MANX.L Regulatory News (MANX)

Manx Telecom Plc

Results for the six months ended 30 June 2018

Solid performance across the business and investment for growth

Manx Telecom Plc (AIM: MANX), ("Manx Telecom", the "Company" or the "Group") the leading communication solutions provider on the Isle of Man, announces its results for the six months ended 30 June 2018.

Financial Highlights

· Revenues of £38.1m (H1 2017: £38.5m)

- Fixed Line, Broadband and Data revenues solid at £15.5m (H1 2017: £15.6m)

- Mobile revenues as prior year at £10.2m (H1 2017: £10.2m)

- Global Solutions revenue as prior year at £7.9m (H1 2017: £7.9m)

- Data Centre revenues as prior year at £2.3m (H1 2017: £2.3m)

- Other revenues at £2.3m (H1 2017: £2.5m)

· Underlying EBITDA lower at £12.4m (H1 2017: £12.6m). Reported EBITDA higher at £10.9m (H1 2017: £10.7m)

· Underlying Profit Before Tax at £6.6m (H1 2017: £6.7m)

· Reported Profit Before Tax up 4.9% at £5.5m (H1 2017: £5.2m)

· Continued strong cash conversion with underlying operating cash flow at £10.1m (H1 2017: £10.2m). Reported operating cash flow of £8.0m (H1 2017: £5.4m)

· Net debt of £64.0m (H1 2017: £61.7m) after investment in the Transformation Programme and the launch of our Goshawk Communications hearing loss product - this level of net debt is expected to fall in the second half of the year

· Interim dividend of 4.10p (H1 2017: 3.90p), following our progressive dividend policy

Operational Highlights

· Market leading position maintained in the core market of Fixed, Broadband, Data and Mobile

· Fibre to the Premise ("FTTP") rollout is progressing well with over 6% of premises now passed and expected to increase to 12% of premises passed by the end of H2

· Further progress with Transformation Programme, remains on schedule to complete in H2

Significant Events

· Agreement signed with BT to leverage its EE mobile network to launch the Goshawk proposition as an Mobile Virtual Network Operator ("MVNO") in the UK in 2019, following an Isle of Man launch this year

· Very positive results seen from the Goshawk hearing loss product pilot

· Iarla Hughes has agreed to join the Board as CFO in November

Gary Lamb, Chief Executive Officer, said:

"We have had another solid six months, with performance in line with the Board's expectations. A good performance by the core business against a competitive market backdrop allowed continued investment in our areas of highest growth potential: Global Solutions, managed services and Vannin Ventures. We are particularly excited by our high potential Goshawk product to be initially launched in the Isle of Man during September and then in the UK next year in partnership with BT/EE. This product is a global first for those with hearing loss and presents a significant medium-term growth opportunity for Manx Telecom.

"We are on track with our new ultrafast FTTP broadband rollout ("Fibre to the Premise") with over 6% of premises passed and 12% due to be passed by the year end. Uptake has been encouraging and we are expecting further growth in H2. We will provide an update later this year on our efforts to accelerate the rollout working with the Government.

"We remain confident in the long-term prospects of the business which continues to trade in line with the Board's expectations for the full year Underlying levels of cash flow remain strong which underpins our increased interim dividend payment and will enable us to continue our investment in growth."

1 Results for the six months ending 30 June 2018 are on an IFRS 15 basis unless indicated. Results for the six months ending 30 June 2017 are on an IAS 18 basis.The implementation of IFRS 15 accounts for £0.5m in revenue and £0.5m in EBITDA. Please see note 3 for further details of these adjustments and the impact the transition method has had on opening retained earnings.2 Underlying results are alternative performance measures which are relevant to an understanding of the Group's financial performance which are not defined in IFRS and are therefore termed 'non-GAAP' measures. Underlying results are adjusted for specific items, a full list of which is provided in note 18. See note 18 for further details, including definitions of terms and for reconciliations to the most comparable GAAP measure.

