iomart Reports Positive Half Yearly Results

• Profit before tax growth of 26% to £7.1m (H1 2016: £5.7m)
• Basic earnings per share from operations increased by 19% to 5.43p (H1 2016: 4.57p)

Angus MacSween, CEO commented, 

"Trading in the first half of the year has been very good and we remain focussed on building our recurring revenues in line with our business model. We are uncovering an increasing breadth of opportunities to constantly grow that recurring revenue and remain confident in our future prospects."

^[1]   Throughout this statement adjusted EBITDA is earnings before interest, tax, depreciation and amortisation (EBITDA) before share based payment charges and acquisition costs. Throughout this statement acquisition costs are defined as acquisition related costs and non-recurring acquisition integration costs.

^[2]   Throughout this statement 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, interest charges in respect of contingent consideration due, acquisition costs and in the previous period the accelerated write off of arrangement fees on the restructuring of our bank borrowing facility.

^[3]   Throughout this statement adjusted 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, interest charges in respect of contingent consideration due, acquisition costs and in the previous period the accelerated write off of arrangement fees on the restructuring of our bank borrowing facility including the taxation effect of these.

This interim announcement contains forward-looking statements, which have been made by the directors in good faith based on the information available to them up to the time of the approval of this report and such information should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking information. 

For further information:
iomart Group plc
Tel: 0141 931 6400
Angus MacSween
Richard Logan

Peel Hunt LLP
Tel: 020 7418 8900
(Nominated Adviser and Broker)
Richard Kauffer
Euan Brown

Alma PR
Tel: 020 8004 4217
Caroline Forde
Hilary Buchanan

About iomart Group plc 

iomart Group Plc (AIM: IOM) designs, builds and manages cloud environments.  Expert in all types of managed cloud - public, private and hybrid - iomart is vendor, platform and technology agnostic and will recommend the cloud environment to meet your specific business needs. 

With a global infrastructure of 10 UK and 6 Global data centres, fully certified to supply services to both the public and private sectors, and with over 200 technical experts on hand, iomart delivers Any Cloud Your Way.

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

Chief Executive's Statement 

Introduction 

We have again enjoyed a very good trading period with Group revenue having grown by 16% to £42.1m (H1 2016: £36.4m). Our adjusted EBITDA has grown by 13% to £17.6m (H1 2016: £15.5m) and our adjusted profit before tax by 23% to £10.6m (H1 2016: £8.7m).

Market 

The move to the cloud continues to be at the centre of attention within IT departments.

iomart continues to invest in the skills required to architect, migrate, manage, monitor, secure and scale public cloud, private cloud, hybrid IT and traditional IT, with a view to enabling organisations to transform, innovate, and scale their operations.

There is a long term and large market opportunity in preparing and managing enterprises for transformation and deployment to cloud platforms. The IT environment has become more complex with more choice and we see a growing requirement for the skills associated with cloud adoption.

Our ongoing challenge and opportunity is to navigate through these early days of the further evolution of cloud adoption to ensure we continue to develop the assets, skills and resources necessary to be successful in that space.

As we have broadened the scope of our services to include professional services, we have begun to see the benefits of having the skill sets around consulting and managing cloud transformation. We are entering into more strategic conversations with IT departments who are looking for 'joined up thinking' when it comes to looking at moving applications or services to the cloud.

There is a growing trend to manage IT in a more fragmented way. Gone are the days when large organisations or departments would outsource their entire IT departments and magically believe that things would somehow be better.

IT evolution now tends to be project by project, application by application, with a view to maximising value, not being locked into any one technology vendor, and being able to migrate services at will.

This plays into the strengths we have established around agility and flexibility alongside the right expertise and infrastructure, with an ability to manage the mix of public and private cloud and hybrids of both effectively.

This is a very long term market opportunity. We are only now starting to see back office workloads move to cloud environments and this is a trend that will continue for many years. It is, after all, only day 2 of the internet.

Operational review 

Cloud Services 

The Cloud Services operation continues to perform well, delivering an overall revenue growth rate of 13% with an encouraging 10% organic growth rate.

During the period we have continued to win new business in both the private and public cloud arenas. Our positioning as an agnostic supplier of cloud solutions together with our wide range of skills and experience makes us the ideal partner for companies that are considering moving some or all of their infrastructure into the cloud.

