Maintel Regulatory News (MAI)

Maintel Holdings Plc

("Maintel", the "Company" or the "Group") 

Final audited results for the year to 31 December 2018

Maintel Holdings Plc, a leading provider of communications cloud and managed services, is pleased to announce its results for the twelve month period to 31 December 2018.

The full year accounts for 2017 have been restated throughout this announcement to reflect the adoption of IFRS 15. Please refer to note 2 of the financial statements for details of the impact of the change in accounting policies.

Financial highlights

· Group revenue up 8% to £136.5m (2017: £126.8m) with recurring revenue at 69%

· Group adjusted EBITDA[1] increased 17% to £12.7m (2017: £10.9m)

· Basic earnings per share increased 33% to14.4p (2017: 10.8p)

· Adjusted earnings per share[2] at 65.5p, an increase of 20% (2017: 54.7p)

· Strong underlying cash conversion[3] of 84% of adjusted EBITDA[1]

· Period end net debt[4] of £25.5m, equivalent to 2.0x adjusted EBITDA[1] (2017: 2.5x adjusted EBITDA[1])

· Proposed final dividend per share of 19.5p (2017: 19.1p), taking full year dividend per share to 34.5p (2017: 33.8p), an increase of 2%

Operational highlights

· Maintel's transition to a cloud and managed services business continues with ICON cloud seats up 38% on the prior year to c.61,000 in total

· Managed service base at £44m at the year end, an increase of 10% year on year, underpinned by the acquisition of a customer base from Atos on 1st July 2018

Key Financial Information

Commenting on the Group's results, Eddie Buxton, CEO, said:

"During the year we have delivered significant increases in all our key financial metrics, notwithstanding the challenging market backdrop, whilst continuing to make progress in our continued transformation to a cloud and managed services business. Growth in contracted seats on our ICON platform accelerated in the fourth quarter of the year and we have delivered several exciting new customer wins, including two multi-year public sector contracts with the NHS, which on implementation will be our largest cloud contracts to date.

In addition, we continue to invest in developing and improving our platform and services offering, to increase our addressable market going forward.

As a result, the Board remains confident in delivering growth in revenue and EBITDA in the full year to 31 December 2019, in line with expectations."

Notes

[1] Adjusted EBITDA is EBITDA of £10.7m (2017: £9.2m), adjusted for interest, tax, depreciation and amortisation, exceptional costs and share based payments (note 12).

[2] Adjusted earnings per share is basic earnings per share of 14.4p (2017: 10.8p), adjusted for intangibles amortisation, exceptional costs, interest charge on deferred consideration, share based payments and deferred tax charges related to loss reliefs from previous acquisitions of Datapoint and Azzurri (note 11). The weighted average number of shares in the period was 14.2m (2017: 14.2m).

[3] Cash conversion calculated as operating cash flow (being adjusted EBITDA plus working capital) to adjusted EBITDA.

[4] Interest bearing debt (excluding issue costs of debt) minus cash.

[5] Adjusted profit before tax of £10.8m (2017: £9.3m) is basic profit before tax, adjusted for intangibles amortisation, exceptional costs and share based payments.

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I am pleased to report that in the year ended 31 December 2018 Maintel made considerable progress on its strategic transition to a cloud and managed services company, delivering increases in all its key financial metrics.

The Group's revenue grew by 8% to £136.5m with growth in gross profit of 7% to £39.1m and growth in adjusted EBITDA of 17% to £12.7m. Adjusted earnings per share increased 20% to 65.5p and we are proposing a final dividend per share of 19.5p, up 2% on last year, giving a 2% increase in the dividend for the year.

Price pressure on some of our traditional support revenues, combined with changing dynamics in our sector, led to growth being slower than our expectations at the start of 2018. In response to the changing marketplace, the Group has focused on developing its cloud and managed services base in order to future proof our customer offering and improve our revenue mix.

The number of subscribers on our cloud platform climbed by 38% in the year, coming from both public and private sector clients, while our managed services base grew by around 10%. Cloud related revenues were £20.7m for the year and grew significantly throughout 2018 - a 68% increase from H1 2018 to H2 2018 - and now account for 15% of Group revenues. We are continuing to win cloud contracts from both our existing base of on-premise customers (52% of cloud customers) and from new customers to the Group (48%) and are pleased to have won two of our largest ever cloud contracts in the fourth quarter of the year.

Our managed service base now stands at £44m, boosted by the acquisition of a customer base from Atos on 1 July 2018. Together with our other contracted revenues (cloud, network services and mobile), recurring revenues make almost 70% of the Group's income.

The Group has a strong base of customers which continues to provide both recurring revenues and project work. This base is increasingly transitioning to cloud and next generation services, supporting the growth in cloud revenues at the expense of some traditional support income. This change in sales mix is expected to increase the proportion of recurring revenue and levels of customer retention.

We have brought together our cloud and software engineering teams in our new Technology Centre in Fareham to incubate and accelerate our growth in those areas and we have invested significantly in our ICON cloud suite to add both capacity and capability, with offerings now across several high-growth markets. We continue to invest for the future in our people, our products and our IT platforms, positioning ourselves to take advantage of the changing marketplace.

In the current uncertain economic and political environment, we remain focused on reducing net debt and maintaining a strong balance sheet. Based on our outlook for the business, we expect that the total dividend paid annually will remain progressive and propose a 2018 final dividend per share of 19.5p (2017: 19.1p), taking full year dividend per share to 34.5p (2017: 33.8p), an increase of 2%.

The commitment and hard work of our excellent employees have enabled us to deliver growth at the same time as significant business transformation and on behalf of the Board and our shareholders, I would like to thank them for this achievement, building our platform for success for the years ahead.

J D S Booth

Chairman

15 March 2019

These are exciting and fast moving times for the communications sector with a rapid pace of innovation in technology development and adoption.

