Final Results

AdEPT Telecom plc

("AdEPT", the "Company" or together with its subsidiaries the "Group")

Final results for the year ended 31 March 2018

AdEPT (AIM: ADT), a leading UK independent provider of award-winning managed services for IT, unified communications, connectivity and voice solutions, announces its results for the year ended 31 March 2018.

Financial highlights

· 15th consecutive year of increased underlying EBITDA up 24.8% to £9.8m (2017: £7.8m)

· Revenue increased by 34.8% to £46.4m (2017: £34.4m)

· Gross margin % increased by 5.4% to 47.7% (2017: 42.3%)**

· Underlying EBITDA margin % of 21.0% (2017: 22.7%)

· Profit before tax increased by 32.8% to £4.5m (2017: £3.4m)

· 26.2% increase to adjusted fully diluted earnings per share to 27.69p (2017: 21.94p)

· 12.9% increase to dividends declared to 8.75p (Interim 4.25p, Final 4.50p) (2017: 7.75p)

· Year-end net senior debt* of £17.6m (2017: £15.5m)

· Capital expenditure 0.8% of revenue (2017: 0.3%)

Operational highlights

· Managed services accounted for 69.8% of total revenue (2017: 55.4%)

· Acquisition of entire issued share capital of Atomwide Limited completed in August 2017

* Net senior debt is defined as cash and cash equivalents less short-term and long-term bank borrowings and prepaid bank fees

** Excluding £0.755m Openreach compensation credits

Commenting upon these results Chairman Roger Wilson said:

"AdEPT has delivered a 25% increase to underlying EBITDA for the year ended 31 March 2018 and the Group continues to deliver consistently high levels of free cash flow generation with more than 80% of reported EBITDA turned into net cash from operating activities after tax. The continued strong cash generation has funded a 13% increase to dividends declared during the year and the Board is confident that continued focus on underlying profitability and cash generation will support a progressive dividend policy.

Free cash flow generated combined with the drawdown of part of the accordion debt facility, put in place in February 2017, and the convertible loan from BGF, was used by the Company to complete the earnings enhancing acquisition of Atomwide Limited during the current period. The acquisition completed during the year combined with organic sales have increased the rate of transition of the Group towards a complete managed service provider, with revenue from managed services accounting for 70% of the total in the year ended 31 March 2018."

This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.

For further information on AdEPT please visit www.adept-telecom.co.uk or contact:

Chairman's statement

Review of operations

I am pleased to report that in the year ended 31 March 2018 the Group has made considerable progress on a wide range of fronts. In early 2015 we embarked on a journey to transform AdEPT from our original telecoms background into unified communications and then into IT. Our logic was simple: it is becoming increasingly difficult to tell where telecoms ends and IT starts in a world where 'work is something that we do, rather than necessarily, a place that you go to'.

The strategy of the Group has been focussed on increasing the proportion of revenue from managed services, combined with targeting customers in London and the South East and the public sector. We believe that the economy in London and the South East will continue to grow faster than the other regions in the UK and that there is an increasing drive in the public sector to put business with Small and Medium-sized Enterprises (SME's).

The Group has been focussed on the growth of managed service revenues and the acquisition of Atomwide, combined with organic sales, has increased the rate of transition of the Group towards managed services, which accounted for 69.6% of total revenue in the year ended 31 March 2018 (2017: 55.4%). The team at Atomwide has proved to be an excellent fit with AdEPT and has been successful in jointly working on delivering an infrastructure and support service which can be used across all companies in the Group.

London and the South East

In London we are Chief Technology Partner to London Grid for Learning supplying over 3,000 schools, we have nearly 50 hospitals and specialist medical facilities, over 200 business centres, thousands of commercial customers, and a range of specialist data and cloud services being supplied to central government departments.

Public sector and healthcare

In March 2016, the Government set a target that 33% of public sector spend would be with SME's by 2022. Following the impact of the Atomwide acquisition, in March 2018 31% of total Group revenue was generated from public sector and healthcare customers (2017: 20%) and as customers we currently have over 100 Councils, 13 NHS Trusts, more than 30 private hospitals, twelve universities, over 3,000 schools and services being provided to central government departments.

Both Atomwide and OurIT have been awarded approved supplier status on the new RM3804 Technology Services 2 Framework by Crown Commercial Services. This framework is designed to make it far easier for public sector customers to buy IT products and services. AdEPT Tunbridge Wells has been awarded HSCN (Health and Social Care Network) Compliance and is now authorised to sell data networks to the NHS.

Dividends

In line with its progressive policy, AdEPT has increased the dividend proposed year-on-year by 12.9%, proposing a final dividend of 4.50p per ordinary share (2017: 4.00p), making total dividends proposed in respect of the year ended 31 March 2018 of 8.75p per ordinary share (2017: 7.75p).

