Tpximpact Hldg Regulatory News (TPX)

31 January 2023

TPXimpact Holdings PLC

("TPXimpact", "TPX", the "Company" or the "Group")

Q3 Trading Update

Trading below expectations. Full-year guidance revised.

TPXimpact Holdings PLC (AIM: TPX), the technology-enabled services company focused on digital transformation, announces its Q3 trading update for the three months ended 31 December 2022.

Q3 and 9M Financial highlights:

Post-period outlook:

Bjorn Conway, Chief Executive Officer, commented:

"I am pleased by the strong momentum in our new business win rate which exceeded £41m in the last quarter and has continued into January with £9m won in the month. However, trading performance in Q3 23 was below our expectations: an encouraging performance in November was followed by a disappointing December, reflecting external factors largely outside the Group's control.

"Having conducted a thorough review of our latest reforecast with all our businesses, we have revised our full-year estimates to reflect current expectations of performance in Q4 23. We have faced some challenges in recruiting the right mix of resource and skill sets on a timely basis to support our new business wins, and this has led to pressure on margins. Combined with client-driven challenges in some parts of the business, these factors have led to a reduction in our revenue and margin expectations for the remainder of the financial year. The business also continues to be impacted by the structural and personnel changes implemented at the start of the year and the loss of capability that resulted.

"Given the updated reforecast for Q4 23, the Group is unlikely to pass its debt covenants at 31 March 2023, the next measurement date. We are actively engaged with our bankers on appropriate actions to address this event (including a waiver), although these discussions are yet to conclude. We are committed to managing the business in an efficient and productive way, whilst maintaining our collective responsibility for impactful change.

"The market opportunity available to TPX remains significant with organisations across public and commercial sectors needing to adapt to the evolving market challenges and invest in digital transformation, as supported by our very healthy sales pipeline. I continue to be impressed by the talent and commitment of our people in the face of the challenging circumstances we are encountering. Working collaboratively is key to achieving our goals, and I am certain that, together, we will see progress as the coming year unfolds."

1In measuring our performance, the financial measures that we use include those which have been derived from our reported results in order to eliminate factors which distort period-on-period comparisons. These are considered non-GAAP financial measures, and include measures such as like-for-like revenue, adjusted EBITDA and net debt. All are defined in the Group's 2022 Annual Report.

Enquiries:

Third quarter trading

New business wins totalled £41m in the third quarter, building on the solid foundation of new business won in the first half of the year. However, trading performance in Q3 was below expectations. Although November performance was largely in line with our forecasts, the month of December was impacted by a markedly higher rate of client staff absence due to sickness and holidays, which led to client-side delays in commencing projects and lower client availability for projects that were already underway. This pattern was consistent across almost all our businesses and led to a significant reduction in billable time and, therefore, utilisation rates, revenues and gross profit. Revenue for the third quarter was £19.0m, down 3.9% against the same period last year and down 14.6% on a like-for-like basis. Gross profit for the same period was £5.2m, down 15.0% against the same period last year and down 27.3% on a like-for-like basis. Gross margins therefore decreased to 27.4% against 30.8% in Q3 last year (and against 32.0% on a like-for-like basis). These challenges impacted Adjusted EBITDA margin for Q3, which was 3.1%.

For the nine months to 31 December 2022, revenue was £59.4m, up 3.7% against the same period last year, but down 9.2% on a like-for-like basis. Gross profit was £15.7m, down 9.3% against the same period last year, and down 22.9% on a like-for-like basis. Gross margins were therefore 26.4% against 30.2% for the same period last year (and against 31.0% on a like-for-like basis). Adjusted EBITDA margin was 3.0% for the nine months to 31 December 2022.

In total, Group headcount of 740 people (on an FTE basis) at 31 December compares with 659 people at 31 March 2022, an increase of 12% on a like-for-like basis. Including contractors, the Group's aggregate workforce is around 1,000 people.