We have continued to develop our relationships with the main vendors in the market including Microsoft, Dell/ EMC and AWS. Our consultancy division, SystemsUp, has recently been named as an AWS Public Sector Partner for Government. The public cloud vendors led by AWS and Microsoft continue to win market share and it is clear that they require an ecosystem of organisations, such as iomart, to provide services and support to the users of these public clouds.

This has led to the generation of revenue from the provision of Public Cloud solutions. As expected this has modestly affected some of our percentage profit margins and the impact of this has been a reduction in our percentage margins at both gross profit and adjusted EBITDA level but compensated by an improvement in our adjusted and reported profit before tax percentage margins. This is due to the fact that as we provide Public Cloud solutions to our customers we incur a charge from the Public Cloud service provider which is included within our cost of sales. The increased cost of providing Public Cloud solutions has offsetting savings elsewhere within our income statement with lower charges for power, which is also included in cost of sales and depreciation. On private or hybrid cloud solutions we acquire and operate the infrastructure ourselves and thereby incur depreciation and power charges for their operation, whereas the charge from the Public Cloud service provider includes these costs.

The acquisition of Cristie Data Limited ("Cristie") towards the end of the period provides us with access to an excellent customer base many of whom are in the public sector.

Our revenues have grown to £35.6m (H1 2016: £31.5m) as a result of our acquisitive and organic activities and we continue to expect Cloud Services to be the driver of growth going forward.

Easyspace 

The Easyspace segment has performed as expected and with the addition of United Communications Limited (which trades as "United Hosting") from November 2015 has recorded substantial growth in both revenue and profitability.

Easyspace provides a range of products to the small and micro business community including an ever wider range of domain names, shared hosting, emails and dedicated servers.

Our revenues have grown by 33% to £6.6m (H1 2016: £4.9m) mainly as a result of our acquisitions, although we have also seen organic growth of 3% (H1 2016: organic decline of 9.5%) during this period.

M&A Activity 

On 25 August we acquired the entire share capital of Cristie on a no debt, no cash, normalised working capital basis. Cristie provides storage and backup solutions and has a significant presence in the public sector market. On completion a payment of £3.8m, including adjustments required in respect of normalised working capital, was made to acquire Cristie which at the time had £3.1m of cash resulting in a net outflow of funds of £0.7m to acquire the company.

The M&A market continues to provide opportunities and we remain committed to continuing to complement our organic growth through further acquisitions.

Financial Performance 

Revenue  

Overall revenues from our operations grew 16% to £42.1m (H1 2016: £36.4m).

Our Cloud Services segment grew revenues by 13% to £35.6m (H1 2016: £31.5m). This increase was largely due to organic growth of 10% (H1 2016: 10%) added to which was the contribution for the full six month period from the acquisition of SystemsUp in June 2015 and a modest contribution from the acquisition of Cristie.

Our Easyspace segment grew revenues by 33% to £6.6m (H1 2016: £4.9m). This increase was mainly due to the impact of the acquisition of United Hosting although the segment did record organic revenue growth of 3% in the period (H1 2016: 9.5% organic revenue decline).

Gross Margin 

The gross profit in the period, which is calculated by deducting from revenue variable cost of sales such as domain costs, power and sales commission and the relatively fixed costs of operating our datacentres, increased by 12% to £27.7m (H1 2016: £24.7m). This substantial increase in gross profit was a direct result of the contribution from the additional revenue generated over the period, including the impact of acquisitions.

In percentage terms the gross margin was 65.8% (H1 2016: 67.7%). As explained above Cloud Services saw a reduction in gross margin percentage as we begin to provide Public Cloud solutions which incur a charge from the Public Cloud service provider with offsetting savings elsewhere within our income statement.

The gross profit margin within our traditional private and hybrid cloud solutions continues to rise due to our relatively static datacentre costs which to some extent are fixed in nature and therefore do not rise in line with revenue growth.

The Easyspace segment saw an increase in its gross margin percentage mainly due to the favourable impact of the acquisition of United Hosting in November 2015.

Whilst the provision of Public Cloud solutions into our range of services has, as expected, impacted our gross and adjusted EBITDA percentage margins, due to offsetting savings elsewhere within our income statement, it has not had an adverse effect on our adjusted profit before tax percentage margin which increased to 25.2% (H1 2016: 23.8%).

Adjusted EBITDA 

The Group's adjusted EBITDA grew by 13% to £17.6m (H1 2016: £15.5m) reflecting a significantly improved performance. In percentage terms the adjusted EBITDA margin reduced to 41.8% (H1 2016: 42.6%) with the reduction arising in the Cloud Services segment whilst the Easyspace segment recorded an improved gross margin percentage.

