Maintel Regulatory News (MAI)

Preliminary results for the year to 31 December 2010

Maintel Holdings Plc, the telecoms services company, announces preliminary results for the year to 31 December 2010.

Financial highlights

Adjusted* earnings per share of 20.3p (2009: 17.7p); basic earnings per share of 17.8p (2009: 15.7p)

Group revenue increase of 13% to £22.0m (2009: £19.4m), with recurring revenue increasing by 9% to £17.5m (2009: £16.0m) to be 79% of total 2010 revenue

Profit before tax up 12% at £2.673m (2009: £2.382m)

Adjusted* profit before tax up 14% at £3.046m (2009: £2.675m)

Maintenance base £13.2m at year end (2009: £10.3m)

Equipment sales up by 32% at £4.7m (2009: £3.6m), including a £622,000 contract

Sales of broadband, call traffic, line rental and related products increased by 2% to £5.8m (2009: £5.7m) despite rate pressures

Strong operating cash flow and year end cash balances of £2.5m (2009: £2.5m), after the acquisition of the Redstone base for £1.6m net cash, dividends of £1.2m (including a special dividend in March 2010) and share buy backs costing £0.5m; the Group has no debt

Final dividend proposed of 4.6p per share (2009 second interim equivalent: 4.1p), making 8.5p for the year (2009: 10.1p, including a special dividend of 2.9p)

*adjusted for goodwill impairment, intangibles amortisation and non-trading accounting adjustments re the Redstone acquisition

Operational highlights

3 year partnership agreement signed with Westcon in June to service its maintenance base, adding c£600,000 annualised maintenance revenue, c1,400 customers and an important Avaya skill base

Acquisition of business and assets from Redstone plc subsidiaries in October, adding c£2m annualised maintenance base and further Avaya and other resource

2 further significant orders received from the Group's main customer, one in February and one in July

For further information please contact:

Eddie Buxton, Chief Executive 020 7401 4601

Dale Todd, Finance Director 020 7401 0562

Chairman's statement

Maintel Holdings' revenues rose by 13% during 2010 to £22.0m (2009 - £19.4m) and adjusted profit before tax by 14% to £3.046m (2009 - £2.675m) giving an increase in adjusted earnings per share of 15% to 20.3p (2009 - 17.7p).

Our maintenance base ended the year at a record £13.2m (2009 - £10.3m) having grown by 28%, boosted by two substantial pieces of new business from our largest customer, a new partnership with Westcon which brought in £600,000 of annualised revenues and the acquisition towards the end of the year of a £2m maintenance base from Redstone which we believe will deliver significant incremental earnings in the future. Equipment sales rebounded strongly from 2009 levels showing a 32% increase which included one very large order at lower than average margin but a good spread of smaller projects which fulfilled our margin targets. Network services revenues increased only slightly during the year, with call rates remaining highly competitive. However, line rental and data showed promising returns and we continue to broaden our product offering to access new revenue streams.

Aside from organic growth which continues to be a priority, we remain vigilant for acquisitions that fulfil our valuation criteria as industry consolidation continues apace. Equally we are always pleased to work closely with a range of longstanding partners including some of the biggest companies in our industry to whom we supply complementary services and we expect further growth in this area in the year ahead as various new relationships bear fruit.

The Company continues to be strongly cash generative. We repurchased 295,000 shares during the year, equivalent to 3% of the outstanding share capital, and following our acquisition in October of the Redstone businesses for £1.6m net we ended the year with cash balances of £2.5m and no debt. We are proposing a final dividend of 4.6p payable on 28 April 2011 to shareholders on the register at 25 March 2011.

It falls to me to thank on behalf of shareholders our loyal and energetic staff for their work and commitment during the year and to wish them well for the challenges and opportunities ahead.

J D S Booth

Chairman

10 March 2011

Business review

Results

As anticipated in the half-year statement, revenue and profit improved further in the second half of the year, reflecting the continued growth in the maintenance base and higher levels of equipment sales derived from the base.

