Redcentric Regulatory News (RCN)

9 November 2015

Redcentric plc

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

Unaudited Interim Results for the six months ending 30 September 2015

Redcentric plc (AIM:RCN), a leading UK IT managed services provider, today announces its unaudited interim results for the six months ended 30 September 2015.

Highlights

· Revenue up 15% to £54.0m (H1 FY15: £46.8m), representing 8% organic growth

o Recurring revenue up 18% (12% organic) to £43.9m

· Adjusted EBITDA* up 17% to £11.8m (H1 FY15: £10.1m)

o Adjusted EBITDA* margin of 21.8% (H1 FY15: 21.5%)

· Adjusted profit before tax** up 22% to £5.0m (H1 FY15: £4.1m)

· Calyx Managed Services acquired for £12.0m in April 2015, integration completed September 2015

· Adjusted EPS*** up 18% to 4.70p (H1 FY15: 4.00p). Statutory EPS 0.76p (H1 FY15: 2.28p)

· Interim dividend up 50% to 1.5p per share (H1 FY15: 1.0p)

· Net bank debt £16.5m (31 March 2015: £4.8m) post Calyx acquisition, expected to reduce steadily with ongoing cash generation

· The business continues to trade in line with the Board's expectations and the Board is confident of the full year outlook

Fraser Fisher, Chief Executive Officer of Redcentric commented:

"Redcentric has continued to perform well in the first half, with some very impressive contract wins, good sales momentum and the successful integration of Calyx. Our focus continues to be on growing our recurring revenue base by providing our customers with market leading services, allowing them to concentrate on their core business."

Chris Cole, Chairman of Redcentric commented:

"These first half results demonstrate the continued growth pattern seen in previous periods. The Calyx acquisition and subsequent integration have enabled us to expand our contract base, and demonstrates both the scalability of the platform and the ambition the board has to deliver increasing shareholder value over the coming years."

* Earnings before interest, tax, depreciation, amortisation of acquired intangibles, transaction and integration costs and share based payments.

** Adjusted profit before tax excludes transaction and integration costs. Statutory profit before tax was £1.4m (H1 FY15: £3.9m).

*** Adjusted Earnings per Share excludes amortisation of acquired intangibles, transaction and integration costs and share based payments and replaces the reported tax credit with a notional tax charge at the full rate of corporation tax.

An analyst presentation will be held at 9.30am on Monday 9th November 2015 at Tulchan Communications, 2nd Floor, 85 Fleet Street, EC4Y 1AE, London.

Enquiries:

Chairman's Statement

I am delighted to present the unaudited interim results for Redcentric for the six months to 30 September 2015, which demonstrate both the continued strength of the business to drive organic growth combined with the management team's ability to supplement that organic growth through acquisitions to create shareholder value.

Summary trading results

Revenue for the first six months of the financial year grew strongly to £54.0m (H1 FY15: £46.8m), which represents organic growth of 8%, combined with the results from Calyx Managed Services Ltd ("Calyx"). Within this, recurring revenue grew organically by 12% and now represents 81% of total revenue (H1 FY15: 80%). Profitability grew in the period, with adjusted EBITDA* up 17% to £11.8m (H1 FY15: £10.1m), representing a slightly improved 21.8% margin (H1 FY15: 21.5%).

Calyx has now been fully integrated and is trading as expected, with a full contribution coming through in the second half of the year.

Financial position and dividend

Following the acquisition of Calyx and the securing of new bank facilities in April 2015, net bank debt has increased to £16.5m (31 March 2015: £4.8m). The highly cash-generative nature of the business means that this debt can be steadily reduced in future periods.

Following the initiation of a dividend policy in 2014, the Board is pleased to announce an increased interim dividend of 1.5p (H1 FY14: 1.0p), which will be paid to shareholders in February 2016. The Board remains committed to a progressive dividend policy.

Board changes

As announced on 30 September 2015, Fraser Fisher, previously Chief Operating Officer, today takes over from Tony Weaver as Chief Executive Officer. Tony remains on the Board as a non-executive director, and I look forward to continuing to work with both of them to deliver value to shareholders.

