MANX.L Regulatory News (MANX)

15 April 2014

Manx Telecom Plc

Preliminary Results for the year-ended 31 December 2013

Manx Telecom Plc (AIM:MANX), the leading communication solutions provider on the Isle of Man, announces its preliminary results for the year ended 31 December 2013.

Highlights

- Strong financial performance in line with market expectations

o Revenues up 5% to £76.0m, generating adjusted Operating profit of £18.1m, up 19.9%

o Cash generated from operations was £28.1m, representing an adjusted EBITDA cash conversion of 103%

- Fixed Line, Broadband and Data revenues grew 2% driven by good take-up of high speed broadband

- Mobile remained steady overall, with growth in post-paid revenue more than offsetting a continued slowdown in pre-paid revenue

- Data Centre revenues increased 17%, with strong demand from e-gaming and financial services companies

- Off-Island revenues grew 26% as a result of increased termination, machine-to-machine services (M2M), and Strongest Signal Mobile (branded Chameleon) services revenue

- Investment in our third data centre and 4G mobile network on the Isle of Man, in line with expectations

- Maiden interim dividend to be declared at half year results, payable in November 2014

o Intention to pay a total dividend with 7% yield calculated on the IPO placing price of 142p per share

Financial summary

Mike Dee, Chief Executive of Manx Telecom, commented:

"These are our first results since the Company's successful IPO and admission to trading on the London Stock Exchange and underline Manx Telecom's strengths and solid prospects for the future. We have seen good progress across our key areas of growth - Data Centre and Off-Island - while the core business continues to generate good levels of cash, which will enable us to invest in future growth whilst also paying an attractive dividend.

"With the launch of phase one of our new data centre already announced and our 4G launch due for later in 2014, it will be a very busy first half year with opportunities to capitalise on these investments coming through in the second half. We look forward to developing our on-Island customer base, continuing to grow our Off- Island and Data Centre revenues and seeking new opportunities to expand our business, using the core strengths of our network, experienced workforce and outstanding customer service."

Kevin Walsh, Non-Executive Chairman, added,

"Both these results and the successful IPO of Manx Telecom are a testament to the hard work and dedication of our talented and long serving workforce, who take pride in providing an excellent customer experience. In addition, it will also allow us to reward our shareholders with an attractive dividend which we expect to initiate during the current financial year. The Board confirms that current trading is in-line with expectations."

-Ends-

About Manx Telecom Plc ("Manx Telecom")

• Manx Telecom is the leading communication solutions provider on the Isle of Man, offering a wide range of fixed line, broadband, mobile, and data centre services to businesses, consumers and the public sector on the Isle of Man as well as a growing portfolio of innovative solutions to offshore customers.

• Manx Telecom has a record of innovation, being the first European operator to launch a 3G mobile service and the first in the world to launch a 3.5G mobile service. 4G services are expected to be launched in the summer of 2014, while the Company's high speed VDSL broadband service (Ultima) is available to over 80 per cent. of homes on the island.

• The Company has two Tier 3 data centre and international connectivity and its operations are business-critical to the economic strategy of the Isle of Man.

• One of the largest employers on the Island, Manx Telecom employs over 280 people. The company plays a major role in the wider community through a range of activities, including charitable donations, sponsorships, and corporate social responsibility initiatives.

• The Isle of Man has a resilient and growing economy which has experienced 29 years of unbroken GDP growth. Unemployment is low at approximately 2.4 per cent. and there is a zero per cent. corporate tax rate which applies to the vast majority of Manx Telecom's business and means that the Group currently pays no corporation tax on its annual profits.

• Manx Telecom trades on the Alternative Investment Market of the London Stock Exchange with the ticker MANX.

Chairman's Preliminary Statement

I am pleased to present my inaugural report as Chairman of Manx Telecom plc (the "Company" or "MT") following the Company's successful IPO on 10th February 2014. I am delighted to report a positive set of results for 2013 which include a 5% increase in revenues to £76.0m, and an 19.9% increase in Adjusted Operating Profit to £18.1m.