We have an enviable client base of both public and private sector clients, which is driving much of our growth in cloud and other next-generation services. Approximately 55% of our cloud growth is coming from that installed base, with the balance from new customer acquisition, and we still have more than 75% of our managed services base to take on the cloud journey. With analyst reports for the UCaaS market typically reporting between 11% and 25% compound annual growth rate ("CAGR") to 2025, there is plenty of market to go after for our flagship ICON services. In January 2019 we launched a mid-market oriented UCaaS service, ICON Now, which will enable us to pursue the 100 to 1,000 seat market much more effectively, while ICON Communicate will remain the flagship enterprise managed service for larger organisations or those with more complex requirements.

Contact centre technology, driven by organisations wishing to differentiate themselves by offering an improved customer experience and by consumers wishing to interact with their suppliers and service providers via an increasing number of digital channels, is also experiencing significant growth, with CAGRs of 25.2% and 25.9% cited in two recent analyst reports. As with unified communications, contact centre operators are steadily migrating their technology to the cloud. Maintel's ICON Contact offer is positioned to support customers in that transition. The market is being further enriched by the use of Artificial Intelligence ("AI") and Machine Learning technologies to improve outcomes for customers - either by ensuring the best possible match of available agents to queuing customers, or by supporting a significantly improved experience using self-service channels, AI is driving a lot of product evaluation and pilot projects.

Our secure networks offer is also positioned to capture three significant business trends: our ICON Connect service is optimised to support customers as they transition not just their communication services but all their business applications to the cloud. ICON Connect SD-WAN is positioned to take advantage of the 40% to 60% CAGRs being talked about by vendors - although as early stage technology, these figures represent growth from a low base, and much of it will be substitutional from traditional WAN technologies. Finally, ICON Secure's cyber security service serves a market currently seeing 10% CAGR and in particular a Managed Security Services CAGR of 14% to 2022.

At Maintel, we seek to have a product portfolio that is at the head of the market, not behind - an aim that is assured by our product and strategy team, led by our Chief technology and strategy officer. Our customers trust us to bring them innovation and new technology that will improve their businesses, make them more competitive and help them to reduce their own costs.

Group revenues increased by 8% to £136.5m (2017: £126.8m) with adjusted EBITDA of £12.7m representing an increase of 17% (2017: £10.9m). Adjusted profit before tax increased by 16% to £10.8m (2017: £9.3m). Adjusted earnings per share (EPS) increased by 20% to 65.5p (2017: 54.7p).

On an unadjusted basis, profit before tax increased by 40% to £2.2m (2017: £1.6m) and basic EPS by 33% to14.4p (2017: 10.8p). This includes £1.7m of exceptional costs associated with the integration of the Intrinsic acquisition and related restructuring activities (2017: £1.5m relating to the Azzurri acquisition), and intangibles amortisation of £6.5m (2017: £5.9m), the increase in the latter due mainly to the acquired Atos base related intangible assets during 2018 and an additional 7 month charge relating to the Intrinsic acquired intangible assets.

(a) Adjusted EBITDA is EBITDA of £10.7m (2017: £9.2m) less exceptional costs and share based remuneration (note 12)

(b) Adjusted profit after tax divided by weighted average number of shares (note 11)

New IFRS implementation

Maintel has adopted IFRS 15 - Revenue from Contracts with Customers and IFRS 9 - Financial Instruments for the financial year ending 31 December 2018.

To reflect the adoption of IFRS 15, 2017 figures have been restated throughout this document. The effect of adopting IFRS 15 primarily impacts on the following areas:

Technology revenues/margins recognised under contracts with customers, which include both the supply of technology goods and installation services, representing one performance obligation under IFRS 15 result in revenue recognition at a point in time, which is different to the previous treatment whereby the supply of goods and professional services were treated as separate sale arrangements (refer note 2).There is no impact on managed services revenues, mobile revenues or network services revenues.

The adoption of IFRS 15 has resulted in an increase in 2018 revenue and profit before tax of £2.5m and £0.2m respectively (2017: IFRS 15 adjustments resulted in a reduction of £6.3m and £1.9m respectively). In addition, opening reserves at 1 January 2017 are £1.0m lower than the amount reported in the 2017 financial statements. These amounts are based on the Group applying the retrospective method in transitioning to IFRS 15 (refer note 1).

The adoption of IFRS 15 has not altered total contract values or timing of cash flows.

The impact of IFRS 9 is to reduce the Group's opening reserves at 1 January 2018 and trade receivables by £0.1m. These amounts are based on applying the retrospective method. There has not been a material impact on 2018 reported numbers as a result of adopting IFRS 9.

Cash performance

The Group generated net cash flows from operating activities of £8.6m (2017: £4.4m) resulting in a cash conversion (c) of 84% for the full year (2017: 54%). As reported last year, 2017 was negatively impacted by the unwind from strong trading in H2 2016, and also by the success of our ICON service offering, which resulted in both reduced upfront project billing and a need for increased capital investment in additional capacity.

Atos customer base acquisition

On 1 July 2018, the Group announced a strategic partnership with Atos and the acquisition of certain UK customer contracts for a total net consideration of £5.1 million. The consideration is payable over a period of four and a half years and will be satisfied using the Group's existing cash resources. Following the acquisition, Maintel has become a new channel partner of Atos.

The Atos customer base has underpinned the growth in our managed service business. The expectation is that this base of customers will increase our project revenues in 2019 and it is on track to be accretive in the first full year of ownership.

Review of operations

The following table shows the performance of the three operating segments of the Group. The 2018 results include a full twelve months' contribution from Intrinsic compared to five months' contribution in 2017. On 1 January 2018, the Intrinsic trading entity was hived up into Maintel Europe Ltd so that for 2018 the UK operations were managed and controlled as one entity.