Adjusted profit before tax for the year was £3.046m, a 14% increase on 2009, with unadjusted profit before tax increasing by 12% to £2.673m.

The Company repurchased 295,000 shares in the year (3% of the year end share capital), mostly in Q3, and this, combined with the increased profitability, has enhanced adjusted EPS by 15% from 17.7p in 2009 to 20.3p in 2010. Basic EPS increased by 13%, from 15.7p in 2009 to 17.8p in 2010.

Group revenues increased by £2.614m, or 13%, in the year. The two major new contracts from the Group's largest customer noted in the interim report were supplemented by 6 months' revenue from a partnership agreement with Westcon and continuing higher levels of equipment sales, including a large supply and installation contract referred to at the half year.

Network services revenues increased marginally in the year, with low attrition being matched by low new sales, the investment made in the division during the year having been less effective than anticipated.

At the end of June, the Group entered into a three year partnership agreement with Westcon Convergence UK (the "Westcon partnership") which effectively added approximately £600,000 of annualised revenue and 1,400 customers to the maintenance base, with Maintel being the preferred maintainer to any new customers Westcon signs. Under the agreement, a team of Avaya engineers joined Maintel from Westcon, significantly accelerating our development of a product expertise which gained dramatically in importance when Avaya acquired Nortel in 2009. While the cost of the engineers means that the partnership adds more to our strategic strength than our short term profitability, it provides instant access to a new market at negligible risk or cost. A consequential benefit has been the ability to bring in house some previously outsourced Avaya contracts, reducing our third party support costs.

In addition, the Group acquired certain business and assets from Redstone Converged Solutions Limited and Marcom Communications Limited (a Redstone subsidiary) (together the "Redstone acquisition") at the end of October, for a net cash consideration of £1.6m. Approximately £1.7m annualised of maintenance contracts were acquired as part of the agreement, and Maintel also agreed to supply certain customers of Redstone with maintenance services for approximately £280,000 per annum. After redundancies, a net 18 Redstone/Marcom employees were retained by Maintel. Due to the acquired customers' billing cycles, the Redstone acquisition is not expected to reach full cash generation potential until Q3 2011. In 2010 it contributed, before redundancy costs, an approximate £50,000 profit to Group results including £105,000 of deferred income net of deferred costs for which no cash flows will be received by the Group; assuming no significant excess of attrition over new sales in the acquired base, the acquisition should contribute progressively more to operating cash flows during 2011 until peaking in Q3. A further £141,000 of deferred income less deferred costs will be recognised in 2011. The Group incurred £222,000 in redundancy costs in 2010 in respect of the acquisition, £175,000 of which is covered by an indemnity from Redstone. The £175,000 indemnity has been treated as a deduction from consideration for the purposes of calculating goodwill, and the £175,000 costs being expensed as incurred in 2010. The £175,000 indemnity, and the £105,000 deferred income less costs adjustment noted above, have been added back in calculating adjusted profit, as this represents a more accurate picture of underlying trading.

Recurring revenue (maintenance and network services) increased again in the year to £17.5m (79% of total revenues) (2009 - £16.0m and 82%), providing good visibility of revenues notwithstanding the effects of attrition.

Cash generated from operating activities continued to be strong, at £4.117m, in 2010 (2009 - £2.917m). Cash balances were £2.459m at the year end (2009 - £2.506m) after the £1.6m net cash cost of acquiring the Redstone base, dividend payments of £1.173m, £822,000 tax and the £487,000 cost of buying back shares. The Group has no debt.

Divisional performance is described further below.

The maintenance and equipment division provides maintenance, service and support of office-based voice and data equipment across the UK on a contracted basis. It also supplies and installs voice and data equipment to maintenance customers.

The division's revenues increased by 18% in the year as shown in the table above, maintenance related revenue growing by 13% and equipment sales by 32%.

