Redcentric Regulatory News (RCN)

Redcentric plc

("Redcentric" or the "Company")

Trading Update

Redcentric plc (AIM: RCN), a leading UK IT managed services provider offering cloud, cyber security, connectivity and communication solutions to mid-market and enterprise customers, is pleased to announce the following update for the financial year ended 31 March 2023 ("FY23").

PROVISIONAL RESULTS FOR THE YEAR ENDED 31 MARCH 2023

We are pleased to announce following provisional results for FY23:

· Revenues of £141.8m (FY22: £93.3m);

· Adjusted EBITDA* of £24.8m (FY22: £23.7m); and

· Adjusted net debt as at 31 March 2023 of £35.5m (31 March 2022: net debt of £1.5m).

These results reflect the contribution from the five acquisitions completed over the last two financial years including a full year of trading from Piksel and 7 Elements, and a partial year's contribution from 4D Data Centres and the two Sungard asset acquisitions. The results further reflect the following:

· Higher than anticipated electricity costs of c.£1.7m, reflecting the impact of the Government Energy Bill Relief Scheme not being applied to overall consumption, the significant increase in non-commodity charges and rephasing of energy efficiency savings as a result of supplier equipment delays.

· Higher than expected software license costs of £0.7m (annualised effect of £1.5m) as a result of the acquired Sungard business not recording platform usage accurately and under reporting license consumption prior to the acquisition.

*Adjusted EBITDA is EBITDA excluding exceptional items, share-based payments and associated National Insurance.

OPERATIONAL AND OTHER UPDATES

Organic growth update

We continue to see strong organic growth, with an increase in net new business (new business plus or minus renewal churn less cancellations and excluding inflationary price increases) in each of the last ten months to the end of March 2023. Net new business when converted into revenue equates to an organic growth rate of approximately 6%, a level that has not been experienced for a number of years and we expect this level of organic growth to continue into FY24.

The improvement in organic growth reflects the increase in new logos and delivering against the cross-selling opportunities to existing customers as a result of Redcentric's broader product offering and enlarged customer base.

Electricity sourcing

Redcentric operates out of eight of its own data centres and has a large (including management) presence in a third-party data centre. In seven out of nine of these data centres, Redcentric is responsible for the sourcing of electricity. The electricity purchasing cost differences between the data centres are detailed below:

· In the seven data centres where procurement is managed by Redcentric, electricity has been forward bought for the whole of FY24. The commodity rates achieved are consistent with the Board's expectations and removes the commodity price risk in these data centres until 1 April 2024.

· The two data centres where Redcentric has no control on the procurement of electricity have also locked in forward prices but at rates much higher (c.80%) than those achieved by Redcentric. Whilst we have the ability to pass on price increases to the former Redcentric, Piksel and 4D customer bases, the fixed priced Sungard customer contracts mean that for FY24 there will be £0.9m of increased costs which cannot be passed on to customers. One of the two data centres where Redcentric has no control on electricity purchasing decisions will be closed by the end of FY24.

Redcentric continues to monitor the forward rates for FY25 and beyond and will forward buy electricity as and when it considers beneficial to do so in line with our historical hedging policy. 

Integration update

The integration programme is progressing well with total synergies of £22.0m now forecast, £5m ahead of the expectations at the time of the H1 FY23 results. £16.2m of the total synergies have already been actioned and reflected in the run rate, with the balance of £5.8m to be actioned throughout the course of FY24 and effective throughout both FY24 and FY25.

The anticipated total cost synergies, progress to date and phasing of synergies is shown below:

The sale of the Elland data centre anticipated for December 2022 did not complete due to funding issues on the buyer's part and as a result this facility will now be retained and developed as a long-term strategic asset. The Harrogate data centre will now be closed instead with customer and core equipment transferred to Elland by the end of FY24. Annualised savings of circa £1.4m are anticipated versus the £0.6m expected for Elland, but these savings will materialise in FY25 rather than FY24. In addition, one of the two sites where Redcentric does not have control over electricity purchasing decisions will have been closed (see Electricity sourcing above). 

Inflation

The business continues to experience widespread inflationary increases across its cost base, primarily wage inflation, electricity costs and software license costs. Furthermore, we have been notified of significant increases in business rates (c.33%) across our data centre portfolio which is anticipated to add c.£0.8m to the FY24 cost base. Although the business can pass on specific increases relating to electricity (with the exception of the Sungard customer base) and license costs periodically, increases relating to general inflation can only be passed on annually.

Change in accounting standards

To align to the IFRS Interpretations Committee's agenda decision in April 2021, ongoing development costs that relate to cloud computing arrangements will be treated within operating costs from FY24 onwards. These costs have previously been treated as exceptional costs on the basis that they related to the customisation and configuration of the D365 ERP solution. The expected development costs included within operating costs for FY24 are £0.6m.

Contingent consideration

As part of the deal structure for the acquisition of 7 Elements Ltd, contingent consideration of up to £0.45m was included based on the performance of the business in the 13 months to 31 March 23. As the acquisition has exceeded the targets set, the maximum amount of £0.45m became payable, and was paid on 3 April 2023.

The final consideration for the Sungard DCs acquisition is based on the conversion of short-term contracts into long-term contracts. This position will not fully crystalise until June 2023 and based on latest information the contingent consideration is expected to be £2.75m, which will be payable in July 2023.

CURRENT TRADING AND OUTLOOK

Considering the improved electricity purchasing arrangements, customer and supplier price increases effective from 1 April 2023 and completed cost reductions as result of the synergy programme, we commence FY24 with annualised revenues and adjusted EBITDA of c.£160.0m and c.£29.0m respectively.

The focus for FY24 will be to complete the integration of the recently acquired businesses and to continue to grow the business by capitalising on the excellent opportunities provided by the broader product offerings and increased customer bases which have resulted from the acquisitions undertaken in FY22 and FY23. 

Electricity costs remain key to financial performance and we will continue to make significant investments in FY24 to further reduce electricity consumption. This will be achieved by deploying new cooling infrastructure at the flagship data centre in Heathrow and by installing solar panels at the Heathrow and Elland data centres. The Company has locked in electricity prices for the whole of FY24 and so will not be subject to commodity price volatility in the current financial year.

With both the synergy and energy efficiency programmes completing during the course of FY24, FY25 will be the first full year that reflects the full benefit of the acquisitions.

NOTICE OF FINAL RESULTS

The Company intends to announce its results for the financial year ended 31 March 2022 on Wednesday 19 July 2023.

Peter Brotherton, Chief Executive Officer, commented:

"The last two years have been transformational for the Company. The five acquisitions, together with a return to organic growth, has seen Redcentric's revenues grow by 75% in the last two years from £91.4m in FY21 to a current annualised run rate of c.£160m.

Due to the very significant and complex nature of the synergy programmes, which were reflected in the consideration paid for the acquisitions, the boost in profitability will not be fully realised until FY25. However, we are confident of achieving long term EBITDA margins close to or in line with our stated target of 25% once the integration programmes have been completed and fully reflected in the cost base.

Given the broader product offerings, the enlarged customer base, and the integration programmes currently underway, I am extremely confident in the outlook for Redcentric."

Enquiries:

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.