(d) Technology includes revenues from hardware, software, professional services and other sales

Gross profit for the Group increased to £39.1m (2017: £36.7m) with gross margin of 29% at the same level as 2017. Detailed divisional performance is described further below.

The managed services and technology division provides the management, service and support of unified communications, contact centres and local area networking technology on customer premises and in the cloud, across the UK and internationally, on a contracted basis. It also supplies and installs project-based technology, professional and consultancy services, to our direct clients and through our partner relationships.

Revenue in this division increased by 23% to £89.9m with gross profit increasing by 26% to £26.4m (2017: £21.0m). Gross margin was flat year on year at 29%, but as predicted, we saw gross margin increase in H2 2018.

In the year Maintel continued to see pressure on its high margin legacy maintenance business as customers move to newer technology with a higher software support mix. This newer technology and the move to cloud services will have an impact on our organisational model as it increasingly reduces the need for a large field based engineering team over the medium term.

As highlighted previously, both technology and managed service revenues in the period were adversely affected by the customer driven delays in specific projects, in particular a large NHS contract and 2 large contact centre upgrades, one for a major utility and the other for a large business process outsourcing customer.

We continue to be successful on the government procurement frameworks, with further awards of two large NHS contracts in Q4 2018, for implementation in 2019.

While we have seen a lengthening of the sales cycle, particularly with larger organisations across both the public and private sectors, there is currently no evidence of projects being cancelled and the sales pipeline remains healthy.

At 31 December 2018, the managed service base including the acquired Atos base stood at c. £45m, up c.10% on 2017.

Network services division

The network services division sells a portfolio of connectivity and communications services, including managed MPLS networks, security as a service, internet access services, SIP telephony services, inbound and outbound telephone calls and hosted IP telephony solutions. These services complement the on-premise and cloud solutions offered by the managed service and technology division and the mobile division's services.

Network services revenues decreased by 12% year on year impacted by the full year effect of the previously highlighted loss of two large legacy WAN customers (not on the ICON platform) that had particularly high margins.

Traditional call traffic and line rental revenues decreased 14% to £15.3m (2017: £17.7m), which is a reflection of the overall market decline, although Maintel's rate of decline slowed in H2 2018.

Data connectivity revenues declined by 12% over the previous year, driven by a full year's impact of the loss of the two large WAN customers. Excluding this impact, underlying data revenues grew by 2%, as we started to see a positive impact of new contract wins coming through.

We have a significant order back log on data, as customer driven delays on the implementation of two new WANs for a national retailer and national health company will now be delivered during 2019.

Our revenues from cloud customers in the year are £20.7m (15% of total Group revenues) and accelerated in H2 2018 with an increase of 68% on H1 2018. The growth of our ICON cloud services, was underpinned by ICON Communicate, our Unified Communications service, which delivered growth of c. 38% in contracted seats over the previous year. We continue to see the movement of mission critical services into ICON Communicate - from large (multiple thousand employees) hospital trusts to contact centres for financial services institutions. Our sales pipeline for both Unified Communications and Contact Centre continues to be dominated by cloud-based services as the market moves to that delivery model.

We have also seen continued growth of ICON Secure, our Managed Security-as-a-Service offer - with the number of customers on the platform doubling over the previous year.

As highlighted previously, we have set up a new Technology Centre in Fareham bringing together our cloud and software engineering teams to better foster and accelerate our growth as we continue to invest in all aspects of the ICON platform. Product and service enhancements are being added as well as the capacity expansion required to deliver the growth. We launched a managed SD-WAN service late in the year to position us for the growth in that technology, and have further enhanced our PCI secure payment capability.

Mobile division

Maintel mobile derives its revenue primarily from commissions received under its dealer agreements with Vodafone and O2 and from value added services such as mobile fleet management and mobile device management.

The strategic review of our mobile business in 2016, and the action taken to reduce our exposure to mobile, is now complete. We are now focused on the mid-market, and therefore better aligned with the rest of our product propositions. Following this process, mobile revenues decreased by 18% versus the previous year to £5.6m (2017: £6.9m) with the customer base reducing by 19%. This reduction has stabilised when compared to H1 2018, and we expect the full impact to have run through in 2019.

Gross margin increased to 52% (2017: 48%) as the focus has moved to mid-market customers who require a managed service proposition.

O2 remains our largest network partner with 92% of connections.

The introduction of new sales resource has led to the customer sales pipeline steadily growing across both brand new customers and the existing Group customer base, through cross-selling opportunities.

Other operating income

Other operating income of £476,000 (2017: £155,000) includes monies associated with the recovery of an R&D tax credit of £320k (2017: £Nil) and a full year rental income from the sub-letting of a part of the Group's London premises of £155k (2017: £155k). The sub-lease runs until November 2020.

Administrative expenses

(e) Excluding intangibles amortisation, exceptional expenses and share based remuneration

Total administrative expenses for the Group increased by 3% to £27.6m (2017: £26.7m) driven in part by the inclusion of twelve months of Intrinsic (2017: five months) and some additional employees recruited as a result of the Atos customer base acquisition. Total administrative expenses as a percentage of total revenue have reduced to 20% from 21% in 2017.

We reported in our interim results that, as a result of the integration of Intrinsic and an ongoing review of operational efficiencies, £2.4m of annualised savings were delivered in H1 2018 from the Group's total overhead base, the full run rate impact of which has come through in H2 2018.

The Group's headcount as at 31 December 2018 was 624 (31 December 2017: 670), reflecting a reduction of 6% as a result of the Group's ongoing review of its operational structure.

Facility costs in 2018 reduced by £0.7m resulting from the changes made to the Group's property estate in 2017 and 2018.

Costs relating to accounting for share options increased to £0.4m (2017: £0.3m).