3 EBITDA and Free Cash Flow are non-GAAP measures and are defined in note 18.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

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CEO's review

The first six months showed a solid performance across all areas of the Group, in line with the Board's expectations. Group revenues for the period were slightly lower than in the comparable period last year primarily as a result of lower kit sales and lower mobile roaming revenues, partly offset by Smartroam, our UK and EU roaming package, introduced in H2 2017. These decreases have been offset in part by £0.5m revenues recognised as a result of the adoption of IFRS 15. Revenue from Global Solutions remains robust and shows opportunity for growth through the remainder of the year. Data Centre revenues were in line with H1 2017 and show potential for H2 growth with the introduction of our new cloud product offerings.

Underlying EBITDA was down during the half year at £12.4m (H1 2017: £12.6m), with reported EBITDA up at £10.9m (H1 2017: £10.7m). The decrease in Underlying EBITDA was predominately due to one of our smaller Data Centre customers ceasing to trade and lower roaming revenues. Underlying profit before tax was £6.6m (H1 2017: £6.7m) with reported profit before tax at £5.5m (H1 2017: £5.2m). Underlying diluted EPS was 5.87p (H1 2017: 5.88p) with reported diluted EPS at 4.87p (H1 2017: 4.57p).

Underlying operating cash flow was £10.1m (H1 2017: £10.2m), with Underlying EBITDA cash conversion up at 81.7% (H1 2017: 81.3%). Reported EBITDA cash conversion was 73.9% (H1 2017: 50.8%). The improvement is due to better working capital management compared with the same period last year.

Reported operating cashflow, which takes into account the exceptional costs associated with the Transformation Programme and Goshawk product launch costs, was £8.0m (H1 2017: £5.4m).

The Board remains confident in the strength of the underlying cash flows of the Group and as such has declared an interim dividend of 4.1p (H1 2017: 3.9p), representing growth of 5.1% over the same period last year, in line with its progressive dividend policy.

The Isle of Man economy continues to perform well, with an unemployment rate of less than 1%. Manx Telecom continues to support the Isle of Man Government in attracting business to the Island, and the telecommunications infrastructure and services that Manx Telecom provides, forms an essential part of the Island's continued success.

Our Transformation Programme remains on track, with benefits starting to accrue as systems and processes are implemented. Most of the costs have now been incurred, with further costs expected to be incurred as scheduled up to the end of the programme in H2.

We continue to invest for growth in Vannin Ventures and signed a contract with BT/EE to enable the launch of the Goshawk hearing loss product in the UK next year, following the planned Isle of Man full launch in the second half of 2018. This will also provide a platform for growth in the Global Solutions business. 

We are delighted to report that Iarla Hughes has agreed to join the Board as CFO and is expected to be appointed in November 2018. Iarla joins from International Aerospace Coatings LLP, where he has been Group Chief Financial Officer and Company Secretary for 3 years. With over 8 years' experience in the telecoms industry, Iarla previously held a General Manager position at Cable and Wireless Ireland before becoming CFO at Digicel West Indies. He spent a number of years in various senior finance roles at Cable and Wireless.

Results overview

Fixed Line, Broadband and Data Services

Fixed Line, Broadband and Data Services provide fixed line voice, broadband and connectivity services for customers, connecting approximately 37,000 homes and 4,000 businesses on the Isle of Man. It is our largest business, representing 41% of Company revenues in the period.

Fixed Line revenues were broadly flat. Without the impact of IFRS 15, revenues were up £0.1m following the introduction of our changes to Fixed Line Tariffs in March 2018.

Broadband and Data Services revenue were in line with revenue in H1 2017.

Our high-speed broadband services, known as Ultima and Ultima Plus, now reach 93% of households, with 56% penetration (31 December 2017: 52%, 30 June 2017: 45%).

Our ultrafast Fibre to the Premise (FTTP) rollout progressed well during the first half of 2018, and in line with our targets, covering key business districts and industrial estates across the Island, with over 6% premises now passed. This figure is expected to increase to 12% by the end of the year, the cost of which is included within our normal capital expenditure. There has been good uptake of these higher average revenue per user (ARPU) services, which has largely helped to offset some of the impact of customers moving to 4G broadband.

Mobile

Our award-winning 4G network provides 99% population coverage at speeds 10 times faster than 3G services and is available to our post-paid and pre-paid customers.

