MANX.L Regulatory News (MANX)

14 April 2015

Manx Telecom plc

Full year results for the year ended 31 December 2014

Manx Telecom Plc (AIM:MANX, the "Company"), the leading communication solutions provider on the Isle of Man, announces its results for the year ended 31 December 2014.

Financial Highlights

- Revenue of £79.3m, up 4.2% (2013: £76.0m)

• Fixed line, Broadband and Data revenues grew 1.1% driven by good take-up of high speed broadband

• Strong growth in Global Solutions revenue with a 23% increase as a result of increased wholesale volumes, machine-to-machine (M2M) and Strongest Signal Mobile (branded Chameleon) services revenue

• Steady growth in Data Centre revenues, increasing 2.3% 

• Decline in Mobile revenues of 4.4%, as expected, due to a reduction in mobile termination rates

- As expected underlying EBITDA decreased moderately year on year to £27.1m due to the incremental costs of being a public company

- Continued strong cash generation with operational cash flow up 3.6% and cash conversion from underlying EBITDA greater than 100%.

- Net debt of £53.7m, equivalent to net debt/EBITDA ratio of 1.98x

- Final dividend of 6.6p, making 9.9p for the full year, representing a 7% yield on the IPO price of 142p 

Operational Highlights

- Phase I of Greenhill Data Centre completed in March 2014

- Successful launch of 4G for pay monthly customers in July 2014

- Defined benefit pension scheme closed to future accruals in August 2014

- Company share save scheme launched in December 2014 with 82% of the workforce joining

Post period events

- Contract extension with Isle of Man Government announced in February 2015

- Several new contracts won in 2015 for Phase I of the Greenhill Data Centre

o Isle of Man Government confirmed today as anchor tenant

- Agreement signed with anchor tenant for Phase II of Greenhill Data Centre

- 4G Pay As You Go launched to mobile customers in January 2015

- CEO Mike Dee to retire in H2 2015, recruitment of successor underway

Mike Dee, CEO of Manx Telecom, said,

"We have made good progress over the year, with revenue growth driven by strong sales in Global Solutions, as well as positive take-up of high speed broadband on the island. After a slower than anticipated start the Greenhill Data Centre now has a number of new local customers ready to move in. This, and the continuing success of 4G, gives us confidence that the underlying strength in the business will continue in the year ahead."

Kevin Walsh, Non-Executive Chairman, added,

"The company remains committed to creating shareholder value through our dual strategy of defending our significant on-island presence, whilst seeking off-island opportunities to exploit and leverage our data centre and mobile infrastructure. During 2014, we successfully followed this strategy and will strive to do the same through 2015.

"We are delighted to be paying a final dividend of 6.6p, meeting the commitment given when the Company was admitted to AIM in February 2014. Together with the interim dividend, this constitutes a 7% yield for the full year based on our IPO placing price of 142p.

"Following the recent announcement of Mike Dee's intention to retire in H2 2015 I wish to thank Mike for 31 years' service and commitment to Manx Telecom. He will leave the company well positioned for the future and recruitment for his successor has commenced."

Chairman's Statement

I am pleased to report a positive set of results for 2014, which are in line with the Board's expectations.

Revenue continues to show steady growth, along with a small expected decline in EBITDA as a result of the additional costs associated with being a public company. Cash generated from operating activities was strong notwithstanding continued significant investment in the future growth of the business.

The move to public company status continues to be well received by the Isle of Man Government and our customers, providing ownership certainty, greater transparency and more opportunities to grow.

During the year, our domestic business has performed well, with growth in both the core fixed, broadband and data business and also the data centre business. We have continued to invest in our infrastructure, both to facilitate further growth and also to defend our market position. We completed Phase I of our data centre investment programme which has provided an additional 100 racks to our estate, and rolled out a 4G mobile network across the Isle of Man to reach 99% of the population. We have continued the roll-out of fibre across the island and can now reach 87% of homes. More recently, we have announced the roll-out of superfast broadband for 50% of the homes and businesses on the island, reaching speeds of up to 80 Megabits per second and the launch of 4G to our pay as you go customers. An increased focus on Global Solutions saw a good return.