The level of the Group's administrative expenses will continue to be tightly controlled in 2019 and we expect to deliver further cost savings in 2019 as our operational model evolves.

Exceptional costs

A breakdown of the exceptional costs of £1.6m (2017: £1.5m) shown in the income statement is provided in note 13. The main elements are staff related restructuring costs associated with the integration of the Intrinsic business and the ongoing review of the Group's operating cost base (£1.1m) and the creation of an onerous property lease provision relating to the Haydock office premises (£0.2m).

Intangibles amortisation

The intangibles amortisation charge increased in the year due to a full year's charge in respect of Intrinsic compared to 5 months in 2017 and a 6 months' charge relating to the Atos customer base acquired. Impairment and amortisation charges are discussed further below.

Foreign exchange

The Group's reporting currency is Sterling; however, it trades in other currencies, notably the Euro, and has assets and liabilities in those currencies. The Euro rate moved from €1.13 = £1 at 31 December 2017 to €1.11 = £1 at 31 December 2018 and the US Dollar rate moved from $1.36 = £1 at 31 December 2017 to $1.28 = £1 at 31 December 2018. The effect of this and other movements in the period was a net loss to the income statement of £10,000 (2017: £149,000 gain), which is included in other administrative expenses.

The exchange difference arising on the retranslation at the reporting date of the equity of the Group's Irish subsidiary, whose functional currency is the Euro, is recorded in the translation reserve as a separate component of equity, being a charge of £Nil in the period (2017: £9,000).

Interest

The Group recorded a net interest charge of £1.3m in the year (2017: £0.9m), an increase of £0.4m due to a combination of interest rate increases during the year; impact of borrowings taken on to fund the acquisition of Intrinsic in August 2017; and £0.1m of interest on the deferred consideration relating to the customer base acquisition from Atos in July 2018.

Taxation

The consolidated statement of comprehensive income shows a tax charge of £0.2m (2017: £0.1m) on a profit before tax of £2.2m (2017: £1.6m) reflecting a tax rate of 9%, for the reasons described below.

Each of the Group companies is taxed at 19% (2017: 19.25%) with the exception of Maintel International Limited, which is taxed at 12.5% (2017: 12.5%). Certain expenses that are disallowable for tax raise the underlying effective rate above this.

The tax charge in the period benefitted from a deferred tax credit of £0.5m, reflecting an increase in the deferred tax asset based on the directors' assessment that more tax losses, arising originally from the Datapoint acquisition, are likely to be useable in the future. This was offset by a deferred tax charge of £0.3m associated with an intangible asset relating to software licences.

This is described further in note 22.

Dividends and adjusted earnings per share

A final dividend for 2017 of 19.1p per share (£2.7m in total) was paid on 11 May 2018. An interim dividend for 2018 of 15.0p (£2.1m) was paid on 4 October 2018. The board is pleased to confirm an increase in the full year dividend of 2% for the financial year ending 31 December 2018, resulting in a final dividend of 19.5p per share being proposed. This would take the total dividend payment for 2018 to 34.5p.

In accordance with accounting standards, the final dividend is not accounted for in the financial statements for the period under review, as it had not been committed as at 31 December 2018.

Consolidated statement of financial position

Net assets decreased by £2.5m in the year to £22.0m at 31 December 2018 (31 December 2017: £24.5m) with the key movements explained below.

Intangible assets valued at £69.4m, increased by £1.9m, driven by intangibles arising on the acquisition of the customer base from Atos (see note 14) and capitalised development costs associated with the Group's contact centre software, Callmedia, offset by the amortisation charge in the year of £6.5m (2017: £5.9m).

The net book value of property, plant and equipment increased by £0.5m to £2.0m (2017: £1.5m) primarily due to continued investment in our ICON platform and general IT infrastructure amounting to £1.2m, offset by the depreciation charge of £0.7m.

Inventories are valued at £8.3m, a decrease of £2.3m in the year, mainly as a result of a reduction in the value of stock held for resale of £2.1m. This was due to the timing of customer deliveries, with some large projects at year-end 2017 not being replicated at year-end 2018. Maintenance service stock reduced by £0.2m due mainly to the results of regular revaluation.

The asset held for sale related to the freehold property in Burnley, which was sold in 2018 for the fair value carried at 31 December 2017 of £1.5m (see note 18).

Trade receivables increased by £1.4m in the year to £20.4m. The increase is due to the net effect of a number of phasing differences in both technology and managed service invoicing spanning the year-end.

Prepayments and accrued income amounted to £13.0m (2017: £14.0m). The decrease of £1m was mostly due to : (a) lower level of deferred costs (£1.1m)driven in particular by the unwinding of one large order; (b) decrease in prepaid costs relating to hardware funds from the mobile business (£0.5m); both of which were partly offset by a higher level of accrued income (£0.5m).

Corporation tax of £0.8m (2017: £0.8m) reflects the estimated liability associated with the profits derived from FY 2018 and FY 2017 trading activities offset by the utilisation of historical tax losses and unused capital allowances. Due to the hive up of Datapoint's UK businesses into Maintel Europe in Q4 2016, the Group is currently accounting for relief of the historic Datapoint losses on a streamed basis, for those open tax periods of assessment, against the profits of the trade that was transferred from the previous Datapoint UK businesses.

Trade payables increased by £1.3m in the year to £14.8m (2017: £13.5m) with a number of different supplier and delivery timing factors affecting the balance.

Other tax and social security liability has increased by £0.4m to £3.9m (2017: £3.5m), due to a higher VAT liability because of increased Q4 customer invoicing in 2018 compared to 2017.

Accruals amounted to £7.5m (2017: £6.7m), the £0.8m increase due to a combination of £0.5m relating to a higher level of accrued costs associated with several large projects in progress at 2018 year-end, and others £0.3m.