Outlook

The opportunity for growth through both organic and acquisitive means is significant, and the Board looks to the future with confidence. This has been a period of excellent progress for the Company, and the Board would like to thank all of the staff and management for their hard work.

Chris Cole

Non-Executive Chairman

9 November 2015

\* Throughout this document reference to "adjusted EBITDA" is defined as Earnings Before Interest, Tax, Depreciation and Amortisation and excludes transaction and integration costs and charges for share-based payments. The Board regards adjusted EBITDA as the key measure of underlying profitability.

Operational Review

Overview

The first six months of the financial year have seen a dual focus on maintaining organic growth of our recurring revenue base and integrating Calyx. These results show both objectives have been achieved.

We have won a number of significant new contracts in the period. Key to these wins has been the ability to deliver services over our owned infrastructure, which includes state-of-the-art data centres in Harrogate, Reading, London and Cambridge connected by a fully resilient MPLS network.

Trading results

The strong start to trading continued through the first half, with some significant new contracts helping to support a record level of order intake. Revenue grew by 15% to £54.0m (H1 FY15: £46.8m) which included organic growth of 12% in our recurring revenues, which make up 81% of our total revenue. Services revenue grew 10% (2% organic) while we continued to manage the decline of low-margin product revenue. Overall organic revenue growth was 8%.

During the first half we won several significant contracts, including;

• Health and Social Care Information Centre (HSCIC), a £3.5m, two year contract to provide access to Redcentric's Database-as-a-Service platform.

• Medica Group, a £1.1m, five year managed network contract with N3 connectivity allowing the provision of super-fast & secure 24/7 access to radiology and imaging reporting for over 50% of NHS trusts across the UK.

• Legal Aid Agency, a £2m, two year contract to provide a hosted, consolidated, flexible application development & test platform.

• A major Central Government Department, a £4.5m, two year contract to provide network, hosting and Platform-as-a-Service within Redcentric's datacentres.

• Proactis, a £1.8m, three year contract to provide a private cloud with disaster recovery.

Along with ownership of our own managed infrastructure, the significant investment we maintain in security, training and a broad range of accreditations provides all of our customers with confidence that we will continue to deliver high quality services. This ongoing investment enables us to access significant opportunities in the public sector.

Profitability grew in line with revenue, with adjusted EBITDA of £11.8m being 17% ahead of the prior year. EBITDA margin improved slightly to 21.8% (H1 FY15: 21.5%), and we expect further improvements in the second half of the year as the impact of the contract wins in the first half are felt, along with the benefits of the Calyx acquisition.

Calyx Managed Services

The integration of Calyx, which we acquired in April 2015, has progressed to plan. The services we provide to customers have been migrated to Harrogate, along with back-office functions, allowing the closure of the Didsbury office in September 2015. This successful transition has meant that the financial benefits of the Calyx acquisition will be felt in full in the second half of the year.

Our market and strategy

Redcentric continues to target the UK mid-market IT managed services market. This market remains highly fragmented, and is served by a broad spectrum of businesses from global telecommunication companies through to hardware and software providers, system integrators and a range of independent managed service providers of varying sizes. The market continues to grow, with organisations increasingly moving towards a cloud-based IT infrastructure, which is at the heart of Redcentric's capabilities.

Our strategy remains unchanged; we seek to win new business through differentiating ourselves through Innovation, Reliability and Value. We are able to combine the benefits of a proprietary network and data centres with a flexible and technically skilled workforce able to deliver and support reliable services and solutions.

Redcentric is well-positioned in the market, and is successfully winning new customers as well as expanding services for existing customers. Our primary aim is to continue to grow the business organically, although the fragmented nature of the market often presents acquisition opportunities. We will appraise these opportunities on a case by case basis if they strengthen Redcentric's market proposition and offer the ability to enhance shareholder returns.

Outlook

The financial year is progressing well. Our first half performance has been strong, and our continued sales momentum, combined with high levels of recurring revenue, gives us confidence that we will continue to drive organic growth. The business continues to trade in-line with the Board's expectations and the Board is confident of the full year outlook. With Calyx successfully integrated, we remain on the lookout for accretive acquisition opportunities.

