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Iomart Group PLC (IOM)

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Tuesday 11 June, 2019

Iomart Group PLC

Final Results

RNS Number : 7480B
Iomart Group PLC
11 June 2019
 

11 June 2019

iomart Group plc

("iomart" or the "Group" or the "Company")

 

Final Results for the Year ended 31 March 2019

 

iomart (AIM:IOM), the cloud computing company, is pleased to report its consolidated final results for the year ended 31 March 2019.

 

FINANCIAL HIGHLIGHTS

·      Revenue growth of 6% to £103.7m (2018: £97.8m), a milestone for the Company surpassing £100m

·      Adjusted EBITDA1 growth of 6% to £42.2m (2018: £39.9m)

·      Adjusted profit before tax growth2 of 6% to £25.5m (2018: £24.1m)

·      Adjusted diluted earnings per share3 from operations increased by 4% to 18.6p (2018: 17.9p)

·      Cash flow conversion from operations >90%, being £39.1m (2018: £40.8m)

·      Adjusted profit before tax2 margin maintained at 25% (2018: 25%)

·      Proposed final dividend of 5.01p per share resulting in total dividend for year of 7.46p per share, an increase of 4% (2018: 7.18p per share), representing the 10th consecutive year of dividend growth

 

OPERATIONAL HIGHLIGHTS

·      Investments made to ensure long term certainty to datacentre infrastructure, including the purchase of the freehold of our Maidenhead site

·      Two acquisitions completed, Bytemark and LDeX, adding new customers and complementary datacentre locations

·      Refreshed sales and marketing function to support next phase of growth; early benefits started to flow through in H2 with increased new lead generation from both new and existing customers

·      New Board members appointed, adding significant experience to the leadership team

·      Market remains large with structural drivers, which combined with M&A strategy, supports ambition to deliver same long term pace of growth achieved over last 5 years which saw the business double in size

 

Statutory Equivalents

The above highlights are based on adjusted results. A full reconciliation between adjusted and statutory results is contained within this statement. The statutory equivalents of the above results are as follows:

·      Profit before tax growth of 9% to £16.2m (2018: £14.9m)

·      Basic earnings per share from operations increased by 3% to 11.9p (2018: 11.5p)

 

 

 

1 Throughout these financial statements adjusted EBITDA is earnings before interest, tax, depreciation and amortisation (EBITDA) before share based payment charges, acquisition costs, (loss)/gain on the revaluation of contingent consideration and material non-recurring costs. Throughout these financial statements acquisition costs are defined as acquisition related costs and non-recurring acquisition integration costs.

2 Throughout these financial statements adjusted profit before tax is profit before tax, amortisation charges on acquired intangible assets, share based payment charges, mark to market adjustments in respect of interest rate swaps, acquisition costs, interest on contingent consideration due, accelerated write off of arrangement fees on banking facility, (loss)/gain on revaluation of contingent consideration and material non-recurring costs.

3 Throughout these financial statements adjusted diluted earnings per share is earnings per share before amortisation charges on acquired intangible assets, share based payment charges, mark to market adjustments in respect of interest rate swaps, acquisition costs, interest on contingent consideration due, accelerated write off of arrangement fees on banking facility, (loss)/gain on revaluation of contingent consideration and material non-recurring costs.

 

Angus MacSween, CEO of iomart Group plc, stated:

 

"These results represent another year of strong performance by the Company, with increased revenues, profits, cash flow and dividend levels. The demand for the products and services we provide continues to grow. Over the last 12 months we have reinvigorated our sales and marketing function which delivered a strong finish to the year with March, the final month of our financial year, recording the highest month of revenue in the year. We enter the new year with confidence, underpinned by a significantly larger pipeline of prospects than this time last year.

 

"The journey to Cloud adoption remains a long term trend and, as a result, our market opportunity is large and widening. We continue to invest in our cloud product offering, skills and organisational platform to ensure we are positioned to capitalise on this opportunity, and the Board is confident that strong growth will continue for many years into the future." 

 

For further information:

                                                       

 

iomart Group plc

Tel: 0141 931 6400

Angus MacSween, Chief Executive Officer

 

Scott Cunningham, Chief Financial Officer

 

 

 

Peel Hunt LLP (Nominated Adviser and Broker)

Tel: 020 7418 8900

Edward Knight

Peter Stewart

Nick Prowting

 

 

Alma PR

 

Tel: 020 3405 0212

Caroline Forde

Hilary Buchanan

 

Helena Bogle

 

About iomart Group plc

For over 20 years iomart Group plc (AIM: IOM) has been helping growing organisations to maximise the flexibility, cost effectiveness and scalability of the cloud. From data centres we own and operate in the U.K., and from connected facilities across the globe, we deliver 24/7 storage and protection for data across the most complex of cloud and legacy infrastructures. Our team of over 400 dedicated staff work with our customers at the strategy stage through to delivery and ongoing management, to implement the secure cloud solutions that deliver to their business requirements.

 

For further information about the Group, please visit www.iomart.com 

 

 

 

CHAIRMAN'S STATEMENT

 

In my first year as Chairman I am delighted to report on another successful year for the Group. We have continued to grow revenues, both organically and through acquisitions, while maintaining market leading profit margins and generating our usual high levels of operating cash.

 

iomart is a leading provider of managed cloud computing services, helping companies at all stages of their IT journey with a wide and flexible portfolio of services and products.  We deliver these from our own infrastructure by a team with deep sector expertise.  Customer relationships and excellence in service is at the heart of our business. The business model and strong market position has been established over more than ten years and we have made further steps to build upon this strong position during the year.

 

Over the next five years, our aim is to keep up the pace of growth achieved in the last five years, which saw the business double in size.  To ensure we achieve this, we have refreshed our sales and marketing function in recognition that growing to a £200 million revenue business needs a broader set of skills, processes and tools.  As we start our new financial year we are well placed to capture the full market opportunity.

 

This year has seen further significant long-term investment made into our UK market position. We have had another active year on the acquisition front, welcoming Bytemark and LDeX into the Group. These two acquisitions brought a new and diverse customer base to iomart, and added datacentre locations which are complementary to our existing estate. Towards the end of the year we also purchased the freehold of our Maidenhead site.  This investment, along with the extension of our London lease to 2030 earlier in the year, brings long term certainty to our datacentre infrastructure.  Our investment in infrastructure ensures we are well placed for the future to continue to deliver robust and cost effective managed cloud services to our growing customer base.

 

The financial strength and visibility of our business model allows us to operate a progressive dividend policy. During the year we made an interim dividend of 2.45p per share which was paid to shareholders in January.  In addition, the Board is now proposing to pay a final dividend of 5.01p per share. With this final dividend payment, the total for the year will be 7.46p representing an increase of 4% over last year and equivalent to the maximum pay-out ratio under our current policy of 40% of adjusted diluted earnings per share.  If approved, this would represent the 10th consecutive year of dividend growth.

 

During the period we have seen some changes to the composition of the Board. In August 2018, I took over the Chairmanship from Ian Ritchie, who did not stand for re-election following a successful ten-year tenure. This change left us with the requirement to fill a non-executive role. In February 2019 we were delighted to welcome Karyn Lamont to the Board. Karyn's financial background and experience will be an invaluable asset and support to the Group over the coming years. We also had a change within the Executive team with Scott Cunningham joining in September 2018 as our new Chief Financial Officer following the retirement of Richard Logan.  In Scott we have found another high calibre individual to fulfil this role and he is now fully established within the organisation, working closely with Angus and the team on the delivery of our strategic objectives.

 

The progress we have made this year and the continued strong financial performance is a result of a great deal of hard work by our executives and staff and I thank them all on behalf of the Board and the shareholders for their efforts over the year.

 

 

 

Ian Steele

Non Executive Chairman

10 June 2019

 

 

 

CHIEF EXECUTIVE OFFICER'S REPORT

 

Introduction

During the year we broke through the £100m revenue barrier, a landmark for the business and validation of the strategy we established over ten years ago. This achievement, as in all other years, has come with consistently strong profitability and cash flow. Our revenues in the year were £103.7m, an increase of 6% over the previous year, our adjusted EBITDA of £42.2m also showed a 6% increase over the previous year and our statutory profit before tax increased by 9% to £16.2m.

 

Market and Strategy

iomart has operated in cloud computing for over 10 years after acquiring the initial datacentre estate in March 2007.  We operate in a dynamic market with new products and solutions being developed at an ever-increasing pace. We are focussed on ensuring our product portfolio remains relevant to support customers in the journey to cloud based solutions, be that of a public, private, hybrid nature or indeed "on premise", as a substantial number of organisations still continue to acquire elements of what they need in this way.

 

The growth in data requirements sees no slow down, with the number of users, devices, content rich data and applications increasing demand for computer power, storage and connectivity.  Development around such areas as machine learning, internet of things and big data will ensure this is a long term trend.  The complexity of hosting environments is putting pressure on resourcing and capabilities of in-house IT teams, driving outsourcing demand. The market for cloud computing solutions which we identified in 2007 presents us with as much opportunity now as it did then and our strategy is well positioned to deliver continued success.

 

Overall our market continues to grow strongly. A large part of this growth is dominated by the 'hyper-scalers', primarily Amazon, Microsoft and Google.  These organisations are now established parts of the landscape and what has been shown, especially given the trend to multiple cloud architectures, is that there is plenty of space for organisations like iomart and the hyper-scalers to coexist.  We strongly believe our differentiation is that we provide advice, help, great customer service and flexibility. In addition, what is being shown is that for organisations with a stable baseload of computer power, iomart's bespoke cloud solutions can compete head to head on full life costs.  The untidy nature of the vast majority of the world's legacy IT infrastructure provides us with the reassurance that there will always be customers who are looking for a trusted advisor in this space.

 

We have already established a strong position as a leading provider of managed cloud computing services which has customer relationships and excellence in service at the heart of the business. We plan to build on this position by focussing on:

•      Growing our managed cloud services by excelling in customer service and ensuring innovation in our customer offering continues to match the needs of the market;

•      Growing our self-managed infrastructure brands by differentiating with products, solutions and support which add value;

•      Retaining our presence in the mass consumer domain name and web hosting market via selective marketing and dynamic pricing;

•      Building a high performance team supported by best in class systems and processes;

•      Continued optimisation of our datacentre estate with cost efficiency achieved via asset planning, procurement and automation;

•      Ensuring robust and resilient infrastructure, connectivity and security at all times; and

•      Continuation of our disciplined acquisition strategy, with earning enhancing deal valuations and clear integration to the existing business.

 

Acquisitions

We again augmented our overall growth during the year through the acquisition of:

·      Bytemark Holdings Limited ("Bytemark") in August 2018, a York based business which brings a diverse customer base and skillset to the group; and

·      LDeX Group Limited ("LDeX") in December 2018. LDeX provides datacentre and connectivity services in the UK from central London and Manchester locations. As well as bringing a new customer base to iomart, the two locations are complementary to our existing infrastructure. 

Strict criteria continue to be applied to any potential acquisition target, ensuring they enhance our overall strategy and are accretive to the financial strength of the Group. We expect M&A activity will continue as an important growth driver for the Group in what remains a highly fragmented market.