Other payables are £4.0m compared to £3.4m in 2017, an increase of £0.6m, primarily due to a set-up of an onerous lease provision of £0.2m, a reduced level of hardware funds and cash advances of £0.1m, linked to the mobile business, and others £0.3m.

Deferred managed service income is £18.5m (2017: £19.5m). Excluding the incremental effect associated with the acquired customer base of £1.6m, the underlying movement is a decrease of £2.6m. This was in the main due to invoice timing differences and the effect of some lower value renewals due to technology refreshes.

Other deferred income amounted to £8.2m, a decrease of £3.9m, primarily due to the completion of two large projects which resulted in revenue being recognised and which were deferred under IFRS 15 at year-end 2017.

The deferred consideration of £0.6m relates to the current element that is due in the next 12 months arising from the customer base acquisition from Atos (see note 14).

Non-current other payables are £4.9m (2017: £1.5m), an increase of £3.4m due to the deferred consideration of £3.8m relating to the acquisition of the customer base from Atos (see note 14), offset by a decrease in intangible licences and dilapidation provisions of £0.4m.

The deferred tax liability increased by £1.0m to £3.3m (2017: £2.3m), predominantly due to an additional deferred tax liability of £1.3m associated with the intangibles acquired from the Atos acquisition, offset by the net effect of other movements (£0.3m).

Intangible assets

The Group has two intangible asset categories: (i) an intangible asset represented by customer contracts and relationships, brand value, product platforms and software acquired from third party companies, and (ii) goodwill relating to historic acquisitions.

The intangible assets represented by purchased customer contracts and relationships, brand value, product platforms and software were carried at £29.2m at the period end (2017: £27.8m). The intangible assets are subject to an average amortisation charge of 18% of cost per annum in respect of the managed service and technology division, 13% per annum in respect of the network services division and 16% per annum in respect of the mobile customer relationships, with £6.5m being amortised in 2018 (2017: £5.9m), the increase being attributable to a full 12 months' charge (2017: 5 months) relating to the Intrinsic intangibles acquired in August 2017 and 6 months' charge relating to the Atos intangibles acquired in July 2018.

Goodwill of £40.2m (2017: £39.7m) is carried in the consolidated statement of financial position, which is subject to an impairment test at each reporting date. The increase of £0.5m is because of the Atos customer base acquisition. No impairment has been charged to the consolidated statement of comprehensive income in 2018 (2017: £Nil).

Property

We reported at the end of 2017 significant progress in management's ongoing review and consolidation of its property locations, leading to the Weybridge lease being assigned to a new tenant with Maintel sub-letting a much reduced space and the closure of the Thatcham and Manchester offices resulting in annualised savings of £0.7m. As of February 2019 we have now also exited from the Weybridge lease.

A review was also undertaken of the Burnley freehold property in Q4 2017 resulting in a decision to market the property, consolidate the warehousing requirements in Haydock and to lease more modern alternative office premises. The sale of the freehold property was successfully concluded for £1.5m in February 2018, and a new lease was signed in July 2018 for office premises located in Blackburn with minimal net incremental ongoing operating costs to the Group.

Following the sub lease of the Haydock office premises to a new tenant in Q4 2018, which will deliver annualised savings of £0.2m, the Group now operates from 4 office locations being London, Fareham, Aldridge and Blackburn in addition to our warehouse facilities located in Haydock.

Cash flow

As at 31 December 2018 the Group had net debt of £25.5m, excluding issue costs of debt, (31 December 2017: £27.7m), equating to a net debt: adjusted EBITDA ratio of 2.0x (2017: 2.5x).

An explanation of the £2.2m reduction in net debt is provided below.

The Group generated £9.1m (2017: £4.9m) of cash from operating activities (excluding acquisition costs of £44,000 (2017: £273,000) and as disclosed in the Consolidated statement of cash flows operating cash flow before changes in working capital of £11.1m (2017: £9.6m).

Cash conversion in 2018 remained strong at 84%(c) (2017: 54%) continuing the normalisation of cash conversion delivered in H2 2017. As reported last year, the full year cash conversion in 2017 was suppressed because of cash timing benefits from a strong trading performance in Q4 2016 combined with strong growth in our ICON cloud product offering, leading to a reduction in upfront project billing, which unwound in H1 2017.

The Group incurred exceptional costs of £1.6m during 2018 (2017: £1.5m), primarily covering restructuring and redundancy costs associated with the ongoing review of the Group's operating cost base and the integration of Intrinsic.

Capital expenditure of £0.3m (net of £1.5m of proceeds received from disposal of the Freehold property) comprised £1.8m ongoing investment in the ICON platform and IT infrastructure and continued development of Callmedia, the Group's contact centre product.

A more detailed explanation of the working capital movements is included in the analysis of the consolidated statement of financial position.

The net finance cost increased by £0.2m to £1.2m, due to a combination of an increase in borrowing rates, impact of a full year weighting of the additional debt taken on to fund the Intrinsic acquisition in August 2017and £0.1m relating to the deferred consideration associated with the Atos base acquisition.

In managing the Group's funding costs, we have used surplus cash and overdraft to reduce our utilised facility by £9.5m in the period, leaving a net cash and cash equivalents overdraft balance of £4.0 m at year-end (2017: cash balance of £3.3m).

Including the payment of dividends in 2018, amounting to £4.8m, and acquisition costs of £0.2m, the net effect when combined with a free cash flow of £7.3m is a decrease in the net debt position of £2.2m to £25.5m.

Further details of the Group's revolving credit and overdraft facilities are given in note 23.

