Zegona Com Regulatory News (ZEG)

ZEGONA COMMUNICATIONS PLC

ZEGONA - 2016 RESULTS

ROBUST 2016 PERFORMANCE AT TELECABLE WITH CONTINUING GROWTH MOMENTUM

London, England, 6 April, 2017 - Zegona Communications plc (LSE: ZEG) announces results for period ending 31 December 2016.

Telecable continues to perform strongly, in line with guidance for 2016

· Revenue3 up 3.0% to €138.5 million for full year, driven by both Consumer and Business sectors

· EBITDA3 up 0.2% to €65.1 million for full year, including significant investment in football content

· Cash Flow3 up 9.7% to €39.6 million for full year, reflecting improved cost efficiencies

Significant improvements delivered during the first full year of Telecable ownership

· Enhanced product offers - 500Mbps broadband, increased mobile data allowances, advanced TV services and premium football

· New innovative mobile access agreement with Telefonica, providing 4G services at much improved cost

· Increase in online sales and development of self-install programmes to drive ongoing efficiencies

· Stronger business development pipeline, both within Asturias and nationally across Spain

Sustained growth expected in 2017

· Healthy industry price repair, with all major operators increasing prices in 2016 and further rises announced for 2017

· Spain expected to remain fastest growing Euro economy, GDP growth of 3.2% in 2016

· Telecable focus on driving increased convergence in 2017, leveraging advantageous new mobile access agreement

· Targeting 3-5% Revenue3 growth, with contributions from both the Consumer and Business sectors

· Another year of double digit Cash Flow growth (before a €2-3 million one-off investment in 4G Mobile transition)

Strong cash returns to shareholders

· Dividend of 4.5 pence per ordinary share paid for 2016

· 5.0 pence dividend policy confirmed for 2017, 11% increase

· Incremental capital return potential via share buybacks and/or special distributions

Eamonn O'Hare, Zegona Chairman and CEO commented: "Telecable has continued to deliver under Zegona ownership. We are particularly pleased that the business has grown its revenues and cash flows strongly in 2016 at the same time as delivering improvements that provide a solid platform to ensure this growth is sustained. Telecable's growth has outperformed other players in the Spanish market in recent years, and it is satisfying to see our track record being maintained. As we look forward in 2017, we are encouraged by the increasing momentum in the business and the fact this is underpinned by a strong Spanish economy and further evidence of industry price repair. This momentum gives us confidence that Telecable will sustain growth across its key financial metrics in the coming year. As a result, and underpinned by our confidence in the Cash Flow generation of the business we can now confirm an 11% increase in the dividend to 5.0 pence per ordinary share for 2017.

As we look across the broader European TMT landscape, the dynamic forces of consumer consumption, industry consolidation and convergence are creating significant opportunities for new acquisitions. In fact, since creating Zegona almost two years ago, it is my personal view that the market environment to execute our core Buy-Fix-Sell strategy has never been better. We are seeing a steady increase in the number of new opportunities and are confident that additional acquisitions satisfying our disciplined financial criteria will be identified."

Enquiries

Tavistock (Public Relations adviser)

Tel: +44 (0)20 7920 3150

Jos Simson - jos.simson@tavistock.co.uk

Lulu Bridges - lulu.bridges@tavistock.co.uk

Mike Bartlett - mike.bartlett@tavistock.co.uk

Notes to Editors:

About Zegona

Zegona was established with the objective of acquiring businesses in the European Telecommunications, Media and Technology ("TMT") sector with a 'Buy-Fix-Sell' strategy to deliver attractive shareholder returns. Zegona is listed on The London Stock Exchange's Main Market and is led by former Virgin Media executives, Eamonn O'Hare and Robert Samuelson.

Zegona's first acquisition was the €640 million purchase of Telecable, the leading quad play cable telecommunications operator in the Asturias region of Spain, which completed in August 2015. Zegona believes Telecable represents a compelling investment because of its market leading position in Asturias and strong cash generation, coupled with attractive dynamics in the Spanish telecoms market and Spanish economy. In 2016, Telecable delivered Revenues3 of €138.5 million, EBITDA3 of €65.1 million and Cash Flow of €39.6 million.

There will be a conference call for analysts and investors in London at 1:30 p.m. BST. Analysts and investors can dial in to the presentation on +44 (0) 20 3427 1912 - passcode 9489699 for all participants. The associated presentation will be available to download from the results and presentations section of www.zegona.com from 12:00 noon BST.