Mobile revenue was in line with our expectations and flat year on year, boosted in part by accounting changes under IFRS 15. Excluding the impact of these changes and new retail hardware product offerings, revenues were down by £0.5m. This is due to reduced roaming revenues following the introduction of lower roaming rates across the EU, offset in part by our Smartroam product. In addition, we have reduced costs through negotiation of lower rates with our roaming partners. In addition, as customers continue to move on to the Smartroam higher tariffs, contract subscription revenues increase with higher ARPU.

Global Solutions

The Global Solutions business generates revenue from services which run on our domestic mobile technology platform and use our international roaming agreements. This enables us to offer a variety of products to UK and international partners who use our Global Solutions sim cards. There are four key revenue areas: wholesale SMS and voice, international traveler market, M2M and Strongest Signal Mobile (branded Chameleon).

Global Solutions revenue performed well by delivering revenues of £7.9m in the first half of the year (H1 2017: £7.9m) and continuing the strong momentum delivered in 2017. We have some exciting products in the pipeline that support our growth aspirations for the business and look forward to leveraging significant benefit from the new major network contract we have secured for the Goshawk product launch.

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 Tier III designed 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).

Data Centre revenues were broadly in line with revenues in H1 2017, with a decline of 2.9% largely due to one of our smaller Data Centre customers ceasing to trade. We remain positive about the revenue growth associated with new cloud-based products which will become available in H2.

Other

Other revenues include the advertising revenue from our telephone directory, hardware equipment sales, inter-connection fees, managed services and revenue from our subsidiaries, including the provision of telecommunications software.

Other revenues during the period fell to £2.3m (H1 2017: £2.5m) with the reduction mainly due to lower low-margin kit sales than experienced in H1 2017.

Outlook

Current trading remains in line with the Board's expectations. Overall growth in our core business is expected within Mobile and Broadband balanced by moderate decline in Fixed Line and Data Services revenues. We expect that our Data Centre business will see growth in H2, with take up of our cloud-based offerings. We are excited about growth in our Global Solutions business during H2 from our existing partnerships.

Net debt is expected to reduce in the second half with the majority of cash outflows relating to the Transformation Programme recognised in the first half of the year.

We continue to build our growth platform in Vannin Ventures which will deliver meaningful growth in the medium to long term with projects like Goshawk, whilst we continue investing to maintain our core business on the Isle of Man.

We remain confident in the outlook for the Group, reflected in our commitment to maintain our progressive dividend policy. We continue to generate strong underlying levels of operating cash flow from our core business, which enables us to support our ongoing investment programme and to create further value for shareholders.

Financial review

Group revenue declined by 0.9% to £38.1m (H1 2017: £38.5m) mainly due to a reduction in Other revenues from lower low-margin kit sales compared to H1 2017 and £0.6m lower roaming revenues. These decreases were offset in part by the application of IFRS 15, recognising £0.5m revenue from the provision of handsets upfront net of a reduction in recognition of Fixed Line connection fees.

The Fixed Line, Broadband and Data business was in line with H1 2017 at £15.5m (H1: 2017: £15.6) with a £0.1m reduction in connection fee income on application of IFRS 15 offset by changes in our Fixed Line Tariffs. Mobile revenues remained in line with H1 2017 at £10.2m. Without the impact of IFRS 15 revenue was £0.5m, or 4.9% lower than H1 2017. This was as a result of lower roaming revenues following the introduction of lower roaming rates across the EU, offset in part by our Smartroam product. The Global Solutions business performed well with H1 2017 revenues at £7.9m. Data Centre revenues reduced slightly by 2.9% at £2.3m (H1 2017 £2.3m). Other revenues were down by 8.0% to £2.3m (H1 2017 £2.5m) due to lower low-margin kit sales than H1 2017.

The Group generated underlying EBITDA of £12.4m (H1 2017: £12.6m) and reported EBITDA of £10.9m (H1 2017: £10.7m). The lower underlying EBITDA was primarily due to one of our smaller Data Centre customers ceasing to trade and as a result of lower roaming revenues offset in part by lower roaming costs. Underlying EBITDA margin was consistent at 32.5% (H1 2017 32.7%) and reported EBITDA margin increased to 28.5% (H1 2017: 27.7%).