IFRS 16 - Leases

IFRS 16 is required to be adopted for all accounting periods beginning on or after 1 January 2019. During Q4 2018, the Group carried out a detailed assessment of the impact that the adoption of IFRS 16 may have on the Group's financial statements. As an indication of the effect of IFRS 16 for the current reporting period, the Group would recognise a liability of £4.8m and a right of use asset of £4.8m. The impact on the consolidated statement of comprehensive income for 2018 will be that £0.9m which would have been shown as operating expense will now be shown as £0.8m of depreciation and £0.2m of interest.

A detailed explanation of the impact of IFRS 16 on the Group's accounting policies is provided in note 2.

(c) calculated as operating cash flow (being adjusted EBITDA plus working capital) to adjusted EBITDA

Outlook

We continue to invest in our ICON services and infrastructure, adding both capacity and capability to our platform and improving our customer offering. One example is the post-period end launch of our new mid-market, ICON Now unified communications proposition, which will extend our market reach into the lower end of the mid-market. As a result, we expect the acceleration of growth in this area to continue through the current financial year.

In addition, we will continue to invest in our people, wider product offering and IT platforms, future-proofing our business and positioning ourselves to take advantage of the changing marketplace.

The Board remains confident in delivering growth in both revenue and EBITDA for the current financial year, in line with current expectations, underpinned by the full year impact of the acquired Atos customer base and continued growth in the ICON cloud services, as well as the implementation of margin enhancing initiatives across the business.

Our dividend policy remains unchanged, with a commitment to pay-out at least 40% of adjusted net income per annum, however our aim is that the dividend will remain progressive in absolute terms.

The Company announced on 4 March 2019 that Mark Townsend, Chief financial officer, informed the Board of his intention to leave the Company for personal reasons. The Board is taking steps to identify a new Chief financial officer and will update the market when appropriate. The Board would like to thank Mark for his contribution and wish him well for the future.

On behalf of the board

E Buxton

Chief executive

15 March 2019

Financial statements

Consolidated statement of comprehensive income

 for the year ended 31 December 2018

Financial statements

Consolidated statement of financial position

 at 31 December 2018

The consolidated financial statements were approved and authorised for issue by the board on 15 March 2019 and were signed on its behalf by:

M Townsend

Director

Financial statements

Consolidated statement of changes in equity

for the year ended 31 December 2018

* Refer to note 2 for a summary of adjustments raised in relation to the change in accounting policy for IFRS 15 and the restatement of equity at 1 Jan 2017 and 31 December 2017.

Financial statements

Consolidated statement of cash flows

for the year ended 31 December 2018

The following cash and non-cash movements have occurred during the year in relation to financing activities from non-current liabilities

Reconciliation of liabilities from financing activities

Non-current loans and borrowings (Note 23)

Financial statements

Notes forming part of the consolidated financial statements

for the year ended 31 December 2018

 Maintel Holdings Plc is a public limited company incorporated and domiciled in the UK, whose shares are publicly traded on the Alternative Investment Market (AIM). Its registered office and principal place of business is 160 Blackfriars Road, London SE1 8EZ.

The principal policies adopted in the preparation of the consolidated financial statements are as follows:

(a) Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union ("adopted IFRSs"), IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies preparing their accounts in accordance with adopted IFRSs.

(b) Basis of consolidation

The consolidated financial statements present the results of the Company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the consolidated statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The acquisition related costs are included in the consolidated statement of comprehensive income on an accruals basis. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained.

(c) Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and can be reliably measured.

Revenue represents sales to customers at invoiced amounts and commissions receivable from suppliers, less value added tax.

Managed services and technology

Managed services revenues are recognised over time, over the relevant contract term, on the basis that the customer simultaneously receives and consumes the benefits provided by the Group's performance of the services over the contract term. Where the Group's performance of its obligations under a contract exceeds amounts received, accrued income or a trade receivable is

recognised depending on Group's billing rights. Where the Group's performance of its obligations under a contract is less than amounts received, deferred income is recognised.

Technology revenues for contracts with customers, which include both supply of technology goods and installation services, represent in substance one performance obligation and result in revenue recognition at a point in time, when the Group has fulfilled its performance obligations under the relevant customer contract. Under these contracts, the Group performs a significant integration service which results in the technology goods and the integration service being one performance obligation. Over the course of the contract, the technology goods, which comprise both hardware and software components are customised through the integration services to such an extent that the final customised technology goods installed on completion are substantially different to their form prior to the integration service. Revenue is recognised when the integrated technology equipment and software has been installed and accepted by the customer.

Network services

Revenues for network services are comprised of call traffic, line rentals and data services, which are recognised over time, for services provided up to the reporting date, on the basis that the customer simultaneously receives and consumes the benefits provided by the Group's performance of the services over the contract term. Amounts received in advance of the performance of the call traffic, line rentals and data services are recognised as performance obligations and released to revenue as the Group performs the services under the contract. Where the Group's performance of its obligations under a contract are less than amounts received, deferred income is recognised.

Mobile

Connection commission received from the mobile network operators on fixed line revenues, are allocated primarily to two separate performance obligations, being (i) the obligation to provide a hardware fund to end users for the supply of handsets and other hardware kit - revenues are recognised under these contracts at a point in time when the hardware goods are delivered to the customer and the customer has control of the assets; and (ii) ongoing service obligations to the customer - revenues are spread over the course of the customer contract term. In the case of (i) revenues are recognised based on the fair value of the hardware goods provided to the customer on delivery and for (ii) the residual amounts, representing connection commissions less the hardware revenues are recognised as revenues over the customer contract term.

Customer overspend and bonus payments are recognised monthly at a point in time when the Group's performance obligations have been completed; these are also payable by the network operators on a monthly basis.

(d) Operating leases

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an "operating lease"), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

Rentals receivable under operating leases are credited to the consolidated statement of comprehensive income on a straight-line basis over the term of the lease. The aggregate cost of lease incentives offered is recognised as a reduction of the rental income over the lease term on a straight-line basis.