Employees

As a result of the acquisitions completed in the year ended 31 March 2018, the Group now has just over 200 full-time employees. The improved profitability and free cash flow generation this year was made possible by the continued hard work and focus of all employees at AdEPT. As a Group we are immensely proud of the track record we have created over the last 15 years and, on behalf of the Board, I would like to take this opportunity to thank all of our employees for their continued hard work.

Director changes

On 8 November 2017 we announced the appointment of Christopher Kingsman as a non-executive director. Christopher brings a broad range of experience from investing in and being involved with a number of public and private companies across different sectors. A graduate of Cambridge University, he started his career with Fidelity Investments and has managed a hedge fund and family office. He is the principal of a private Swiss investment group, executive chairman of Aranca, a global research, analytics and advisory firm based in India, and is a director of a number of private companies.

Through Greenwood Investments Ltd, he has been the second largest shareholder of AdEPT since 2011. Having increased his stake in February 2018 from 16.9% to 21.3% of the current issued share capital of the Company Christopher Kingsman is now the largest shareholder.

Company name change

The Board considered that the name of Company should be changed to better reflect the business of the Group as a managed service provider for IT and unified communications. On 16 January 2018 the Company announced that at the General Meeting held on 16 January 2018 it received approval for the change of company name and that it would make a further announcement when the change became effective. The proposed company name has not yet been able to be secured by the Company and therefore an alternative change of name will be proposed as part of the resolutions for the forthcoming AGM in September 2018.

Outlook

The excellent result for this year was delivered through a combination of strategic acquisition and organic contract wins, maintaining margins on customer contracts and maintaining high levels of operational efficiency. The Board is confident that continued strong cash conversion of operating profit will support its intention of a progressive dividend policy.

The focus for the coming year remains on developing organic sales through leveraging AdEPT's approved supplier status on the various public sector telecom frameworks, maintaining profitability and cash flow conversion, which will be used to reduce net borrowings and/or fund suitable earnings-enhancing acquisitions.

Roger Wilson

Non-executive Chairman

Strategic report

Principal activities and review of business

The principal activity of the Group is the provision of unified communication and IT services to both domestic and business customers. A review of the business is contained in the Chairman's statement and the highlights are summarised in this strategic report.

Summary of three year financial performance:

Revenue

During the year AdEPT has continued its transition from a traditional fixed line service provider towards a managed services provider. Total revenue generated from managed services represented 69.8% of total revenue in the year ended 31 March 2018 (2017: 55.4%).

Total revenue increased by 34.8% to £46.4m (2017: £34.4m):

· Managed services product revenues increased by £13.3m to £32.4m (2017: £19.1m). This reflects the impact of the 8 month contribution from the acquisition of Atomwide combined with an increased level of organic contract wins and a lower relative churn rate within the managed service customer base. AdEPT has continued to make progress in expanding the number of circuits and connections from new customer additions and through cross-selling into the existing customer base. As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 10Gb services.

· Traditional fixed line revenues decreased to £14.0m (2017: £15.4m), which is a reflection of the organic sales focus of the Group on managed services and IT combined with the substitution impact of existing customers transitioning to new technologies, such as SIP and hosted services. The Group's reliance on fluctuating call revenues continues to reduce, with call revenue providing only 10.0% of total revenue in the year ended 31 March 2018 (2017: 15.4%).

The proportion of AdEPT revenue being generated from recurring products and services (being all revenue excluding one-offs projects, hardware and software) remains high at 78.4% of total revenue. All of Centrix, Comms Group, OurIT and Atomwide product sets include hardware supply and installation services, which, by their nature, are project based and not fixed recurring revenue streams; however, a high proportion of hardware supply and installations are further products and services being supplied to the existing customer base.

AdEPT continued to be highly successful in gaining further traction in the public sector space during the last year through leveraging its approved status on various frameworks. AdEPT Tunbridge Wells was awarded HSCN (Health and Social Care Network) Compliance during the year, which is the replacement for the legacy N3 data network used by the NHS, and AdEPT has already contracted data connectivity services to the NHS. AdEPT is an approved supplier to the Crown Commercial Service under the RM1045 Network Services Framework, RM3825 HSCN Access Services Framework and the RM3804 Technology Services 2 Framework and the Group has been successful in winning new business through this framework. This is in addition to AdEPT's existing framework agreement with JISC, under which AdEPT is one of only a small number of companies approved to sell data connectivity to UK Colleges and Universities. The proportion of total revenue generated from public sector and healthcare customers has increased to 30.6% at March 2018 which partly arises due to the contribution from the Atomwide acquisition as the whole of the acquired revenue stream is generated from their public sector customer base.

