Utilitywise Regulatory News (UTW)

23 April 2018

Utilitywise plc

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

Interim results

for the six-months ended 31 January 2018

Utilitywise, a leading independent utility cost management consultancy, announces its financial results for the six-months ended 31 January 2018 ("H1 FY18"). Following the early adoption of IFRS15 on 1 August 2017, the comparable financial information has also been restated to reflect the adoption of this new accounting standard.

Financial summary

· Revenue of £39.7m, an increase of 3% (H1 FY17: £38.4m)

· Adjusted EBITDA1 of £3.4m, an increase of 31% (H1 FY17: £2.6m)

· Adjusted profit before tax2 of £3.2m, an increase of 33% (H1 FY17: £2.4m)

· Adjusted fully diluted earnings per share3 of 4.1 pence, an increase of 64% (H1 FY17: 2.5 pence)

· Underlying operating cash flow4 of £5.9m, an increase of 168% (H1 FY17: £2.2m)

· Underlying free cash flow4,5 of £6.1m (H1 FY17: £(0.2)m)

· Group net debt of £15.0m at 31 January 2018, compared to £9.6m at 31 January 2017 and £19.0m at 31 July 2017

· Group net liabilities of £32.0m impacted by:

o Deferral of revenue to later periods of £17.2m, upon the adoption of IFRS 15

o Un-recognised deferred tax assets of £10.3m

o Non-cash impairment charges in prior year of £17.3m

Operational summary

· Growth in total customer numbers of 1% to c.43,000, driven by a 3% growth in the UK & Ireland, the core geographical market of the Group.

· Energy Consultant attrition of 72% for the twelve-month period ended 31 January 2018, compared to 59% in the same period last year, primarily due to a spike in attrition late in H1 FY18, caused by uncertainty regarding the suspension of the shares of the Group, as a result of the delay in the completion of the FY17 year-end audit.

· Order book6 impacted by the further strengthening of a number of internal controls to improve the quality of business delivered, along with commercial decisions taken by management for the benefit of the business:

o Increase in "go-live" rates on new contracts secured of 82% compared to 78% in the prior period, leading to increase in expected proportion of delivered contracts that subsequently become revenue for the Group

o On a like-for-like basis7, order book additions were 3.1% lower than the same period in the prior year and closing order book remained broadly consistent with 31 July 2017

· Increase of 299% in buildings made intelligent to 1,221 in the period, using Utilitywise's IoT-enabled intelligent platform

· A further increase in net promoter score from 60 to 63.

Brendan Flattery, Chief Executive Officer, commented:

"The overall performance of the Group in the first half is in line with our expectations with revenue, profit and cash flow all improving while we have maintained our customer base, whose satisfaction with our services, as reflected in our net promoter score, is high. As I said at the full year results published in March, the significant delay in the completion of the 2017 year-end audit has had a destabilising effect on several key stakeholders, including colleagues, and accordingly, we expect that the Enterprise division, in particular, will have a softer second half of the financial year. The performance of the Corporate division was strong and, in particular, the growth potential of corporate controls and "intelligent building" enablement through "internet of things" technology remains exciting. In the first half of the year, the number of buildings made intelligent, using our IoT-enabled platform has quadrupled compared to the same period last year.

In the short term, we have dealt with a number of legacy issues from earlier years but, looking ahead, I remain excited about the prospects for Utilitywise. We have a clearly stated Strategy for Growth, including both the Enterprise and Corporate divisions, which will create significant value for our shareholders."

There will be a meeting for analysts at 9.30am today at the offices finnCap, 60 New Broad Street, London EC2M 1JJ. For details, please contact Redleaf Communications at utilitywise@redleafpr.com or 020 3757 6865.