Post year end, on 10 February 2014 the Company completed its successful IPO and admission to trading on the AIM market of the London Stock Exchange raising £89.2m (before expenses) for the Company. Together with a new £80m credit facility agreement the IPO proceeds were used to refinance the balance sheet which leaves the Company well positioned to execute its strategy for future growth. The IPO also enabled HgCapital and CPS Partners to divest their interests in the Company. As a result 97.6% of our shares are now freely traded and in the most part held by long term institutional investors.

There are several other benefits of Manx Telecom being a public company. The process has brought stability and certainty to the Company's ownership and the Company's brand and profile should also be enhanced, creating further opportunities to grow the business. Our people will also benefit from being part of public company life through career opportunities and the opportunity to participate in incentive schemes.

I also believe a public Manx Telecom PLC is in the interests of the Island as a whole. The Government has expressed a desire to have a well-invested telecoms infrastructure and the Company is now well placed to support its strategy of attracting e-Commerce and other business to the Island.

An IPO process can be very demanding. Therefore it is appropriate that I acknowledge and thank the strong and capable senior team, together with the hardworking and dedicated people in MT, who remained focused on our customers to ensure that we delivered their expectations, whilst at the same time growing our revenues.

Dividend Policy

As stated in our AIM admission document the Company intends to operate a progressive dividend policy; this will take into account our profitability, underlying growth in earnings and cash flows. It is the Board's intention, based on current and future trading, to pay a dividend in respect of the year to 31st December 2014 that equates to 7% dividend yield, calculated on the IPO placing price of 142p per share.

Therefore, the Board plans to declare a maiden interim dividend with the Company's results for the six months ending 30th June 2014, payable in November 2014. It is our intention to announce these results in September 2014.

People, Management and Directors

The Company is fortunate to have an effective and hardworking workforce, which takes pride in providing a high standard of customer service.

The Board was restructured at IPO, when I joined as non-executive Chairman. Previous MT Holdings Ltd independent directors' Jeff Hume and Sir Miles Walker have been appointed to the PLC Board as senior independent non-executive director and non-executive director respectively. Importantly the Board also includes the two executive directors, Mike Dee CEO and Gary Lamb CFO, who were both directors of the business pre-IPO and who both played a pivotal role during the flotation.

Outlook

Trading in the first three months of 2014 is in line with the Board's expectations.

With the AIM Admission successfully completed management is free to concentrate fully on maintaining and developing the key strengths of the business: our customer base and high standards of customer service; our strong market share and cash generative assets; the continued development of an experienced and motivated workforce; and the important contribution we make to the local community. This renewed focus should ensure we continue to deliver further growth in 2014, as well as support our plans for a maiden interim dividend in November 2014.

We remain committed to creating shareholder value through our dual strategy of defending our significant on Island presence, whilst seeking off Island opportunities to exploit our data centre capability and to leverage our market leading mobile platform.

Finally, on behalf of the Board, I would like to thank all the MT team for their commitment and contribution to making this year a success.

CEO's review

Manx Telecom provides a wide range of communications services to consumers, businesses and the public sector on the Isle of Man. We have strong market positions across fixed line, mobile and data services and are investing in growth opportunities, including expanding our data centre footprint and growing Off-Island services, which leverage our flexible approach, our telecoms expertise, and our international roaming agreements.

We believe that following the IPO and its associated capital raise, Manx Telecom is well set for future success. As the only operator of a fixed line copper network providing local access on the Island, Manx Telecom is in a strong position, serving almost all of the existing available residential and business customers for fixed line, and providing a substantial proportion of the Island's existing available customers with broadband and mobile services.

We operate in a growing, relatively affluent, local market, with a population of approximately 85,000 people, and the benefit of a zero per cent corporate tax rate which applies to the vast majority of Manx Telecom's business means that the Group currently pays no corporation tax on both on and off Island profits. The Isle of Man has seen 29 years of unbroken economic growth, including throughout the recent recession.