 

Operational Review

While all of our activities involve the provision of services from common infrastructure, we are organised into two operating segments, the Cloud Services (£90.6m revenue) and Easyspace (£13.1m revenue) segments.

 

Cloud Services

Revenues in this segment have grown by 8% to £90.6m (2018: £84.1m).  A quarter of this growth has been generated organically as we continue to build on our strategy of providing cloud-based solutions to both new and existing customers as they increase their cloud-based presence. The remainder of this growth has been driven by the contribution from the acquisitions made in both this period and the previous year. The Cloud Services EBITDA (before share based payments, acquisition costs and central group overheads) was £40.4m being 44.6% of revenue (2018: £37.1m being 44.1% of revenue).  We continue to expect Cloud Services to be the driver of revenue and profit growth for the Group going forward.

 

Over the last 12 months we have reinvigorated our sales and marketing function to ensure we are best placed to capture the full market opportunity. These efforts have included:

·      Recruitment of a new senior sales management team;

·      Changes to marketing resources;

·      Revisions to commission schemes;

·      The rollout of new group wide marketing toolsets; and

·      Implementation of a new group wide CRM system.

 

The early benefits of this effort started to flow through in t he second half of the financial year with an increase in new lead generation from both new and existing customers. Encouragingly, March, the final month of our financial year, was the highest revenue month of the year, ensuring a positive conclusion to what has been an intense period of change.

 

We believe controlling our own infrastructure is important to delivering high quality, secure and robust solutions to customers. We have had great success in the year in bringing long-term security to our datacentre estate. In May 2018 we successfully negotiated the extension to our London lease to June 2030, this was followed with an intensive month of December, which saw the purchase of the freehold of our Maidenhead site and also the acquisition of LDeX.  LDeX provides datacentre and connectivity services in the UK from central London and Manchester locations. The Manchester site offers the ability to consolidate our current third party infrastructure in the region into one site in Trafford Park.  Manchester is a "hot spot" for the IT industry in the UK and our investment plans will see a first class facility and hosting environment established.

 

Within our Cloud Services division we have three core offerings, recognising the complexity of the solutions designed and the level of ongoing managed services we provide. This means we are able to supply products and services across the full cloud spectrum and do so using shared resources and common platforms across the Group.   In a considered manner, ensuring minimum disruption to the customer experience, we continue to consolidate legacy brands under iomart. 

 

iomart Cloud Services: provides fully managed, complex bespoke designs, resulting in resilient solutions involving private, public and hybrid cloud infrastructure. This can range from the provision of managed online backup and disaster recovery solutions, through to an entity's entire online live presence where all revenue generated by the entity's activities are transacted through the cloud infrastructure we provide, delivered with reassurance of a full 24/7 management service.

 

Infrastructure as a Service (IaaS): delivers dedicated, physical, self-service servers to customers. We provide many thousands of physical servers for our customers using highly automated systems and processes which we continue to develop and improve. 

 

Cristie Data: supplies computer equipment to customers' premises along with associated support services.  The continued revenue growth of this brand, including a higher mix of recurring business, confirms the move to the consumption of computing power in the cloud by established organisations is happening over a long period and establishing relationships at this early stage has allowed us to support customers as they start the journey to the cloud. 

 

Easyspace

The Easyspace segment which provides a range of products to the micro and SME markets including domain names, shared, dedicated and virtual servers and email services saw a small  reduction in revenue in the year to £13.1m (2018: £13.7m).  To grow Easyspace significantly would mean competing in a more commoditised market with the need for a high marketing budget.  As a result, our target for Easyspace is to retain our existing presence in the UK market via selective marketing and responding to market conditions with dynamic pricing.  As in the past Easyspace delivered strong profitability with an EBITDA (before share based payments, acquisition costs and central group overheads) of £6.2m being 47.1% of revenue (2018: £6.4m being 46.8% of revenue).  The business benefits from use of the Group infrastructure meaning this profitability translates to strong cash flow for the Group.

 

UK membership of the European Union

The majority of our revenue is generated within the UK. Revenue generated from other EU states is not material, the bulk of which is from our online operations involving the provision of domain names and both shared and dedicated servers where our customers are choosing to take a service from our UK-based datacentres.

 

We do not rely on migrant employees from other EU states to provide services to our customers. We have an established subsidiary in the Republic of Ireland should a EU trading relationship be required post Brexit by any of our customers.  As a result, while the uncertainty caused by political delays is frustrating, we do not foresee any material direct impact from the potential Brexit scenarios.

 

Current trading and outlook

This is another year of strong results, with increased revenues, profits, cash flow and dividend levels. The demand for the products and services we provide continues to grow. Over the last 12 months we have reinvigorated our sales and marketing function which delivered a strong finish to the year with a significantly larger pipeline of prospects than this time last year and we enter the new financial year with confidence.

 

The first two months of the year have, consistent with our high recurring revenue business model, performed in line with our own expectations. A focus for the coming year is the timely conversion of the growing prospects pipeline, ensuring strong growth from the investment made in our skills, processes and systems. 

 

The journey to cloud adoption remains a long term trend and, as a result, our market opportunity is large and widening. We continue to invest in our cloud product offering, skills and organisational platform to ensure we are positioned to capitalise on this opportunity, and the Board is confident that strong growth will continue in the future.

 

Angus MacSween

Chief Executive Officer

10 June 2019

 

 

 

 

CHIEF FINANCIAL OFFICER'S REPORT

Key Performance Indicators

 

 

 

2019

 

2018

(restated, note 2)

Revenue

 

 

£103.7m

£97.8m

Gross Profit %

 

 

64.4%

64.4%

Adjusted EBITDA

 

 

£42.2m

£39.9m

Adjusted EBITDA margin %

 

 

40.7%

40.8%

Adjusted profit before tax

 

 

£25.5m

£24.1m

Adjusted PBT margin %

 

 

24.6%

24.7%

Adjusted earnings per share (diluted)

 

 

18.6p

17.9p

Cash flow from operating activities before exceptional costs / Adjusted EBITDA %

93%

102%

Net debt / Adjusted EBITDA leverage ratio

 

 

0.9

0.7

 

Revenue

Revenues for the year grew by 6% to £103.7m (2018: £97.8m) through the combination of continued organic growth and the impact of acquisitions.

 

Our Cloud Services segment grew revenues by 8% to £90.6m (2018: £84.1m). A full year contribution from Dediserve, Simple Servers and Sonassi, all of which were acquired at various points during the prior year, plus the current year acquisitions of Bytemark in August and LDeX in late December contributed to the overall growth rate. Revenue growth in the Cloud Services segment excluding the impact of acquisitions was 2% (2018: 3% or 7% if excluding a low margin public cloud consultancy project in the 2016/17 comparative period). The lower organic growth rate reflects the cumulative impact of lower new customer orders in FY18 and FY19 which has been addressed by the reorganisation of our sales and marketing engine.  March, the final month of our financial year, was the highest revenue month of the year, and reflects the reinvigoration of the sales and marketing function in the last year.  We enter the new financial year with a more positive revenue run rate.

 

Revenues within the Easyspace segment reduced by £0.6m to £13.1m (2018: £13.7m), in line with management expectations and recognising somewhat the cycle of domain name registrations.

 

Our business model in both segments generally involves the provision of cloud and managed hosting services from our datacentres, delivering to our customers the computing power, storage, and network capability they require for the operation of their own businesses. We have invested in an estate of datacentres, in an extensive fibre network and for each customer the servers, routers, firewalls etc that are necessary to create the IT infrastructure they require.  Customers then pay us for the provision of that infrastructure, with the potential to add a managed services wrapper.

 

Larger customers tend to have multi-year contracts for complex cloud solutions, which are invoiced on a monthly basis. Many of our smaller customers pay in advance for the provision of services which results in a substantial sum of deferred revenue, which is then recognised over the period of the service provision. A very large proportion of our revenue is therefore recurring and the combination of multi-year contracts and payment in advance provides us with excellent revenue visibility.

 

In the current financial period, the Group has fully adopted IFRS 15 Revenue from Contracts with Customers. The Group has elected to apply the full retrospective method and restate comparative information from prior periods upon adoption of IFRS 15 (see note 2).  As previously reported, the impact was not material to the financial statements with prior year revenue restatement being an increase of £135,000, and EBITDA restatement being an increase of £91,000. 

 

Gross Margin

Our gross profit for the year was £66.7m (2018: £63.0m), increasing as a result of the additional revenues in the year.  In percentage terms, our margin remained around the same level at 64.4% (2018: 64.4%).

 

Within Cloud Services our recent acquisitions have come with different margin profiles, we remain vigilant to protecting our strong overall profitability and always take this into account in our integration planning.

 

The gross margin within our Easyspace segment has remained consistent with the previous year.

 

Adjusted EBITDA

Adjusted EBITDA for the year was £42.2m (2018: £39.9m) an increase of 6%. Our adjusted EBITDA margin has remained consistent at 40.7% (2018: 40.8%).

 

Adjusted EBITDA in the Cloud Services segment was £40.4m (2018: £37.1m), an increase of 9%. This improved performance is mainly a direct result of the additional gross margin delivered by the increase in sales revenue, from both organic and acquired sources. We saw an increase in payroll costs as we invested in the core team, offset by some smaller reduction in administrative expenses. We anticipate a slight increase in investments into the business moving forward as we scale the organisation to ensure we capture more enterprise level market opportunities in our current and expanding customer base, while maintaining market leading margins. In percentage terms, the full year adjusted EBITDA margin in the Cloud Services segment has slightly increased to 44.6% (2018: 44.2%) following a positive mix in the first half of the year. EBITDA margin in the second half of the year was 43.8%.

 

The Easyspace segment's adjusted EBITDA was £6.2m (2018: £6.4m) reflecting the impact of slightly lower revenue this year.  In percentage terms the adjusted EBITDA margin is marginally ahead of last year at 47.1% (2018: 46.8%).

 

Group overheads, which are not allocated to segments, include the cost of the Board, the running costs of the headquarters in Glasgow, Group marketing, human resource, finance and design functions and legal and professional fees for the year. These overhead costs have increased by £0.8m in the year to £4.5m (2018: £3.7m).

 

Adjusted profit before tax

Depreciation charges of £13.1m (2018: £12.5m) have remained broadly consistent with prior year, after recognising the growth in the business including the impact of acquisitions. In contrast to other years, other than the purchase of the Maidenhead freehold property in December 2018, there was no material project type investments made in the year. We had planned to upgrade the cooling system at our London datacentre but planning approval delay means this project will now happen in the new financial year.

 

The charge for amortisation of intangibles, excluding amortisation of intangible assets resulting from acquisitions ("amortisation of acquired intangible assets"), of £2.5m (2018: £2.1m) has increased as a result of an increase in the level of software investment.

 

Finance costs of £1.2m (2018: £1.2m), excluding the mark to market adjustment in respect of interest swaps on the Company's loans and the interest charge on the contingent consideration due in respect of acquisitions recorded in prior year, have remained static over the period.