Cloud Services increased its adjusted EBITDA by 8% to £16.3m (H1 2016: £15.0m). The continued improvement in adjusted EBITDA is largely due to the additional gross margin contribution arising from our organic sales growth offset by continued investment in staffing levels and a full period contribution from the acquisition of SystemsUp in June 2015. In percentage terms the margin reduced to 45.8% (H1 2016: 47.8%). The primary reasons for the percentage margin reduction were the reduction in the Cloud Services gross margin percentage previously described and inclusion of SystemsUp for the full six month period. Whilst we have initially included the activities of Cristie within the Cloud Services segment we intend to consider this further in due course and may not include it within this segment in the future.

The adjusted EBITDA of Easyspace increased by 38% to £3.1m (H1 2016: £2.2m) largely as a result of the impact of the acquisition of United Hosting in November 2015. In percentage terms the margin increased to 46.8% (H1 2016: 44.9%) which again was predominantly due to the impact of the acquisition of United Hosting.

Group overheads, which are not allocated to segments, include the cost of the Board, all the running costs of the headquarters in Glasgow, and Group led functions such as human resources, marketing, finance and design. Group overheads of £1.8m have increased modestly in the period (H1 2016: £1.7m).

Adjusted profit before tax 

Depreciation charges of £5.4m (H1 2016: £5.6m) have slightly reduced. This is a combination of additional depreciation charges as a result of continued investment in our datacentre estate and the purchase of equipment to provide services to our new and existing customers, offset by assets bought in previous periods becoming fully depreciated in this period and therefore no longer contributing to the ongoing depreciation charge. In addition we have not incurred any capital expenditure on the provision of public cloud solutions which has had the effect of reducing our depreciation charge in absolute terms and also in it falling as a percentage of our revenue to 12.7% (H1 2016: 15.3%). In addition this percentage reduction is also due to the impact of the mix of assets which we have acquired, with differing useful lives causing reduced depreciation charges and the fact that not all of our operations require the same level of capital expenditure to generate revenue. For example, our SystemsUp consultancy operation requires no significant capital expenditure and thereby does not generate a depreciation charge related to its revenues. The charge for the amortisation of intangible assets, excluding amortisation of intangible assets resulting from acquisitions ("amortisation of acquired intangible assets") has increased to £0.9m (H1 2016: £0.6m) as a result of increased charges for software licenses and the additional development activity within the enlarged Group.

Net finance costs, excluding the mark to market adjustment on interest swaps on the Company's loans, the interest charge on contingent consideration due and in the previous period the accelerated write off of arrangement fees on restructuring of our bank borrowing facility were £0.7m (H1 2016: £0.6m).

After deducting the charges for depreciation, amortisation, excluding the amortisation of acquired intangible assets, and finance costs, excluding the interest charges in respect of contingent consideration due, the accelerated write off of arrangement fees in the previous period and the mark to market adjustment on interest rate swaps, from adjusted EBITDA the adjusted profit for the period before tax increased by 23% to £10.6m (H1 2016: £8.7m).

The adjusted profit before tax margin for the period was 25.2% (H1 2016: 23.8%). The increase in percentage margin of 1.4% is due to a combination of the reduction in the adjusted EBITDA margin over the period of 0.8% offset by the reduction in deprecation charge as a percentage of revenue of 2.6%.

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 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                6 months to 30/09/2016  6 months to 30/09/2015   Year to 31/03/2016
    Adjusted profit before tax                                                                       10,632                   8,677               18,970
    Less: Share based payments                                                                        (557)                   (338)              (1,081)
    Less: Amortisation of acquired intangible assets                                                (2,697)                 (2,417)              (5,354)
    Less: Acquisition costs                                                                           (102)                   (129)                (116)
    Less: Accelerated write off of arrangement fees on restructuring of facility                          -                   (177)                (177)
    Add: Mark to market adjustment on interest rate swaps                                                43                      67                   64
    Less: Interest on contingent consideration                                                        (177)                       -                (152)
    Add: Gain on revaluation of contingent consideration                                                  -                       -                  870
    Profit before tax                                                                                 7,142                   5,683               13,024

The adjusting items are: share based payment charges in the period which increased to £0.6m (H1 2016: £0.3m) as a result of the issue of additional share options; charges for the amortisation of acquired intangible assets of £2.7m (H1 2016: £2.4m) which have increased mainly as a result of the full period effect of acquisitions made in previous periods; costs of £0.1m (H1 2016: £0.1m) as a result of acquisitions; finance charges of £nil (H1 2016: £0.2m) due to the accelerated release of arrangement fees on the bank borrowing facility which was restructured in the previous period; a finance cost credit of £0.04m (H1 2016: £0.07m) in respect of mark to market adjustments relating to interest rate swaps on the Company's loans and interest charges on contingent consideration due of £0.2m (H1 2016: £nil).