There will be a live webcast of the conference call available from the following link:

http://edge.media-server.com/m/p/f29o9z3m

An on-demand webcast will be available from www.zegona.com 

Forward-looking Statements

Certain statements in this announcement are forward-looking statements which are based on Zegona's expectations, intentions and projections regarding its future performance, anticipated events or trends and other matters that are not historical facts. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of such statements and, except as required by applicable law, Zegona undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The information contained in this announcement is subject to change without notice and, save as required by the law, Zegona does not assume any responsibility or obligation to update publicly or review any of the forward-looking statements contained herein.

OVERVIEW4

It has been an exciting and productive first full year for Zegona. The Company was launched via an IPO in March 2015, with the objective of acquiring businesses in the European TMT sector with a 'Buy-Fix-Sell' strategy to deliver shareholder returns through fundamental business improvements.

Our first acquisition was the purchase of Telecable, the leading telecommunications operator in the Asturias region of Spain. Zegona acquired Telecable for €640 million in August 2015. Our first full year of ownership has confirmed our view that Telecable is a compelling investment driven by the company's market leading position and strong cash generation, coupled with attractive dynamics in the Spanish telecoms market and a recovery in the Spanish economy.

During 2016, Zegona has continued to work closely with the Telecable management team to further develop the business and the services it provides. Building on the early work done in 2015, we have implemented a number of key strategic initiatives, including:

· Driving growth in consumer revenue with broadband speed upgrades and innovative TV services

· Enhancing the mobile experience for all customers by doubling data allowances and expanding the Wifisfera WiFi service

· Renewing the focus on business clients with a comprehensive change in management and product portfolio

· Delivering Capex productivity improvements focused on sales distribution, network maintenance and home installations

Beyond Telecable, we continue to see many attractive investment opportunities in Asturias, nationally in Spain and across the broader European TMT landscape. It is Zegona's view that the market environment to execute our core Buy-Fix-Sell strategy has never been better. We are seeing a steady increase in the number of new opportunities and are confident that additional acquisitions satisfying our disciplined financial criteria will be identified.

TELECABLE 2016 PERFORMANCE

Telecable's results in 2016 were in line with our expectations and represent a strong performance across our key financial metrics of Revenue3 and Cash Flow. Telecable's total Revenue3 for the year was €138.5 million, which represents 3.0% growth compared to 2015. This Revenue3 growth was driven by an impressive performance in the Consumer Mobile and Business sectors with year on year growth of 10.3% and 6.2% respectively. Across the broader Consumer sector performance was solid with 1.9% growth compared to 2015. To counter the competitive nature in this sector the focus has been on upselling products and enhancing the overall value proposition to drive growth in customer lifetime value.

EBITDA3 for the year was €65.1 million, which represents 0.2% growth compared to 2015 because increases in Revenue3 were broadly offset by the combined impact of three factors (1) the first year of a substantial investment in premium football content that we expect will generate returns in future years, (2) higher mobile access costs from our legacy mobile access agreement that we expect will be substantially reduced when Telecable transitions to its new agreement in the first half of 2017, and (3) effective management of other costs such as handsets, networks, operations and headcount that delivered a 5.7% saving across these categories.

Capex for the year decreased by 11.7% to €25.6 million. This was driven by strong cost control and a focus on effective capital expenditure. Key Capex productivity improvements included increased online sales, lower network costs and development of customer self-help and self-install programmes. The combination of higher EBITDA3 and lower Capex delivered Cash Flow generation of €39.6 million, 9.7% growth compared to 2015.

CONSUMER5

Telecable's consumer business generated Revenue3 of €100.8 million in 2016, a 1.9% increase compared to 2015. The growth in Telecable's high value quad-play customers and improved consumer ARPU6 (5.9% growth from €57.4 per month in 2015 to a full year record of €60.8 per month in 2016) were important drivers of this Revenue performance. These increases more than offset the impact of a reduction in total customers resulting from short term promotional activity from other operators who have invested in deploying FTTH in Asturias in recent years. This deployment now appears to be largely complete. ARPU growth was driven by a €2 per month price increase for fixed-line and bundled products in January 2016 and a second price increase of €3 per month in September. These price increases were supported by improvements in the consumer proposition including doubling mobile data allowances, doubling the minimum broadband speed to 200 Mbps, launching a high-end 500 Mbps broadband service, and expanding the premium content available to Telecable customers (including significant investments in La Liga and Champions League Football).