1 Adjusted EBITDA means earnings before interest, taxation, depreciation and amortisation and adjusted EBITDA is stated before exceptional income and costs and non-cash accounting charges for share based payments, as set out in the financial review

2 Adjusted profit before tax is stated before exceptional income and costs, non-cash accounting charges for share based payments and amortisation of intangible assets acquired through business combinations, as set out in the financial review

3 Adjusted earnings per share is stated before exceptional income and costs, non-cash accounting charges for share based payments and amortisation of intangible assets acquired through business combinations and the tax impact of those items

4 Underlying operating cash flow and free cash flow5 are both stated before operating cash outflows in respect of exceptional items

5Free cash flow is net cash flow stated before dividend payments or receipts from the issue of equity, as set out in the financial review

6Order book means total value of closed transactions in the period, which may either be included within revenue in the period or is included within future secured revenue

7Like-for-like basis means Order book6, as adjusted for the internal control improvements and commercial decisions, as described in the business review

For further information please contact:

About Utilitywise

Utilitywise is a leading independent utility cost management consultancy, which has established trading relationships with a number of major UK and European energy suppliers and provides services to its customers designed to assist them in achieving better value out of their energy contracts, reduced energy consumption and lower carbon footprint. Utilitywise is a UK company quoted on the AIM market of the London Stock Exchange. For more information, please visit www.utilitywise.com. 

Business review

The summary adjusted financial results for the Group, stated before exceptional income and costs, non-cash accounting charges for share-based payments and amortisation of intangible assets acquired through business combinations, for the six-month period ended 31 January 2018 showed growth in each of revenue, Adjusted EBITDA1 and Adjusted profit before tax2 compared to the same period last year.

The 31% increase in the Group's Adjusted EBITDA to £3.4m (H1 FY17: £2.6m) included an unchanged Adjusted EBITDA contribution from the Enterprise division and an increase of £0.8m from the Corporate division.

Particularly pleasing was the significant growth in underlying operating cash flow and underlying free cash flow, which contributed to a 21% reduction in the net debt of the Group to £15.0m at 31 January 2018, compared to £19.0m at 31 July 2017.

Total customer numbers grew by 1% in the period to c. 43,000, driven by a 3% growth in the UK & Ireland, which is the core geographical market of the Group.

As set out in the divisional review below, a number of further improvements to internal controls and commercial decisions have been implemented. This has led to an increased "go-live" rate on new contracts secured of 82%, compared to 78% in the prior period, which reflects an improvement in the quality of the business won in the period. On a like-for-like basis, order book additions were 3.1% lower than the same period in the prior year and closing order book remained consistent with 31 July 2017.

The delay in completion of the FY17 year-end audit process had a short-term destabilising effect on colleagues, with a sharp increase in sales staff attrition late in the period and overall Energy Consultant attrition increasing to 72% for the twelve-month period ended 31 January 2018, compared to 59% in the same period in the prior year.

The Corporate business saw further traction in the delivery of corporate controls solutions, with an increase of 299% in the number of buildings "made intelligent" in the period to 1,221, compared to the same period last year.

The Group's customers provided further endorsement of their experience dealing with the Group, with a further increase in net promoter score from 60 to 63.

Divisional performance

During the period, the Group operated from two main divisions. The performance of both divisions is reported separately. All references to Adjusted EBITDA below refer to Earnings before interest, taxation, depreciation and amortisation (EBITDA), stated before exceptional income and costs and non-cash accounting charges for share based payments, as defined above. Divisional revenues are stated before the elimination of intersegment revenue.

Enterprise division

The total number of Enterprise customers increased in the UK and Ireland by 3% to 34,115 and decreased in Europe by 5% to 7,551, an overall Enterprise Division increase of 1%, equating to 575 customers.

Energy Consultant staff turnover was 72% for the twelve-month period ended 31 January 2018, compared to 59% in the same period last year

The amount added to the order book of the Enterprise division was impacted during the period by the further strengthening of a number of internal controls, along with commercial decisions taken by management for the longer-term benefit of the business, as follows:

· The implementation of additional internal processes to be followed before any procurement contract is added to the Group's order book. This is with the intention of improving the quality of the business that is written by the division, leading to an increase in the proportion of that business which ultimately goes live, which is the point at which revenue is recognised by the business. The "go-live" rate in H1 FY18 was 82%, compared to 78% in H1 FY17.

· Additional management scrutiny of proposed contracts where the levels of energy consumption are estimated, leading to lower initial order book values recognised on those contracts. Any contract which has estimated consumption, rather than based upon historic actual data, is now recognised in the order book of the division (and commissions paid to sales staff) at 50% of its estimated value, until consumption data from the energy supplier justifies an increase. Historically, those estimated consumption contracts were treated the same way as other contracts and included in the order book at their full estimated value The value of the 50% reduction in estimated value is £1.6m in the period. Whilst this value is excluded from the internal order book of the division, for the reasons set out above, it has been nominally added back to the order book figures below to allow like-for-like comparison between years.