We focus on providing a superior service and having reliable, trustworthy reputation. Our goal is to "Innovate and Invest for Growth" reflecting our desire to maintain and develop existing and new customer relationships.

The Company sees growth opportunities within the Off-Island and Data Centre markets, including high value managed service contracts, and aims to be the Island's leading, quality data centre operation. Off-Island, we intend to grow revenues through our various mobile virtual network operator (MVNO) relationships, as well as through increasing penetration of connected devices and expansion into M2M market.

Results overview

2013 has been another good year for Manx Telecom. We have continued to drive an increase in revenue and profits, with a focus on growth being maintained in all areas of the business, whilst continuing to implement operational efficiencies to improve margins. Revenue growth in the year of 5% was mainly driven by our Off-Island and Data Centre channels. However we have also been able to achieve growth in fixed line services and maintain mobile revenues at a similar level to 2012. By focussing on opportunities to improve the way we run our business in particular our interaction with our customers and tight cost control, we have increased EBITDA, operating profits and margins in 2013. Cash generation remained strong and free cash flow remained at similar levels to last year despite increased capital expenditure on the commencement of the two significant capital projects, namely the 4G network and Data Centre.

Our 4G mobile service is due for launch in the summer of 2014 bringing high speed data services to our mobile customers as well as a significant uplift to our current 2G and 3G data services. 4G enabled handsets and new mobile data packages have been made available in preparation for the summer launch.

Phase One of the new data centre project was completed at the end of the Q1 2014 bringing additional capacity as well as dual site resilience opportunities. The conversion of the existing engineering centre means the project is being undertaken in an extremely cost effective manner as well as having scope for further development, potentially trebling our existing hosting capacity. This phased approach to expansion means that we can link capex spend to customer demand, minimising risk and maximising returns.

Fixed, Broadband and Data services

Fixed and Broadband provides fixed line voice, broadband and connectivity services for customers, connecting approximately 35,000 homes and approximately 4,000 businesses on the Island. At 31 December 2013, the Group had 51,500 voice lines. Customers have access to ADSL and high speed VDSL broadband services throughout the Island, via a high quality copper and fibre network. At 31 December 2013, Manx Telecom had approximately 25,300 broadband subscribers, a substantial proportion of the Island's existing available customers. In addition, Manx Telecom delivers connectivity solutions to corporate customers, which can include voice, data and video services.

Further focus on rolling out high speed broadband has resulted in revenue growing 2.2% in the year due partially to the overall increase in the number of broadband customers but, in particular, due to the up-sell from basic speed to high speed broadband. With further roll-out of high-speed broadband planned for 2014 and relatively low take up there remains further scope for revenue growth in this area.

Core fixed revenues remained flat in the year with reducing call usage offset by increased revenue from line rental charge increases.

Data services revenues grew by around 3.5% in the year mainly due to connectivity associated with Data Centre customers.

Mobile

Mobile offers a combination of pre-paid and post-paid tariffs addressing all market segments and also sells mobile hardware (mobile handsets and accessories), serving a substantial proportion of the existing available customers in the Isle of Man. As at 31 December 2013, we had approximately 36,000 pre-paid subscribers and approximately 28,700 post-paid. In terms of network, we have a 2G/3G mobile network with 60 sites.

Despite this being the area where we have the strongest competition, Mobile revenues remained at the same level as the previous year. Increased revenues from the sale of higher value handsets and post-paid tariff plans as well as increased inbound roaming revenues helped counter the slow down in pre-paid. Competition remains strongest in the pre-pay area and the introduction of lower priced packages and continuing loss of market share albeit at a lower rate than previous years contributed to the decline.

Data Centre

Data Centre offers co-location, managed hosting, cloud and disaster recovery to an international corporate client base, via three data centres on the Island, at Douglas North, Douglas Centre and the Greenhill Data centre (GDC). Manx Telecom's 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. The Company's data centres already provide hosting services for many leading private sector brands.