CONSUMER MOBILE

Consumer Mobile is a key area of growth for Telecable. Consumer Mobile Revenue3 increased to €28.8 million in 2016, up 10.3% compared to 2015. This significant increase was driven by a 16.6% growth in the number of postpaid lines, offset by a 4.5% reduction in Postpaid ARPU resulting from lower out-of-allowance charges. Mobile penetration within Telecable's fixed consumer customers increased to 56% and quad-play penetration reached a record high of 37% during 2016. In addition, Telecable continues to expand its Wifisfera WiFi service, resulting in 65k connected customers at the end of 2016, up 7.6% compared to 2015. Continuing these positive trends is an important part of Zegona's strategy for Telecable as we drive increased convergence across our customer base. We expect Consumer mobile to continue its strong growth, given Telecable's still relatively low mobile penetration and the transformational effect of Telecable's new mobile access agreement. This agreement will allow us to offer substantially improved converged customer propositions, including 4G data services, at a much lower cost than in 2016 when it becomes effective in the first half of 2017.

BUSINESS7

Zegona places a high priority on growing Telecable's SOHO8 and Enterprise businesses. Business Revenue3 increased to €37.6 million in 2016, representing growth of 6.2% compared to 2015. This Revenue3 growth was driven by ARPU growth of 4.3% and a 1.7% increase in the number of business customers. RGU growth was 2.1% as each customer subscribed to more products on average. The investment we are making in premium football content is supporting our Business segment growth, in particular in bars and restaurants. We believe there is significant potential to grow Business Revenue3, given Telecable's relatively low market share in Asturias of only 28%9.

CAPEX

In 2016, Capex was €25.6 million compared to €28.9 million in 2015 while Capex as a percentage of Revenue3 in 2016 was 18.5% which compares favourably with 21.5% in 2015. This is a trend we expect to continue. While Telecable continues to make significant investments in its business to drive top-line growth it has also succeeded in making substantial improvements in its Capex productivity, focusing more effectively on those higher priority developments which drive sustained business growth. Capex in 2016 included customer premise equipment and installation costs of €6.1 million, sales commission costs of €6.6 million, and network and IT costs of €8.3 million. Other Capex, including OTT, Wifisfera and one-off projects, was €4.5 million.

NET DEBT

Telecable's Net Debt10 was €256.5 million as at 31 December 2016, consisting of a €274.0 million senior credit facility and €0.8 million other debt, offset by a cash balance of €18.3 million. This compares favourably with 2015 where Net Debt was €266.8 million. Zegona held an additional €4.1 million of cash, reducing Zegona's total net debt to €252.4 million as at 31 December 2016. Telecable's senior credit facility is non-amortising, with a bullet repayment due in August 2022. Telecable also has a €20 million revolving credit facility, which has never been drawn.

MOODY'S CREDIT RATING

Telecable's debt was assigned a B1 corporate family rating (CFR) by Moody's11 in January 2016, which was reviewed and reconfirmed in February 2017. This rating continues to be in line with or better than many far larger European cable operators and is the highest rating of any European TMT company of Telecable's size. Moody's in-depth review as part of its rating process confirmed the underlying strength of Telecable's business.

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TELECABLE 2017 OUTLOOK

Building on the financial performance and business improvements delivered during 2016, Zegona continues to have great confidence in Telecable's prospects. Telecable posted robust growth in both Revenue3 and Cash Flow during 2016. This performance was driven by a number of underlying factors that we expect will continue through 2017. These include:

· Robust Spanish economy: The Spanish economy grew strongly in 2016, with GDP increasing by 3.2%12. This was well ahead of the Euro area average of 1.7%. Growth is expected to continue at a dynamic pace, with forecasts13 projecting growth of 2.4% in 2017.

· Sustained industry price repair: All major telecoms operators in Spain began to increase consumer prices in 2015 and price increases have continued through 2016 and into 2017. Telecable successfully increased consumer prices twice during 2016, and again in February 2017. This was executed through our 'more-for-more' strategy whereby an enhanced product is offered for a slightly higher price.

· Product and service enhancements: Telecable offers high quality products that have been continually enhanced since acquisition. Improvements delivered during 2016 include increasing the minimum broadband speed to 200Mbps, doubling mobile data allowances, offering the broadest suite of premium football content in the Spanish market, developing a 4K set top box and improving OTT offerings. These improvements have helped Telecable to deliver record high ARPU and increase the number of products supplied per customer in 2016.

· Innovative new mobile access agreement: During 2016, Telecable signed an agreement with Telefonica that provides access to the highest quality mobile network in Spain on highly attractive terms. The agreement will enable Telecable to offer customers a market leading mobile service, including high-speed 4G data, while increasing mobile margins. The service and financial advantages gained through this agreement will help Telecable to drive convergence and accelerate the growth in its mobile business.