(e) Employee benefits

The Group contributes to a number of defined contribution pension schemes in respect of certain of its employees, including those established under auto-enrolment legislation. The amount charged in the consolidated statement of comprehensive income represents the employer contributions payable to the schemes in respect of the financial period. The assets of the schemes are held separately from those of the Group in independently administered funds.

The cost of all short-term employee benefits is recognised during the period the employee service is rendered.

Holiday pay is expensed in the period in which it accrues.

(f) Redundancy costs

Redundancy costs are those costs incurred from the date of communication of the restructuring decision and the at risk consultation process has been started with the relevant employee or group of employees affected.

(g) Interest

Interest income and expense is recognised using the effective interest rate basis.

(h) Taxation

Current tax is the expected tax payable on the taxable income for the year, together with any adjustments to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, except for differences arising on:

· the initial recognition of goodwill;

· the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit; and

· investments in subsidiaries where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits and taxable temporary differences will be available against which the asset can be utilised.

Management judgement is used in determining the amount of deferred tax asset that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

The amount of the deferred tax asset or liability is measured on an undiscounted basis and is determined using tax rates that have been enacted or substantively enacted by the date of the consolidated statement of financial position and are expected to apply when the deferred tax assets/liabilities are recovered/settled.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:

· the same taxable Group company; or

· different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

(i) Dividends

Dividends unpaid at the reporting date are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company.

Proposed but unpaid dividends that do not meet these criteria are disclosed in the notes to the

consolidated financial statements.

(j) Intangible assets

Goodwill

Goodwill represents the excess of the fair value of the consideration of a business combination over the acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired; the fair value of the consideration comprises the fair value of assets given. Direct costs of acquisition are recognised immediately as an expense.

Goodwill is capitalised as an intangible asset and carried at cost with any impairment in carrying value being charged to the consolidated statement of comprehensive income.

Customer relationships

Customer relationships are stated at fair value where acquired through a business combination, less accumulated amortisation.

Customer relationships are amortised over their estimated useful lives of (i) six years to eight years in respect of managed service contracts, and (ii) seven years or eight years in respect of network services and mobile contracts.

Product platform

The product platform is stated at fair value where acquired through a business combination less accumulated amortisation.

The product platform is amortised over its estimated useful life of eight years.

Brand

Brands are stated at fair value where acquired through a business combination less accumulated amortisation.

Brands are amortised over their estimated useful lives, being eight years in respect of the ICON brand.

Software (Microsoft licences and Callmedia)

Software is stated at cost less accumulated amortisation. Where these assets have been acquired through a business combination, the cost is the fair value allocated in the acquisition accounting.

Software is amortised over its estimated useful life of (i) three years in respect of the Microsoft licences, (ii) five years in respect of the Callmedia software.

(k) Impairment of non current assets

Impairment tests on goodwill are undertaken annually on 31 December. Customer relationships and other assets are subject to impairment tests whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (being the higher of value in use and fair value less costs to sell), the asset is written down accordingly in the administrative expenses line in the consolidated statement of comprehensive income and, in respect of goodwill impairments, the impairment is never reversed.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment

test is carried out on the asset's cash-generating unit (being the lowest Group of assets in which the asset belongs for which there are separately identifiable cash flows). Goodwill is allocated on initial recognition to each of the Group's cash-generating units that are expected to benefit from the synergies of the combination giving rise to goodwill.

(l) Property, plant and equipment

Property, plant and equipment is stated at cost, less accumulated depreciation and any impairment in value. Depreciation is provided to write off the cost, less estimated residual values, of all tangible fixed assets, other than freehold land, over their expected useful lives, at the following rates:

Property, plant and equipment acquired in a business combination is initially recognised at its fair value.

(m) Inventories

Inventories comprise (i) maintenance stock, being replacement parts held to service customers' telecommunications systems, and (ii) stock held for resale, being stock purchased for customer orders which has not been installed at the end of the financial period. Inventories are valued at the lower of cost and net realisable value.

(n) Cash and cash equivalents

Cash and cash equivalents comprise cash balances and short term deposits with an original maturity of three months or less, held for meeting short term commitments.

(o) Financial assets and liabilities

The Group's financial assets and liabilities mainly comprise cash, borrowings, trade and other receivables and trade and other payables.

Trade and other receivables are not interest bearing and are stated at their amortised cost as reduced by appropriate allowances for irrecoverable amounts or additional costs required to effect recovery.

The Group reviews the amount of credit loss associated with its trade receivables based on forward looking estimates that take into account current and forecast credit conditions. The Group has applied the Simplified Approach applying a provision matrix based on number of days past due to measure lifetime expected credit losses and after taking into account customer sectors with different credit risk profiles and current and forecast trading conditions. Trade and other payables are not interest bearing and are stated at their amortised cost.

(p) Borrowings

Interest bearing bank loans and overdrafts are initially recorded at the value of the amount received, net of attributable transaction costs. Interest bearing borrowings are subsequently stated at amortised cost with any difference between cost and redemption value being recognised in the consolidated statement of comprehensive income over the period of the borrowing using the effective interest method.

(q) Assets held for sale

Assets are classified as held for sale as a current asset from the date the Group has a clear plan to dispose of the asset and its sale is considered highly probable within a period of twelve months. Assets held for sale are stated at the lower of carrying value at the date the asset is designated as held for sale and fair value less costs of sale.

(r) Foreign currency

The presentation currency of the Group is Sterling. All Group companies have a functional currency of Sterling (other than Maintel International Limited ("MIL") which has a functional currency of the Euro) consistent with the presentation currency of the Group's consolidated financial statements. Transactions in currencies other than Sterling are recorded at the rates of exchange prevailing on the dates of the transactions.