The Group is continuing to focus its organic sales efforts on adding and retaining larger customers whilst complementing this with an acquisitive strategy. AdEPT is managing the customer risk with a wide spread of business sectors and no particular customer concentration, with the top ten customers accounting for 22.3% of total revenue (2017: 24.3%).

Gross margin

Gross margin percentage has improved to 49.4% during the year (2017: 42.3%). The current year gross margin includes £0.76m of compensation credits received from Openreach following the settlement in relation to the deemed consent process in relation to installation of data circuits. This compensation relates to service credits for a large number of data circuits across a number of financial periods and is not a true reflection of ongoing margin. Excluding the compensation credits gross margin has increased to 47.7% for the year, this increase over the prior year largely arises due to the business mix moving in greater proportion to IT services.

Gross margins for fixed line services have decreased to 38.8% (2017: 39.5%) which is a reflection of focus on winning and retaining larger customer accounts which by their nature have larger absolute revenue and gross profit but lower than average gross margin percentage.

Gross margins for managed services and IT, such as installations, support and maintenance, are higher than fixed line; this is a reflection of the headcount costs of supporting the project installations, helpdesk support and maintenance services being included within operating expenditure.

Underlying EBITDA

Underlying EBITDA is defined as operating profit after adding back depreciation, amortisation, acquisition fees, revaluation of deferred consideration and share-based payment charges. The Group uses underlying EBITDA as a measure of performance in line with the telecommunications sector's general approach to relative performance measurement. As the Group operates a capex-light model, the Board considers that underlying EBITDA is the best indication of the underlying cash generation of the business. Below is a reconciliation of underlying EBITDA to the reported profit after tax:

During the year the Group received £0.76m compensation from Openreach following the settlement in relation to the deemed consent process in relation to installation of data circuits. The value of the compensation received by the Group has been excluded from the calculation of underlying EBITDA as it does not relate to the current year and it is not a reflection of the underlying profitability of the Group.

Underlying EBITDA has increased for the 15th consecutive year since AdEPT's inception in 2003. The Group has focussed on the underlying profitability of customers and revenue streams combined with tight overhead control, industry leading debt collection and wholesale supply chain negotiation.

Finance costs

Total interest costs have increased to £1.56m (2017: £0.93m), arising largely from the increase in the average level of net borrowings, including the interest payable on the convertible loan note, which was used to fund the acquisition of Atomwide. Included within interest costs is a £0.3m charge, which is non-cash, in relation to the discounted cash flow impact of the contingent deferred consideration payable in relation to the Comms Group, CAT, OurIT and Atomwide acquisitions. A further £0.1m of non-cash interest from the application of IAS 32 and IAS 39 has been recognised in interest costs in relation to the discounting of the convertible loan liability. Increases to interest costs have been partially mitigated through treasury management of surplus cash balances to minimise the amount of drawn funds.

Profit before tax

This year profit before tax has increased by £1.12m with a reported £4.52m (2017: £3.40m). The increase to profit before tax arises from the £1.94m underlying EBITDA improvement plus the compensation credits received from Openreach of £0.76m, which has been partially absorbed by the £0.63m increase in finance costs, the acquisition costs of £0.23m, and the associated increase in depreciation and amortisation arising from the acquisitions undertaken during the current and prior year.

Profit after tax and earnings per share

Profit after tax for the year amounted to £3.93m (2017: £2.75m). Basic earnings per share was 16.61p (2017: 12.17p). Adjusted fully diluted earnings per share, based on the profit for the year attributable to equity holders adding back amortisation, share option charges, revaluation of deferred consideration and acquisition costs and excluding the compensation credits (see Note 28), increased by 26.2% to 27.69p per share (2017: 21.94p).

Dividends and dividend per share

On the back of strong cash flow generation AdEPT announced an interim dividend of 4.25p per share, which was paid to shareholders on 7 April 2018. The Company announced in the pre-trading update on 5 April 2018 that, subject to shareholder approval at the annual general meeting later in the year, it is proposing a final dividend of 4.50p per ordinary share (2017: 4.00p). This dividend is expected to be paid on or around 8 October 2018 to shareholders on the register at 28 September 2018.

Total dividends approved and proposed during the year ended 31 March 2018 of 8.75p per ordinary share represent a 12.9% increase year-on-year (2017: 7.75p). The Board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.

Cash flow

The Group benefits from an excellent cash-generating operating model. Low capital expenditure results in a high proportion of underlying EBITDA turning into cash. The proportion of reported EBITDA which turned into net cash from operating activities before income tax was 95.2% (2017: 82.2%). On an after income tax basis, the proportion of reported EBITDA turned into net cash from operating activities was 80.5% (2017: 68.1%). The Group continues to manage its credit risk and the collections of trade receivables has improved, leading to a reduction to 26 days at year end (2017: 35 days). This reduction is partly a reflection of an increased value of customer payments in advance received for telecom and IT maintenance and support services.