· In August 2017, the Group took the decision to discontinue trading with certain sub-brokers in its partner channel, as the quality of the business delivered and the associated commercial terms did not give an appropriate financial return for the Group. Accordingly, the order book delivery in H1 FY18 is lower as a result of this decision.

· Prior to the adoption of IFRS 15 on 1 August 2017, the Group recognised revenue on same supplier renewal contracts upon signature of the contract rather than the go-live date of the contract. As a result, the business historically sought to sign significant extra renewals contracts in the final month of each six-month accounting period. Since the adoption of IFRS 15, the business has discontinued this practice. As a result of this decision, order book additions in H1 FY18 were lower than H1 FY17.

The order book additions in the period were as follows:

Taking into account the above factors, the order book additions in the period, on a like-for-like basis at expected go-live rate, were 3.1% lower than the same period in the prior year as follows:

The closing order book was similarly impacted by the above decisions. On a like-for-like basis at expected go-live rate, the closing order book remained broadly consistent with 31 July 2017 as follows:

The revenue and EBITDA of the division were as follows:

The year-on-year change in revenue and EBITDA is summarised as follows:  

After adjusting the opening live contracts to the current year leakage rate, that revenue fell by 8% from £36.0m to £33.2m and EBITDA fell by 66% from £7.0m to £2.4m. This £3.6m reduction in EBITDA, compared to H1 FY17 (as restated), is impacted by £2.2m of additional other costs, mainly comprising overheads, support costs and annual bonus charges.

Corporate division

The Corporate division offers a comprehensive portfolio of products and services designed to assist larger companies with more complex energy needs in managing their energy consumption. These include both energy procurement and broader services designed to give customers enhanced control over their energy. Within the portfolio of services is the Utilitywise IoT-enabled intelligent platform which gives customers real-time visibility of energy usage and an ability to monitor asset usage across multiple sites from a central interface.

The revenue and EBITDA of the division including intercompany transactions were as follows:

The financial year ended 31 July 2017 ("FY17") was a year of transition for the Corporate division, as it changed its focus towards quality of revenue and profit margin from a different mix of income streams. That transition included, in the early part of FY18, a restructuring to reduce the operational gearing of the business. The restructuring removed £1.9m of annualised fixed costs from the business, the non-recurring cost of which is included in exceptional items, as set out in the financial review.

During H1 FY18, the business saw significant growth in its profitability, with adjusted EBITDA increasing to £0.9m, compared to £0.1m in the same period in the prior year. This was from revenue of £6.5m, which was 11% lower than H1 FY17, as a result of the change in focus and mix detailed above.

The division saw continued traction from its energy services/IoT offering, with a growth in the number of buildings "made intelligent" of 915, from 306 at H1 FY17 to 1,221 at H1 FY18. Further growth is expected in the second half of the financial year as the commercial offering is considered compelling and disruptive. 

Financial review

Group overview

A summary of the Group's performance, where "adjusted" means excluding exceptional items, amortisation of intangible assets acquired in business combinations and share-based payment charges in the six-month period ended 31 January 2018 ("H1 FY18"), along with the change compared to the prior year ("H1 FY17"), as restated, is as follows:

Adjusted basis:

Statutory basis:

Trading and EBITDA

During H1 FY18, Group revenue was £39.7m, an increase of 3.4% compared to H1 FY17 (H1 FY17: £38.4m, as restated).

Adjusted Earnings before interest, taxation, depreciation and amortisation (EBITDA) is calculated as follows:

Exceptional items in the current period comprise legal and settlement costs, incurred as a result of a disputes with customers and competitors, of £0.4m, restructuring and re-organisation costs of £0.7m and other non-recurring professional fees of £0.9m.

In the prior period, they comprised £13.4m of non-cash impairment losses, £1.2m of legal, restructuring and re-organisation costs and a credit of £0.2m from a historic provision release.

The main changes in the Adjusted EBITDA of the Group are as follows:

The above items are explained further in the Business review above.

Taxation

At the balance sheet date, there were un-recognised deferred tax assets in respect of unutilised tax losses of £10.3m (31 July 2017 £7.2m), at the UK headline rate of corporate tax of 19%. Of those un-recognised deferred tax assets, £3.3m arose on the adoption of IFRS 15 on 1 August 2017.