Maintenance

Maintenance revenues increased by £1.389m in the year, with two significant orders from the Group's largest customer, one going live in February and the other in July. Revenues also benefited from the commencement of the Westcon partnership (initially around £600,000 of annualised maintenance revenues) at the end of June and the acquisition of the Redstone base (c£2m annualised maintenance revenues) at the end of October, both of which are contributing maintenance revenues in line with expectations. The maintenance base stood at a record of more than £13m at the year end.

As envisaged, we have received increasing levels of business during the year from our relationships with larger integrators, and further relationships continue to be forged, whilst at the other end of the scale the direct sales team continues to sign up traditional SME and larger customers, albeit at lower levels than experienced historically, all of which helps provide a balance to the base.

It was noted at the half year that attrition was running slightly ahead of recent years, but this position reversed in H2, so that the rate for the year was virtually identical to that of 2009.

Equipment sales

Following a drop in equipment sales revenue in 2009 attributed to the economic environment, this has increased by £1.141m in the year, despite a conscious and continuing policy to generally avoid such sales if they do not meet margin criteria. £622,000 of the increase, however, is attributable to a single project which was low risk and at a lower than usual, but acceptable, margin and which has led to a further £250,000 extension to that order in 2011. There were a number of medium-sized sales in the year, but a large proportion of equipment sales is of low unit value and is a function of the increased size of the maintenance base and which could reasonably be deemed recurring revenue. Overall equipment sales margin percentage was below budget due to the large contract, but not significantly so.

The increase in the sales and customer service headcount shown below has primarily arisen from the transfer to the Group of Redstone employees and the enhancement of resource to maintain a quality service to the increased customer base. The increase in engineer headcount is in the main the result of the acquisition of Avaya skills through the Westcon partnership and the Redstone acquisition.

* excluding redundant Redstone employees

The division's gross profit margin dropped by 2 percentage points in the year, the equipment sales at lower margin noted above being the main contributory factor, although the division was also affected by a full year's support charge from a manufacturer and by the effects of some renegotiated customer contracts, in particular the framework agreement with the Group's largest customer, although this latter cost is also expected to result in improved contract security and greater exposure to new business opportunities.

The percentage margin in the second half was also affected by the Westcon partnership agreement and Redstone acquisitions, where low levels of profitability were expected initially post-completion, but will improve in 2011 as the negative effects of deferred maintenance income not acquired unwind.

Net margin (operating profit as a percentage of revenue) from the division fell from 16.0% in 2009 to 14.4%, in sympathy with gross margin but partly due to the two Redstone accounting adjustments (the inclusion of the £105,000 deferred income less deferred costs, and the £175,000 redundancy cost) which increased revenue and administration costs; excluding these adjustments, net margin was 14.9%.

Given the application of common resource across both maintenance and equipment sales, it is not practical to quote definitive margin data on the separate business sectors; however management figures are used to monitor results internally.

Network services division

The network services division sells a portfolio of services which includes telephone line rental, inbound and outbound telephone calls, data connectivity, Internet access and IP telephony solutions. These services complement the services offered by the maintenance and equipment division.

The division's revenue increased by £113,000 or 2% with the switch from call traffic to line rental continuing the trend of the last few years, and data services revenues increasing by a further 10% in the year.

The reduction in call traffic revenue is a consequence of reduced fixed line traffic volumes generally, a continuing effect of the economic environment impacting on call volumes, the effects of cancellations by some medium-sized customers in late 2009 and H1 2010 and reduced call minute rates. The signing of a major line rental customer in mid-2009 has helped contribute to the increase in line rental revenues and BT's recently announced increase in its line rental estate is an encouraging indicator for this revenue stream.

2010 has also seen increasing uptake in the division's IP-based telephony solutions including SIP trunking and hosted PBX solutions, which is a trend that we expect to continue alongside the more traditional services.

Although line rental revenues attract around half the margin of call traffic, the entire revenue increase translated to margin increase due to year on year improvements in call traffic and data services margins, as a result of improved buy-in rates and the continuing focus on improving processes and rationalising suppliers.