Cash interest paid has increased during the year to £0.91m (2017: £0.40m), which arises from the increase in net borrowings to fund the acquisition of Atomwide.

Cash outflows in the year ended 31 March 2018 in relation to acquisitions amounted to £14.52m (net of cash acquired). The contingent consideration in respect of the acquisition of Comms Group was paid in July 2017 and for CAT Communications in November 2017 with no further amounts due. The initial cash consideration for the acquisition of Atomwide of £12.0m (net of cash acquired) was paid in August 2017.

Dividends paid during the year ended 31 March 2018 absorbed £1.84m of cash (2017: £1.46m). This increase over the prior period arises from the continued application of the progressive dividend policy.

In August 2017 the Group raised £7.29m in the form of a convertible loan instrument from BGF to part fund the acquisition of Atomwide. The convertible loan instrument is excluded from the leverage calculations by the senior debt partners, Barclays and RBS. The Group has applied the principles of IAS 32 and IAS 39 in the recognition and measurement of the convertible loan. The net present value of the loan of £7.09m has been split between the debt and equity components and an amount of £1.16m has been recorded in equity, with £5.93m being included within long-term debt. The transaction cost of £0.20m is being recognised in the interest charge in the income statement across the term of the convertible instrument.

There was a significant increase to cash and cash equivalents during the year of £6.59m. This arises from a net increase in the drawn element of the revolving credit facility at March 2018 which was used to fund the deferred consideration for the acquisition of Our IT, with an amount of £3.65m paid in early April 2018. The Group will continue to apply its treasury management policies to minimise the cost of finance whilst retaining flexibility to meet its growth strategies.

Capital expenditure

The Group continues to operate an asset light strategy and has low capital requirements; therefore, expenditure on fixed assets is low at 0.8% of revenue (2017: 0.3%).

Business combinations

The strategy of the Group is to concentrate organic sales efforts on attracting larger customers, particularly in the public and healthcare sector. Rather than operate a telesales operation aimed at acquiring smaller business customers organically, we use our free cash generation in combination with debt and equity instruments to acquire customer bases and businesses in the IT and telecommunications industry.

On 2 August 2017 the Company acquired the entire issued share capital of Atomwide. Atomwide, founded in 1987, is an IT services provider with over 30 years' experience, offering specialised IT support services and technology solutions to approximately 2 million users in over 3,000 schools. Atomwide is the chief technology partner for London Grid for Learning, supplying IT services to around 2,500 schools in London. The bespoke services have been created by the in-house development team and are supported by an experienced team of IT professionals based at Atomwide's premises in Orpington, Kent. All of the senior management team which are responsible for the strategic direction, technical development and the day-to-day operations of Atomwide are to be retained within the business post-acquisition. The acquisition was for an initial consideration of £12.0m plus the value of the surplus cash balance of Atomwide at completion (approximately £6.5m), payable in cash. Further contingent deferred consideration of up to £8.0m will be payable, also in cash, dependent upon the performance of Atomwide post-acquisition. The estimated deferred consideration payable at 31 March 2018 was £0.7m.

A fair value of £7.22m in relation to the customer contracts for the acquired business and £3.53m in relation to the Atomwide developed software applications have been recognised as intangible asset additions in the year ended 31 March 2018. Further details on the acquisition during the year are described in Note 29 of the financial statements.

Net debt and bank facilities

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow and therefore support net borrowings. As a result of the Group's focus on underlying profitability and cash conversion, free cash flow after taxes but before bank interest paid of £8.27m was generated during the year ended 31 March 2018 (2017: £4.33m).

Opening cash plus the free cash flow generated in the year, the proceeds of the convertible loan note issued and borrowing drawdowns form the senior debt facility have been used to fund £14.52m acquisition consideration, £1.84m dividends paid and £0.45m of capital expenditure on tangible and intangible assets. Net senior debt, which comprises cash balances and bank borrowings, has increased to £17.62m at the year-end (2017: £15.46m) as a result of the acquisition consideration outflows.

The Group's available banking facilities are described in Note 29 of the financial statements.

Segmental key performance indicators (KPIs)

The segmental KPIs outlined below are intended to provide useful information when interpreting the accounts.

There are no non-financial KPIs which are reviewed regularly by the senior management team.

Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's long-term performance and could cause actual results to differ materially from expected results.

Liquidity risk

The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. External funding facilities are managed to ensure that both short-term and longer-term funding is available to provide short-term flexibility whilst providing sufficient funding to the Group's forecast working capital requirements.

