Redcentric Regulatory News (RCN)

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.

Redcentric plc

("Redcentric" or the "Company")

Trading update for the six month period to 30 September 2022

Redcentric plc (AIM: RCN), the leading UK IT managed services provider offering cloud and data connectivity solutions to mid-market and enterprise customers, is pleased to announce the following update for the six months ended 30 September 2022 ("HY23").

FINANCIAL HIGHLIGHTS

HY23 has seen the business continue to perform well, with both revenue and adjusted EBITDA being in line with the expectations of the board of directors of the Company (the "Board"). The Board expects to announce the following trading results for HY23:

· Revenues of £61.5m (HY22: £44.3m)

· Adjusted EBITDA of £11.7m (HY22: £11.9m)

· *Adjusted net debt of £39.3m (31 March 2022: £1.5m)

· Capital expenditure of £1.5m (HY22: (restated) £1.9m)

The adjusted net debt reflects:

· The initial cash consideration net of cash acquired of £23.2m paid following the acquisitions of 4D Data Centres Limited ("4D") and certain business and assets from Sungard Availability Services (UK) Limited (in administration) ("Sungard");

· An investment of £3.2m, reflecting stock forward bought to avoid significant price increases, protecting profitability, and to ensure that supply chain issues do not delay network rollout projects. It is anticipated that approximately half of this working capital investment will reverse by the end of the financial year;

· An additional working capital requirement of £6.3m as the Company worked to onboard the customers acquired as part of the Sungard acquisition. The invoicing relating to this onboarding has now been brought up to date and hence this adverse working capital impact will reverse in H2 of the year ended 31 March 2023 ("FY23");

· Exceptional costs of £4.8m were incurred in the period, £2.5m higher than anticipated due to additional integration and restructuring costs in relation to the 4D and Sungard acquisitions. Approximately half of these additional costs will result in like for like additional annual savings in the financial year ending 31 March 2024.

* Adjusted net debt excludes supplier loans and lease liabilities that would have been classified as operating leases under IAS 17

OPERATIONAL HIGHLIGHTS

The first six months of FY23 have built on the progress made in the financial year ending 31 March 2022 and have been transformational for Redcentric. During the period the Company has successfully completed two scale acquisitions and one capability acquisition for a combined initial consideration net of cash acquired of £23.2m.

As a result of the five acquisitions completed between September 2021 and July 2022, the Company has significantly strengthened its cyber security, hyper-cloud and consulting capabilities, and materially increased the annualised revenue base by c.70%. With these acquisitions, we feel that we now have one of the broadest product offerings in the market.

Other operational highlights for the period include:

· The signing of a new £100m banking facility on 27 April 2022, giving the Company access to £80m of committed funds at very competitive rates of interest to support and accelerate our acquisition strategy; and

· A significant increase in new sales orders during the second quarter of FY23 with order levels now substantially ahead of pre-covid levels. The increase in sales volumes reflects the enlarged customer base, additional capability and a restructuring and strengthening of the sales team.

INTEGRATION UPDATE

The key highlights are as follows:

· Three months into the ownership of Sungard, we have fully integrated the business and ceased all transitional service arrangements, removing significant duplicated costs;

· Phase one of a staff restructuring programme has been completed, resulting in a reduction in annual salary costs of £3.2m;

· As part of the Sungard acquisition, the Company entered into short term licenses to occupy three data centre facilities with the administrator of Sungard. Of these:

o  The largest facility is considered to be a long-term strategic asset and the eight-year lease has been assigned to the Redcentric group;

o  The second facility is considered important in the medium term and a new three-year agreement has been signed. As part of this agreement, the short-term annualised license to occupy costs of £8.5m have been replaced by a three-year agreement with a year one annual cost of £4.1m, followed by annual indexation of 3%;

o  The third facility is not considered as a core strategic asset, and so this property continues to be occupied under a short-term license whilst we explore options to either sell or exit the facility;

o  It was originally assumed that the license to occupy costs would be treated as part operating and part exceptional costs. Following discussions with the Company's accounting advisors, these costs have all been classified as IFRS16 leases and therefore add £2.6m to right of use depreciation charges in FY23. As this reclassification relates to the license to occupy period only, there will be no impact beyond FY23. 

· During the second half of FY23, several electricity initiatives will be implemented to improve the efficiency of the acquired data centres. These will result in additional capital expenditure of c.£2m. Assuming a cost equivalent to the recent government energy price guarantee, it is expected that these measures will have a one-year payback;

· With the exception of employee synergies, the acquired 4D business has largely been left as a standalone business whilst focus was placed on migrating away from the onerous Sungard transitional arrangements. 4D will be fully integrated by the end of the financial year.

OUTLOOK

The Board is pleased by the continued progress made by the Company in the first six months of FY23 and remains confident in delivering revenue and adjusted EBITDA for FY23 in line with its expectations.

Of particular note, the Board is pleased to see a substantial uplift in sales activity and order intake as a result of the additional scale, breadth of product and enhanced sales team.

The Board is cognisant of the continuing volatility of electricity prices and that this could significantly increase or decrease profitability of the acquired businesses. Unlike the acquired businesses, Redcentric has historically hedged electricity prices and this will be replicated across the recently acquired businesses once prices have stabilised.

Work continues to seek further synergies from the acquisitions completed in the period and despite some of the current economic headwinds, the Board is very confident that the Redcentric group will build on the progress shown over the last eighteen months, delivering enhanced revenue growth and EBITDA ahead of the Board's expectations in FY24 as the benefits of the acquisitions are realised.

NOTICE OF INTERIM RESULTS

Redcentric's unaudited interim results for the half year period ended 30 September 2022 will be published on Thursday 8 December 2022.

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