After deducting the charges for share based payments, the amortisation of acquired intangible assets, acquisition costs, the mark to market adjustment on interest rate swaps, the interest charges in respect of contingent consideration due and the accelerated write off of arrangement fees on the bank borrowing facility which was restructured during the previous period from the adjusted profit before tax, the reported profit before tax increased by 26% to £7.1m (H1 2016: £5.7m).

In percentage terms the profit before tax margin was 17.0% (H1 2016: 15.6%). This increase in percentage margin of 1.4% is similar to the increase in the adjusted profit before tax percentage margin and is due to the same reasons as the adjusted profit before tax margin increase previously explained.

Profit for the period from total operations 

There is a tax charge in the period of £1.3m (H1 2016: £0.8m), which comprises a current taxation charge of £2.1m (H1 2016: £1.7m), and a deferred taxation credit of £0.8m (H1 2016: £0.9m). The tax charge for the period has increased because of the increase in profitability of the Group. This results in a profit for the period from total operations of £5.8m (H1 2016: £4.9m) an increase of 20%.

Earnings per share 

Adjusted diluted earnings per share, which is based on profit for the period attributed to ordinary shareholders before share based payment charges, amortisation of acquired intangible assets, the accelerated write off of arrangement fees on the restructuring of the bank facility in the previous period, the mark to market adjustment on interest rate swaps, the interest charges in respect of contingent consideration due and acquisition costs and the tax effect of these items, was 8.03p (H1 2016: 6.75p) an increase of 19%.

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

Basic earnings per share from continuing operations was 5.43p (H1 2016: 4.57p) an increase of 19%.

The calculation of both adjusted diluted earnings per share and basic earnings per share is included at note 3.

Cash flow 

The Group generated cash from operations in the period of £16.7m (H1 2016: £13.6m), which is 95% of our adjusted EBITDA (H1 2016: 88%). Expenditure on taxation in the period was £1.2m (H1 2016: £1.8m), which was reduced due to the receipt of a tax refund relating to previous periods, resulting in net cash flow from operating activities in the period of £15.5m (H1 2016: £11.8m).

Expenditure on investing activities of £8.5m (H1 2016: £16.3m) was incurred in the period. £4.6m (H1 2016: £6.6m), net of related finance lease drawdown and trade creditors, was incurred on the acquisition of property, plant and equipment principally to provide services to our customers. We made purchases of intangible assets of £1.4m (H1 2016: £0.4m) in the period, with the increase largely due to the advance purchase of additional software licences for storage and backup purposes. In respect of M&A activity £1.2m (H1 2016: £nil) was paid out for contingent consideration due on acquisitions made in previous periods and £0.7m (H1 2016: £8.7m) was incurred on the acquisition of Cristie in the period, as described above, net of cash acquired of £3.1m. We also incurred £0.7m (H1 2016: £0.6m) in respect of the capitalisation of development costs during the period.

There was net cash used in financing activities of £6.7m (H1 2016: £4.0m net cash generated). We generated £0.6m (H1 2016: £0.1m) from the issue of shares as a result of the exercise of options by staff. We made no drawdowns under our bank facility (H1 2016: £9.0m) and we made repayments of £3.0m (H1 2016: £1.0m) during the period. We repaid £0.3m (H1 2016: £0.6m) of finance leases and incurred £0.6m (H1 2016: £0.8m) of finance charges. We also made a dividend payment of £3.4m (H1 2016: £2.7m). As a result cash and cash equivalent balances at the end of the period were £10.6m (H1 2016: £7.9m).

Net Debt 

The net debt position of the Group at the end of the period was £22.2m (H1 2016: £23.2m). 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.

Current trading and outlook 

Trading in the first half of the year has been very good and we remain focussed on building our recurring revenues in line with our business model. We are uncovering an increasing breadth of opportunities to constantly grow that recurring revenue and remain confident in our future prospects.