Credit risk

The Group extends credit of various durations to customers depending on customer credit worthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Group will suffer adverse consequences. To manage this, the Group continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, a large proportion of our customer receipts are collected by monthly direct debit. The risk is further reduced by the customer base being spread across a wide variety of industry and service sectors. The top ten customers account for approximately 22.5% of revenues.

Competitor risk

The Group operates in a highly competitive market with rapidly changing product and pricing innovations. We are subject to the threat of our competitors launching new products in our markets (including updating product lines) before we make corresponding updates and developments to our own product range. This could render our products and services out-of-date and could result in loss of market share. To reduce this risk, we undertake new product development and maintain strong supplier relationships to ensure that we have products at various stages of the life cycle.

Competitor risk also manifests itself in price pressures which are usually experienced in more mature markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value for money. The Group therefore monitors market prices on an ongoing basis.

Acquisition integration execution

The Group has set out that its strategy includes the acquisition of businesses where they are earnings enhancing. The Board acknowledges that there is a risk of operational disturbance in the course of integrating the acquired businesses with existing operations. The Group mitigates this risk by careful planning and rigorous due diligence.

John Swaite

Finance director

Consolidated statement of comprehensive income

For the year ended 31 March 2018

All amounts relate to continuing operations.

Consolidated statement of financial position

As at 31 March 2018

Company statement of financial position

As at 31 March 2018

The profit for the financial year dealt with in the financial statements of the parent Company was £9,326,057 (2017: loss £566,084).

Consolidated statement of changes in equity

For the year ended 31 March 2018

The Group has initially applied IFRS 15 using the cumulative effect method. Under this method, the comparative information is not restated. See Note 4.

Company statement of changes in equity

For the year ended 31 March 2018

The Company has initially applied IFRS 15 using the cumulative effect method. Under this method, the comparative information is not restated. See Note 4.

Consolidated statement of cash flows

For the year ended 31 March 2018

Company statement of cash flows

For the year ended 31 March 2018

Notes to the financial statements

For the year ended 31 March 2018

1. Nature of operations and general information

AdEPT is one of the UK's leading independent providers of managed services for IT, unified communications, connectivity and voice solutions focussed on enterprise business customers, public sector and healthcare customers. The Company provides a complete communications portfolio of unified communications, IP telephony, IT services, equipment installation, managed services, Wi-Fi, IT and communications hardware and data connectivity products.

AdEPT is incorporated under the Companies Act and domiciled in the UK and the registered office is located at One Fleet Place, London, EC4M 7WS. The Company's shares are listed on AIM of the London Stock Exchange.

2. Accounting policies

Basis of preparation of financial statements

The financial statements have been prepared in accordance with applicable IFRSs as adopted by the EU.

Accounting standards require the directors to consider the appropriateness of the going concern basis when preparing the financial statements. The directors confirm that they consider that the going concern basis remains appropriate. The Group's available banking facilities are described in Note 28 to the financial statements. The Group has adequate financing arrangements which can be utilised by the Group as required. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

At the date of authorisation of these financial statements, the directors have considered the standards and interpretations which have not been applied in these financial statements that were in issue but not yet effective (and in some cases had not yet been adopted by the EU) and IFRS 16 "Leases" and IFRS 9 "Financial Instruments" were considered to be relevant.

The directors have considered the application of IFRS 16 and IFRS 9, once effective, and do not consider that they will have a material impact on the net assets or retained profits of the Group.

The Group has commenced a detailed assessment to determine the impact of adopting IFRS 16, which introduces for certain lease contracts significant changes to the allocation of the costs in the statement of comprehensive income but it is not expected to have a material impact on profit before tax. It is also expected that the recognition of lease assets and liabilities will increase the gross value of assets and liabilities but the impact on net assets will not be material. This assessment is ongoing and the Board will update the shareholders on the impact on transition, and on our ongoing accounting policy, during 2018 as appropriate.

Adoption of the other standards and interpretations are not expected to have a material impact on the results of the Group. Application of these standards may result in some changes in presentation of information within the Group's financial statements.

The financial statements are presented in sterling, which is the Group's functional and presentation currency. The figures shown in the financial statements are rounded to the nearest thousand pounds.

Segmental reporting

The directors have considered the requirements of IFRS 8 "Operating Segments" and have concluded that the Group has two segments. For further information see Note 5 of the financial statements.

Revenue

The Group has early adopted IFRS 15 "Revenue from contracts with customers" with a date of initial application of 1 April 2017 which has been applied in respect of data circuit installation and rental, further details are included in Note 4. The Group has applied IFRS 15 using the cumulative effect method and therefore the comparative information has not been restated and continues to be reported under IAS 18. Revenue is measured based on the consideration specified in a contract with a customer. Revenue is recognised when it transfers control over a product or service to a customer to the extent that it is probable that the economic benefits will flow to the Group and can be reliably measured.

