H1 2015: £0.4m). The tax charge for the period has been reduced by the favourable impact on deferred tax of the increase in the Company's share price which in turn has increased the tax deduction that would be available when the outstanding share options are exercised. This results in a profit for the period from total operations of £4.9m (H1 2015: £4.5m) an increase of 7%.

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 accelerated write off of arrangement fees on the restructuring of the bank facility in the period, the mark to market adjustment on interest rate swaps and acquisition costs and the tax effect of these items, was 6.75p (H1 2015: 6.09p) an increase of 11%.

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 4.57p (H1 2015: 4.25p) an increase of 8%.

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 £13.6m (H1 2015: £13.5m), which is 88% of our adjusted EBITDA (H1 2015: 96%). Expenditure on taxation in the period was £1.8m (H1 2015: £1.3m) resulting in net cash flow from operating activities in the period of £11.8m (H1 2015: £12.2m).

Expenditure on investing activities of £16.3m (H1 2015: £8.3m) was incurred in the period. £6.6m (H1 2015: £6.5m), 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. We made purchases of intangible assets of £0.4m (H1 2015: £0.1m) in the period. In respect of M&A activity £nil (H1 2015: £1.3m) was paid out for contingent consideration due on acquisitions made in previous periods and £8.7m (H1 2015: £nil) was incurred on the acquisition of SystemsUp in the period as described above net of cash acquired of £1.1m. We also incurred £0.6m (H1 2015: £0.5m) in respect of the capitalisation of development costs during the period.

There was net cash generated from financing activities of £4.0m (H1 2015: £8.1m cash spent). From our bank facility we drew down £9.0m (H1 2015: £13.5m) to fund the acquisition of SystemsUp and in the previous period we repaid the outstanding amount of £13.5m on our term loan facility in full and in addition we made other repayments in the period of £1.0m (2015: £5.0m, £1.5m against our term loan facility and £3.5m against our revolving credit facility) resulting in total bank loan repayments in the period of £1.0m (H1 2015: £18.5m). We repaid £0.6m (H1 2015: £0.6m) of finance leases and incurred £0.8m (H1 2015: £0.7m) of finance charges. We also made a dividend payment of £2.7m (H1 2015: £1.9m). As a result cash and cash equivalent balances at the end of the period were £7.9m (H1 2015: £8.8m).

Net Cash/Debt

The net debt position of the Group at the end of the period was £23.2m (H1 2015: £18.9m). This represents a multiple of less than one times our annual adjusted EBITDA which we believe is a comfortable level of debt to carry.

Current trading and outlook

The cloud market landscape that we occupy continues to evolve and with that, the long term recurring revenue opportunities for iomart. We are well established as a major player in providing the flexible cloud solutions that businesses require, whether that be the private cloud, public or hybrid cloud spheres, and we are investing in expanding our teams of highly skilled staff to help our customers navigate and deploy a wider choice of solutions. We believe we are well positioned in the market and remain confident in the Group's growth prospects.

Angus MacSween

CEO

1 December 2015

Consolidated Interim Statement of Comprehensive Income

Six months ended 30 September 2015

Consolidated Interim Statement of Financial Position

As at 30 September 2015

Consolidated Interim Statement of Cash Flows

Six months ended 30 September 2015

Consolidated Interim Statement of Changes in Equity

Six months ended 30 September 2015

Notes to the Half Yearly Financial Information

Six months ended 30 September 2015

1. Accounting policies

The financial information for the year ended 31 March 2015 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 2015 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 2016. This will include the adoption of an accounting policy relating to consulting services revenue which is a new revenue stream arising from the acquisition of SystemsUp. Consulting services are generally provided on a "time and materials" basis and therefore revenue is recognised as services are rendered. The Group financial statements for the year ended 31 March 2015 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 2015. The provisions of IAS 34 'Interim Financial Reporting' have not been applied in full.

2. Operating segments

Revenue by Operating Segment

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 £113,000 (H1 2015: £67,000) were incurred in respect of professional fees on acquisitions. In addition to these professional fees, one-off costs of £16,000 (H1 2015: £nil) directly related to the integration of acquisitions into the Group were also incurred.

5. Finance costs

6. Taxation

The Group has unused tax losses of £0.5m (H1 2015: £2.1m) available for offset against future profits. A deferred tax asset has been recognised in respect of all £0.5m (H1 2015: £2.1m) of these tax losses as they are expected to be used up by taxable profits by the end of the period covered by future projections.

7. Intangible assets

8. Property, plant and equipment

9. Contingent consideration due on acquisitions

10. Analysis of change in net cash/(debt)

11. Acquisitions

Systems Up Limited

The Group acquired 100% of the issued share capital of Systems Up Limited ("SystemsUp") on 5 June 2015.

SystemsUp is a London consultancy specialising in the delivery of IT transformation using Public Cloud. It boasts a range of expertise in the design and delivery of public cloud solutions and is a G-Cloud partner to Google, an authorised Government Partner to Amazon Web Services and a Microsoft Gold Partner. With the acquisition of SystemsUp, the Group has broadened its ability to engage at a strategic level and act as a trusted adviser on cloud strategy to organisations wanting to create the right blend of cloud services, both public and private, to fit their requirements. The acquisition is in line with the Group's strategy to grow its hosting operations both organically and by acquisition.

During the current period the Group incurred £113,000 of third party acquisition related costs in respect of this acquisition. These expenses are included in administrative expenses in the Group's consolidated statement of comprehensive income for the period ended 30 September 2015.

The following table summarises the consideration to acquire SystemsUp and the amounts of identified assets acquired and liabilities assumed at the acquisition date and are provisional:

The acquisition of SystemsUp includes contingent consideration arrangements that are due in respect of revenues, on an adjusted basis, for the year to 31 March 2016. We estimate that the amount of contingent consideration that will be paid will be £1,005,000 and that payment will be made within 12 months of this reporting date. At the point of the acquisition a payment was made of £9,500,000 in cash, including an amount of £500,000 as an interim payment towards the settlement in respect of the additional debt assumed, cash acquired and normalised working capital position of SystemsUp at completion. A further £335,000 was paid in August 2015 to the vendors in respect of the final amount due for the additional debt assumed, cash acquired and normalised working capital position of SystemsUp at completion.

SystemsUp earned revenue of £1,511,000 and generated profits before tax of £527,000 in the period since acquisition.

ServerSpace Limited

The fair values of acquired assets and liabilities, including goodwill, previously disclosed as provisional for ServerSpace Limited have been finalised in the current period with no changes to the fair values disclosed in the Annual Report and Accounts 2015.