Attrition in the division remained at its historically low levels during the year, although this was balanced by a relatively subdued level of new sales, partially reflecting our focus on good margin, low risk prospects in the current economic environment.

Administrative expenses, excluding goodwill impairment and intangibles amortisation

Sales expenses increased by £224,000 or 11% in the year, as a senior sales person was recruited, certain Redstone employees were retained and commissions were paid on increased revenues. Administrative costs remain tightly controlled and rose by £100,000 or 4% in the year, £28,000 being an increase in the holiday pay accrual arising from the increased employee numbers, and £26,000 being the costs of the Redstone acquisition.

Impairment and amortisation charges are discussed below.

The table below shows relevant headcount in relation to revenue.

* excluding redundant Redstone employees 

Interest

Net interest receivable increased from £12,000 to £29,000 in 2010, with average cash balances being higher in 2010 despite share buybacks in September and the Redstone acquisition at the end of October.

Taxation

The consolidated statement of comprehensive income shows a tax rate of 28.6% (2009 - 28.8%). The two main trading companies are taxed at 28.0% (2009 - 28.0%). Disallowables raise the effective rate above this, as did an element of the goodwill impairment charge in 2009 which did not attract tax relief.

Dividends

A second interim dividend for 2009 of 4.1p per share (£441,000 in total) was paid on 25 March 2010, together with a special interim dividend for 2009 of 2.9p per share (£312,000), and an interim dividend for 2010 of 3.9p (£420,000) was paid on 1 October 2010.

It is proposed to pay a final dividend of 4.6p in respect of 2010 on 28 April to shareholders on the register at the close of business on 25 March. The corresponding ex-dividend date will be 23 March. In accordance with accounting standards, this dividend is not accounted for in the financial statements for the period under review as it had not been committed as at 31 December 2010.

Consolidated statement of financial position

The consolidated statement of financial position remains sound, with £2.459m of cash and no debt, facilitating continued growth from existing resources.

Trade receivables have increased by £459,000 over the year, with higher levels of billing in Q4 2010 compared with Q4 2009, including the effects of Westcon and Redstone billing. Trade payables have increased by £399,000 largely due to the increase in cost of sale relating to equipment sales. These factors, plus the NI/PAYE effect of increased staff levels have resulted in an increase in tax and social security liability at the year end compared with the previous year.

The value of maintenance stock has increased by £17,000 in the year, to £621,000, due to the acquisition of £95,000 of stock from Redstone, net of regular provisioning being applied. As part of the agreement signed with Westcon, the Group took ownership of Avaya maintenance stock from Westcon which, not being material, has been incorporated in the Group's maintenance stock at nil value. The value of stock held for resale has increased from £114,000 to £380,000 as a result of a higher number of installations spanning the year end.

Deferred maintenance income has increased by £748,000, due to the increase in the maintenance base over the year, including the effects of the Westcon partnership and Redstone acquisition including £141,000 in respect of the performance obligation liability adjustment. Other deferred income has increased by £204,000 mirroring the increase in stock arising from more installation projects spanning the year end.

No significant expenditure has been required on plant and equipment during the period, with additions broadly matching depreciation, and the spend in the year weighted to improving IT security and resiliency.

Intangible assets

The Group has four intangible assets - (i) goodwill relating to the acquisition of Maintel Network Services Limited, (ii) an intangible asset represented by customer contracts and relationships acquired from District Holdings Limited, Callmaster Limited and Redstone, (iii) goodwill relating to the District and Redstone acquisitions, and (iv) a licence for billing software.

£128,000 was added to Goodwill during the year, in respect of the Redstone acquisition. Goodwill is subject to an impairment test at each reporting date. No impairment has been charged to the consolidated statement of comprehensive income in 2010 (2009 - £30,000), and the carrying value is £475,000 at 31 December 2010 (2009 - £347,000).