 

After deducting the charges for depreciation, amortisation, excluding the charges for the amortisation of acquired intangible assets, and finance costs, excluding the mark to market adjustment in respect of interest swaps on the Company's loans and the interest charge on the contingent consideration due in respect of acquisitions, from the adjusted EBITDA, the Group's adjusted profit before tax was £25.5m (2018: £24.1m), an increase of 6%.

 

The adjusted profit before tax margin for the year was 24.6% (2018: 24.7%) which follows the stability of the gross margin and cost items.

 

Profit before tax

The measure of adjusted profit before tax is a non-statutory measure which is commonly used to analyse the performance of companies particularly where M&A activity forms a significant part of their activities.

A reconciliation of adjusted profit before tax to reported profit before tax is shown below:

 

Reconciliation of adjusted profit before tax to profit before tax

 

 

2019

£'000

2018

(restated, note 2)

£'000

Adjusted profit before tax

 

 

25,524

24,130

Less: Amortisation of acquired intangible assets

 

 

(6,492)

(6,449)

Less: Acquisition costs

 

 

(351)

(774)

Less: Share based payments

 

 

(1,008)

(1,206)

Less: Accelerated write off of arrangement fees on bank facility

 

 

(63)

-

Less/Add: (Loss)/gain on revaluation of contingent consideration

 

 

(1,394)

1,335

Add: Mark to market adjustment on interest rate swaps

 

 

-

46

Less: Interest on contingent consideration

 

 

-

(51)

Less: Non-recurring software licence fees relating to prior years

 

 

-

(2,143)

Profit before tax

 

 

16,216

14,888

 

The adjusting items are: charges for the amortisation of acquired intangible assets of £6.5m (2018: £6.4m) which is the net impact of the acquisitions made in the year and the specific amortisation profile of items from acquisitions made in previous years; acquisition costs of £0.4m (2018: £0.8m) as a result of professional fees associated with acquisitions made; share based payment charges of £1.0m (2018: £1.2m) which have decreased as a result of share option awards made in previous years not fully vesting; and the non-cash accelerated write off of previously capitalised arrangements fees of £0.1m (2018: £nil) following the Group entering into a new banking facility on 6 June 2018.

 

In addition, the adjusting items also include a net loss on the revaluation of contingent consideration of £1.4m (2018: £1.3m net gain). As reported in the prior year, the structure of the Sonassi earn-out arrangement, with a high multiple factor under a ratchet mechanism, meant that a modest change in profitability within a certain range could result in a substantial change in the amount due under the earn-out terms. The brand's performance exceeded management expectations in the final months of the earn-out period to July 2018. As a result, the final payment due on Sonassi of £2.6m, was £1.8m higher than our previous estimate. Offsetting this loss is a gain of £0.4m on the revaluation of the Bytemark contingent consideration with settlement paid in full.  During the year ended 31 March 2018 there had been an assumed decrease to the Sonassi contingent consideration which resulted in a gain of £1.4m being recorded. This represented an assumption, which at that point in time, reduced expected profitability over the earn out period to July 2018 by only 5.4%. Also in prior year, we recorded a loss on the revaluation of contingent considerations in respect of Simple Servers of £0.1m and United Communications of £0.1m resulting in a total net gain on revaluation of contingent consideration of £1.3m recorded in the year ended 31 March 2018. 

 

In the prior year comparatives there were three additional adjustments:  a mark to market credit adjustment in respect of interest rate swaps on the Company's loans of £0.1m and the charge of interest on the contingent consideration paid for the acquisition of United Communications Limited of £0.1m. These two items were extinguished in prior period so are not applicable in the current year. The other adjusting item which is not applicable in the current year relates to software licence fees. As a result of an audit undertaken on behalf of a software licensor in the prior year, incorrect licence information relating to previous financial years has been identified. The software licensor accepted this situation was not due to any deliberate action of the Group. The audit covered the four-year period ending March 2017 and a sum of £2.1m was provided for last year and subsequently paid in cash in August 2018.

 

After deducting these items from the adjusted profit before tax; the reported profit before tax was £16.2m (2018: £14.8m) an increase of 9%. In percentage terms the profit before tax margin remained stable at 15.6% (2018: 15.2%) with offsetting movements on the loss/gain on contingent consideration and the licence fee provision. 

 

Taxation

The tax charge for the year is £3.3m (2018:  £2.5m). The tax charge for the year is made up of a corporation tax charge of £5.0m (2018: £4.3m) with a deferred tax credit of £1.7m (2018: £1.8m). The effective rate of tax for the year is 20.6% (2018: 17.0%).  The increase of 3.6% is heavily influenced by the swing in the tax charge in the current year from the non-tax deductible loss on revaluation of contingent consideration compared to the non-taxable gain in prior year. This one item alone represents an increase to the effective tax rate of 3.4%.  Other adjustments which provide both favourable and unfavourable impact are less material. Further explanation of the tax charge for the year is given in note 4. 

 

Profit for the year from total operations

After deducting the tax charge for the year from the profit before tax the Group has recorded a profit for the year from total operations of £12.9m (2018: £12.4m) an increase of 4%.

 

Earnings per share

The calculation of both adjusted earnings per share and basic earnings per share is included at note 6.

 

Basic earnings per share from continuing operations was 11.9p (2018: 11.5p), an increase of 3%.

 

Adjusted diluted earnings per share, based on profit for the year attributed to ordinary shareholders before share based payment charges, amortisation charges of acquired intangible assets, mark to market adjustments in respect of interest rate swaps, accelerated write off of arrangement fees on the banking facility, the (loss)/gain on the revaluation of contingent consideration and the charge of interest on contingent consideration due, acquisition costs and the tax effect of these items was 18.6p (2018: 17.9p), an increase of 4%.

 

The measure of adjusted diluted earnings per share as described above is a non-statutory measure which is commonly used to analyse the performance of companies particularly where M&A activity forms a significant part of their activities.

 

Acquisitions

On 24 August 2018, the Company acquired the entire share capital of Bytemark on a no debt, no cash, normalised working capital basis. The sale and purchase agreement included an earn-out period to 31 March 2019. During November 2018, whilst not part of the original plan, the previous director shareholders of Bytemark indicated that they wished to consider leaving the business early and a negotiated settlement on the earn-out payment of £0.2m was agreed and paid. This, along with the initial consideration of £4.7m paid at completion, results in a total final consideration of £4.9m. The initial payment was funded from a drawdown from the Company's revolving credit facility.

 

On 20 December 2018, the Company acquired the entire share capital of LDeX on a no debt, no cash, normalised working capital basis using a locked box mechanism. At completion, an initial payment of £7.8m in cash was made. This initial payment included £0.3m to settle the adjustments included in the locked box accounts in respect of the cash, debt and working capital position. The initial payment was funded from a drawdown from the Company's revolving credit facility.  A final sum of no more than £3.5m is payable dependent on the profitability of the business in the year to December 2019. The maximum purchase price is therefore £11m, excluding sums due in respect of the no debt, no cash and normalised working capital.  Based on estimates of the probabilities of various levels of profitability, we expect the amount to be paid in respect of the final contingent consideration due will be £3.0m (note 7). 

 

 

Dividends

Our dividend policy, which has been in place for several years now, is based on the profitability of the business in the period. We have committed to a pay-out policy of up to 40% of the adjusted diluted earnings per share we deliver in a financial year.

 

This year we paid an interim dividend of 2.45p (2018: 2.25p) which was paid in January 2019. We have now proposed a final dividend payment of 5.01p per share (2018: 4.93p) which would result in a total dividend for the year of 7.46p (2018: 7.18p) an increase of 4% and representing a pay-out ratio of 40% of the adjusted diluted earnings per share for the year.  The Board has taken the decision to increase the dividend to shareholders as a result of the recurring revenue nature of the Group, the level of operating cash which we now deliver and the low level of indebtedness within the Group.

 

 

Cash flow and net debt

 

Net cash flows from operating activities

The Group continued to generate high levels of operating cash over the year. Cash flow from operations (before exceptional non-recurring costs) was £39.1m (2018: £40.8m) which represents a 93% conversion of adjusted EBITDA (2018: 102%). During the year we paid £1.6m upfront for a three year software maintenance arrangement, made in order to receive a discount going forward, on a product where we are seeing increasing customer demand. Excluding this triennial invoice the adjusted EBITDA to operating cash conversion would be 97%, more in line with prior year and our internal expectations given our favourable cash cycle.

 

Payments on taxation in the year remained reasonably static at £5.4m (H1 2018: £5.2m) and after paying £2.3m of non-recurring software licence fees the net cash flow from operating activities in the year was £31.4m (2018: £35.6m).

 

Cash flow from investing activities

Given our strong position, in a growing market, we continue to invest large sums on investing activities split between both internal investments into our global infrastructure but also in the continuation of our disciplined acquisition strategy. The Group invested a total of £35.3m (2018: £41.5m) during the year.

 

The Group continues to invest in property, plant and equipment through expenditure on datacentres and on equipment required to provide managed services to both its existing and new customers. As a result, the Group spent £10.4m (2018: £16.1m) on assets, net of related finance lease drawdowns, trade creditor movements and non-cash reinstatement provisions. The largest item in the current year related to the purchase of the Maidenhead freehold in December 2018 for £5.4m (excluding £0.3m of fees and taxes).  Maidenhead is our largest datacentre and we took the opportunity to secure the long-term security of the site when the existing landlord put the site on the market.  The balance of expenditure related to more general investment activities primarily associated with specific customer requirements. We remain focused on increased automation and asset planning within the infrastructure estate with the aim of ensuring cost and utilisation efficiency.

 

Expenditure was also incurred on development costs of £1.4m (2018: £1.6m) and on intangible assets of £1.1m (2018: £1.2m).

 

In line with our strategy of accelerating our growth by acquisition the Group spent £11.6m (2018: £20.1m), net of cash acquired of £0.8m (2018: £4.2m) on acquisitions in the year in relation to the acquisitions of Bytemark and LDeX, as described above. In addition, the Group incurred expenditure of £4.7m (2018: £2.5m) in respect of contingent consideration due on previous acquisitions.

 

Cash flow from financing activities

Drawdowns of £25.9m (2018: £25.0m) were made from the revolving credit facility in the year to fund the purchase of the acquisitions and the freehold at Maidenhead.  Bank loan repayments of £12.2m (2018: £8.5m) were made in the year. We received £0.3m (2018: £0.2m) from the issue of shares as a result of the exercise of options by employees. We also made dividend payments of £8.0m (2018: £8.9m); paid finance costs of £1.0m (2018: £1.0m); and made lease repayments of £0.5m (2018: £0.3m). 

 

Net cash flow

As a consequence, our overall cash generated during the year was £0.6m (2018: £0.6m) which resulted in cash and cash equivalent balances at the end of the year of £10.1m (2018: £9.5m).

 

Net Debt

The net debt position of the Group at the end of the period was £39.2m (2018: £26.6m) as shown below. This represents a multiple of less than one times our annual adjusted EBITDA which we believe is a very comfortable level of debt to carry given the recurring revenue business model and strong cash generation in the business.