In the comparative period, revenue was measured at the fair value of the consideration received or receivable. Revenue from the sale of goods and equipment was recognised when the significant risks and rewards of ownership had been transferred to the customers, recovery of the consideration was probably, the associated costs and possible return of goods could be estimated reliably, there was no continuing management involvement with the goods and the amount of revenue could be measured reliably. Revenue from rendering of services was recognised in proportion to the stage of completion of the work at the reporting date.

The following is a description of the principal activities from which the Group generates its revenue.

Where customer contracts have multiple components to be delivered (e.g. equipment rental and internet services), the revenue attributable to each component is calculated based on the fair value of each component.

The whole of the revenue is attributable to the provision of voice and data telecommunication services to both residential and business customers. All revenue arose within the United Kingdom.

Goodwill

Goodwill is recognised separately as intangible assets and carried at cost less accumulated impairment losses. Goodwill is tested for impairment at least annually. Any impairment is recognised immediately in the income statement. Subsequent reversals of impairment losses for goodwill are not recognised.

Intangible fixed assets acquired as part of a business combination and amortisation

In accordance with IFRS 3 "Business Combinations", an intangible asset acquired in a business combination is recognised at fair value at the acquisition date.

After initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Impairment reviews are conducted annually from the first anniversary following acquisition.

The intangible asset 'customer base' is amortised to the income statement over its estimated useful economic life on a straight line basis.

Other intangible assets

Also included within intangible fixed assets are the development costs of the Company's billing and customer management system plus an individual licence. These other intangible assets are stated at cost, less amortisation and any provision for impairment. Amortisation is provided at rates calculated to write off the cost, less estimated residual value of each intangible asset, over its expected useful economic life on the following bases:

Customer management system - Three years straight line

Other licences - Contract licence period straight line

Computer software - Three years straight line

Software apps - Ten years straight line

Website - Five years straight line

Investments

Shareholdings in subsidiaries are valued at cost less provision for permanent impairment.

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value of each asset, over its expected useful life on the following bases:

Short-term leasehold improvements - The shorter of five years and the remaining period of the lease straight line

Fixtures and fittings - Three years straight line

Office equipment - Three years straight line

Motor vehicles - Four years straight line

Rental equipment at customer premises - Contract agreement period straight line

Lease accounting

The Group leases equipment under operating leases to non-related parties. Leases of equipment where the Group retains substantially all risks and rewards incidental to ownership are classified as operating leases. The underlying assets are recognised in tangible fixed assets. Rental income from operating leases (net of any incentives given to the lessees) is recognised in profit or loss on a straight line basis over the lease term.

Initial direct costs incurred by the Group in negotiating and arranging operating leases are added to the carrying amount of the leased assets and recognised as an expense in profit or loss over the lease term on the same basis as the lease income.

Inventories

Inventories are valued at the lower of cost and net realisable value after making allowance for any obsolete or slow moving items. Full provision is made for any items older than six months. Net realisable value is reviewed regularly to ensure accurate carrying values. Cost is determined on a first-in, first-out basis and includes transportation and handling costs.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale.

Pensions

The Group contributes to personal pension plans. The amount charged to the income statement in respect of pension costs is the contribution payable in the year.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank, cash in hand and overdrafts.

Income tax

Income tax is the tax currently payable based on taxable profit for the year.

Deferred income tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred income tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

Deferred income tax liabilities are provided in full, with no discounting. Deferred income tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred income tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

Changes in deferred income tax assets or liabilities are recognised as a component of income tax expense in the income statement, except where they relate to items that are charged or credited directly to equity, in which case the related deferred income tax is also charged or credited directly to equity.

Share-based payments

The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date at which the relevant employees become fully entitled to the award. Fair value is appraised at the grant date using an appropriate pricing model for which the assumptions are approved by the directors.

At each balance sheet date, the cumulative expense is calculated representing the extent to which the vesting period has expired and management's best estimate of the number of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Trade and other receivables

Trade receivables, which generally have 14 to 30 day terms, are initially recognised at fair value and subsequently held at amortised cost. A provision for impairment of trade receivables is established for any amount due in 90 or more days or when it is considered probable that the Group may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The provision is the difference between the asset's carrying amount and the original invoice amount less bad debts written off. The carrying amount of the asset is reduced through the use of the provision and the amount of the loss is recognised in the income statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables.

Subsequent recoveries of amounts previously written off are credited to the income statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Trade payables

Trade payables are stated at their nominal value, recognised initially at fair value and subsequently valued at amortised cost.