On 28 March 2014 we announced the completion of Phase One of the third data centre GDC at a total cost of £3.5m, which houses 100 racks of storage space. This additional capacity increases the total storage space to 385 racks.

Phases Two and Three, which are planned for completion in 2015 and 2017 and will add a further 120 and 320 racks, making GDC the biggest data centre on the Island in terms of rack space.

We were delighted to win the opportunity to significantly increase our hosting revenue with one of our key customers in Q3 2012, which in turn contributed to the delivery of a 17% increase in hosting revenues in 2013. Since completing the project, focus on this area of our business and attendance at a number of international exhibitions has resulted in continuing interest from various sectors and the desire to complete phase one of our new data centre to meet the levels of demand.

Off-Island - Global Solutions

Off-Island primarily relate to the mobile technology platform, enabling wholesale and corporate customers to offer a variety of mobile products using Manx Telecom SIMs. There are six key areas including wholesale text messaging, strongest signal roaming, inbound services, M2M, wholesale voice termination, UK Mobile Virtual Network Enabler and a service management platform.

Off-Island revenue continued to grow in 2013 by almost 26%. The 2013 growth follows significant focus in this area of the business and accelerated development of our capabilities and products. Good progress was made across our Off-Island product range including Strongest Signal Mobile (branded Chameleon), Mobile Virtual Network Enabler Services (MVNE) and M2M services.

Other Revenues

Other Revenues comprise: the Manx Telecom telephone directory, inbound roaming, hardware equipment, mobile termination, managed services and interconnection fees.

Revenues fell by 10% in the year mainly due to a reduction in equipment sales. However, 2012 included a large equipment order for one of our key customers.

Encouragingly, managed services revenues grew by 3% in the year and we are attracting increasing interest in this area. Directory advertising revenues remained fairly constant.

Strategy

Our strategy is to maintain our leading position in our core markets of Fixed line, Broadband, Data and Mobile; and deliver growth from these highly cash generative revenue sources. In addition, it is our strategy to grow by exploiting new market opportunities which we are continuing to see in the Off-Island and Data Centre markets, by leveraging our existing Island infrastructure.

In 2012 and during 2013, this strategy has been successful, with revenue growth achieved both on-Island and off-Island.

The Company intends to execute its strategy in the following ways:

Fixed line, broadband and data:

We aim to defend our existing fixed line customer base and optimise packages, whilst growing our broadband business through up-sale of higher speed packages. We strive to be the partner of choice for corporate customers in relation to data services;

Mobile:

We intend to grow our high value post-paid customer base and maximise growth in mobile data, including through the launch of our 4G network, expected in summer 2014.

Off-Island:

We intend to grow revenues through our various MVNO relationships, as well as through increasing penetration of connected devices. We see opportunity for expansion into the machine-to-machine market, for example through the provision of metering and car tracking services. We also intend to provide premium roaming coverage for UK strongest signal roaming services, whilst continuing to develop our MVNE offering.

Data centre: 

We see opportunities in high value managed service contracts and aim to be the Island's leading, quality data centre operation. We are also looking to push into the small and medium enterprises market with the provision of Cloud services. The provision of additional data centre facilities in early 2014 should facilitate good growth in this area.

Summary

Overall, this is a good set of results for 2013 giving us a solid platform to move into 2014 as a public company. With the launch of Phase One of our new data centre already completed and our 4G launch due for later in 2014, it will be a very busy first half year with opportunities to capitalise on these investments coming through in the second half. We look forward to maintaining our on-Island customer base, continuing to grow our Off- Island and Data Centre revenues whilst seeking new opportunities to expand our business, using our core strengths of our on Island network, experienced workforce and a high standard of customer service.

Financial Review

Profitability

Revenue grew by over 5% to £76.0m (2012: £72.4m) with a 2.2% increase in the Fixed, Broadband and data services supplemented by strong growth in our Data Centre and Off-Island revenue streams.