· Operational efficiency and cost discipline: A focus on operational efficiency and cost control across cost of goods, operating expenditure and capital expenses has contributed to a 9.7% increase in Cash Flow during 2016 and sustaining this focus is expected to continue to deliver similar improvements in 2017.

Based on these factors, we anticipate the following financial outlook for Telecable in 2017:

Revenue3

Targeting 3-5% Revenue3 growth.

Cash Flow

Targeting double digit Cash Flow growth (before a €2-3 million one-off investment in 4G mobile transition).

Net Leverage Target

Net Debt to remain within a range of 3-4x EBITDA14.

Zegona's 2016 consolidated financial statements include the results of Telecable and the central costs incurred by all entities in the Zegona group for the full twelve-month period. However the 2015 comparative information only includes the results of Telecable from its acquisition on 14 August 2015 and the central costs incurred by Zegona in its operations from its incorporation on 19 January 2015.

Costs are incurred by all Zegona Group entities supporting the corporate activities of the Group, including staff and premises costs related to Zegona's management team, ongoing costs of maintaining the corporate structure, evaluating new acquisitions opportunities and executing acquisition and disposal activities. These central costs totalled €8.2 million in 2016 compared to €13.1 million in 2015 and include (1) €4.0 million recorded within operating profit and EBITDA3 related to Zegona's underlying corporate costs (2015 €3.0 million), (2) €3.8 million recorded within operating profit but outside EBITDA3 of one-off deal and project costs, principally advisory and other professional fees incurred in relation to the potential acquisition of the Yoigo business in Spain which was terminated on 22 June 2016 (2015: €3.0 million) and, (3) €0.4 million recorded within finance costs related to foreign exchange hedging costs to fix the Euro FX rate for the payment of Zegona's 2016 dividend for the period between announcement and payment.

A reconciliation between Telecable's unaudited 2015 Pro Forma results and Zegona's 2015 consolidated financial statements is provided in Appendix H.

ZEGONA SHAREHOLDER REMUNERATION

For 2016, Zegona paid a dividend of 4.5 pence per ordinary share in accordance with the policy stated at the announcement of our 2015 results.

On 3 April 2017 Zegona's board of Directors approved a policy to declare a dividend of 5.0 pence per ordinary share for 2017. This is an 11.1% increase over the 2016 dividend, is in line with Zegona's stated objective to pay a progressive dividend, and reflects the strong growth in Cash Flow in the business. Half of the 5.0 pence dividend is expected to be paid in October 2017 with the balance expected to be paid in March 2018. It is Zegona's intention to pursue a progressive dividend policy.

Zegona anticipates that Telecable will generate significant excess cash in 2017. This excess cash is the cash generated by the business after paying interest, tax and Zegona's dividend. In line with our strategic objectives, Zegona continues to evaluate a number of potentially attractive investment opportunities in the European TMT sector. To the extent the excess cash is not required to investigate or execute these potential new opportunities, it is Zegona's intention to distribute the excess cash to shareholders.

APPENDICIES

A - Telecable Summary Financial Results

B - Telecable Summary Pro Forma Operating Results (unaudited)

C - Zegona Communications plc Condensed Consolidated Statement of Comprehensive Income

D - Zegona Communications plc Condensed Consolidated Statement of Financial Position

E - Zegona Communications plc Condensed Consolidated Statement of Changes in Equity

F - Zegona Communications plc Condensed Consolidated Statement of Cash Flows

G - Notes to the Condensed Consolidated Financial Statements

H - Non-GAAP Measures

A) TELECABLE SUMMARY FINANCIAL RESULTS15

B) TELECABLE SUMMARY PRO FORMA OPERATING RESULTS (UNAUDITED)

C) ZEGONA COMMUNICATIONS PLC CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

D) ZEGONA COMMUNICATIONS PLC CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

E) ZEGONA COMMUICATIONS PLC CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

F) ZEGONA COMMUNICATIONS PLC CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

G) NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

The consolidated financial statements of Zegona Communications plc (the "Company" or the "Parent") and its subsidiaries (collectively, the "Group") for the year ended 31 December 2016 were authorised for issue in accordance with a resolution of the directors on 5 April 2017. The Company is incorporated in England and Wales and domiciled in the United Kingdom. It is a public limited company with company number 09395163 and has its registered office at 20 Buckingham Street, London, WC2N 6EF.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of preparation

The Company was incorporated on 19 January 2015. The Consolidated Financial Statements represent the year ended 31 December 2016 and have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRIC) interpretations as adopted by the European Union, and with those parts of the Companies Act 2006 as applicable to companies reporting under IFRS.