 

 

 

 

2019

£'000

 

2018

£'000

Bank revolver loan

 

 

48,536

35,239

Finance Leases

 

 

777

830

Less: cash and cash equivalents

 

 

(10,069)

(9,495)

Net Debt

 

 

39,244

26,574

 

On 6 June 2018, the Group entered into a new banking facility which provides an £80m revolving credit facility that matured on 31 May 2022.  In June 2019, subsequent to the year end, the facility was extended to September 2022 purely for the administrative matter of ensuring a 12 month remaining facility period at the expected time of signing the March 2021 audited financial statements.

 

Financial position

The strength of our business model, with high recurring revenue, low customer concentration and a positive cash cycle is well established and creates a very strong financial position. The Group continues to generate substantial amounts of operating cash. The generation of that cash flow together with the committed bank loan facility for acquisitions, capital expenditure and general business purposes, means that the Group has the liquidity it requires to continue its growth through both organic and acquisitive means.

 

 

 

 

Scott Cunningham

Chief Financial Officer

10 June 2019

 

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

YEAR ENDED 31 MARCH 2019

 

 

 

Note

2019

 £'000

2018

(restated, note 2)

 £'000

Revenue

 

 

 

103,709

97,804

 

 

 

 

 

 

Cost of sales

 

 

 

(36,965)

(34,785)

 

 

 

 

 

 

Gross profit

 

 

 

66,744

63,019

 

 

 

 

 

 

Administrative expenses

 

 

 

(47,952)

(46,154)

Administrative expenses - exceptional non-recurring costs

 

 

 

-

(2,143)

 

 

 

 

 

 

Operating profit

 

 

    

18,792

14,722

 

 

 

 

 

 

Analysed as:

 

 

 

 

 

Earnings before interest, tax, depreciation, amortisation, acquisition costs, share based payments and non-recurring costs

 

 

 

42,232

39,934

Share based payments

 

 

 

(1,008)

(1,206)

Acquisition costs

 

 

 

(351)

(774)

Depreciation

 

 

9

(13,091)

(12,536)

Amortisation - acquired intangible assets

 

 

8

(6,492)

(6,449)

Amortisation - other intangible assets

 

 

8

(2,498)

(2,104)

Administrative expenses - exceptional non-recurring costs

 

 

 

-

(2,143)

 

 

 

 

 

 

(Loss)/gain on revaluation of contingent consideration

 

 

 

(1,394)

1,335

Finance income

 

 

 

21

13

Finance costs

 

 

 

(1,203)

(1,182)

 

 

 

 

 

 

Profit before taxation

 

 

 

16,216

14,888

 

 

 

 

 

 

Taxation

 

 

4

(3,339)

(2,510)

 

 

 

 

 

 

Profit for the year attributable to equity holders of the parent

 

 

 

12,877

12,378

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Amounts which may be reclassified to profit or loss

 

 

 

 

 

Currency translation differences

 

 

 

(8)

(25)

Other comprehensive income for the year

 

 

 

(8)

(25)

 

 

 

 

 

 

Total comprehensive income for the year attributable to equity holders of the parent

 

 

 

12,869

12,353

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

Total operations

 

 

 

 

 

Basic earnings per share

 

 

6

11.9p

11.5p

Diluted earnings per share

 

 

6

11.6p

11.2p

 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2019

 

 

 

 

 

2018 (restated,

note 2)

 

 

 

 

2019

 

 

 

 

 

 

Note

 

£'000

£'000

ASSETS

 

 

 

 

 

Non-current assets

 

 

 

 

 

Intangible assets - goodwill

 

8

 

85,382

75,837

Intangible assets - other

 

8

 

25,211

26,926

Lease deposits

 

 

 

2,520

2,760

Property, plant and equipment

 

9

 

47,045

40,686

 

 

 

 

160,158

146,209

Current assets

 

 

 

 

 

Cash and cash equivalents

 

 

 

10,069

9,495

Trade and other receivables

 

 

 

20,794

18,508

 

 

 

 

30,863

28,003

 

 

 

 

 

 

Total assets

 

 

 

191,021

174,212

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Non-current borrowings

 

10

 

(48,957)

(503)

Provisions

 

 

 

(1,115)

(1,775)

Deferred tax

 

5

 

(939)

(1,319)

 

 

 

 

(51,011)

(3,597)

Current liabilities

 

 

 

 

 

Contingent consideration due on acquisitions

 

12

 

(3,009)

(2,694)

Trade and other payables

 

 

 

(30,933)

(29,688)

Provisions

 

 

 

-

(2,587)

Current tax liabilities

 

 

 

(1,315)

(1,608)

Current borrowings

 

10

 

(356)

(35,566)

 

 

 

 

(35,613)

(72,143)

 

 

 

 

 

 

Total liabilities

 

 

 

(86,624)

(75,740)

 

 

 

 

 

 

Net assets

 

 

 

104,397

98,472

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Share capital

 

 

 

1,085

1,080

Own shares

 

 

 

(70)

(70)

Capital redemption reserve

 

 

 

1,200

1,200

Share premium

 

 

 

21,518

21,231

Merger reserve

 

 

 

4,983

4,983

Foreign currency translation reserve

 

 

 

(48)

(40)

Retained earnings

 

 

 

75,729

70,088

 Total equity

 

 

 

104,397

98,472

 

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED 31 MARCH 2019

 

 

 

 

 

Note

2019

£'000

2018

(restated, note 2)

£'000

 

 

 

 

 

 

Profit before taxation

 

 

 

16,216

14,888

Loss/(gain) on revaluation of contingent consideration

 

 

 

1,394

(1,335)

Finance costs - net

 

 

 

1,182

1,169

Depreciation

 

 

9

13,091

12,536

Amortisation

 

 

8

8,990

8,553

Share based payments

 

 

 

1,008

1,206

Movement in trade receivables

 

 

 

(1,226)

          (2,245) 

Movement in trade payables

 

 

 

(1,563)

 6,060

Cash flow from operations (before payment of exceptional non-recurring cost)

39,092

40,832

Payment of exceptional non-recurring cost

 

 

 

(2,312)

-         

Cash flow from operations

 

 

 

36,780

40,832

Taxation paid

 

 

 

(5,353)

(5,236)

Net cash flow from operating activities

 

 

 

31,427

35,596

 

 

 

 

 

 

Cash flow from investing activities

 

 

 

 

 

Purchase of property, plant and equipment

 

 

9

(10,383)

(16,092)

Purchase of Maidenhead Freehold

 

 

9

(5,729)

-

Capitalisation of development costs

 

 

8

(1,412)

(1,577)

Purchase of intangible assets

 

 

 

(1,107)

(1,223)

Payments for current period acquisitions net of cash acquired

 

 

 

(11,970)

(20,143)

Contingent consideration paid

 

 

 

(4,688)

(2,475)

Finance income received

 

 

 

21

13

Net cash used in investing activities

 

 

 

(35,268)

(41,497)

 

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

 

Issue of shares

 

 

 

292

224

Draw down of bank loans

 

 

 

   25,860

24,956

Repayment of finance leases

 

 

 

(471)

(276)

Repayment of bank loans

 

 

 

(12,200)

(8,500)

Finance costs paid

 

 

 

(1,075)

(1,029)

Dividends paid

 

 

 

(7,991)

(8,885)

Net cash received from financing activities

 

 

 

4,415

6,490

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

574

589

 

 

 

 

Cash and cash equivalents at the beginning of the year

 

 

9,495

8,906

 

 

 

 

Cash and cash equivalents at the end of the year

 

10,069

9,495

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

YEAR ENDED 31 MARCH 2019

 

 

 

 

 

 

 

Share capital

 

Own shares EBT

 

Own shares Treasury

Foreign currency translation reserve

 

Capital redemption reserve

 

Share premium account

 

 

Merger reserve

 

 

Retained earnings

 

 

 

Total

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

 

 

 

 

Balance at 1 April 2017 (restated, note 2)

 

1,078

(70)

(50)

(15)

1,200

21,067

4,983

65,237

93,430

 

 

 

 

 

 

 

 

 

 

 

Profit for the year (restated, note 2)

 

-

-

-

-

-

-

-

12,378

12,378

Currency translation differences

 

-

-

-

(25)

-

-

-

-

(25)

Total comprehensive income

 

-

-

-

(25)

-

-

-

12,378

12,353

 

 

 

 

 

 

 

 

 

 

 

Dividends - interim (paid)

 

-

-

-

-

-

-

-

(2,426)

(2,426)

Dividends - final (paid)

 

-

-

-

-

-

-

-

(6,459)

(6,459)

Share based payments

 

-

-

-

-

-

-

-

1,206

1,206

Deferred tax on share based payments

 

-

-

-

-

-

-

-

143

143

Issue of share capital

 

2

-

-

-

-

164

-

-

166

Issue of own shares for option redemption

 

-

-

50

-

-

-

-

8

58

Total transactions with owners

 

2

-

50

-

-

164

-

(7,527)

(7,311)

 

 

 

 

 

 

 

 

 

 

 

Balance at 31 March 2018 (restated, note 2)

 

1,080

(70)

-

(40)

1,200

21,231

4,983

70,088

98,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

 

-

-

-

-

-

-

-

12,877

12,877

Currency translation differences

 

-

-

-

(8)

-

-

-

-

(8)

Total comprehensive income

 

-

-

-

(8)

-

-

-

12,877

12,869

 

 

 

 

 

 

 

 

 

 

 

Dividends - interim (paid)

 

-

-

-

-

-

-

-

(2,655)

(2,655)

Dividends - final (paid)

 

-

-

-

-

-

-

-

(5,336)

(5,336)

Share based payments

 

-

-

-

-

-

-

-

1,008

1,008

Deferred tax on share based payments

5

-

-

-

-

-

-

-

(253)

(253)

Issue of share capital

 

5

-

-

-

-

287

-

-

292

Total transactions with owners

 

5

-

-

-

-

287

-

(7,236)

(6,944)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 31 March 2019

 

1,085

(70)

-

(48)

1,200

21,518

4,983

75,729

104,397

                       

 

 

NOTES TO THE FINANCIAL INFORMATION 

YEAR ENDED 31 MARCH 2019

 

1.         GENERAL INFORMATION

iomart Group plc is a company incorporated and domiciled in Scotland. The company has a primary listing on the AIM stock exchange. The address of its registered office is Lister Pavilion, Kelvin Campus, West of Scotland Science Park, Glasgow G20 0SP.

2.         ACCOUNTING POLICIES

 

Basis of preparation

The financial information set out in the announcement does not constitute the Group's statutory accounts for the years ended 31 March 2019 and 31 March 2018 within the meaning of section 434 of the Companies Act 2006. The financial information for the year ended 31 March 2018 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The financial information for the year ended 31 March 2019 is derived from the statutory accounts for that year which were approved by the Directors on 10 June 2019. The statutory accounts for the year ended 31 March 2019 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors reported on those accounts; their report was unqualified and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The Group's financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the Companies Act 2006 applicable to companies reporting under IFRS.

The Group's financial statements have been prepared under the historical cost convention.

Prior year restatement

The results for the year ended 31 March 2018 have been restated on the adoption of IFRS 15 Revenue from Contracts with Customer as the group has applied the full retrospective method.  See IFRS 15 - Revenue from Contracts with Customers for a reconciliation of the impact of IFRS 15 on the prior year and current year financial results.