The regulatory and economic environment on the island remains supportive for the growth of the business. The local economy continues to grow, with low levels of unemployment (c.2%) and a continued commitment to maintaining the current policy on taxation (zero percent corporation tax), and incentives to attract high net worth individuals to the island.

Our People

The good performance of the business in 2014 is a testament to the excellent customer service, experience and professionalism of everyone involved in Manx Telecom. We launched our first share save scheme to all employees during 2014 and received an excellent take up of over 80%, enabling the vast majority of our people to benefit from the continued success of Manx Telecom.

Following the recent announcement of Mike Dee's intention to retire in H2 2015 I wish to thank Mike for 31 years' service and commitment to Manx Telecom. He will leave the company well positioned for the future and recruitment for his successor has commenced.

Dividend Policy

The Company paid its maiden interim dividend of 3.3p per share in November 2014 and intends to pay a final dividend of 6.6p on 25 June 2015. The full year dividend of 9.9p represents a 7% yield at the IPO price and is in line with the policy communicated when the Company was admitted to AIM. The shares will trade ex-dividend on 28 May 2015 and will have a record date of 29 May 2015.

As previously stated, the Company intends to operate a progressive dividend policy moving forward taking into account our profitability, underlying growth in earnings and cash flows.

Outlook

The Company remains committed to our dual strategy of defending our significant on-island presence, whilst seeking off-island opportunities to exploit and leverage our data centre and mobile infrastructure.

After a slower than anticipated start, demand for our data centre services has increased and we have signed an agreement with an anchor tenant for our data centre Phase II expansion. 

2014 was a particularly strong year for Global Solutions and we do not expect this area to record the same level of growth in 2015, however we remain encouraged by its growth potential.

We continue to invest significantly in our on-island infrastructure, demonstrating our continued commitment to the island community.

We remain committed to delivering a progressive dividend in 2015 and confident in the longer term growth prospects of the business.

CEO's Review

Looking back at our achievements in 2014 I am pleased to say that we had a very busy and successful year.

Following the IPO in February 2014, we have continued to focus on our core business of providing a wide range of communications services to consumers, businesses and the public sector on the Isle of Man. We have also continued to expand our data centre footprint and have had success in the local market for high value managed services contracts.

Our Global Solutions business continues to show good growth, utilising our various mobile virtual network operator (MVNO) and international roaming relationships to address the international traveller market, as well as exploiting the opportunities arising from the increasing penetration of connected devices in the M2M market.

We continue to focus on providing a superior customer experience which, coupled with a reliable and trustworthy reputation, has enabled us to retain high market share in the local fixed, broadband and mobile markets despite increased competition.

Overall revenue has grown by 4.2% in the year driven primarily by growth in the Global Solutions business, helped by our move into managed services and an increased sales focus.

EBITDA of £27.1m has decreased by 1.5%, as expected, due to the additional costs of being a public company. There has been a slight decline in EBITDA margin in the year, mainly driven by the mix of business within Global Solutions, with an increase in sales of lower margin wholesale voice and SMS. We remain committed to focusing on higher margin business across the Group, with an emphasis on sales of Chameleon SIMs and M2M within Global Solutions and a drive towards managed hosting sales within the Data Centre business.

Cash generation remains strong and we remain committed to a progressive dividend policy.

We have been successful in meeting our targets for key capital projects in the year including completion of Phase I of the new data centre and the launch of all island 4G coverage. We have achieved this within the capital budget set at the start of the year. The 4G launch has been highly successful with take-up and usage exceeding our initial expectations. Pre-paid 4G services were launched in early 2015.

Whilst the contracts and associated revenues for Phase I of GDC have taken longer than expected to complete, we have now successfully signed new contracts with key corporate customers and the Government, and as a result have started to generate data services revenues from this increased capacity. We are looking to develop Phase II of the data centre later in 2015, given we now have an agreement signed with an anchor tenant.

Fixed, Broadband and Data Services

The fixed, broadband and data services business is the largest business by revenue contribution, and delivered solid revenue growth in the period, with revenues up by 1.1% to £31.3m (FY13: £31.0m).

