Redcentric Regulatory News (RCN)

17 November 2014

Redcentric plc

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

Unaudited Interim Results for the six months ending 30 September 2014

Redcentric plc (AIM:RCN), a leading UK IT managed services provider, today announces its interim results for the six months ended 30 September 2014.

Highlights

· Revenue up 123% to £46.8m (H1 FY14: £21.0m), representing 11% organic growth

o Recurring revenue represents 80% of total (H1 FY14: 67%)

· Adjusted EBITDA* up 181% to £10.1m (H1 FY14: £3.6m), representing 32% organic growth

o Adjusted EBITDA* margin of 21.5% (H1 FY14: 17.1%)

· Profit before tax up 374% to £3.9m (H1 FY14: £0.8m)

· Net bank debt reduced by £3.6m to £8.7m (31 March 2014: £12.3m)

· Interim dividend of 1.0p per share (H1 FY14: nil)

· Diluted EPS of 2.20p (H1 FY14: 1.98p). Adjusted diluted EPS** up 15% to 4.89p (H1 FY14: 4.27p)

Tony Weaver, Chief Executive of Redcentric commented:

"This has been a period of great progress for Redcentric. We have achieved some very significant milestones with the integration of InTechnology Managed Services, and have been operating as a single business for some time now. Our first half results reflect the strength and capability of Redcentric; the business continues to trade strongly in the second half of the year, giving the Board confidence in our future prospects."

Chris Cole, Chairman of Redcentric commented:

"Since joining the Board in September my expectation regarding the professionalism, enthusiasm and maturity of the Redcentric team has been confirmed. These results demonstrate that Redcentric is in a strong financial position and supported by a growing, loyal client base. Tony and his team have developed Redcentric into a leading player in the market and the Board is confident that the Group will continue to deliver increased shareholder value in the years ahead."

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

** Adjusted Earnings Per Share excludes amortisation of acquired intangibles, transaction and integration costs and share based payments and uses underlying cash tax borne.

Enquiries:

Chairman's Statement

I am very pleased to present the interim results for Redcentric for the six months to 30 September 2014 for the first time as Chairman. From a corporate perspective, this has been a period of stability following the demerger from Redstone and the acquisition of InTechnology Managed Services ("IMS") during FY14. These results demonstrate that Redcentric is in a strong financial position and supported by a growing, loyal client base.

Comparative figures from the previous interims are shown, although pro-forma figures have been used where pertinent to highlight the underlying like-for-like changes in the business.

Summary trading results

Revenue for the first six months of the financial year more than doubled to £46.8m (H1 FY14: £21.0m), which represents organic growth of 11% when compared to the pro-forma £42.2m of revenue from the same period last year. Recurring revenue represented 80% (H1 FY14: 67%) of total revenue which provides the Board with excellent stability and visibility of future earnings. Profitability improved significantly, with adjusted EBITDA* in the period of £10.1m (H1 FY14: £3.6m) representing an adjusted EBITDA margin of 21.5% (H1 FY14: 17.1%). These strong trading results are a testament to the underlying quality of the services being delivered by the Company to our customers, and to the efforts of all of the Redcentric team.

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, and congratulate them on their achievements in the first half of the year.

Financial position and dividend

The business model, with its high level of recurring revenue, generates significant cash-flows. In the first half, free cash-flow was £4.9m (H1 FY14: outflow of £0.9m), which allowed a reduction in net bank debt of £3.6m to £8.7m (31 March 2014: £12.3m) after payment of the maiden dividend of £1.4m. The Board is pleased to announce an interim dividend of 1.0p (H1 FY14: nil), which will be paid to shareholders in February 2015. The Board remains committed to a progressive dividend policy and to providing attractive returns to shareholders.

Board changes

As announced separately today, Ian Smith is stepping down from the Board, and is being replaced by Stephen Puckett as Independent Non-Executive Director and Chairman of the Audit Committee. The Board would like to thank Ian for his fundamental contribution to Redcentric's success over the past few years, and welcomes Stephen, who brings a wealth of senior boardroom experience.

Outlook

Some substantial milestones in the integration of IMS have been achieved in the period, and the underlying financial performance of the business is already demonstrating what a significant presence in the market Redcentric is becoming. The business continues to perform in line with market expectations and the Board is pleased that the progress made to date should deliver improved performance for customers and shareholders alike over the coming years. The opportunity for growth through both organic and acquisitive means is significant, and the Board looks to the future with confidence.

Chris Cole

Non-Executive Chairman

17 November 2014

\* 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

Following a transformational year for the Group in 2013/14, the first six months of this financial year have been a period of relative stability, and we have been concentrating on the integration of IMS, and on growing the business. We now have the financial strength, scale and flexibility to provide our customers with best-in-class services, delivered over our own managed infrastructure, and we are pleased that a number of significant new contracts have been won in the period.