Adoption of new and revised Standards - Amendments to IFRS that are mandatorily effective for the current year

In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective in the current year.

IFRS 15 - Revenue from Contracts with Customers

In the current financial year, the Group has adopted IFRS 15 Revenue from Contracts with Customers. The Group has elected to apply the full retrospective method and restate comparative information from prior periods upon adoption of IFRS 15. The Group has not applied any practical expedients in calculating the impact of IFRS 15 as they are not applicable to the Group's revenue streams.

The Group has two reportable segments upon which revenue can be categorised. Our core offering is through the Cloud Services segment, in addition to our offering through the Easyspace segment which continues to focus on micro and SME markets. The Group has assessed the principal vs agent indicators in IFRS 15 and concluded without exception that it is acting as principal in each sales transaction. This conclusion has been determined by giving consideration to whether the Group holds inventory risk, has control over the pricing over a particular service, takes the credit risk, and whether responsibility ultimately sits within the Group to service the promise of the agreements.

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under IFRS 15, revenue is recognised when the performance obligation on each contract has been satisfied with the customer. At the outset of each contract, an assessment is completed to determine the relevant performance obligations on each the contract. As defined in IFRS 15, performance obligations in a contract are either goods or services that are distinct, or a series of goods or services that are substantially the same. Services which are not distinct, which in the case of the Group relate to setup fees, are combined with other services in the contract until a performance obligation is satisfied.

At the outset of a contract, the transaction price for that particular contract is determined, being the total value the Group expects to receive for the provision of the relevant goods or service. The transaction price determined is allocated to each performance obligation based on their stand-alone selling price. The Group uses the expected cost-plus margin approach or observable price to determine the stand-alone selling price for each performance obligation.

Our Cloud Services segment specialises in fully managed cloud computing services, which encompasses the delivery of dedicated self-service servers to customers along with the provision of on premise computer equipment. The vast majority of the services offered within the Cloud Services segment are provided on a monthly recurring basis. Through Easyspace, the Group is again providing a large degree of monthly recurring services, which are all very similar by nature, the key exception to this is being in regards to the provision of domain registrations. The Group has concluded in regards to its recurring revenue streams that the services provided relate to a series of good or services that are substantially the same and have the same method of distribution to the customer. Whilst the route to market in each instance varies, the treatment of our recurring services in such instances remains consistent. These series of goods and services, or recurring revenue transactions, are recognised over the length of the contract, which is in line with when the customer will benefit from the provision of these services. In measuring completion of each performance obligation, the Group adopts the output method when recognising revenue.

In addition to recurring services, the Group also generates revenue from the sale of hardware, software, and consultancy services within our Cloud Services segment. Again consistent with IFRS 15 revenue is recognised in line with the satisfaction of the performance obligation which in the vast majority of instances is in line with the delivery of the item or service to the customer. As a result, the revenue recognition policy for these services remains unchanged under IFRS 15.

In summary, on application of IFRS 15, some changes in accounting policy resulted, principally in the following areas:

·      Set-up fees charged on contracts, which were previously recognised upfront when the set-up was complete, are now spread over the life of the contract under IFRS 15, impacting revenue and deferred revenue disclosed within trade and other payables.

·      In line with the recognition of revenue, sales commission earned on revenue, which was previously spread over a twelve- month period, is now spread over the life of the contract to which the commission relates, impacting cost of sales and deferred commission costs disclosed within trade and other receivables. The commission figure spread is inclusive of employers' national insurance contributions.

·      Revenue from the provision of domain names was previously recognised at the point of sale when the title to the domain name passed to the customer. Under IFRS 15, revenue is now split between the registration of the domain, which is recognised at the point of sale, and the ongoing services, which are over the period of registration of the domain, impacting revenue and deferred revenue disclosed within trade and other payables.

The impact on revenue, cost of sales and EBITDA on the opening retained earnings at 1 April 2017 is not material.  The tables below show the effect of IFRS 15 on the consolidated income statement for the year to 31 March 2018 and the year to 31 March 2019, the impact on the statement of financial position as at 31 March 2018 and 31 March 2019, along with how revenue has been disaggregated in the year to 31 March 2018 and the year to 31 March 2019.

 

 

 

Year to 31/03/2019

Year to 31/03/2018

 

 

Pre IFRS 15

IFRS 15 impact

Total

Originally reported

IFRS 15 impact

Restated

Consolidated income statement (extract)

£'000

£'000

£'000

 £'000

 £'000

£'000

Revenue

103,785

(76)

103,709

97,669

135

97,804


Cost of sales

(36,847)

(118)

(36,965)

(34,741)

(44)

(34,785)


EBITDA

42,426

(194)

42,232

39,843

91

39,934

 

 

 

Year to 31/03/2019

Year to 31/03/2018

 

 

Pre IFRS 15

IFRS 15 impact

Total

Originally reported

IFRS 15 impact

Restated

Statement of financial position (extract)

£'000

£'000

£'000

 £'000

 £'000

£'000


Trade & other receivables

20,362

432

20,794

17,958

550

18,508


Trade & other payables

(30,314)

(619)

(30,933)

(29,145)

(543)

(29,688)


Retained earnings

75,916

(187)

75,729

70,081

7

70,088

 

*retained earnings movement is based on the cumulative impact on adoption of IFRS 15 under the full retrospective method.  The impact on opening retained earnings at 1 April 2017 on adoption of IFRS 15 was a decrease of £0.1m.

 

Year to 31/03/2019

Year to 31/03/2018

 

Revenue recognised over time

Revenue recognised at point in time

Total

Revenue recognised over time

Revenue recognised at point in time

Total

Cash generating unit

£'000

£'000

£'000

£'000

£'000

£'000


Cloud Services

83,065

7,526

90,591

76,779

7,309

84,088


Easyspace

8,949

4,169

13,118

9,474

4,242

13,716


Total

92,014

11,695

103,709

86,253

11,551

97,804

  * Deferred revenue within trade and other payables at 31 March 2018 totalled £10,775,000. The vast majority of this balance has been released and recognised in the revenue figure of £103,709,000 for the year to 31 March 2019.

 

Following the adoption of IFRS 15, our revenue recognition policies in our operating segments are as follows:

 

Cloud Services

This operating segment provides managed cloud computing infrastructure and services including consultancy. Revenue from the sale of cloud computing infrastructure and managed services is recognised on an over time basis over the life of the agreement and only after the service has been established. Set-up fees charged on contracts are spread over the life of the contract. Consultancy services are generally provided on a "time and materials" basis and therefore revenue is recognised as these services are rendered. Revenue from the supply of hardware or software, and the provision of services in respect of installation or training, is recognised when delivery and installation of the equipment is completed on a point in time basis. Any unearned portion of revenue is included in payables as deferred revenue.

 

Easyspace

This operating segment provides domain name registration and hosting services. Revenue from the provision of domain names is split between the registration of the domain and the ongoing services associated with each domain registration. The registration of the domain is recognised on a point in time basis, whilst the ongoing service associated with each domain registration is spread over the length of the registration. Revenue from the provision of hosting services is recognised evenly over the period of the service on an over time basis and only after the service has been established. Any unearned portion of revenue is included in payables as deferred revenue.

 

IFRS 9 - Financial Instruments

In the current year, the Group has applied IFRS 9 Financial Instruments (as revised in July 2014) and the related consequential amendments of IFRS 7 Financial Instruments: Disclosures that are effective for an annual period that begins on or after 1 April 2018.  The Group and parent company has elected to apply the transition provisions of IFRS 9 and opted not to restate comparatives.  Any differences from the adoption of IFRS 9 in relation to classification, measurement and impairment are recognised in retained earnings.  IFRS 9 introduced new requirements for:

1.             The classification and measurement of financial assets and financial liabilities;

2.             Impairment of financial assets; and

3.             Hedge accounting.

There has not been a material impact to the Group on adoption of IFRS 9.  The Group has applied the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of lifetime expected loss provision for all trade receivables.  The expected credit loss provision under IFRS 9 as at 31 March 2019 is £100,000.  In the prior year, the impairment of trade receivables was assessed based on the incurred loss model under IAS 39.  The allowance provision for impairment calculated under IAS 39 "Financial instruments: recognition and measurement" and IFRS 9 "Financial Instruments" at 1 April 2018 are not materially different, accordingly, there are no adjustments on transition. 

New and revised IFRSs in issue but not yet effective and have not been adopted by the Group

At the date of authorisation of these financial statements, the following standards, interpretations and amendments have been issued but are not yet effective and have no material impact on the Group's financial statements: 

·      IFRS 10 and IAS 28 (amendments) - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture.

·      IFRS 11 - Amendments relating to Acquisitions of Interests in Joint Operations.

·      IFRS 2 (amendments) - Classification and Measurement of Share-Based Payment Transactions

·      Annual Improvements to IFRSs 2012 - 2014 cycle - Amendments to IFRS 1 first-time adoption of International Financial Reporting Standards.

IFRS 16 - Leases

IFRS 16 Leases was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019.  As a result, the standard is applicable to the Group for the year ended 31 March 2020.   The adoption of IFRS 16 will result in the Group recognising a right-of-use asset and lease liability for all contracts that are, or contain a lease.  For leases currently classified as operating leases, the Group currently accounts for leases under IAS 17 and does not recognise related assets or liabilities for operating leases, and instead spreads the lease payments on a straight-line basis over the lease term, disclosing the total future commitment.  As at 31 March 2019, the Group has non-cancellable operating lease commitments of £21.6m (2018: £9.9m).

The Group is currently completing its assessment of IFRS 16, however, at this time the Group intends to transition to IFRS 16 applying the modified retrospective adoption method, with no restatement of prior year comparatives, and will therefore recognise leases on balance sheet as at 1 April 2019.   Adopting IFRS 16 will result in the recognition of a right-of-use asset and corresponding liability on the balance sheet for each lease, with the associated depreciation and interest expense being recognised in the income statement over the period of the lease.  The right-of-use asset will be assessed for impairment under IAS 36 at the date of initial application.

The current initial impact assessment of IFRS 16 has provisionally concluded that our intention is to make the following policy choices on transition to IFRS 16 on 1 April 2019:

·      The Group plans to apply IFRS 16 initially on 1 April 2019 using the modified retrospective approach with the cumulative effect of adopting IFRS 16 recognised through opening retained earnings with no restatement of comparatives.

·      The value of the right-of-use asset recognised on the initial application of IFRS 16 will be equal to the lease liability.  The Group intends to apply the practical expedient that permits the exclusion of initial direct costs from the measurement of the right-of-use asset at the date of initial application.

·      The Group intend to use the practical expedient not to recognise short-term leases (with a term of less than twelve months) and low-value leases (where the value of lease on inception is less than £6,000).    These leases will continue to be classed as operating leases under IAS 17.

·      The lease liability at 1 April 2019 will be measured at the present value of unpaid lease payments applying an appropriate incremental borrowing rate based on the rate of interest based on the Group's external borrowings, adjusted for the term of the lease.

Based on our preliminary assessment the impact will be:

·      There will be recognition of a right-of-use asset and lease liability of an estimated of £17m to £20m at 1 April 2019 based on the values disclosed in the operating lease commitment note adjusted to present value and for  our provisional view of the definition of a lease under IFRS 16.