This part of the business provides fixed line voice, broadband and connectivity services to both residential and business customers, connecting approximately 37,000 homes and over 4,000 businesses. At December 2014 the Company provided approximately 50,900 voice lines. Broadband customers have access to ADSL and high speed VDSL broadband services throughout the island via a high quality copper and fibre network. At December 2014 Manx Telecom had approximately 25,500 retail broadband customers with the total broadband base being approximately 32,000 customers.

Manx Telecom also delivers connectivity solutions which can include voice, data and video services.

The ongoing roll-out of high speed broadband resulted in total broadband revenues growing 5% in the year. This was partly due to an increase in broadband lines but also due to upsell from basic to high speed broadband. We expect further growth in take up of higher speed broadband in the year ahead.

Despite continuing increases in line rental charges, core fixed revenues fell 1% this year as call usage continues to reduce.

Data services grew by approximately 1% this year with further growth expected as customers come on line in the new data centre.

Mobile

The Mobile business offers a combination of pre-paid and post-paid tariffs, addressing all market segments and utilising 2G/3G and, since July 2014, 4G technology. It also sells mobile hardware (handsets and accessories) via the Manx Telecom retail outlet and online. The business continues to retain a majority market share on the island, serving a substantial proportion of the available customer base.

Mid way through the year the Group replaced the existing 2G and 3G radio access equipment and introduced new 4G services, giving enhanced speeds and data services across the island. The introduction of new 4G services has been well received and our early progress is ahead of our major competitor, which introduced its first 4G service in late February 2015, seven months after our launch.

We have been encouraged by the positive uptake of 4G by our customers and the high volume of data that they are consuming. 4G is available on 99% of the island and, on average, a Manx Telecom customer uses two and a half times more data on 4G than they did on 2G or 3G previously. We expect rises in both data usage and volume to continue as smartphone penetration increases among our customer base.

The 4% fall in mobile revenues in the year is primarily due to a fall in mobile termination rates in accordance with the glide path agreed with the regulator (ending in 2015).

As at December 2014, we had approximately 35,100 pre-paid customers (FY13: 36,000) and 28,900 post-paid customers (FY13: 28,700). The introduction of 4G and general up-sell of data packages has contributed to a 5% increase in post-paid ARPU in 2014 whilst pre-paid ARPU has remained flat.

Data Centre

The Data Centre business offers co-location, managed hosting, cloud and disaster recovery services to an international and local corporate client base. These services are supplied by three data centres at Douglas North, Douglas Central and Greenhill Data Centre (GDC). The data centres at GDC and Douglas North are ranked as Tier III data centres (according to Telecommunications Industry Association standards). This provides high standards of data security, resilience and expandable hosting capacity, including business continuity and distributed denial of service protection (DDOS).

The business has generated revenue growth of 2.3% to £6.6m (FY13: £6.5m) in 2014. This level of growth is lower than initially expected due to it taking longer than expected to finalise contracts for the new capacity added in the year. In 2015, demand has already picked up and we have a number of local companies set to move into the GDC over the next few months. This includes the Isle of Man Government which has today been confirmed as the anchor tenant for Phase 1 of the GDC having signed a five year contract from 1 February 2015. A signed agreement with another significant anchor tenant means that we are looking to start development of GDC's Phase II extension later in 2015.

Global Solutions

The Global Solutions business generates revenue from services which run on our domestic mobile technology platform and international roaming agreements. These enable us to offer a variety of products to UK and international partners utilising Manx Telecom SIM cards.

These revenues arise from four key areas, wholesale voice and SMS, international traveller market, M2M and strongest signal roaming (Chameleon).

Global Solutions revenues have grown by 22.8% to £16.7m (FY13: £13.6m) driven by strong growth in lower margin wholesale voice and SMS, and to a lesser extent, M2M, which doubled revenue in the period. A drop in termination rates means that the wholesale voice and SMS growth shown in 2014 is not likely to be continued into 2015 and the focus will be on growing the higher margin contribution from Chameleon and M2M. We have continued to focus on these areas in terms of technical and sales/commercial expertise, resulting in high customer satisfaction and a positive outlook for 2015.