The Fixed Line, Broadband, Data and Mobile remained steady, reporting revenues of £31.0m (2012: £30.3m) and £19.2m (2012: £19.2m) respectively. Off-Island performed well in 2013 with growth of 26% to £13.6m (2012: £10.8m). The Data Centre also saw good growth, with £6.5m revenues, up from £5.5m in 2012. 'Other' revenues, were £5.8m (2012: £6.6m) reflecting a lower level of low margin kit sales following a peak in 2012.

As a result of maintaining good cost control our adjusted EBITDA grew by 11.5% to £27.5m (2012: £24.6m) with the margin improving to 36.1% from 34.0% in 2012.

Depreciation was £9.2m (2012: £9.4m) which includes charges for network infrastructure (fixed network, broadband network and 2G / 3G mobile networks) as well as IT equipment and office equipment.

Our adjusted operating profit from operations, before the write down of assets described below, increased by 19.9% to £18.1m compared to £15.1m in 2012 with the margin improving to 23.8% from 20.9% in 2012.

We recorded an impairment of equipment of £2.7m in relation to the write down of 2G/3G mobile network assets following the start of a project to roll out a 4G mobile network across the Isle of Man.

Profit after tax was lower at £0.3m (2012: £3.2m) primarily due to this charge and an increase in financing costs as a result of steps taken to restructure the group's borrowings in order to reduce shareholder loans.

Costs

Overall costs (excluding finance expenses) increased by 6% in the year (£3.3m). Pay costs, which represent almost 30% of total costs, increased by 5%. The greater than forecast growth in revenue and EBITDA earned increased bonus payments throughout the business.

Roaming costs increased by 22% in the year, mainly due to the success of our off-Island business. Energy costs were up 11% reflecting increased growth and usage by data centre customers. Mobile handset costs were up 9% due to the increased sale of higher value smartphones. Maintenance charges increased 7% and are expected to increase in 2014 as the warranty period on the Next Generation Network (NGN) equipment comes to an end.

Net Finance Costs

Net finance costs were £15.9m (2012: £13.3m) including interest payments on bank facilities of £7.1m (2012: £4.0m) and interest payable on shareholder loan notes of £3.9m (2012: £8.5m).

Also included within the finance costs was a £3.3m charge against previously capitalised transaction charges, following the debt refinancing exercise in 2013. Amortisation of the transaction costs on the change in banking facilities during the year was £0.7m (2012: £0.8m). Other interest income was £0.2m (2012: £0.6m).

Our financing arrangements throughout the year were designed to meet the interests of our majority private equity shareholders who exited the business at the time of the IPO. As such they should not be taken as a guide to future financing costs.

Taxation

There is no corporate taxation payable on our profits for both 2013 and the comparative year. We have the benefit of an Isle of Man zero per cent corporate tax rate.

Cash flow

Our free cash flow after investing activities was £16.0m, an increase of 8.1% (2012: £14.8m), out of which we serviced our borrowings.

Operating cash flow was £28.1m (2012: £22.3m). This good cash flow performance represents an adjusted EBITDA cash conversion of 103% (2012: 91%). Working capital improved significantly in 2013 to -£0.8m compared with -£4.3m in 2012.

Capital Expenditure

Capital expenditure increased significantly in the year to £10m. The increase in spend this year includes £5.4m on the two key projects; 4G and phase one of the data centre conversion, split into £3.3m on the 4G project and £2.1m on the data centre conversion project.

The 4G project has a total cost of £10m spilt over 2013-2015 and the total cost for phase one of the data centre conversion is £3.5m, with the remainder of the cost falling into early 2014. Completion of phase one of the data centre was announced on 28 March 2014 and 4G launch is due in the summer 2014.

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 decreased during the year by £2.3m to £62.6m primarily due to the write down of the 2G/3G network following the decision to invest in a 4G mobile network. Capital expenditure of £10.0m exceeded the depreciation and amortisation run rate of £9.2m.

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.