Depreciation and amortisation was £4.7m (H1 2017: £4.8m) which decreased as a result of the timing of higher disposals in H1 2018 compared to H1 2017.

Underlying operating profit was £7.7m (H1 2017: £7.8m) reflecting the decrease in underlying EBITDA and decreased depreciation expense. Reported operating profit was £6.2m (H1 2017: £5.9m) due to the impact of the Transformation Programme costs and Goshawk Product Launch costs of £1.1m and £0.4m respectively.

Underlying profit before tax was £6.6m (H1 2017 £6.7m) which is calculated as profit before tax, adjusted for the Transformation Programme related expenses of £1.1m, Goshawk product launch costs of £0.4m and a £0.4m gain on re-measurement of interest rate swap liability. Before adjusting for these items, reported profit before tax was £5.5m (H1 2017: £5.2m).

Underlying diluted EPS was 5.87p (H1 2017: 5.88p) resulting from the lower underlying profit before tax. Reported diluted EPS was up at 4.87p (H1 2017: 4.57p).

The Company has declared an interim dividend of 4.1p, a 5.1% or 0.2p increase on last year.

Costs

Costs of sales increased by 1.8% to £15.8m (H1 2017 £15.5m), primarily due increased hardware costs offset by lower roaming costs.

Administrative expenses decreased by 5.4% to £16.2m (H1 2017: £17.1m) due to lower pay costs following the Transformation Programme.

Net finance costs remained stable at £1.1m (H1 2017: £1.1m).

We recorded a realised gain of £0.3m and an unrealised gain of £0.1m (H1 2017: unrealised gain £0.4m) on interest rate swaps with two of the three swaps in place having matured on 29 June 2018.

There is no corporation tax payable on the Company's profits for H1 2018 or last year. The Company enjoys the benefit of an Isle of Man 0% corporation tax rate.

Cash flow

Cash generated from underlying operating activities remained stable at £10.1m (H1 2017: £10.2m). This represents an underlying EBITDA cash conversion of 81.7% (H1 2017: 81.3%) with the slight improvement aided by better working capital management.

Cash generated from reported operating activities increased by 48.7% to £8.0m (H1 2017: £5.4m).

Underlying operating cash flow includes adjustments for the following specific items;

1Reported operating Cash Flow is referred to as Net cash generated from operating activities in the Condensed Interim Consolidated Statement of Cash Flows.

Product launch costs relate to the expenses incurred in relation to the launch of the Goshawk hearing loss product.

Reported free cash flow after investing activities was a cash inflow of £2.5m (H1 2017: £0.1m cash outflow) primarily due to improvements in working capital. After adjusting for these items, underlying free cash flow was £6.5m (H1 2017: £7.3m).

Balance Sheet

Property, plant and equipment increased to £58.9m (H1 2017: £58.5m). Capital additions were £4.1m in H1 2018 compared with £2.8m in H1 2017 with the increase attributable to higher capital additions in relation to the Transformation Programme as IT systems are implemented. Depreciation at £4.5m has decreased from the prior year (H1 2017: £4.7m) as a result of higher disposals offset in part by the higher capital additions.

Goodwill of £87.9m remained static, with the balance relating to the purchase of Partitionware in December 2016 and the original purchase of Manx Telecom from Telefonica in 2010 which is robustly supported by current valuations.

Current assets increased to £39.4m (H1 2017: £35.7m), attributable to the recognition of Contract Assets on application of IFRS 15, higher inventories and trade and other receivables, offset by reduced cash levels. Cash held at the end of the period decreased to £5.4m from £7.5m at H1 2017 following cash outflows on the Transformation Programme.

Trade and other payables increased from £26.1m in H1 2017 to £31.5m in H1 2018, this increase along with the increase in Contract Liabilities of £0.3m, following application of IFRS 15, increased current liabilities to £31.8m (H1 2017: £26.7m).

Net debt increased to £64.0m (H1 2017 £61.7m) as a result of cash flows described above, investment in our Transformation Programme and the Goshawk product launch and is expected to fall in H2. The cash and facilities available to the Group as at 30 June 2018 include the long-term borrowings facility of £80m, of which as at 30 June 2018, £10m was unutilised.