Redcentric operates state-of-the-art data centres in Reading, Harrogate, London and Cambridge as well as a fully resilient MPLS network, providing coverage and access across the UK. From this strong base of owned managed infrastructure we are able to offer a wide range of true managed services. The Company is headquartered in Harrogate, with additional offices in London, Reading, Theale, Cambridge and Hyderabad.

Trading results

Revenue of £46.8m was ahead of management expectations, and was 123% up on H1 FY14 (H1 FY14: £21.0m). On a pro-forma basis, as if IMS had been included for the comparative period, organic revenue growth was 11% compared to the £42.2m generated in H1 FY14. The most significant element of this is our recurring revenue which was £37.3m, or 80% of the total, also representing pro-forma organic growth of 11% when compared to H1 FY14. Within the project-based revenues, on a pro-forma basis Services revenue grew by 16% organically to £5.9m, and Product revenue grew 5% to £3.6m.

Our recurring revenue base is characterised by long-duration contracts, typically three years in length but ranging up to seven years in some cases. We were delighted to win a number of significant new customers and contracts for additional services to existing customers in the period, including the following notable new contracts;

· a five year contract with a major London based estate agency. The contract, worth £3.1m, was won following a competitive tender process. Redcentric is providing collaboration and network services, including a Wide Area Network, Cisco LAN Switches, IP Telephony and a Central Internet with Managed Firewall Service to approximately 60 locations across London.

· a five year contract with one of the largest UK vehicle rescue and recovery operators, worth approximately £1.5m. Redcentric has been contracted to provide fully managed Wide Area Network, IP telephony and call centre solutions. The tailored call centre solution will be rolled out across three locations within three months.

· an additional four year contract with a not-for-profit organisation, following an initial contract announced previously. The new contract, which is initially worth approximately £1.3m, will see Redcentric provide 500 preliminary sites with a high speed FTTC (Fibre To The Cabinet) internet connection service. The contract has the potential to double in size over the next six months to 1,000 sites across the organisation.

· a three year contract worth £1.1m with a large UK legal firm. The business operates with around 1,000 staff from 20 offices across the UK, and Redcentric has been engaged to provide unified communications and a managed LAN service across the estate. This was a notable win against a strong incumbent provider.

The sales pipeline of future revenue opportunity has grown substantially over the period. In March 2014, our pipeline of qualified opportunities expected to close within six months represented £41.3m of Total Contract Value ("TCV"). In September 2014 this had grown by 45% to £60.0m of TCV. We now have the operational capability and financial scale to be bidding credibly on larger opportunities and in sectors which were previously harder to access. 

Profitability improved significantly, with adjusted EBITDA of £10.1m (H1 FY14: £3.6m) representing an organic improvement of 32% compared to the pro-forma comparator of £7.6m. The EBITDA margin of 21.5% (H1 FY14: 17.1%) exceeds our targeted margin of greater than 20%, and we believe that our business model and capability means that further profitability improvements are likely.

Integration

During the period a number of significant milestones were reached with the integration of IMS, acquired for £64.3m in December 2013. From July 2014 we have fully adopted a single Redcentric brand in the market and are trading from a single legal entity, using a core set of unified systems and processes. From September 2014 all customer support has been integrated and is being carried out from a single service desk and unified support system in our Harrogate head office.

The data centre estate and dual MPLS networks are in the process of being rationalised, although they have been operated on a single platform basis since early 2014. There will be further changes behind the scenes as we work through the remainder of the integration programme, which will help to deliver further service improvements to our customers and additional cost savings. The integration has been extensive and thorough, and has provided a very strong platform from which to drive further growth.

Our market and strategy

Redcentric targets the UK mid-market 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 is growing, driven by the adoption of remote and mobile access, and the provision of secure off-site storage to run applications and process and store data.

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 this market, and is successfully winning new customers and 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 would consider these on a case by case basis if they were to improve Redcentric's market proposition and were attractive financially.

Outlook

This has been a strong first six months of the financial year for Redcentric. Our financial metrics demonstrate the underlying strength of the business, and we are establishing a growth trajectory which should see good progress from an organic perspective. Our cash-generative business model and low debt level provides financial flexibility which allows the possibility of acquisitions of complementary businesses should they be suitably attractive. The Board and management team are confident that we will be able to continue to grow the Company going forward.

Tony Weaver Fraser Fisher

Chief Executive Chief Operating Officer

17 November 2014 17 November 2014

Financial Review

Financial results

Revenue in the first six months was £46.8m (H1 FY14: £21.0m), with underlying organic growth of 11% on a pro-forma basis. Recurring revenues were 80% of the total, and also grew by 11% when compared to the pro-forma period for the prior year. Services revenue grew by 16% organically to £5.9m (H1 FY14: £3.5m), with Product revenue improving by 5% to £3.6m (H1 FY14: £3.4m).