Net debt

Net debt (excluding lease liabilities) was £17.5m at 31 December 2022 against £14.1m at 30 September 2022. The cash outflow of £3.4m in the third quarter was driven by the payment of the final dividend for FY 22, bank interest and corporate taxes. £1.4m of the outflow was attributable to working capital movements due to the holiday period and some changes in procurement approval processes/systems at certain clients. The Group was within its banking covenants at 31 December 2022.

Outlook for the full year

New business wins in January amounted to £9m, an encouraging start to the quarter.

The Group has recently completed a fresh reforecast of the current financial year. The outlook for Q4 23 reflects the evolution of the business and market in Q3, and a number of challenges to specific parts of the business that have emerged since the half year results announcement on 30 November 2022.

Whilst the high win rate of new business in Q2 and Q3 is beginning to flow through into the Group's revenues, driven by some significant individual contracts with public sector clients, the challenge of recruiting the right mix of talent (including specialist skill sets) at an appropriate remuneration level, will cause a disproportionate weighting towards contractor resource in Q4, largely in our Consulting business (c. 40% of Group revenues). This will impact the Group's gross profit and margins in Q4.

Although the Group has embarked on a significant recruitment campaign to bring in the right mix of permanent talent to service these large contracts, the time taken from launching a search to filling a role and commencement of billable time is typically 2-3 months, which means our ability to switch contractors to FTEs is limited in the short-term. A highly competitive recruitment market, reflecting wider inflationary pressures, also means that margins are currently less than anticipated on a number of major contracts wins, where rates are fixed during a bidding process and (as is usual in the public sector) not index-linked.

At the same time, our Digital Experience business (c. 17% of Group revenues), which is heavily dependent on the charitable and not-for-profit sector, is seeing increasing restraint in client spend, which will reduce forecast revenues. With a cost base largely comprised of permanent staff, it is unlikely that we will be able to offset the expected drop in revenue with a reduction in staff costs in Q4.

The performance of the rest of the Group is expected to be mixed, with some parts of the Group showing healthy growth, whilst others are being impacted by client delays in commencing project work.

For these reasons, the January reforecast indicates revenue for the full year of c.£80 million (vs c.£90 million previously), a gross margin of c.26% (vs 30% previously) and a FY Adjusted EBITDA margin in the range of 2-3%.

At this level of Adjusted EBITDA, the Group is unlikely to satisfy its debt covenants at 31 March 2023, so management have engaged with the Group's bankers with a view to securing a waiver of the covenant test. Our bankers have been supportive in these discussions, although these are yet to conclude.

Outlook for FY 2024

The Group has commenced its budgeting process for the next financial year and is constructing a three-year plan, although this process is not expected to be completed until after the year-end of 31 March 2023.

The Group currently has around £56m of committed/backlog revenue for FY 24, which is significantly higher than at the same time last year. Together with the current run-rate of new business wins, this underpins our expectation of 10-15% like-for-like revenue growth for FY 24, in line with the Group's previous guidance and historical targets. Management will issue a trading update in late April which will include guidance on Adjusted EBITDA margins for the next financial year.

We continue to believe the digital transformation market in the UK - in both the public and private sectors - remains attractive, with plenty of potential for continued growth, and that the Group is well-placed to take advantage of these trends.

Bjorn Conway Steve Winters

Group CEO Group CFO

About TPXimpact

TPXimpact exists to transform the organisations, services and systems that underpin society and that drive business success. It applies strategic and creative thinking, technology, innovative design and user-centred approaches to bring about numerous improvements which together multiply the impact of change.

The Company works closely with its clients in agile, multidisciplinary teams that span organisational design, technology, and digital experiences. It shares a deep understanding of people and behaviours and a philosophy of putting people and communities at the heart of every transformation.

The business is being increasingly recognised as a leading alternative digital transformation provider to the UK public services sector, with c.65% of its client base representing the public sector and c.35% representing the commercial sector.

More information is available at www.tpximpact.com .