Dividends

Dividend distributions to the Company's shareholders are recognised when payment has been made to shareholders.

Share buybacks

The Company has returned surplus cash to shareholders through a limited share buyback scheme pursuant to the authority given to it at the annual general meeting. Shares purchased for cancellation are deducted from retained earnings at the total consideration paid or payable. The Company will continue to monitor the level of cash required for the business and determine if further repurchases remain in the shareholders' best interests.

Financial instruments

Financial assets and liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Capital

The capital structure of the Group consists of debt, which includes the borrowings disclosed in Notes 21 and 29, cash and cash equivalents, and equity attributable to equity holders, comprising issued capital, reserves and retained earnings.

Borrowings and borrowing costs

Borrowings are recorded initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowing costs are expensed to the income statement as incurred, with the exception of arrangement fees which are deducted from the related liability and released over the term of the related liability in accordance with IAS 39.

3. Critical accounting estimates and judgements

The key assumptions concerning the future and other key sources of estimation and uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Key sources of estimation and uncertainty are:

Measuring the fair value of customer bases on acquisition

The main estimates used to measure the fair value of the customer bases on acquisition are:

• the churn rate (turnover of customers);

• discount rate; and

• gross margins.

Estimating churn, discount rate and gross margins

For Centrix and Atomwide the net present value of the discounted future cash flows is based on the actual revenues of the acquired customer bases and applying the actual gross margins achieved by the businesses.

For the remaining customer bases, the churn rates ranging between 3.0% and 13.5% are based upon actual historical churn rates of the revenue stream for each customer base.

The discount rate of 7.2% (2017: 8.0%) used to discount the cash flows is based upon the Group's weighted average cost of capital (WACC), which is the recommended discount rate suggested by IFRSs and is a calculated figure using actual input variables where available and applying estimates for those which are not, such as the equity market premium.

Gross margins applied are based upon actual margins achieved by the customer bases in the current and previous years. The actual outcomes have been materially equivalent.

Estimating the useful life of customer bases

The main estimate used to conduct the impairment review is the churn rate (turnover of customers).

The average useful economic life of all the customer bases has been estimated at 14 years (2017: 15 years) with a range of ten to 30 years.

Measuring the fair value of contingent consideration

The fair value of contingent deferred consideration is determined by reference to the growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the asset or share purchase agreement and discounting the net present value of the future cash flows. The range of contingent consideration in the current period was £0 to £11.75m; further details are included in Note 28.

Subsequent impairment of customer bases

The Group determines whether intangible assets are impaired on at least an annual basis. This requires an estimation of the 'value in use' of the cash-generating units to which the intangible value is allocated. Estimating a value in use amount requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

The calculations are sensitive to any movement in the discount rate, margin or churn rate and would therefore result in an impairment charge to the income statement. A 1% change to the discount rate, gross margin and churn rate would result in additional impairment charges of £122,455, £54,910 and £230,229 respectively.

More details, including carrying values, are included in Note 14.

Allowance for impairment of receivables

Management reviews are performed to estimate the level of provision required for irrecoverable debt. Provisions are made specifically against invoices where recoverability is uncertain. Further information on the receivables allowance account is given in Note 19.

4. Changes in accounting policies

Except for the changes below, the Group has consistently applied the accounting policies to all presented in these consolidated financial statements. The details and quantitative impact of the changes in accounting policies are disclosed below:

Data circuit installation and rental

The Group previously recognised the revenue for the installation of data circuits when the installation had been completed and the data circuit had gone live, and the revenue for the rental of the data circuit was recognised on a monthly basis across the contract period. Under IFRS 15, the total consideration receivable in respect of the data circuit, being the installation revenue plus the total value of the contracted monthly rental charges, is being spread evenly across the contract period.

The following tables summarise the impacts of adopting IFRS 15 on the Group's consolidated financial statements for the year ended 31 March 2018:

The Group has recognised the cumulative effect of initially applying IFRS 15 with an opening adjustment to equity of £173,904 at 1 April 2017. The net impact on profit before tax of applying IFRS 15 in the year ended 31 March 2018 was £23,051, resulting in a net adjustment to retained earnings at 31 March 2018 of £150,853.

The impact of the adoption of IFRS 15 on basic and adjusted earnings per share is not material.

5. Segmental information

IFRS 8 "Operating Segments" requires identification on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance.

The chief operating decision maker has been identified as the Board. The Board reviews the Group's internal reporting in order to assess performance and allocate resources. The operating segments are fixed line services (being calls and line rental services) and managed services (which are data connectivity, hardware, IP telephony, support and maintenance services), which are reported in a manner consistent with the internal reporting to the Board. The Board assesses the performance of the operating segments based on revenue, gross profit and underlying EBITDA.