Condensed Interim Consolidated Statement of Comprehensive Income

\* The Group has initially applied IFRS 15 at 1 January 2018. Under the transition method chosen, comparative information is not restated.

The notes form an integral part of these condensed interim financial statements.

Condensed Interim Consolidated Statement of Financial Position

\* The Group has initially applied IFRS 15 at 1 January 2018. Under the transition method chosen, comparative information is not restated.

The notes form an integral part of these condensed interim financial statements.

These financial statements were approved by the Board of Directors and were signed on its behalf by:

Gary Lamb

Director

11 September 2018

Condensed Interim Consolidated Statement of Changes in Equity

\* The Group has initially applied IFRS 15 at 1 January 2018. Under the transition method chosen, comparative information is not restated.

The notes form an integral part of these condensed interim financial statements.

Condensed Interim Consolidated Statement of Cash Flows

\* The Group has initially applied IFRS 15 at 1 January 2018. Under the transition method chosen, comparative information is not restated.

The notes form an integral part of these financial statements.

1 General information

Manx Telecom plc (the "Company") and its subsidiaries (together "the Group") supply of a broad range of telecommunications services to the Isle of Man.

The Company is a public limited company, which is listed on the Alternative Investment Market of the London Stock Exchange ("AIM") and is incorporated and domiciled in the Isle of Man. The address of its registered office is 33-37 Athol Street, Douglas, Isle of Man, IM1 1LB.

These condensed interim consolidated financial statements were approved for issue on 11 September 2018. The interim report will be available from 12 September 2018 on the group's website www.manxtelecom.com and from the registered office.

2 Basis of preparation

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. These condensed interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting". They do not include all the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union. However, explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual consolidated financial statements as at and for the year ended 31 December 2017. These condensed interim financial statements should be read in conjunction with the last annual consolidated financial statements as at and for the year ended 31 December 2017.

This is the first set of the Group's financial statements where IFRS 15 has been applied. Changes to significant accounting policies are described in Note 3.

3 Accounting policies

Except as described below, the accounting policies applied in these interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2017. Other amendments to IFRSs effective for the financial year ending 31 December 2018 are not expected to have a material impact on the Group.

Changes in significant accounting policies

The changes in accounting policies are also expected to be reflected in the Group's consolidated financial statements as at and for the year ended 31 December 2018.

The Group has initially adopted IFRS 15 Revenue from Contracts with Customers (see A) and IFRS 9 Financial Instruments (see B) from 1 January 2018. A number of other new standards are effective from 1 January 2018, as outlined below, but they do not have a material effect on the Group's financial statements.

The effect of initially applying these standards is mainly attributable to the following:

IFRS 15 Revenue from Contracts with Customers

- Earlier recognition of revenue from the sale of post-paid handsets, routers and retail hardware (see note a below)

- Deferral of connection fee income associated with Fixed Line, Broadband and Data Services over the contract term (see note b below)

- Deferral of directly attributable commission expenses over the term of the contract (see note c below)

- Earlier recognition of post-paid handset and router costs, where previously deferred (see note d below)

A IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a comprehensive framework for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 supersedes previous revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations.

The Group has adopted IFRS 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standard recognised at the date of initial application (i.e. 1 January 2018). Accordingly, the information presented for 2017 has not been restated. It has been presented, as previously reported, under IAS 18, IAS 11 and related interpretations.

The following table summarises the impact of transition to IFRS 15 on retained earnings at 1 January 2018.

The following tables summarise the impacts of adopting IFRS 15 on the Group's interim Statement of Financial Position as at 30 June 2018 and its interim Statement of Comprehensive Income for the six months ended for each of the lines affected.

Impact on the condensed interim consolidated Statement of Financial Position

Impact on the condensed interim consolidated Statement of Comprehensive Income

 The details of the new significant accounting policies and the nature of the changes to previous accounting policies in relation to the impacted areas are summarised below.

The adjustment to revenue includes an adjustment of £0.6m of additional Mobile revenues offset by a reduction of £0.1m in Fixed Line, Broadband and Data Service revenues.