In light of this position, no accounting taxation charges or credits have been recognised in the consolidated income statement for the six months ended 31 January 2018.

Earnings per share

Diluted adjusted earnings per share, with Adjusted earnings stated before exceptional items, non-cash accounting charges for share-based payments and amortisation of intangible assets acquired in business combinations and the associated tax impact of these adjustments was 4.1 pence per share (H1 FY17: 2.5 pence, as restated). Adjusted Earnings, stated on the same basis as above, were £3.2m (H1 FY17: £1.9m, as restated) and the weighted average number of shares in issue, on a diluted basis, increased from 78,888,456 to 79,178,133 shares.

Balance sheet

The Group balance sheet is summarised below on a statutory basis:

The Group balance sheet had a negative net assets position at 31 January 2018. This is summarised as follows:

The above items are summarised as follows:

· In the prior year, non-cash impairments totalling £17.3m were charged against the equity of the Group.

· On 1 August 2017, the Group adopted IFRS 15, the main effect of which was to defer the recognition of revenue on same supplier renewal contracts to later financial periods. Accordingly, it is anticipated that this value will subsequently be recognised in the Group's financial statements in those future periods.

· The unrecognised deferred tax assets are considered in the "taxation" section above.

As well as the above items, the business review sets out that the total value of new contracts, not yet recognised in the Group financial statements and stated net of the expected rate of failure to subsequently go-live, total £48.8m. This value is stated before any provision for expected under-consumption. If the conditions used and/or observed in H1 FY18 remained constant in future, this would represent the following theoretical revenue value, to be recognised in the equity of the Group in future:

· At the average accounting rate of under-consumption used in H1 FY18 of 30.7%, total future revenue of £33.8m; or

· At the average rate of under-consumption observed on maturing contracts in the FY18(H1)/17 lookback period of 21.6%, total future revenue of £38.3m

Cash flows and net debt

The cash flow of the Group is summarised as follows:

The above operating cash flow amount is stated after cash outflows in respect of exceptional items of £2.0m (H1 FY17: £0.8m), such that the underlying operating cash flow of the Group was £5.9m, an increase of 168% compared to H1 FY17 (H1 FY17: £2.2m). The underlying free cash flow of the Group, on the same basis, was £6.1m (H1 FY17: £(0.2)m).

The closing net debt balance is made up as follows:

Financing and banking covenants

The activities of the Group are substantially funded by a £25m revolving credit facility (RCF) with a single lender, Royal Bank of Scotland plc. The RCF facility matures in April 2019.

As at 31 January 2018, the undrawn committed facilities of the Group were £13.1m, net of cash and cash equivalents.

At the balance sheet date, the Group had two main financial performance covenants:

· Minimum liquidity covenant, which sets out maximum balance sheet positions on a monthly basis, taking into account the Group's net debt as well as amounts due back to energy suppliers in respect of projected under-consumption

· EBITA interest cover, with EBITA determined on an assumed constant under-consumption rate of 20% on procurement contracts.

As at the date of approval of the interim financial statements, the Group is in compliance with these covenants and expects to remain so in future.

Related parties

During the period there have been no related party transactions that have had a material impact on the financial position or performance of the Group. There have been no significant changes to related party transactions disclosed in the annual report for the year ended 31 July 2017.

Principal risks and uncertainties

The principal risks and uncertainties of the Group are set out in the FY17 annual report, which is available on the Group's website www.utilitywise.com.

Outlook

The Enterprise division was impacted by a period of uncertainty as a result of the delay in completion of the Group's FY17 year-end audit process and consequential suspension of the Group's shares from trading, with colleague attrition peaking in January 2018 and early in the second half of the financial year. While the attrition levels have stabilised since the FY17 year-end results were announced in March 2018, this will undoubtedly have an impact on the level of order book delivery. Therefore, as previously indicated, the Board anticipates softer trading in the second half of the year. The Corporate division, after a strong performance in the first half, has continued to gain traction and further growth is expected in the second half of the year. Despite the challenging period that the Group has come through, the Board remains confident in the future prospects of the Group.