Fraser Fisher

Chief Executive Officer

9 November 2015

Financial Review

Financial results

Revenue in the first six months was £54.0m (H1 FY15: £46.8m), representing underlying organic growth of 8%. Within this, the recurring revenue base continued to grow, with 18% headline growth comprising organic growth of 12% augmented by the acquisition of the Calyx. Organic growth of the recurring base continues to track ahead of our high single digit organic growth target, supported by continuing low levels of customer churn. Services revenue grew by 10% to £6.5m (H1 FY15: £5.9m), which was a combination of a contribution from Calyx, and 2% organic growth. Product revenue was flat at £3.6m (H1 FY15: £3.6m), although this represents an organic decline of 23%, in line with previous trends.

Profitability grew in line with revenue, with adjusted EBITDA 17% ahead at £11.8m (H1 FY15: £10.1m), representing an adjusted EBITDA margin of 21.8% (H1 FY15: 21.5%). The improvement in profitability was driven organically, with no contribution from Calyx. Significant restructuring and integration has been undertaken at Calyx, which is expected to contribute in line with the Board's expectations in H2.

Transaction and integration costs were £3.6m (H1 FY15: £0.3m), as a result of the acquisition and subsequent integration of Calyx. A detailed breakdown is provided in note 4, with provision for the closure of Calyx's Didsbury office being the single largest item. This office has now been closed, with all activities transferred to Redcentric's Harrogate office. The cash cost in respect of transaction and integration costs was £2.2m (H1 FY15: £1.0m).

The depreciation charge increased to £2.8m (H1 FY15: £2.5m) reflecting the increased level of capital expenditure driven by new contract wins. Amortisation of acquired intangibles was £2.8m (H1 FY15: £2.6m), which includes a provisional estimate of £0.4m in respect of Calyx.

The share based payments charge was £0.7m (H1 FY15: £0.6m), reflecting the employee Save As You Earn share-save plan, which was launched in November 2014. The second iteration of the plan will be launched to staff towards the end of November 2015.

Statutory diluted earnings per share ("EPS") in the period were 0.76p (H1 FY15: 2.28p). The Board also uses an adjusted EPS figure as a benchmark to measure the underlying performance of the business. This measure excludes the effect of amortisation of acquired intangibles, share option charges and transaction and integration costs, and applies a normalised tax charge*. Adjusted EPS grew by 18% to 4.70p (H1 FY15: 4.00p).

* The normalised tax charge applies a full rate of UK corporation tax (20%, H1 FY15: 21%) to adjusted earnings, ignoring the effect of tax losses and movements in deferred tax balances.

Cash flow and funding

The Group continued to generate significant levels of operating cash-flow, with adjusted operating cash-flow up 23% to £10.2m (H1 FY15: £8.3m), representing an adjusted operating cash conversion rate of 87% (H1 FY15: 82%). The following table reconciles adjusted EBITDA to movement in net bank debt:

Net bank debt increased to £16.5m as at 30 September 2015 largely as a result of the Calyx acquisition. Given the Group's strong cash flow generation the Board expects that net bank debt will steadily reduce over time. As previously reported, the Group entered into new flexible long-term bank facilities on 2 April 2015 totalling £50m, which run until April 2020. Redcentric has significant levels of headroom against these facilities, which are available to support future growth.

Dividend

Redcentric's business model generates significant levels of cash, and the Board has previously stated its intention to provide attractive cash returns to shareholders whilst considering the financial requirements of the Group. The Board is pleased to announce an interim dividend of 1.5p per share (H1 FY15: 1.0p), which will be paid on 17 February 2016 to shareholders on the register at the close of business on 15 January 2016. The ex-dividend date will be 14 January 2016.

Tim Coleman

Chief Financial Officer

9 November 2015

Condensed consolidated Income Statement (unaudited)

*Earnings before interest, tax, depreciation, amortisation, transaction and integration costs and share-based payments.

The above condensed consolidated income statement should be read in conjunction with the accompanying notes.