Other Revenues

Other revenues include the advertising revenue from the Manx Telecom telephone directory, hardware equipment sales, interconnection fees from other operators and managed services.

Other revenue increased by 8.1% in the year to £6.3m (FY13: £5.8m). Growth was driven by a 36% increase in hardware equipment sales and continued success in managed services, with revenue growth of 3%. This performance more than compensates for the continuing and expected decline in directory advertising revenues, which saw turnover decrease by 6% in the period.

Summary

In summary, this is a pleasing set of results, with revenue, cash generation, and EBITDA in line with the Board's expectations.

We continue to focus on providing a high quality and innovative service to our local customer base. Our commitment to continuing investment has also been well received by the Isle of Man Government, which has recognised this by recently renewing a number of agreements with the Company.

We are looking forward to the revenue streams from new GDC customers coming through early in 2015 and will continue to focus on attracting business for Phases II and III of GDC's expansion. We will continue to focus on our Global Solutions business as well as seeking new opportunities to expand our business using our core strengths in terms of network, people and customer service.

Financial Review

Group revenue increased by 4.2% to £79.3m (2013: £76.0m), with growth in our core on-island Fixed, Broadband and Data business, supplemented by good growth in our Global Solutions, Data Centre and Other revenue streams.

The Fixed Line, Broadband and Data business remained steady, with revenue growth of 1.1% to £31.3m (2013: £31.0m). Global Solutions performed well in 2014 with growth of 23% to £16.7m (2013: £13.6m). The data centre business was also steady at £6.6m (2013: £6.5m), with growth lower than initially anticipated due to a delay in the signing of new customer contracts. Mobile revenues declined, in line with expectations, to £18.4m (2013: £19.2m) primarily due to anticipated changes to termination rates. Other revenues were £6.3m (2013: £5.8m) following an increase in kit sales during the year.

The Group generated underlying EBITDA of £27.1m (2013: £27.5m), in line with expectations. This was lower than the previous year due to the increased cost of being a public company. The Group's EBITDA margin decreased to 34.2% (2013: 36.1%) due to a change in product mix during the year, particularly within Global Solutions which delivered strong sales of lower margin wholesale voice and SMS.

Depreciation and amortisation was £9.5m (2013: £9.3m) which includes charges for network infrastructure (fixed network, broadband network and mobile network) as well as IT equipment and office equipment.

Underlying operating profit reduced by 2.8% to £17.6m (2013: £18.1m) before a one-off impairment of equipment and a one-off pension adjustment following the closure of our defined benefit pension scheme to future accruals.

We recorded an impairment of equipment of £0.6m in relation to the write down of our pre-paid mobile platform and elements of our fixed voice network which are being replaced in 2015.

Following the closure of our defined benefit pension scheme to future accruals we recorded a one-off non-cash credit of £7.0m which partially offset previous years' losses. This was in turn offset by a cash payment of £0.8m to transition members to our defined contribution pension scheme.

Underlying profit before tax increased by 77.1% to £12.9m (2013: £7.3m) primarily due to lower interest charges following the reduced level of debt post IPO.

Underlying diluted EPS was 12.17p, in line with expectations - based on total outstanding shares as at 31 December 2014 of 112,959,787. It is worth noting that FY 2013 EPS of 14.69p was calculated under the previous private equity capital structure and as such reflects a very different capital structure to the one now in place.

The Company paid a maiden interim dividend of 3.3p in November 2014 and it will pay a final dividend of 6.6p in June 2015.

Costs

Costs (excluding costs associated with the IPO, finance costs and pension reorganisation costs) increased by 2.7%, or £1.7m, in the year. The main component of costs is staff, whose cost increased by 3.1% in the period, and included bonus payments based upon the successful achievement of targets across the Group.

Roaming costs increased by 22% in the year, driven by the continued success of our Global Solutions business. Energy costs were flat during 2014 reflecting slower than expected initial occupancy of our new data centre. Mobile handset costs were 4% lower due to iPhone 6 supply constraints over the Christmas period, whilst maintenance charges increased 14% primarily due to our Next Generation Network ('NGN') completing its warranty period.