The Consolidated Financial Statements are prepared in accordance with IFRS under the historical cost convention and are presented in Euros. The functional currency of the Company is British pounds sterling. The Directors have chosen to present the consolidated financial statements of the Group in Euros as the Company's operational subsidiary, Telecable de Asturias, S.A., has a functional and presentational currency of Euros. All values are rounded to the nearest thousand (€000), except when otherwise indicated.

(b) Revenue and expenses

Revenue and expenses are recognised on an accrual basis, i.e. when the actual flow of the goods and services they represent occurs, regardless of when the resulting monetary or financial flow arises. Revenue is measured at the fair value of the consideration received, less any discounts and taxes.

Revenue

Revenue from sales of handsets is recognised when the Group has transferred the significant risks and rewards of ownership of the goods, neither continuing managerial involvement nor effective control is maintained over the handsets and they do not form part of a bundled contract. In the second half of 2016, in the majority of cases this transfer occurred when handsets were delivered to distributors by our logistics operator (previously, no logistics operator was used to manage the distribution of handsets to distributors).

 Where a contractual arrangement consists of two or more separate elements that have value to the customer on a stand alone basis the total contract consideration is allocated between those separate elements based on the amounts payable by customers under the terms of the contract. Where handsets are sold as part of a bundled contract, any discounts allowed are recognised immediately with the remaining revenue recognised over the life of the contract as was the case in the majority of cases in the first half of 2016. 

Revenue associated with the provision of services is recognised by reference to the stage of completion of the transaction at the reporting date, provided that the outcome of the transaction can be estimated reliably. The stage of completion is determined by the proportion of the minimum contract life that has been fulfilled.

Group revenue is generated from the provision of services in connection with landline phones, television, broadband internet, data and mobile phones for residential and corporate customers, chiefly as bundled sales, and also from phone interconnection services to other operators.

The Group assesses its revenue agreements in line with specific criteria to determine whether it acts as principal or agent. The Group concluded that it acts as principal in all its revenue agreements.

Traffic revenue, both landline and mobile, is recognised in the period during which it is earned.

Regular monthly charges for services are taken to results on a straight-line basis in the period during which the service was provided. Variable consumption revenue is recognised in the period during which it is earned, and revenue from flat-rate consumption is recognised in the period covered by the rate concerned.

Interconnection revenue is recognised in the period during which phone traffic is generated.

3. SEGMENTAL ANALYSIS

For management purposes, the Group is organised into two segments, the Telecable Group which represents the activity of the Telecable business in Spain and a central costs segment which represents costs incurred by all Zegona Group entities supporting the corporate activities of the Group. The results of each segment are reported to the Board which is considered to be the chief operating decision maker (the "CODM"). The information presented to the Board does not include a detailed analysis of the assets and liabilities of each segment and as such this information has not been presented.

The CODM considers an adjusted earnings measure ("Adjusted EBITDA") as the principal measure of profitability of Zegona, which is considered to represent the segment result in accordance with IFRS 8.

Whilst service revenue can be further divided into different revenue streams the key metrics are headline revenue and EBITDA which are KPIs discussed by Zegona management and reported to investors. EBITDA is not disaggregated further and is reported internally and externally on a full Telecable basis. Therefore the Directors consider the Telecable results to represent one segment.

Further information on reportable segments is set out below.

All Revenues earned by the Telecable Group were generated in Spain. There are no major customers on which reliance is placed.

Zegona uses Adjusted EBITDA, in conjunction with other GAAP and Non-GAAP financial measures to assess its operating performance. Zegona believes it is both useful and necessary to report Adjusted EBITDA as a performance measure because it enhances the comparability of profit across businesses, it is commonly used as the key metric for valuing TMT businesses in mergers and acquisition transactions, and it is used by management for planning, reporting and incentive purposes.

EBITDA is operating profit excluding depreciation of Property, Plant and Equipment ("PP&E") and amortization of intangible assets (as defined in our financial statements).

Adjusted EBITDA is EBITDA excluding:

· Impairment losses and losses on disposal of assets,

· Long term management incentive compensation and share based payment expenses ("Incentive costs"),

· Significant items that are not considered by management to be reflective of the underlying performance of the Group. These are typically identifiable costs incurred in the course of mergers and acquisition transactions

A reconciliation of EBITDA and Adjusted EBITDA to the closest equivalent GAAP measure, operating profit, is provided below.

4. PROPERTY, PLANT AND EQUIPMENT

5. INTANGIBLE ASSETS AND GOODWILL