Current assets increased by £2.8m primarily due to an increase in cash held at the end of the period, increasing to £13.5m from £10.4m. Trade receivables improved by £0.9m due to improvements in collections during the year. In 2013 the Company entered into an Interest Rate Swap covering 67% of its £122m third party debt. The fair value of the interest rate swap was £0.6m at the year end (2012: £0.4m liability).

Current liabilities reduced by 15% to £25.8m primarily due to a reduction in interest-bearing loans and borrowings.

Non-current liabilities were £153.1m (2012: £138.8m). Borrowings and interest payable were £115.7m (2012: £54.7m) an increase on 2012 following the refinancing in 2013. Shareholder loans reduced to £31.0m (2012: £84.0m).

The group operates two pension schemes, a defined benefit scheme, which is closed to new joiners, and a defined contribution plan. The retirement benefits liability increased to £6.4m (2012 £1.4m asset) primarily due to an increase in the scheme liabilities driven by a change in financial assumptions (higher inflation and a lower discount rate). The company is currently in the process of discussions with the trustees, our employees and unions to close the defined benefit scheme to future accruals.

Refinancing of Net debt

At 1 January 2013 the Company had borrowings of £146.0m comprising £61.4m of bank debt with a consortium of banks in tranches with interest rates of 4.6% margin on LIBOR (£19.7m) and 5.5% margin on LIBOR (£41.7m), and a £84.6m shareholder loan primarily with Hg Capital at an interest rate of 10.0%.

On 19 March 2013 the Company entered into a new funding arrangement with GE Capital and Ares Capital Corporation, resulting in all existing borrowing with external banks being repaid and shareholders loans reducing by £55.7m at this time. This left the company with total debt of £151.0m comprising bank debt of £122.0m at an interest rate of 6.5% margin on LIBOR, and a shareholder loan primarily with Hg Capital at £29.0m at an interest rate of 10.0%.

Subsequent Events

On 10th February 2014, the Group was admitted to the Alternative Investment Market (AIM). Hg Capital and minority partners sold their entire stakes in the company, as part of a placing that raised £156.3m before expenses from institutional investors. Management shareholders retained 50% of their previous shareholdings. In the course of these developments the company's ordinary shares were redenominated into ordinary shares of 0.2 pence each from a nominal value of 1.0 pence. 2014 costs associated with the IPO include £13.6m of fees and the write-off of £4.6m previously capitalised 2013 debt refinancing fees. Bank fees relating to the new debt were £1.0m and will be amortised over the life of the debt (matures 30 June 2018).

At the same time the company also entered a £80m banking facility with a consortium of banks from which £70m was drawn. These funds and the balance of the placing were used to pay down all previous borrowings and to exit the related interest rate swap arrangements.

Net debt on admission to AIM was £65.0m broken down as £70.0 gross debt and £5.0m of cash. The bank facilities maturity date is 30 June 2018.

Restatement

In 2010 Manx Telecom Holdings Limited drew down on a loan facility from Lloyds TSB as part of the purchase of the Group by HG Capital. Transaction costs relating to the Lloyds TSB facility were expensed in 2010 rather than being capitalised and amortised over the life of the facility in accordance with IFRS. The transaction costs were expensed as it was expected that the facility would be refinanced within 12 to 18 months, and it was considered prudent to accelerate the recognition of transaction costs in 2010. However, the facility was not refinanced until 2013, and therefore, the prior year figures have been restated.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2013

Consolidated Statements of Financial Position

As at 31 December 2013

Consolidated Statement of Changes in Equity

for the year ended 31 December 2013

Consolidated Statement of Cash Flows

for the year ended 31 December 2013

1. Operating Segments

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

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 / (loss) is stated after charging / (crediting) the following:

Finance income and expense

Recognised in profit or loss

In May 2010 Hg Capital LLP acquired Manx Telecom Trading Limited (formerly Manx Telecom 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 have been charged to the Consolidated Statement of Comprehensive Income in 2013. Refinancing costs incurred in 2013 of £5,239,115 have been capitalised.

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.