Net finance costs

Net finance costs were £8.4m (2013: £15.9m) including interest payments on bank facilities of £2.9m (2013: £7.1m), and interest payable on shareholder loan notes of £0.3m (2013: £3.9m).

Also included within the finance costs was a £4.6m charge against previously capitalised transaction charges, following the changes to financing arising from the IPO in February 2014.

One-off costs associated with the IPO and related restructuring, charged to the income statement, were £8.0m.

We recorded a net loss of £1.3m on interest rate swaps, of which £0.3m related to the early cancellation of an interest rate swap in relation to the pre-IPO debt and an unrealised loss of £1.0m on interest rate swaps, having hedged £50m of our £70m gross IPO debt through its maturity in June 2018 at an all-in rate of 3.7% per annum.

Taxation

There is no corporate taxation payable on our profits for either 2014 and the comparative year. We have the benefit of an Isle of Man zero percent corporate tax rate.

Cash flow

Cash generated from operating activities increased by 3.6% to £29.1m, (2013: £28.1m). This represents an underlying EBITDA cash conversion of 107% (2013: 102%), the improvement driven primarily by good working capital management. The Company reported a working capital inflow of £1.6m, which included an accrual for final payments for 4G of £3m, due in 2015.

Our free cash flow after investing activities was 7.5% lower at £14.8m (2013: £16.0m), out of which we serviced our borrowings, financed our IPO and paid our maiden dividend to shareholders.

Good cash generation enabled us to reduce our net debt to £53.7m, equivalent to 1.98x Adjusted EBITDA.

Capital expenditure

Capital expenditure for 2014, including intangibles, was £12.6m (2013: £10.0m), and included a £3m accrual for our 4G mobile network relating to final payments due in 2015. Adjusting for the 4G accrual, capital expenditure including intangibles was £9.6m.

Significant capital expenditure in the period included the launch of the 4G mobile network and completion of Phase I of our new data centre in March 2014 which cost £3.6m (£1.5m paid in 2014). We were pleased to receive a £0.3m grant from the Isle of Man Government by way of support for this investment.

The remaining capital expenditure was spread across a number of business areas including network enhancements, IT and customer projects.

Balance sheet

Property, plant and equipment increased during the year by £2.5m to £65.1m primarily due to the completion of our 4G mobile network project in 2014. Capital expenditure, including intangibles, of £12.6m exceeded depreciation of £9.3m but included an accrual for the completion of the 4G mobile network of £3.0m.

We retain goodwill of £84.3m on the balance sheet arising from the purchase of Manx Telecom from Telefonica in 2010, which is robustly supported by current valuations.

The Group operates two pension schemes, a defined benefit scheme, and a defined contribution plan. During 2014 the defined benefit scheme was closed to future accruals, and all current members transferred to a defined contributions scheme. Under accounting standard IAS19 the defined benefit scheme is shown as an asset of £2.2m (2013: £6.4m liability), in contrast to the previous full actuarial valuation which was completed in March 2014 and showed a deficit of £7.7m.

Current assets increased to £32.7m (2013: £31.9m). Cash held at the end of the period, increased to £15.2m (2013: £13.5m). Trade receivables improved by £0.5m due to lower prepayments and an increase in the provision for bad debts.

Current liabilities increased to £27.5m (2013: £25.8m) primarily due to a provision for final payments for the 4G mobile network. In September 2014 the company entered an interest rate swap which covered £50m of its banking debt (£70m) through to its maturity in June 2018. The fair value of the interest rate swap was a £1.0m liability (2013: £0.6m asset).

Non-current liabilities reduced significantly to £68.9m (2013: £153.1m) primarily following the IPO in February 2014. Borrowings and interest payable were £68.9m (2013: £115.7m), following the repayment of the debt which was in place pre-IPO and entry into a new £70m facility. All shareholder loans were repaid on admission to AIM.