By order of the Board

Brendan Flattery

Chief Executive Officer

20 April 2018 

Note - revenue recognition on procurement contracts

The average levels of under-consumption against initial values of procurement contracts ("leakage") observed upon the scheduled maturity of those contracts was:

Using the methodology set out in the Group's FY17 Annual Report, the leakage provision rates used, for live contracts of less than £50,000 at the balance sheet date that are expected to reach their scheduled maturity dates are as follows:

Including provisions for contracts that are not expected to reach their scheduled maturity dates, the total level of leakage provisions used were as follows:

Condensed consolidated statement of total comprehensive income

For the six months ended 31 January 2018

Condensed consolidated statement of total comprehensive income

For the six months ended 31 January 2018 (continued)

Condensed consolidated statement of financial position

As at 31 January 2018

Condensed consolidated statement of changes in equity

For the six months ended 31 January 2018

Condensed consolidated statement of changes in equity

For the six months ended 31 January 2018 (continued)

Condensed consolidated cash flow statement

For the six months ended 31 January 2018

Unaudited notes

1 Basis of preparation and accounting policies

Utilitywise plc is incorporated and domiciled in the United Kingdom.

The condensed consolidated interim financial information should be read in conjunction with the financial statements for the year ended 31 July 2017, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.

On 1 August 2017, the Group early-adopted IFRS 15 (Revenue from Contracts with Customers). In accordance with IAS 8, the results of the Group for the six-month period ended 31 January 2017 and for the year ended 31 July 2017 have been restated to take account of this change in accounting policy. A qualitative explanation of the impact on the Group's results, as a result of the adoption of IFRS 15, is set out in the financial statements of the Group for the year ended 31 July 2017.

The information for the year ended 31 July 2017 does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006, but is based on the statutory financial statements for that year, on which the auditors have reported, as subsequently restated upon the adoption of IFRS 15 as explained above. Their audit report was unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain a statement under Section 498 (2) or (3) Companies Act 2006.

A financial reconciliation of the Group's results for the year ended 31 July 2017 and on the consolidated balance sheet of the Group as at 31 July 2017 and 31 July 2016, between the audited results and the results as restated upon the adoption of IFRS 15, was announced on 13 April 2018. As this was after the approval of the financial statements of the Group for the year ended 31 July 2017, the financial reconciliation has not been audited.

The interim financial information for each of the six-month periods ended 31 January 2018 and 31 January 2017 has not been audited and does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006.

The principal accounting policies have been applied consistently to all years and are set out in the 2017 Annual Report and Accounts, with the exception of the change in accounting policy upon the adoption of IFRS 15, as explained above.

2 Segment information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker ("CODM") has been identified as the management team, including, amongst others, the Chief Executive Officer, Non-executive Chairman and Chief Financial Officer.

During the year, the Group serviced both Enterprise and Corporate businesses. The Board considers that the services were offered from two distinct segments in the current year.

Operating segments are determined based on the internal reporting information and management structure within the Group. Information regarding the results of the reportable segment is included below. Performance is based on segment Adjusted Earnings before income taxation, depreciation and amortisation (EBITDA), which is operating profit or loss stated before depreciation, amortisation, share-based payment expenses and any exceptional items, as reported in the internal management reports that are reviewed by the CODM. The segment EBITDA, as defined above, is used to measure performance. Revenues disclosed below represent revenues to external customers.

The Enterprise Division derives its revenues from energy procurement by negotiating rates with energy suppliers for small and medium sized business customers throughout the UK, Republic of Ireland and certain European markets. The Corporate Division derives its revenues from energy procurement of larger industrial and commercial customers, providing an account care service and offering a variety of utility management products and services designed to assist customers in managing their energy consumption.

2 Segment information (continued)

3 Exceptional items

Exceptional charges/(income), stated before applicable taxation effects, are as follows:

Exceptional items in the six-month period ended 31 January 2018 comprise:

· Legal and settlement costs incurred as a result of a disputes with customers and competitors of £422,000

· Restructuring and re-organisation costs of £685,000

· Other non-recurring professional fees of £940,000

Exceptional items in the six-month period ended 31 January 2017 comprise:

· An impairment loss in respect of t-mac Technologies Limited CGU of £13,367,000

· Other charges in relation to various legal, restructuring and other costs total £1,241,000

· Exceptional income of £249,000 in the period relates to an adjustment to a historic dilapidations provision.

4 Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. 

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume the conversion of all potentially dilutive ordinary shares. The Group has potentially dilutive ordinary shares, being those share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the period. Own shares held are excluded from the average number of shares used to calculate basic and diluted EPS.