Condensed consolidated Statement of Comprehensive Income (unaudited)

Condensed consolidated Statement of Changes in Equity (unaudited)

Condensed consolidated Balance Sheet (unaudited)

Condensed consolidated Cash Flow Statement (unaudited)

Notes to the Interim Financial Information

Six months ended 30 September 2015

1 General information and basis of preparation

The Interim Financial Information is unaudited.

Statutory accounts for Redcentric plc for the period ended 31 March 2015 were approved by the Board of directors on 15 June 2015 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under sections 498 (2) or (3) of the Companies Act 2006.

The consolidated financial statements of Redcentric plc have been prepared on the going concern basis and in accordance with EU adopted International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention.

The Directors are required to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. The validity of this assumption depends on the ability of the Group to meet its cash flow forecasts and the continuing support of its bankers by providing adequate overdraft facilities and of its debt holders and shareholders. The Group's banking facilities run until 1 April 2020. A high proportion of the Group's revenue is recurring in nature, which provides good visibility of future cash-flows. However, there can be no absolute certainty that the Group will achieve its EBITDA forecasts. The present cash flow forecasts indicate that the Group will be able to operate within its banking facilities for at least 12 months from the date of approval of this Interim Financial Information. For these reasons the Directors believe the going concern basis to be appropriate.

This condensed, consolidated interim report and financial information was approved by the Board on 9 November 2015.

2 Accounting policies

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

The accounting policies used in preparing the Interim Financial Information are unchanged from those disclosed in the Group's annual report and financial statements for the year ended 31 March 2015, and are those the Group expects to apply in its financial statement for the year ended 31 March 2016.

3 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been identified as the Group Chief Executive Officer and the Chief Financial Officer. The CODM are jointly responsible for resources allocation and assessing the performance of the operating segments. The operating segments are defined by distinctly separate product offerings or markets. All of the revenue derives from customers located in the United Kingdom. No single customer accounted for more than 10% of the revenue of any operating segment.

Recurring revenue is derived from the provision of the Group's services to customers under long-term agreements, including data, connectivity, hosting, cloud, and support services. Services revenue is derived from the provision of consultancy, or installation services regarding the provision and set-up of a new service. Product revenues are derived from the sale of third party products, which comprises mostly hardware.

Results for the six months ended 30 September 2015

Results for the six months ended 30 September 2014

* Earnings before interest, tax, depreciation, amortisation, transaction and integration costs and share-based payments.

4 Transaction and integration costs

In accordance with the Group's policy of separately identifying transaction and integration costs, the following charges were recognised in the period:

5 Net finance costs

6 Tax

7 Earnings per share 

Basic earnings per share have been calculated using a weighted average number of shares of 144,761,349 (2014: 144,007,543). The dilutive effect of share options in issue at 30 September 2015 increased the weighted average number of shares to 152,713,413 (2014: 148,910,747).

In addition, adjusted earnings per share have been calculated to reflect the underlying performance of the business. This measure is derived as follows:

8 Trade and other receivables

9 Trade and other payables

10 Borrowings

11 Called up share capital

Allotted, called up and fully paid share capital, comprising Ordinary shares of 0.1p each:

On 16 and 21 September 2015 the Company issued a total of 655,650 shares to satisfy warrant exercises. The warrants were issued to certain placees in November 2013 as part of the Company's acquisition of InTechnology Managed Services Ltd.

On 2 July 2014 the Company issued 195,000 new Ordinary shares of 0.1p each as a result of an employee option exercise.

At 30 September 2015 the Company had issued 14,522,039 options over Ordinary shares (2014: 13,082,099), and 548,611 warrants which are convertible into Ordinary shares (2014: 1,731,055). Further details can be found in the Company's Annual Report and Accounts for the period ended 31 March 2015.

12  Net Cash flows from continuing operating activities

13   Acquisition of Calyx Managed Services Ltd

On 10 April 2015 the Company acquired Calyx Managed Services Ltd for £12.0m, and its results have been consolidated from that date. An initial assessment of the fair value of the assets and liabilities acquired has been consolidated into the Group consolidated balance sheet. This work will finalised prior to year-end, and will be included in the Group's full year results announcement.