Angus MacSween

CEO

5 December 2016

Consolidated Interim Statement of Comprehensive Income     

Six months ended 30 September 2016 

   
                                                                                     Unaudited Unaudited   Audited
                                                                                      6 months  6 months
                                                                                            to        to   Year to
                                                                                     30/09/201 30/09/201 31/03/201
                                                                                             6         5         6
                                                                                       GBP'000   GBP'000   GBP'000

    Revenue                                                                             42,119    36,431    76,280

    Cost of sales                                                                     (14,416)  (11,755)  (24,650)

    Gross profit                                                                        27,703    24,676    51,630

    Administrative expenses                                                           (19,693)  (18,217)  (37,917)

    Operating profit                                                                     8,010     6,459    13,713

    Analysed as:
    Earnings before interest, tax, depreciation, amortisation, acquisition costs
    and share based payments                                                            17,585    15,520    32,341
    Share based payments                                                                 (557)     (338)   (1,081)
    Acquisition costs                                                              4     (102)     (129)     (116)
    Depreciation                                                                   8   (5,365)   (5,570)  (10,878)
    Amortisation - acquired intangible assets                                          (2,697)   (2,417)   (5,354)
    Amortisation - other intangible assets                                               (854)     (607)   (1,199)

    Gain on revaluation of contingent consideration                                          -         -       870
    Finance income                                                                          16        10       128
    Finance costs                                                                  5     (884)     (786)   (1,687)

    Profit before taxation                                                               7,142     5,683    13,024

    Taxation                                                                       6   (1,327)     (803)   (2,005)

    Profit for the period from total operations                                          5,815     4,880    11,019

    Other comprehensive income
    Currency translation differences                                                        14         1        10
    Other comprehensive expense for the period                                              14         1        10

    Total comprehensive income for the period                                            5,829     4,881    11,029

    Attributable to equity holders of the parent                                         5,829     4,881    11,029

    Basic and diluted earnings per share

    Total operations
    Basic earnings per share                                                       3    5.43 p    4.57 p   10.32 p
    Diluted earnings per share                                                     3    5.36 p    4.52 p   10.17 p

Consolidated Interim Statement of Financial Position 

As at 30 September 2016 

   
                                                      Unaudited   Unaudited    Audited
                                                     30/09/2016  30/09/2015 31/03/2016
                                                        GBP'000     GBP'000    GBP'000

    ASSETS
    Non-current assets
    Intangible assets - goodwill                  7      61,724      55,050     61,123
    Intangible assets - other                     7      22,497      19,366     23,065
    Lease deposit                                         2,760       2,416      2,760
    Property, plant and equipment                 8      35,340      34,831     36,045
                                                        122,321     111,663    122,993
    Current assets
    Cash and cash equivalents                            10,599       7,938     10,341
    Trade and other receivables                          14,092      13,123     13,718
                                                         24,691      21,061     24,059

    Total assets                                        147,012     132,724    147,052

    LIABILITIES
    Non-current liabilities
    Contingent consideration due on acquisitions  9           -           -    (2,068)
    Non-current borrowings                                (740)     (1,029)      (826)
    Trade and other payables                              (318)       (593)      (455)
    Provisions for other liabilities and charges        (2,010)     (2,330)    (1,879)
    Deferred tax liability                              (1,521)     (1,521)    (2,075)
                                                        (4,589)     (5,473)    (7,303)
    Current liabilities
    Contingent consideration due on acquisitions  9     (2,220)     (2,655)    (1,135)
    Trade and other payables                           (19,827)    (17,445)   (19,532)
    Provisions                                                -           -      (211)
    Current income tax liabilities                      (2,506)     (1,645)    (1,504)
    Current borrowings                                 (32,037)    (30,078)   (35,098)
                                                       (56,590)    (51,823)   (57,480)

    Total liabilities                                  (61,179)    (57,296)   (64,783)

    Net assets                                           85,833      75,428     82,269

    EQUITY
    Share capital                                         1,078       1,078      1,078
    Own shares                                            (267)       (514)      (489)
    Capital redemption reserve                            1,200       1,200      1,200
    Share premium                                        21,067      21,067     21,067
    Merger reserve                                        4,983       4,983      4,983
    Foreign currency translation reserve                   (23)        (46)       (37)
    Retained earnings                                    57,795      47,660     54,467
    Total equity                                         85,833      75,428     82,269

Consolidated Interim Statement of Cash Flows 

Six months ended 30 September 2016 

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