Net debt ended the period at £53.7m down from £134.1m at the end of 2013, following the capital raise at IPO, subsequent repayment of bank and shareholder debt and entry into a new banking arrangement as a public company, establishing a more conservative capital structure for the company than under previous ownership.

During 2014 we issued a number of free shares to our workforce and introduced a share save scheme open to all employees. We are very pleased to report that over 80% of our workforce entered the share save scheme.

Consolidated statement of comprehensive income

for the year ended 31 December 2014

Consolidated statement of financial position

as at 31 December 2014

Consolidated statement of changes in equity

for the year ended 31 December 2014

Consolidated statement of cash flows

for the year ended 31 December 2014

notes

1 Operating segments

The Group has five reportable revenue segments which management report on and base their strategic decisions on:

The segmental analysis shows revenue classified according to market source. However, the Group is not structured on a divisional basis and has functional departments, processes, assets and obligations which serve each of these revenue streams. These are not allocated in the financial reports received by the Board and its decisions are not routinely based on any such identification. Consequently the analysis shown above does not extend to any segmentation of profits and net assets.

2 Operating profit

The operating profit is stated after charging/(crediting) the following:

Listing costs incurred as a result of the Admission and refinancing costs relating to the Admission have been charged to equity, profit or loss or capitalised as set out below.

Listing costs have been recognised as a reduction to share premium within equity to the extent that they relate to the newly issued shares. All other costs that do not qualify for recognition in equity are recognised in financial expenses in the profit or loss.

Non-GAAP measures

The adjustments made to reported profit before tax and operating profit are income and charges that are one-off in nature, significant and distort the Group's underlying performance. These adjustments include:

· Impairment of equipment. During the current year, following the implementation of 4G which was completed during 2014, the Group has made further impairments of equipment used to provide mobile prepaid services and fixed voice network equipment, resulting in an expense of £592,000.

· Refinancing costs. As a result of the refinancing described in note 13, net realised and unrealised losses of £291,000 were incurred in exiting the interest rate swap held in connection with the prior financing arrangements, which is not considered a regular finance cost to the Group.

· Listing expenses. On 10 February 2014, the Company was admitted to AIM. One off listing costs charged to profit or loss in the period were £7,991,000, which include £475,000 in respect of share options which vested as a result of the admission to AIM.

· Pension scheme reorganisation. On 31 August 2014 the Manx Telecom Limited Combined Pension Scheme was closed to future accrual. In connection with the closure of the Manx Telecom Limited Combined Pension Scheme to future accrual, one-off expenses of £788,000 were incurred, including additional payments to members of the scheme of £666,000 and other related costs of £122,000. As a result of the changes made to the scheme, a one off curtailment credit of £7,000,000 to past service cost was recorded. This credit has arisen from changes in actuarial assumptions regarding future salary increases, which are replaced with pension increases in deferment given the scheme is now closed to future accrual.

· Release of capitalised loan transaction costs. Due to the refinancing of the Group following Admission, unamortised transaction costs of £4,567,000 relating to prior financing arrangements were released to the statement of comprehensive income within finance expenses.

3 Finance income and expense

Recognised in profit or loss

In May 2010 Hg Capital LLP acquired Manx Telecom Trading Limited and as a result the Group obtained bank debt and incurred financing costs of £5,341,000. These costs were capitalised. The debt was subsequently repaid as a result of refinancing in April 2013. The remaining unamortised financing costs were charged to the Consolidated Statement of Comprehensive Income in 2013.

Refinancing costs incurred in as a result of refinancing in April 2013 of £5,239,115 were capitalised in 2013. The debt was subsequently repaid as a result of the Admission and refinancing in February 2014. The remaining unamortised financing costs of £4,567,000 were charged to the Consolidated Statement of Comprehensive Income in 2014.

The new debt arrangement incurred directly related expenses of £1,475,000 which have been capitalised and which are being amortised over the period of the loan facility. Amortisation of £301,000 is included within financial expenses in the current year.

Cautionary statement

This announcement contains certain forward looking statements with respect to the financial condition, results, operations and business of Manx Telecom plc. These statements and forecasts may involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. Nothing in this announcement should be construed as a profit forecast.