The intangible assets represented by purchased customer contracts and relationships were supplemented by the addition of contracts valued at £1.448m arising from the Redstone acquisition during the year. The intangible assets are subject to an amortisation charge of 17-20% of cost per annum in respect of maintenance contract relationships and 14.2% per annum in respect of network services contracts. £303,000 was amortised in 2010 (2009 - £263,000), leaving a carrying value of £1.713m (2009 - £568,000).

The billing software is amortised over a three year period and is subject to an annual impairment review. The amortisation charge in the period was £32,000, leaving a carrying value of £43,000 (2009 - £75,000).

Purchase of own shares

Further to the authority granted at the last two AGMs, the Company repurchased and cancelled 295,000 of its own shares during 2010, at prices between 140p and 165p each and a total cost of £487,000.

The share price at 31 December 2010 was 250p.

Cash flow

At 31 December 2010 the Group had cash and bank balances of £2.459m (2009 - £2.506m), all of it unrestricted. Cash generated from operating activities in the year was £4.117m, out of which £1.173m was paid in dividends, £487,000 on share buy backs, £822,000 in corporation tax and a net £1.6m on the Redstone acquisition.

The Group has no debt and invests its surplus cash with mainstream banking organisations.

Principal risks

The directors consider that the principal risks to the Group relate to technological advance, marketplace relationships and pricing strategies, and the ongoing implications of the current economic environment.

Telecommunications hardware has historically focused on a PBX core, which is gradually being replaced, at least at the higher end, by Voice over Internet Protocol (VoIP) capabilities. Customers' acceptance of the new technologies moves at varying rates, however, so that legacy systems will continue to be serviced for some time to come. Maintel sells and maintains the replacement breed of telephone system (IPPBX), and has had notable success with the transition to date. Maintenance income from the new technology can be reduced when compared to traditional telephony although every effort is made to counter this effect through reduced costs in delivering our service and by retaining the resultant enhanced calls and lines revenue.

VoIP technology is a potential threat to the reselling of call minutes with a particular type of customer. Recognising this potential risk, the Group has expanded its product portfolio with, for example, the launch of SIP trunking and hosted IP technology. In addition line rental revenues have continued to grow significantly during 2010. The development of VoIP is constantly monitored so that the Group may take advantage of profitable business models as and when they appear.

The Group is potentially subject to new pricing strategies by both competitors and suppliers, whether due to their own internal policies, in response to technological change or, in the case of call minutes and line rentals, potential regulatory change. The directors monitor margins closely and take action where appropriate.

The Group has a symbiotic relationship with Cable & Wireless Worldwide, such that Cable & Wireless Worldwide constitutes a significant share of its maintenance base. Should this relationship be terminated, the maintenance base would reduce to that extent over time, necessitating a commensurate reduction in costs. Partnerships with other integrators are being developed which have begun to reduce the percentage weighting, with the Redstone acquisition having the same effect by increasing the size of the base.

The Group's maintenance contracts have a natural finite life, and are subject to competitive attack, so that there is an inevitable customer churn. The directors monitor the rate and causes of churn and implement strategies with the objective of minimising attrition and growing the customer base organically and by way of acquisition if cost effective.

Outlook

While we see the 2011 economic environment remaining difficult as the government's policy to reduce the structural deficit continues to have an impact on company investment and cost reduction activity, Maintel is well placed to continue its growth in this environment, with the maintenance and equipment division expected to advance on a number of fronts during 2011, including the further development of partner business, the development of the Westcon partnership and the Redstone base, and progression into the Avaya marketplace capitalising on the investments in resource and critical mass established during 2010.

The enhanced engineering skills gained from recent acquisitions, especially in the areas of IP and data will allow Maintel to accelerate its growth in these areas to supplement its traditional maintenance revenues.

The network services division is expected to see slower growth in the year, with the main focus being on the maintenance and equipment division, although farming of the Westcon and Redstone bases is expected to produce positive results.

The Group is therefore well positioned to make further progress during the current year.