B IFRS 9 Financial Instruments

IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

There has been no impact of transition of IFRS 9 on the financial statements for the current or comparative periods.

The details of new significant accounting policies and the nature and effect of the changes to previous accounting policies are set out below.

i. Classification and measurement of financial assets and financial liabilities

IFRS 9 eliminates the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale. 

The adoption of IFRS 9 has not had a significant effect on the Group's accounting policies related to financial liabilities. The impact of IFRS 9 on the classification and measurement of financial assets is set out below.

Under IFRS 9, on initial recognition, a financial asset is classified as measured at amortised cost; FVOCI - debt investment; FVOCI - equity investment; or FVTPL. 

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

- it is held within a business model whose objective is to hold assets to collect contractual cashflows; and

- its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:

- it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

- its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment's fair value in OCI. This election is made on an investment-by-investment basis.

All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets.

ii. Impairment of financial assets

IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses are recognised earlier than under IAS 39.

The financial assets at amortised cost consist of trade receivables, cash and cash equivalents, and contract assets.

Under IFRS 9, loss allowances are measured on either of the following bases:

- 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and

- lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.

The Group has elected to measure loss allowances for trade receivables and contract assets at an amount equal to lifetime ECLs.

When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group's historical experience and informed credit assessment and including forward-looking information.

New currently effective requirements and forthcoming requirements

The following new and revised Standards and Interpretations have been adopted in the current period. Their adoption has not had any significant impact on the amounts reported in these financial statements.

At the date of authorization of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

With the exception of IFRS 16, of which the impact has been outlined in the 2017 Annual Report, the Directors do not expect that the adoption of the Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future periods.

Going concern

The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

4 Critical accounting judgements and key sources of estimation uncertainty

The preparation of these condensed interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2017, except for new significant judgements and key sources of estimation uncertainty related to the application of IFRS 15 which is described in Note 3.

5 Financial risk management and financial instruments

5.1 Financial risk factors

The Group's operations expose it to a variety of financial risks including credit risk, currency risk, interest rate risk and liquidity risk. The Group's overall risk management policies focus on the unpredictability of financial markets and seek to minimise potential adverse effects on the Group's financial performance and net assets.

These condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 31 December 2017.

5.2 Liquidity risk

The Group's liquidity profile is unchanged during the period.

5.3 Fair value estimation

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, the Group takes into account the characteristics of the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial states is determined on such a basis, except for share based payments within the scope of IFRS 2 and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3: inputs for the asset or liability that are not based on observable market data.

The table below analyses financial instruments carried at fair value at 30 June 2018, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. Interest rate swaps are valued using discounted cash flows, under which future cash flows are estimated based on forward interest rate yields (from observable yield curves at the end of the reporting period) and contract interest rates.

The following table presents the group's assets and liabilities that are measured at fair value at 30 June 2017.

The following table presents the group's assets and liabilities that are measured at fair value at 31 December 2017.

There were no transfers between levels during the current or prior periods.

6 Operating segment information

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.

There is no inter-segmental trading.

The products and services included within each of the five segments are as follows:

Fixed line, broadband and data includes revenues from ADSL and VDSL rental and connection charges, fixed line call charges, fixed line rental and connection charges, and private circuit rental and connection charges.

Mobile includes revenues from mobile calls, SMS and data charges, mobile rental charges, mobile handset and accessory sales, and roaming.

Global solutions includes revenues from mobile termination, products such as strongest signal mobile (branded Chameleon) and M2M (machine to machine).

Data centre includes revenues from hosting services provided.

Other includes kit sales, directory revenues, managed service rental charges and revenue from the provision of telecommunications software.

7 Finance income and expense recognised in profit or loss

8 Provisions

During 2016, the Group committed to a plan to restructure the business as part of the Transformation Programme. The restructuring provision relates to consulting fees and other costs of the Transformation Programme. Estimated costs were based on the terms of relevant contracts.

9 Property, plant and equipment

Fixed asset additions during the period relate principally investment in the Group's fixed voice network, billing systems and building facilities.