On consolidation, the results of MIL are translated into Sterling at rates approximating those ruling when the transactions took place. All assets and liabilities of MIL, including goodwill arising on its acquisition, are translated at the rate ruling at the reporting date. Exchange differences on retranslation of the foreign subsidiary are recognised in other comprehensive income and accumulated in a translation reserve.

(s) Accounting standards issued

IFRS 15 Revenue from Contracts with Customers

An analysis of the key changes that IFRS 15 has on the Group's revenue streams, taking into account the move from the recognition of revenue on the transfer of risks and rewards to the transfer of control are summarised below:

- Technology revenues: certain contracts with customers, which include both supply of technology goods and installation services, represent in substance one performance obligation under IFRS 15 and result in revenue recognition at a point in time. This is different to the previous treatment, whereby the supply of goods and professional services were treated as separate sale arrangements. In relation to these contracts, the Group performs a significant

integration service which results in the technology goods and the integration service being one performance obligation under IFRS 15. Under IAS 18, the installation was judged to be separable, as it was possible for a customer to obtain equipment and kit from one party and obtain installation services from another. In addition, associated commission payments to sales staff are capitalised as an asset and will be released to profit and loss when the performance obligation has been satisfied. The effect of these adjustments on the comparative periods are disclosed further below.

- Mobile business: connection commission revenues received from mobile network operators on fixed line revenues were previously spread over the term of the customer contract. Under IFRS 15 the Group's mobile contracts with customers include a number of performance obligations. Typically, these include an obligation to provide a hardware fund to the end users. Under IFRS 15 revenues for the supply of handsets and other hardware kit are recognised under these contracts at a point in time when the hardware goods are delivered to the customer. This is different to the previous treatment of spreading the associated revenue over the course of the customer contract. The financial effect of the change in policy did not have a material impact for the current and comparative periods, no adjustments were required to the current or comparative periods.

The Group's new accounting policy for revenue recognition is explained in detail in note 2(c).

IFRS 9 Financial instruments

In adopting IFRS 9, the only changes made from the previous reporting period is in relation to the impairment of financial assets. The Group now reviews the amount of credit loss associated with its trade receivables based on forward looking estimates that take into account current and forecast credit conditions as opposed to relying on past historical default rates. In adopting IFRS 9 the Group has applied the Simplified Approach applying a provision matrix based on number of days past due to measure lifetime expected credit losses and after taking into account customer sectors with different credit risk profiles and current and forecast trading conditions. The Group has elected to adopt the initial application date of 1 Jan 2018 and therefore has chosen not to restate comparatives.

The effect of IFRS 9 is an increase to the provision of £108,000 and an adjustment to opening reserves at 1 Jan 2018 of £108,000. The effect on the current year was immaterial.

Accounting standards issued (not yet mandatory)

The Group also notes IFRS16 Leases, which takes effect and will be adopted in 2019. The Group has elected to take the fully retrospective approach. As a result of the new standard the Group will recognise a lease liability and a right of use asset at 1 January 2019 for leases previously classified as operating leases applying IAS 17. The Group has calculated that the right of use asset to be recognised at 1 January 2019 will be £4.8m and there will be a corresponding liability of £4.8m. An estimation of the expected depreciation charge against the right of use asset in 2018 has been calculated to be £0.8m, with an interest charge of £0.2m, which compares to an operating lease charge within operating expenses of £0.9m. Details of the Group's operating lease commitments are disclosed in note 29.

The table below shows the effect of IFRS 15 on the restated Consolidated statement of comprehensive income for the year ended 31 December 2017:

Impact of IFRS 15 on Consolidated statement of comprehensive income

for the 12 months ended 31 December 2017

The adjustments under IFRS 15 include the following items:

- Technology supply and installation contract revenues of £6.3m have been reversed with the corresponding adjustments recognised through accrued income (other receivables) or Other deferred income;

- Cost of sales of £4.2m in connection with equipment for supply and installation contract revenues have been reversed and recognised as an asset in Inventories;

- Commission costs in respect supply and installation contract billings of £0.2m have been reversed and recognised as an asset;

- Taxation expense has been adjusted for the current tax effect of the above adjustments to profit before tax.

The tables below show the effect of IFRS 15 on the restated Consolidated statement of financial position as at 31 December 2017 and Consolidated statement of cash flows for the 12 months ended 31 December 2017:

Impact of IFRS 15 on Consolidated statement of financial position

as at 31 December 2017

The adjustments under IFRS 15 include the following items:

- Inventories: the costs for technology equipment and sales commissions in connection with supply and installation contract revenues reversed for FY 2017 and prior periods have been recognised as an asset;

- Accrued income: accrued income of £3.0m recognised previously on technology supply and installation contract revenues have been reversed;

- Trade and other payables: additional deferred revenues of £7.6m have been recognised in relation to technology supply and installation contracts where the revenues have been reversed;

- Current tax liabilities: these have decreased to account for lower taxes payable in relation to lower profits assessed to corporation tax as a result of the IFRS 15 adjustments.

Impact of IFRS 15 on Consolidated statement of cash flows

for the 12 months ended 31 December 2017

Impact of IFRS 15 on opening balance sheet at 1 January 2017

In the process of applying the Group's accounting policies, management has made various estimates, assumptions and judgements, with those likely to contain the greatest degree of uncertainty being summarised below:

Deferred tax asset relating to brought forward losses

At 31 December 2018, the directors have had to assess the validity of the carrying value of tax losses attributable to the Datapoint UK companies that might be used against future profits, shown in note 22, which involves estimating the profitability for the Datapoint businesses, which are now reported within Maintel Europe Ltd. The company recognises the deferred tax asset for Datapoint tax losses on a streamed basis against forecast future taxable profits, which are expected to be generated by the former Datapoint businesses.

Impairment of non-current assets