Eddie Buxton

Chief Executive

10 March 2011

Consolidated statement of comprehensive income

for the year to 31 December 2010

Consolidated statement of financial position

as at 31 December 2010

Consolidated statement of changes in equity

for the year to 31 December 2010

Consolidated statement of cash flows

for the year to 31 December 2010

Notes to the preliminary statement

1. Basis of preparation

The financial information set out in these preliminary results does not constitute the company's statutory accounts for 2009 or 2010.

Statutory accounts for the years ended 31 December 2010 and 31 December 2009 have been reported on by the Independent Auditors. The Independent Auditors' Report on the Annual Report and Financial Statements for 2010 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Statutory accounts for the year ended 31 December 2009 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2010 will be delivered to the Registrar in due course.

2. Accounting policies

The financial information set out in these preliminary results has been prepared using the recognition and measurement principles of International Accounting Standards, International Financial Reporting Standards and Interpretations adopted for use in the European Union (collectively Adopted IFRSs). The accounting policies adopted in this results announcement have been consistently applied to all the years presented except for the expensing in 2010 of £26,000 costs incurred in the Redstone acquisition which would have been, under prevailing accounting standards in previous years, treated as part of the cost of the acquisition, and are consistent with the policies used in the preparation of the statutory accounts for the period ended 31 December 2010. Save for this change, the principal accounting policies adopted are unchanged from those used in the preparation of the statutory accounts for the period ended 31 December 2009.

3. Segmental analysis

For management reporting purposes and operationally, the Group consists of two business segments: (i) telephone maintenance and equipment sales, and (ii) telephone network services. Each segment applies its respective resources across inter-related revenue streams which are reviewed by management collectively under these headings. The businesses of each segment and a further analysis of revenue are described under their respective headings in the Business review.

Year to 31 December 2010

Revenue is wholly attributable to the principal activities of the Group and other than sales of £10,000 to other EU countries arises predominantly within the United Kingdom.

Maintenance and equipment revenue consists of maintenance related revenue of £11.678m and equipment, installation and other revenue of £4.713m (2009 - £10.289m and £3.572m). Network services revenue consists of call traffic revenue of £2.690m, line rental revenue of £2.282m and other revenue of £0.844m (2009 - £2.826m, £2.048m and £0.829m).

Intercompany trading consists of telecommunications services, and recharges of sales, engineering and rent costs, £48,000 attributable to the Maintenance and equipment segment and £151,000 to the Network services segment.

In 2010 the Maintenance and equipment division had one customer (2009 - One) which accounted for more than 10% of its revenue, totalling £5.201m (2009 - £2.876m).

Year to 31 December 2009

Revenue is wholly attributable to the principal activities of the Group and other than sales of £51,000 to other EU countries arises predominantly within the United Kingdom.

Intercompany trading consists of telecommunications services, and recharges of sales, engineering and rent costs, £69,000 attributable to the Maintenance and equipment segment and £101,000 to the Network services segment.

4. Earnings per share

Earnings per share is calculated by dividing the profit after tax for the period by the weighted average number of shares in issue for the period, these figures being as follows:

The adjustment above in respect of goodwill impairment and intangibles amortisation, the non-trading accounting effects of the Redstone acquisition and tax thereon, has been made in order to provide a clearer picture of the trading performance of the Group.

In calculating diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has one category of potentially dilutive ordinary share, being those share options granted to employees where the exercise price is less than the average price of the Company's ordinary shares during the period.

5. Dividends

The directors propose the payment of a final dividend for 2010 of 4.6p (2009 - equivalent second interim dividend of 4.1p) per ordinary share, payable on 28 April 2011 to shareholders on the register at 25 March 2011.

6. Purchase of own shares

Pursuant to the authority granted at the last two AGMs, the Company repurchased and cancelled 295,000 of its own 1p ordinary shares during 2010, at prices between 140p and 165p each and a total cost of £487,000. The purchase represents 2.8% of the Company's issued share capital as at 31 December 2010.

7. The annual report and accounts will be posted to shareholders in due course and copies will also be available on the Group's web site www.maintel.co.uk and on request from the Company's registered office at 61 Webber Street, London SE1 0RF.