10 Goodwill

On 29 June 2010, the Group acquired all of the ordinary shares in Manx Telecom Trading Limited (previously Manx Telecom Limited) for £133.8m satisfied in cash.

On 1 December 2016, the Group acquired all of the ordinary shares in Partitionware Limited for £4,007,000 satisfied in cash, giving rise to goodwill of £3,634,000.

Goodwill is deemed to have an indefinite life and so is not subject to amortisation.

The cash generating unit of the Group is considered to be the operations of Manx Telecom Trading Limited in its entirety due to the structure of the Company which operates as one telecommunications business. Goodwill is considered to be impaired if the carrying amount exceeds the recoverable amount.

A review for indicators of impairment since 31 December 2017 has been performed with no such indicators identified.

11 Share capital

The table below sets out the amounts recorded in equity:

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

On 24 November 2015, the Company made a block listing application to the London Stock Exchange for admission of 30,000 Ordinary Shares of 0.2p each in the Company to trading on AIM. The shares will be issued from time to time pursuant to the exercise of share options under the Company's Save As You Earn share option scheme and will rank pari passu in all respects with the existing ordinary shares of the Company. On 10 December 2015, 3,214 shares were issued in respect of options exercised under this scheme, on 28 January 2016, 9,285 shares were issued in respect of options exercised under this scheme and on 17 May 2016 4,285 shares were issued in respect of options exercised under this scheme. During the year to 31 December 2017, a further 13,216 shares have been exercised under this scheme.

On 28 March 2017, the Company made a block listing application to the London Stock Exchange for admission of 250,000 Ordinary Shares of 0.2p each in the Company to trading on AIM. The shares will be issued from time to time pursuant to the exercise of share options under the Company's Save As You Earn share option scheme and will rank pari passu in all respects with the existing ordinary shares of the Company. During the year to 31 December 2017, 187,309 shares were issued in respect of options exercised under this scheme. During the period to 30 June 2018, 2,308 shares were issued in respect of options exercised under this scheme.

On 28 November 2017, the Company made a block listing application to the London Stock Exchange for admission of 855,000 Ordinary Shares of 0.2p each in the Company to trading on AIM. The shares will be issued from time to time pursuant to the exercise of share options under the Company's Save As You Earn share option scheme and will rank pari passu in all respects with the existing ordinary shares of the Company. During the period to 31 December 2017, 682,537 shares were issued in respect of options exercised under this scheme. During the period to 30 June 2018, 150,744 shares were issued in respect of options exercised under this scheme.

On 14 June 2017, by way of a special resolution passed at the Annual General Meeting of the Company, it was resolved that share premium of £84,366,271 be cancelled and reclassified as retained earnings.

12 Interest-bearing loans and borrowings

The Group has a £80m revolving credit facility in place with Barclays Bank plc, DNB Bank ASA and The Royal Bank of Scotland PLC, of which the Group has drawn down £70m. In 2015, the Group extended the term of the existing revolving credit facility by a further 2 years from 30 June 2018 to 30 June 2020. Transaction costs incurred as part of the original debt facility and the extension were capitalised and will be amortised over the loan period.

As at 30 June 2017, 31 December 2017 and 30 June 2018 the margin applicable to the interest rate on the facility was 1.5%.

Amounts drawn under the Facility Agreement are to be repaid on the last day of each applicable interest period unless the relevant borrower elects otherwise and amounts repaid will (subject to certain drawdown conditions) remain available for re-drawing unless cancelled.

The loan is secured by way of a debenture in favour of the security agent providing a fixed and floating charge over certain of the Group's assets, including the shares of Manx Telecom Holdings Limited and Manx Telecom Trading Limited and property, plant and equipment of the Group.

To mitigate the Group's exposure to interest rate risk, the Group has entered into interest swap agreements.

On 28 December 2017, Lloyds Bank PLC, as arranger, novated its portion of the loan to DNB Bank ASA whilst remaining agent and security agent.

During the period the swap agreement held with Royal Bank of Scotland PLC and DNB Bank ASA expired. No further swap agreements have been entered into.

The net movement in unrealized gains/(losses) on interest rate swaps in the year gives rise to a gain of £101,000 (H1 2017: gain of £428,000) in the current period. As a result of the expiration of swaps described above, realised gains of £291,000 (H1 2017: nil) were recognised in the current period.