The improved revenue mix and the impact of cost synergies from the IMS integration drove 32% organic growth in adjusted EBITDA to £10.1m on a pro-forma basis (H1 FY14: £3.6m). The EBITDA margin of 21.5% was a significant improvement from the 17.1% reported in the same period last year, and is ahead of our targeted 20% EBITDA margin.

Transaction and integration costs of £0.3m (H1 FY14: £1.1m) arose from the integration programme, and include certain redundancy costs and dedicated project management costs which were not provided for in the prior year. The cash cost incurred in relation to the integration in the period was £1.0m (H1 FY14: £0.7m), most of which was provided for previously. This relates primarily to redundancy and office closure costs.

The depreciation charge of £2.5m was significantly higher than the prior period (H1 FY14: £0.6m) as it included depreciation on the significant levels of infrastructure acquired with IMS in December 2013. The amortisation of acquired intangibles was £2.4m (H1 FY14: £0.7m) and represents the amortisation of the various intangible assets recognised on the acquisition of IMS. Further details of these can be found in the Company's 2014 Annual Report and Accounts.

We have recorded a share-based payments charge of £0.6m in the period (H1 FY14: £0.2m). The increase is almost all due to the full-period effect of the charge for options issued during the previous year.

Statutory diluted earnings per share ("EPS") in the period were 2.20p (H1 FY14: 1.98p). We have also calculated an adjusted EPS figure which the Board uses as a benchmark to measure the true underlying performance of the business. The measure excludes the effect of amortisation of acquired intangibles, share option charges and transaction and integration costs, and uses cash tax paid rather than the tax charge or credit in the income statement. Adjusted diluted EPS in the period grew by 15% to 4.89p (H1 FY14: 4.27p).

Cash flow and funding

The Group's improved cash performance noted in the 2014 Annual Report and Accounts continued in the first six months of the current financial year, with free cash-flow of £4.9m (H1 FY14: outflow of £0.9m).

Operating cash conversion was 82% in the first half, which was a significant improvement on the 7% conversion experienced in the comparative period. The Group is confident that cash conversion over the year as a whole will be ahead of the prior year's performance.

Following payment of the maiden dividend of 1.0p per share or £1.4m in September 2014, the remaining cash-flow was used to reduce net debt by £3.6m to £8.7m. Given the high proportion of recurring revenue and the run-rate profitability level, the Group is very comfortable with the low level of debt. There is headroom of £11.5m against committed bank facilities of £20.2m as at 30 September 2014, and the bank facilities run until November 2016.

Dividend

As previously announced, the Company has adopted a progressive dividend policy and, whilst considering the financial requirements of the Group, intends to grow the dividend to provide attractive cash returns to shareholders. In line with this, the Company is pleased to announce an Interim dividend of 1.0p (H1 FY14: nil), which will be paid to shareholders in February 2015. Further details regarding the payment will be announced in due course.

Tim Coleman

Chief Financial Officer

17 November 2014

Condensed consolidated Income Statement (unaudited)

\* The comparative period covered the period from incorporation on 11 February 2013 to 30 September 2014, however the trading results of the business comprised the period of ownership of the managed services business which was effectively demerged from Redstone plc on 8th April 2013, and is thus for a comparable time period.

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

The above 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)

\* The comparative period covered the period from incorporation on 11 February 2013 to 30 September 2014, however the trading results of the business comprised the period of ownership of the managed services business which was effectively demerged from Redstone plc on 8th April 2013, and is thus for a comparable time period.

Condensed consolidated Balance Sheet (unaudited)

Condensed consolidated Cash Flow Statement (unaudited)

\* The comparative period covered the period from incorporation on 11 February 2013 to 30 September 2014, however the trading results of the business comprised the period of ownership of the managed services business which was effectively demerged from Redstone plc on 8th April 2013, and is thus for a comparable time period.

Notes to the Interim Financial Information

Six months ended 30 September 2014

1 General information and basis of preparation

The Interim Financial Information is unaudited.

This condensed, consolidated financial information for the six months ended 30 September 2014 has been prepared in accordance with IAS 34, 'Interim financial reporting' as adopted by the European Union and does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for Redcentric plc for the period ended 31 March 2014 were approved by the Board of directors on 16 June 2014 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 15 November 2016. 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 17 November 2014.

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 2014, and are those the Group expects to apply in its financial statement for the year ended 31 March 2015.

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, the Chief Operating 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 2014

Results for the period ended 30 September 2013

* 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 144,007,543. The dilutive effect of share options in issue at 30 September 2014 increased the weighted average number of shares to 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 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 2014 the Company had issued 13,082,099 options over Ordinary shares, and 1,731,055 warrants which are convertible into Ordinary shares. Further details can be found in the Company's Annual Report and Accounts for the period ended 31 March 2014.

12  Net Cash flows from continuing operating activities