·      It is estimated that proforma EBITDA for the year ended 31 March 2019 would increase by £2m to £3m as operating lease expenses previously recognised as operating expenses will be reclassified to depreciation and finance costs under IFRS 16.

·      Our preliminary assessment will be further advanced over the coming months ahead of the September 2019 half year results announcement. 

3.    sEGMENTAL ANALYSIS

The Chief Operating Decision-Maker has been identified as the Chief Executive Officer ("CEO") of the Company. The Group has two operating segments and the CEO reviews the Group's internal reporting which recognises these two segments in order to assess performance and to allocate resources. The Group has determined its reportable segments which are also its operating segments based on these reports.

The Group currently has two operating and reportable segments being Easyspace and Cloud Services.

·      Easyspace - this segment provides a range of shared hosting and domain registration services to micro and SME companies.

·      Cloud Services - this segment provides managed cloud computing facilities and services, through a network of owned datacentres, to the larger SME and corporate markets. The segment uses several routes to market including iomart Cloud, Infrastructure as a Service (IaaS), SystemsUp, Cristie Data, Dediserve, Simple Servers, Sonassi plus LDeX and Bytemark which were acquired in the year.

Information regarding the operation of the reportable segments is included below. The CEO assesses the performance of the operating segments based on revenue and a measure of earnings before interest, tax, depreciation and amortisation (EBITDA) before any allocation of Group overheads, charges for share based payments, costs associated with acquisitions and any gain or loss on revaluation of contingent consideration and material non-recurring items. This segment EBITDA is used to measure performance as the CEO believes that such information is the most relevant in evaluating the results of the segment.

The Group's EBITDA for the year has been calculated after deducting Group overheads from the EBITDA of the two segments as reported internally. Group overheads include the cost of the Board, all the costs of running the premises in Glasgow, the Group marketing, human resource, finance and design functions and legal and professional fees.

The segment information is prepared using accounting policies consistent with those of the Group as a whole. 

The assets and liabilities of the Group are not reviewed by the chief operating decision-maker on a segment basis. Therefore none of the Group's assets and liabilities are segmental assets and liabilities and are all unallocated for segmental disclosure purposes. For that reason the Group has not disclosed details of segmental assets and liabilities.

All segments are continuing operations. No customer accounts for 2% or more of external revenues. Inter-segment transactions are accounted for using an arms-length commercial basis.

 

Operating Segments

 

Revenue by Operating Segment

 

2019

2018 (restated, note 2)

 

External

Internal

Total

External

Internal

Total

 

£'000

£'000

£'000

 £'000

 £'000

£'000

Easyspace

13,113

-

13,113

13,716

2

13,718

Cloud Services

90,596

1,912

92,508

84,088

1,839

85,927

 

103,709

1,912

105,621

97,804

1,841

99,645

 

Geographical Information

 

In presenting the consolidated information on a geographical basis, revenue is based on the geographical location of customers. There is no single country where revenues are individually material other than the United Kingdom. The United Kingdom is the place of domicile of the parent company, iomart Group plc.

 

Analysis of Revenue by Destination

 

 

 

 

 

2019

2018 (restated, note 2)

 

 

 

 

 

£'000

£'000

United Kingdom

 

 

 

 

86,246

79,760

Rest of the World

 

 

 

 

17,463

18,044

Revenue from operations

 

 

 

103,709

97,804

 

 

 

Profit by Operating Segment

 

2019

2018 (restated, note 2)

 

Adjusted EBITDA

Depreciation,  amortisation, acquisition costs, share based payments and non-recurring costs

Operating profit/(loss)

Adjusted EBITDA

Depreciation,  amortisation, acquisition costs, share based payments and non-recurring costs

Operating profit/(loss)

 

£'000

£'000

£'000

 £'000

£'000

£'000

Easyspace

6,182

(1,595)

4,587

6,416

(1,636)

4,780

Cloud Services

40,447

(20,486)

19,961

37,148

(21,596)

15,552

Group overheads

(4,397)

-

(4,397)

(3,630)

-

(3,630)

Acquisition costs

-

(351)

(351)

-

(774)

(774)

Share based payments

-

(1,008)

(1,008)

-

(1,206)

(1,206)

Profit before tax

 and interest

42,232

(23,440)

18,792

39,934

(25,212)

14,722

(Loss)/gain on revaluation of contingent consideration

 

 

(1,394)

 

 

1,335

Group interest and tax

 

 

(4,521)

 

 

(3,679)

Profit for the year

42,232

(23,440)

12,877

39,934

(25,212)

12,378

Group overheads, acquisition costs, share based payments, interest and tax are not allocated to segments.

 

 

 

4.    TAXATION

 

 

 

 

 

2019

£'000

2018

(restated, note 2)

£'000

Corporation Tax:

 

 

 

 

Tax charge for the year

 

 

(4,920)

(4,364)

Adjustment relating to prior years

 

 

(119)

68

Total current taxation charge

 

 

(5,039)

(4,296)

 

 

 

 

 

Deferred Tax:

Origination and reversal of temporary differences

 

 

 

1,661

 

1,900

Adjustment relating to prior years

 

 

24

(15)

   Effect of different statutory tax rates of overseas jurisdictions

 

(8)

(70)

Effect of changes in tax rates

 

 

23

(29)

Total deferred taxation credit

 

 

1,700

1,786

 

 

 

 

 

Total taxation charge

 

 

(3,339)

(2,510)

The differences between the total taxation charge shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax are as follows:

 

 

 

 

 

 

2019

£'000

2018

(restated, note 2)

£'000

 

 

 

 

 

Profit before tax

 

 

16,216

14,888

 

 

 

 

 

Tax charge @ 19%

 

 

3,081

2,829

 

 

 

 

 

Expenses disallowed for tax purposes

 

 

76

138

Tax effect of net (loss)/gain on revaluation of contingent consideration

 

 

265

(254)

Adjustments in current tax relating to prior years

 

 

119

(68)

Tax effect of different statutory tax rates of overseas jurisdictions

 

 

22

113

Movement in deferred tax relating to changes in tax rates

 

 

(23)

29

Tax effect of share based remuneration

 

 

(192)

(231)

Movement in unprovided deferred tax related to development costs

 

 

11

(68)

   Movement in unprovided deferred tax related to property, plant and equipment

4

7

Movement in deferred tax relating to prior years

 

 

(24)

15

 

 

 

 

 

Total taxation charge for the year

 

 

3,339

2,510

 

The weighted average applicable tax rate for the year ended 31 March 2019 was 19% (2018: 19%).  The effective rate of tax for the year, based on the taxation charge for the year as a percentage of the profit before tax, is 20.6% (2018: 16.9%).    The net increase of 3.7% of the effective tax rate for the year is largely due to the following:

·      The increase in the tax effect as a result of a net loss on revaluation of contingent consideration in the year (2018: net gain) and the movement relating to adjustments in current tax relating to prior years. 

·      The increase is offset by reduction to the tax effect of different statutory tax rates of overseas jurisdictions largely due to the reduction of the US tax rate in the prior year from 34% to 21%.  In addition, there is a decrease in the tax effect relating to reduced disallowed expenses.  Disallowed expenses of £76,000 (2018: £138,000) largely relate to M&A costs incurred on the acquisitions in the year. 

A number of changes to the UK Corporation tax system were announced in the March 2016 Budget Statement with the main rate of corporation tax reduced from 18% to 17% from 1 April 2020. These changes were substantively enacted in the prior year and therefore are included in these financial statements. 
 

5.         DEFERRED TAX

 

The Group recognised deferred tax assets and liabilities as follows:

 

 

 

 

2019

£'000

2018

£'000

 

 

 

 

 

 

Share based remuneration

 

 

 

1,378

1,588

Capital allowances temporary differences

 

 

 

1,632

1,455

Deferred tax on development costs

 

 

 

(422)

(329)

  Deferred tax on acquired assets with no capital allowances

 

(157)

(235)

Deferred tax on customer relationships

 

 

 

(3,173)

(3,581)

Deferred tax on intangible software

 

 

 

(197)

(217)

Deferred tax liability

 

 

 

(939)

(1,319)

At the year end, the Group had no unused tax losses (2018: £nil) available for offset against future profits.

 

The movement in the deferred tax account during the year was:

 

 

 

 

Share based remuneration

£'000

 

Capital allowances temporary differences

£'000

 

 

 

Development costs

£'000

Deferred tax on acquired assets with no capital allowances

£'000

 

 

 

Customer relationships

£'000

 

 

 

Intangible Software

£'000

 

 

 

 

Total

£'000

 

 

 

 

 

 

 

 

Balance at 1 April 2017

1,135

1,181

(311)

(326)

(2,567)

-

(888)

Acquired on acquisition of subsidiaries

-

(1)

-

-

(2,144)

(217)

(2,362)

Credited to equity

143

-

-

-

-

-

143

Credited/(charged) to statement of comprehensive income

310

304

(18)

91

1,200

-

1,887

Effect of different tax rates of overseas jurisdictions

-

-

-

-

(70)

-

(70)

Effect of changes in tax rates

-

(29)

-

-

-

-

(29)

Balance at 31 March 2018

1,588

1,455

(329)

(235)

(3,581)

(217)

(1,319)

Acquired on acquisition of subsidiaries

-

(226)

-

-

(841)

-

(1,067)

Charged to equity

(253)

-

-

-

-

-

(253)

Credited/(charged) to statement of comprehensive income

43

394

(108)

87

1,249

20

1,685

Effect of different tax rates of overseas jurisdictions

-

-

-

-

(8)

-

(8)

Effect of changes in tax rates

-

9

15

(9)

8

-

23

Balance at 31 March 2019

1,378

1,632

(422)

(157)

(3,173)

(197)

(939)

 

The deferred tax asset in relation to share based remuneration arises from the anticipated future tax relief on the exercise of share options.

The deferred tax on capital allowances temporary differences arises mainly from plant and equipment in the Cloud Services segment where the tax written down value varies from the net book value.

The deferred tax on development costs arises from development expenditure on which tax relief is received in advance of the amortisation charge.

 

The deferred tax on acquired assets arises from datacentre equipment acquired through the acquisition of iomart Datacentres Limited on which depreciation is charged but on which there are no capital allowances available.

The deferred tax on customer relationships and intangible software arises from permanent differences on acquired intangible assets.

 

6.         EARNINGS PER SHARE

 

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, after deducting any own shares held in Treasury and held by the Employee Benefit Trust.  Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the total of the weighted average number of ordinary shares in issue during the year, after deducting any own shares, and adjusting for the dilutive potential ordinary shares relating to share options. 