13 Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

13.1 Reported Earnings per Share

The calculation of the Reported Earnings per Share has been based on the weighted average number of shares outstanding during the period (as above) and the Profit/(loss) for the period after tax attributable to the owners of the Group ("Earnings").

13.2 Underlying Earnings per Share

The calculation of Underlying Earnings per Share has also been included to enable shareholders to assess the results of the Group excluding income and charges that are one-off in nature, significant and distort the Group's underlying performance.

Underlying earnings of £6.8m (H1 2017: 6.7m) are attributable to the Parent of the Group and have been calculated as underlying profit before Tax less the loss of £147,000 (H1 2017: £12,000) attributable to the Non-Controlling Interest.

14 Retirement Benefit Obligations

The Group operates two pension schemes. The Manx Telecom Limited Combined Pension Scheme is a defined benefit scheme that is closed to new entrants and the Manx Telecom Employee Retirement Plan is a defined contribution plan.

At 30 June 2018, the net liability on the defined benefit scheme decreased to £1.9m from a net liability of £3.8m at 31 December 2017 (30 June 2017: £4.5m liability).

The fair value of the assets at 30 June 2018 were £88.6m (31 December 2017: £92.1m, 30 June 2017: £91.9m). The defined benefit obligation at 30 June 2018 was £90.5m (31 December 2017 £95.9m, 30 June 2017: £96.4m).

The service cost for the six month period was £nil as the scheme was closed to future accrual in August 2014 (31 December 2017: nil, 30 June 2017: nil), the net interest expense on the defined benefit liability was nil (31 December 2017: £0.1m, 30 June 2017: nil) and employer contributions were £0.3m (31 December 2017: £0.6m, 30 June 2017: £0.3m).

The gain on remeasurement of the defined benefit pension scheme recognised in other comprehensive income for the six-month period was £1.6m (31 December 2017: £1.1m gain, 30 June 2017: £0.6m gain). The gain on remeasurement of the defined benefit pension scheme is a combination of the gain based on changes in financial assumptions, offset by a return on scheme assets less than the discount rate applied. The gain as a result of financial assumptions was £3.7m for the six month period to 30 June 2018 (31 December 2017: £1.5m loss, 30 June 2017: £0.5m loss).

The financial assumptions used were:

15 Related party transactions

There have been no related party transactions during the period other than the compensation of key management personnel.

16 Non-Controlling Interest

Summarised consolidated financial information in respect of Goshawk Communications Limited, which has a material non-controlling interest, is set out below. The summarised financial information below consolidates Goshawk Communications (UK) Limited and represents amounts before other intragroup eliminations.

Goshawk Communications Limited

17 Dividends

The following amounts were recognised as distributions to equity holders in the period:

The final dividend for the year ended 31 December 2017 was declared on 15 March 2018 and paid on 30 June 2018. The interim dividend was declared on 11 September 2018 and has not been included as a liability in these condensed interim financial statements. The dividend is payable to all shareholders on the Register of Members on 12 October 2018. The total dividend to be paid is 4.1p per share. The payment of this dividend will not have any tax consequences for the Group.

18 Alternative performance measures

The Directors of the Group have presented a number of additional performance measures which they believe are relevant to an understanding of the Group's financial performance which are not defined in IFRS and are therefore termed 'non-GAAP' measures. The Group's definition of these terms may not be comparable with similarly titled performance measures and disclosures by other entities. Such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure.

EBITDA

EBITDA is defined as the Group profit or loss before depreciation, amortisation, net finance expense and taxation.

Underlying EBITDA is defined as EBITDA, adjusted for the specific items listed below. EBITDA is a common measure

used by investors and analysts to evaluate the operating financial performance of companies, particularly in the

telecommunications sector. The Directors consider EBITDA and underlying EBITDA to be useful measures of operating performance. This presentation is consistent with the way that financial performance is measured by management and reported internally and assists in providing a meaningful analysis of the trading results of the Group.

A reconciliation from Group Operating Profit, the most directly comparable IFRS measure, to EBITDA and Underlying EBITDA is provided below.