 

Total operations

 

 

 

 

 

2019

£'000

2018

(restated, note 2)

£'000

Profit for the financial year and basic earnings attributed to ordinary shareholders

 

 

12,877

12,378

 

 

 

 

No

No

Weighted average number of ordinary shares:

 

 

 

000

000

 

 

 

 

 

 

Called up, allotted and fully paid at start of year

 

 

107,990

107,803

Own shares held in Treasury

 

 

-

(28)

Own shares held by Employee Benefit Trust

 

 

(141)

(141)

Issued share capital in the year

 

 

396

70

Weighted average number of ordinary shares - basic

 

 

108,245

107,704

 

 

 

 

 

Dilutive impact of share options

 

 

2,909

2,571*

 

 

 

 

 

Weighted average number of ordinary shares - diluted

 

 

 

111,154

110,275

 

 

 

 

 

Basic earnings per share    

 

 

11.9 p

11.5 p

Diluted earnings per share

 

11.6 p

11.2 p

             

 

* Following updated analysis, the dilutive impact of share options in 2018 has been restated to increase the number of dilutive options by 714,000 number of shares representing 0.6% of the diluted weighted average of shares.  The impact of this restatement was to reduce diluted earnings per share and adjusted diluted earnings per share by 0.1p.

 

Adjusted earnings per share

 

 

 

 

 

 

2019

£'000

2018

(restated, note 2)

£'000

Profit for the financial year and basic earnings attributed to ordinary shareholders

 

 

12,877

12,378

-       Amortisation of acquired intangible assets

 

 

6,492

6,449

-       Acquisition costs

 

 

351

774

-       Share based payments

 

 

1,008

1,206

-       Mark to market interest adjustment

 

 

-

(46)

-       Net loss/(gain) on revaluation of contingent consideration

 

 

1,394

(1,335)

-       Non-recurring software licence fees

 

 

-

2,143

-          Accelerated write off of arrangement fees on banking facility

 

63

-

-       Finance charge on contingent consideration

 

 

-

51

-       Tax impact of adjusted items

 

 

(1,462)

(1,850)

Adjusted profit for the financial year and adjusted earnings attributed to ordinary shareholders

 

 

 

20,723

19,770

 

 

 

 

 

Adjusted basic earnings per share     

 

 

19.1 p

18.4 p

Adjusted diluted earnings per share

 

18.6 p

17.9 p

             

 

 

7.         ACQUISITIONS

 

On 24 August 2018, the Company acquired the entire share capital of Bytemark Holdings Limited.  On 20 December 2018, the Company acquired the entire share capital of LDeX Group Limited.  Total cash paid on acquisitions, net of cash acquired, in the year ended 31 March 2019 was £11.6m (2018: £20.1m).

 

Bytemark Holdings Limited

The Group acquired 100% of the issued share capital of Bytemark Holdings Limited on 24 August 2018.   Bytemark Holdings Limited ("Holdings") is principally a holding company which owns 100% of the issued share capital of Bytemark Limited ("Bytemark"), together the "Bytemark Group".

 

The Bytemark Group provides managed and cloud based hosting services via its owned datacentre in York to a wide range of customers in all sectors of industry to primarily SMEs.  The acquisition is in line with the Group's strategy to grow its operations both organically and by acquisition and gives the group access to additional datacentre space and another customer base.

 

During the current period the Group incurred £128,000 of third party acquisition related costs in respect of this acquisition. These expenses are included in administrative expenses in the Group's consolidated statement of comprehensive income for the year ended 31 March 2019. 

The following table summarises the consideration to acquire Bytemark and the amounts of identified assets acquired and liabilities assumed at the acquisition date which are now final.

 

 

£'000

Recognised amounts of net assets acquired and liabilities assumed:

 

Cash and cash equivalents

546

Trade and other receivables

205

Property, plant and equipment

2,362

Intangible assets

988

Trade and other payables

(1,470)

Current borrowings

(290)

Borrowings due after more than 1 year

(140)

Deferred tax liability

(209)

Identifiable net assets

1,992

Goodwill

3,320

Total consideration

5,312

 

 

Satisfied by:

 

Cash - paid on acquisition

4,712

Contingent consideration - payable

600

Total consideration transferred

5,312

The acquisition of Bytemark was completed using a "locked box" mechanism, on a no cash, no debt, and normalised working capital basis. An initial payment of £4,712,000 was made at completion. This initial payment included an amount of £62,000 to settle the adjustments required to the locked box acounts.

 

The share purchase agreement (SPA) included a provision requiring the Group to pay the former shareholders of Bytemark an additional amount contingent on the level of profitability delivered by Bytemark in the year ending 31 March 2019 ("the earn-out payment").

 

The potential undiscounted amount of the earn-out payment that the Group could be required to pay was between £nil and £1,000,000.  The amount of contingent consideration payable, which was recognised as of the acquisition date, was £600,000. The level of profitability for the earn-out payment was estimated by applying the income approach to different scenarios based on historic performance and forecasts. Those scenarios reviewed had a range of outcomes for the amount of the earn-out payment of £289,000 to £928,000. A weighted average, based on management estimates of the probability of the achievement of the various levels of profitability, was then calculated to give the expected outcome of the amount of the earn-out payment of £600,000 as of the acquisition date.

 

Subsequently, while not part of the original plan, during November 2018, the previous director shareholders of Bytemark indicated that they wished to consider leaving the business early. Driven by this, a negotiated settlement on the earn-out payment was agreed. The amount due to be paid by the Group, in full and final settlement of all its liabilities to the former shareholders, under the SPA, was fixed at £187,000 and the resulting gain of £413,000 has been included in the Group's consolidated statement of comprehensive income for the year ended 31 March 2019.

The goodwill arising on the acquisition of Bytemark is attributable to the premium payable for a pre-existing, well positioned business and the specialised, industry specific knowledge of the management and staff, together with the benefits to the Group in merging the business with its existing infrastructure and the anticipated future operating synergies from the combination.  The goodwill is not expected to be deductible for tax purposes.

The trading name "Bytemark" is not actively advertised or promoted by the company   The Bytemark Group's standard terms and conditions restrict the ability of the Bytemark Group to sell, distribute or lease any personal information it holds on customers.  As a consequence there is no significant value in either the trade name/brand or customer lists acquired at the acquisition date and therefore no value has been attributed to either intangible asset.

The fair value of the financial assets acquired includes trade receivables with a fair value of £91,000. The gross amount due under contracts is £91,000, all of which is expected to be collectable.

Included in the intangible assets of £988,000 is the fair value included in respect of the acquired customer relationships intangible asset of £974,000.

To estimate the fair value of the customer relationships intangible asset, a discounted cash flow method, specifically the income approach, was used with reference to the directors' estimates of the level of revenue, which will be generated from them. A post-tax discount rate of 13.14% was used for the valuation. Customer relationships are being amortised over an estimated useful life of 8 years.

Bytemark earned revenue of £1,983,000 and generated profits, before allocation of group overheads, share based payments and tax, of £184,000 in the period since acquisition.

 

LDeX Group Limited

The Group acquired 100% of the issued share capital of LDeX Group Limited ("LDeX Group") on 20 December 2018.   LDeX Group is a holding company, which has two 100% owned subsidiary companies, London Data Exchange Limited ("LDeX") and LDeX Connect Limited ("Connect"), both of which are trading companies.

 

LDeX provides colocation, managed networks and media streaming solutions to a number of customers from its datacentres in London and Manchester, while Connect operates from the LDeX datacentres and provides connectivity services.

 

The acquisition is in line with the Group's strategy to grow its operations, both organically and by acquisition, and provides the Group with additional long-term datacentre space in both London and Manchester, with the opportunity to consolidate all the Group's Manchester operations within the two adjacent LDeX datacentres in Manchester.

 

During the current period the Group incurred £213,000 of third party acquisition related costs in respect of this acquisition. These expenses are included in administrative expenses in the Group's consolidated statement of comprehensive income for the year ended 31 March 2019.

 

The following table summarises the consideration to acquire LDeX Group and the amounts of identified assets acquired and liabilities assumed at the acquisition date which are provisional.

 

 

£'000

Recognised amounts of net assets acquired and liabilities assumed:

 

Cash and cash equivalents

295

Trade and other receivables

849

Property, plant and equipment

1,712

Intangible assets

3,806

Trade and other payables

(1,146)

Current income tax liabilities

(89)

Deferred tax liability

(858)

Identifiable net assets

4,569

Goodwill

6,225

Total consideration

10,794

 

 

Satisfied by:

 

Cash - paid on acquisition

7,785

Contingent consideration - payable

3,009

Total consideration to be transferred

10,794

 

The acquisition of LDeX Group was completed using the "locked box" mechanism, on a no cash, no debt, and normalised working capital basis. An initial payment of £7,785,000 was made at completion. This initial payment included an amount of £285,000 to settle the adjustments required to the locked box accounts in respect of the cash, debt and working capital position at the locked box date.

 

The share purchase agreement included a provision requiring the Company to pay the former shareholders of LDeX Group an additional amount contingent on the level of profitability delivered by LDeX Group in the year ending 31 December 2019 ("the Earn-out Payment").

 

The potential undiscounted amount of the Earn-out Payment that the Company could be required to pay is between £nil and £3,500,000.  The amount of contingent consideration payable, which was recognised as of the acquisition date, was £3,009,000.  The level of profitability for the Earn-out Payment was estimated by applying the income approach to different scenarios based on historic performance and forecasts. Those scenarios reviewed had a range of outcomes for the amount of the Earn-out Payment of £2,317,000 to £3,500,000. A weighted average, based on management estimates of the probability of the achievement of the various levels of profitability, was then calculated to give the expected outcome of the amount of the Earn-out Payment of £3,009,000.

The goodwill arising on the acquisition of LDeX is attributable to the premium payable for a pre-existing, well positioned business and the specialised, industry specific knowledge of the management and staff, together with the benefits to the Group in merging the business with its existing infrastructure and the anticipated future operating synergies from the combination.  The goodwill is not expected to be deductible for tax purposes.

The name "LDeX" is not actively advertised or promoted.  The LDeX Group's standard contracts restrict the ability of the LDeX Group to sell, distribute or lease any personal information it holds on customers unless the customer's permission is given.  As a consequence there is no significant value in either the trade name/brand or customer lists acquired at the acquisition date and therefore no value has been attributed to either intangible asset.

 

The fair value of the financial assets acquired includes trade receivables with a fair value of £492,000. The gross amount due under contracts is £584,000 of which £92,000 are expected to be uncollectable.

The fair value included in respect of the acquired customer relationships intangible asset is £3,806,000.

To estimate the fair value of the customer relationships intangible asset, a discounted cash flow method, specifically the income approach, was used with reference to the directors' estimates of the level of revenue, which will be generated from them. A post-tax discount rate of 13.44% was used for the valuation. Customer relationships are being amortised over an estimated useful life of 8 years.

LDeX Group earned revenue of £1,096,000 and generated profits, before allocation of group overheads, share based payments and tax, of £231,000 in the period since acquisition.

 

 

Pro-forma full year information

The following summary presents the Group as if the businesses acquired during the year had been acquired on 1 April 2018.  The amounts include the results of the acquired business, depreciation and amortisation of the acquired property, plant and equipment plus the amortisation of intangible assets recognised on acquisition.  The amounts do not include any possible synergies from the acquisition.  The information is provided for illustrative purposes only and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of the future results of combined companies.

 

 

Pro-forma year ended 31 March 2019

 

 

£'000

Revenue

 

107,960

 

 

 

Profit after tax for the year

 

12,902

 

 

8.    INTANGIBLE ASSETS

 

 

 

 Goodwill

Development costs

Acquired Customer relationships

 Software

 

Beneficial contracts

 Domain names & IP addresses

 Total

 

 £'000

£'000

£'000

 £'000

£'000

 £'000

£'000

Cost

 

 

 

 

 

 

 

At 1 April 2017

62,000

6,204

35,965

4,847

86

280

109,382

Additions

-

-

221

905

-

-

1,126

Currency translation differences

-

-

(91)

(42)

-

-

(133)

Acquired on acquisition of subsidiaries

13,837

-

11,904

1,243

-

-

26,984

Disposals

-

-

-

(10)

-

-

(10)

Development cost capitalised

-

1,577

-

-

-

-

1,577

At 31 March 2018

75,837

7,781

47,999

6,943

86

280

138,926

Additions

-

-

-

1,082

-

-

1,082

Currency translation differences

-

-

(13)

-

-

-

(13)

Acquired on acquisition of subsidiaries

9,545

-

4,780

14

-

-

14,339

Disposals

-

-

-

-

-

-

-

Development cost capitalised

-

1,412

-

-

-

-

1,412

At 31 March 2019

85,382

9,193

52,766

8,039

86

280

155,746

 

 

 

 

 

 

 

 

Accumulated amortisation:

 

 

 

 

 

 

 

At 1 April 2017

-

(4,183)

(20,936)

(2,297)

(33)

(226)

(27,675)

Currency translation differences

-

-

82

(27)

-

-

55

Disposals

-

-

-

10

-

-

10

Charge for the year

-

(1,241)

(6,449)

(801)

(8)

(54)

(8,553)

At 31 March 2018

-

(5,424)

(27,303)

(3,115)

(41)

(280)

(36,163)

 

 

 

 

 

 

 

 

Currency translation differences

-

-

-

-

-

-

-

Disposals

-

-

-

-

-

-

-

Charge for the year

-

(1,442)

(6,492)

(1,049)

(7)

-

(8,990)

At 31 March 2019

-

(6,866)

(33,795)

(4,164)

(48)

(280)

(45,153)

 

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 March 2019

85,382

2,327

18,971

3,875

38

-

110,593

 

 

 

 

 

 

 

 

At 31 March 2018

75,837

2,357

20,696

3,828

45

-

102,763

Of the total additions in the year of £1,082,000 (2018: £1,126,000), £nil (2018: £25,000) was included in trade payables as unpaid invoices at the year end resulting in a net cash outflow of £25,000 (2018: net cash outflow £97,000) in trade payables. Consequently, the consolidated statement of cash flows discloses a figure of £1,107,000 (2018: £1,223,000) as the cash outflow in respect of intangible asset additions in the year.

All amortisation and impairment charges are included in the depreciation, amortisation and impairment of non-financial assets classification, which is disclosed as administrative expenses in the statement of comprehensive income.

Included within customer relationships are the following significant items: customer relationships in relation to the acquisitions of Bytemark Limited with a net book value of £0.9m and LDeX Group Limited of £3.5m both with a remaining useful life of 8 years.  Sonassi Limited with a net book value of £4.8m and a remaining useful life of 7 years, Dediserve Limited with a net book value of £2m and a remaining useful of 7 years, Simple Servers Limited with an net book value of £1m and a remaining useful life of 7 years, Backup Technology with a net book value of £1.4m and a remaining useful life of 3 years; and United Hosting with a net book value of £2.2m and a remaining useful life of 5 years.

 

During the year, goodwill was reviewed for impairment in accordance with IAS 36 "Impairment of Assets". No impairment charges (2018: £nil) arose as a result of this review. For this review goodwill was allocated to individual Cash Generating Units (CGU) on the basis of the Group's operations. The goodwill acquired in the year on all acquisitions has been allocated to the Cloud Services CGU as this is the CGU expected to benefit from the business combination.

 

The carrying value of goodwill by each CGU is as follows:

 

Cash Generating Units (CGU)

 

 

 

2019

£'000

2018

£'000

Easyspace

 

 

 

23,315

23,315

Cloud Services

 

 

 

62,067

52,522

 

 

 

 

85,382

75,837

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by the Board covering a two-year period. These projections are the result of detailed planning and assume similar levels of organic growth as the Group has experienced in the previous year unless there is a reason to alter historic growth rates and also full year contributions from acquisitions.

The growth rates and margins used to extrapolate estimated future performance in the 3 years after the initial 2 year period continue to be based on past growth performance adjusted downwards to take into account the additional risk due to the passage of time. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. The growth rates used to estimate future performance beyond the periods covered by the annual and strategic planning processes do not exceed the long-term average growth rates for similar products.

 

Management continue to apply the judgement that there are two distinct CGUs within the Group, namely Cloud Services and Easyspace. These segments have been derived with due consideration to IFRS 8. The assumptions used for the CGU included within the impairment reviews are as follows:

 

 

 

 

 

Easyspace

Cloud Services

Discount rate

 

 

 

9.8%

9.0%

Average growth rate in years 3 to 5

 

 

 

2.5%

2.5%

Future perpetuity rate

 

 

2.0%

2.0%

Initial period for which cash flows are estimated (years)

 

2

2

Based on an analysis of the impairment calculation's sensitivities to changes in key parameters (growth rate, discount rate and pre-tax cash flow projections) there was no reasonably possible scenario where the CGU's recoverable amount would fall below its carrying amount.

 

 

9.     PROPERTY, PLANT AND EQUIPMENT

 

 

Freehold property

Leasehold improve-ments

Datacentre equipment

Computer equipment

Office equipment

Motor vehicles

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

 

 

At 1 April 2017

2,062

7,967

21,169

55,603

2,614

68

89,483

Additions in the year

-

767

1,511

14,297

96

11

16,682

Acquisition of subsidiaries

-

-

-

1,275

1

-

1,276

Disposals in the year

-

(194)

-

(1,191)

(313)

(48)

(1,746)

Currency translation differences

-

-

-

59

-

-

59

At 31 March 2018

2,062

8,540

22,680

70,043

2,398

31

105,754

Additions in the year

5,729

33

775

9,256

38

-

15,831

Acquisition of subsidiaries

1,131

-

-

2,376

567

-

4,074

Disposals in the year

-

(630)

-

(67)

(83)

-

(780)

Currency translation differences

(12)

-

2

3

-

-

(7)

At 31 March 2019

8,910

7,943

23,457

81,611

2,920

31

124,872

 

 

 

 

 

 

 

 

Accumulated depreciation:

 

 

 

 

 

 

 

At 1 April 2017

(258)

(2,774)

(9,763)

(39,942)

(1,629)

(68)

(54,434)

Charge for the year

(48)

(556)

(1,984)

(9,538)

(409)

(1)

(12,536)

Disposals in the year

-

192

-

1,191

313

48

1,744

Currency translation differences

-

-

(8)

166

-

-

158

At 31 March 2018

(306)

(3,138)

(11,755)

(48,123)

(1,725)

(21)

(65,068)

Charge for the year

(112)

(570)

(1,880)

(10,317)

(209)

(3)

(13,091)

Disposals in the year

-

198

-

67

83

-

348

Currency translation differences

-

-

-

1

(17)

-

(16)

At 31 March 2019

(418)

(3,510)

(13,635)

(58,372)

(1,868)

(24)

(77,827)

 

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

 

At 31 March 2019

8,492

4,433

9,822

23,239

1,052

7

47,045

 

 

 

 

 

 

 

 

At 31 March 2018

1,756

5,402

10,925

21,920

673

10

40,686

                 

The net book value of computer equipment held under finance lease at 31 March 2019 was £214,000 (2018: £234,000) and the net book value of datacentre equipment held under finance lease at 31 March 2019 was £295,000 (2018: £375,000).

Of the total additions in the year of £15,819,000 (2018: £16,682,000), £1,553,000 (2018: £1,846,000) was included in trade payables as unpaid invoices at the year end resulting in a net decrease of £293,000 (2018: net increase of £590,000) in trade payables. Consequently, the consolidated statement of cash flows discloses a figure of £16,112,000 (2018: £16,092,000) as the cash outflow in respect of property, plant and equipment additions in the year.

 

 

10.       BORROWINGS

 

 

 

 

2019

£'000

2018

£'000

 

 

 

 

 

 

Current:

 

 

 

 

Obligations under finance leases

 

 

(356)

(327)

Bank loans

 

 

-

(35,239)

Current borrowings

 

 

(356)

(35,566)

 

 

 

 

 

Non-current:

 

 

 

 

Obligations under finance leases

 

 

(421)

(503)

Bank loans

 

 

(48,536)

-

Total non-current borrowings

 

 

 

(48,957)

(503)

 

 

 

 

 

 

Total borrowings

 

 

 

(49,313)

(36,069)

 

Given the terms of the revolving credit facility and the ability for any drawdowns made to be extended well beyond 31 March 2020 at the discretion of the Company, the total amount outstanding has been classified as non-current.

 

11.       ANALYSIS OF CHANGE IN NET DEBT

 

 

 

Analysis of change in net cash/(debt)

 

Cash and cash equivalents

£'000

 

Bank

loans

 

£'000

Finance leases and hire purchase

£'000

 

Total liabilities

 

£'000

Total net cash/(debt)

£'000

 

 

 

 

 

 

At 1 April 2017

8,906

(18,639)

(858)

(19,497)

(10,591)

 

 

 

 

 

 

Repayment of bank loans

-

8,500

-

8,500

8,500

New bank loans

-

(24,956)

 

(24,956)

(24,956)

Impact of effective interest rate

-

(144)

-

(144)

(144)

Acquired on acquisition of subsidiary

4,153

-

283

283

4,436

Currency translation differences

-

-

21

21

21

Cash flow

(3,564)

-

(276)

(276)

(3,840)

At 31 March 2018

9,495

(35,239)

(830)

(36,069)

(26,574)

 

 

 

 

 

 

Repayment of bank loans

-

12,200

-

12,200

12,200

New bank loans

-

(25,860)

 

(25,860)

(25,860)

Impact of effective interest rate

-

363

-

363

363

Acquired on acquisition of subsidiaries

841

-

(430)

(430)

411

Currency translation differences

-

-

12

12

12

Cash flow

(267)

-

471

471

204

At 31 March 2019

10,069

(48,536)

(777)

(49,313)

(39,244)

 

 

12.       CONTINGENT CONSIDERATION

 

 

 

 

2019

£'000

2018

£'000

 

 

 

 

 

Contingent consideration due on acquisitions within one year:

 

 

 

 

-       LDeX Group Limited

 

 

(3,009)

-

-       Tier 9 Limited

 

 

-

(1,862)

-       Sonassi Holding Company Limited

 

 

-

(832)

 

 

 

 

 

Total contingent consideration due on acquisitions

 

 

(3,009)

(2,694)

 

 

13.       POST BALANCE SHEET EVENT

 

In June 2019, subsequent to the year end, the multi option revolving credit facility was extended from 31 May 2022 to 30 September 2022 purely for the administrative matter of ensuring a 12 month remaining facility period at the expected time of signing the March 2021 audited financial statements.

 

 

 

 


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