During the year the Group received compensation from Openreach following their mis-use of the deemed consent process in relation to installation of data circuits. This compensation relates to service credits for a large number of data circuits across a number of financial periods. The value of the compensation received by the Group has been excluded from the calculation of managed services gross margin and underlying EBITDA as it does not relate to the current year and it is not a reflection of the underlying profitability of the Group.

The assets and liabilities relating to the above segments have not been disclosed as they are not separately identifiable and are not used by the chief operating decision maker to allocate resources. All segments are in the UK and all revenue relates to the UK.

Transactions with the largest customer of the Group are less than 10% of total turnover and do not require disclosure for either 2017 or 2018.

6. Revenue

In the following table, revenue is disaggregated by major product/service lines and timing of revenue recognition. All revenue is derived from the UK.

The Group has initially applied IFRS 15 using the cumulative effect method. Under this method the comparative information is not restated.

The following table provides information about receivables, contract assets and contract liabilities with customers:

Contract assets relate to the deferred direct costs in respect of data circuit installations which have been completed and are being recognised across the customers contractual term to which the installation relates. The contract liabilities relate to the deferred revenue in respect of data installations which have been completed and the revenue is being recognised across the term of the customer contract.

Significant changes in the contract assets and contract liabilities balances during the period are as follows:

The Group recognised the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance at 1 April 2017.

The performance obligations of the underlying contracts to which the contract assets relate are expected to be met over periods of up to 5 years. However, the performance obligations for all revenues and costs that have been deferred into future periods have been satisfied at the year end, as these relate to the installation and equipment of data networks which have been completed and the service is being used by the customer.

There are no impairment losses in relation to the contract assets recognised under IFRS 15.

7. Operating profit

The operating profit is stated after charging:

8. Auditor's remuneration

9. Finance costs

The finance costs on contingent consideration arises from the release of the discounted contingent consideration liability evenly across the term of the deferred consideration period in relation to each acquisition. This is a non-cash item.

10. Employee costs

Staff costs, including directors' remuneration, were as follows:

The average monthly number of employees, including the directors, during the year was as follows:

Key management personnel

The directors are considered to be the key management personnel of the Group, having authority and responsibility for planning, directing and controlling the activities of the Group.

11. Income tax expense

Factors affecting tax charge for the year

The relationship between expected tax expense based on the effective tax rate of AdEPT at 19% (2017: 20%) and the tax expense actually recognised in the income statement can be reconciled as follows:

The change in income tax rates will affect future tax charges.

12. Dividends

On 30 September 2017 the directors approved an interim dividend of 4.25p per ordinary share (2017: 3.75p), which was paid to shareholders on 7 April 2018. On 5 April 2018 the directors proposed a final dividend, subject to shareholder approval at the 2018 annual general meeting, of 4.50p per ordinary share (2017: 4.00p). Total dividends proposed in respect of the year ended 31 March 2018 will absorb £2,073,910 of shareholders' funds in future periods (2017: £1,836,892).

On 7 April 2017 the Company paid dividends of £888,818 in relation to the interim dividend declared in September 2016. On 10 October 2017 the Company paid dividends of £948,074 in relation to the final dividend declared in March 2017. Total dividends paid in the year ended 31 March 2018 absorbed £1,836,892 of cash (2017: £1,461,467).

13. Goodwill

Group

The goodwill is split by cash-generating units as follows:

The assumptions are set out in note 3. The net present value of the future cash flows for some of the cash-generating units is sensitive to the weighted average cost of capital. The rate used to discount the future cash flows is the Group's pre-tax weighted average cost of capital of 7.18%. An increase in the Groups weighted average cost of capital to above 10.9% would materially impair the carrying value of the Group's goodwill by more than £400,000.

An increase to the weighted average cost of capital may lead to impairment of goodwill, further details of the sensitivity of the variables used in the impairment testing are included in Note 3.

14. Intangible fixed assets

Group

Included within the Group's intangible assets is:

Company

Intangible assets are reviewed annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The net present value of cash flows for each cash-generating unit is reviewed against the carrying value at the balance sheet date. At the final reporting date of 31 March 2018 the net present value of future cash flows of certain cash-generating units was below the carrying value and an impairment charge of £212,850 (2017: £185,583) has been recorded in respect of four cash-generating units.

The useful lives of the customer base intangible assets are determined by reference to the actual historical churn rates of the revenue stream for each customer base acquired. Sensitivity of the assumptions are included in Note 3.

The rate used to discount the future cash flows is the Group's pre-tax weighted average cost of capital of 7.18%. An increase in the Groups weighted average cost of capital to above 11.4% would materially impair the carrying value of the Group's intangible assets by more than £400,000.

15. Investments in subsidiaries

Company

Details of the principal subsidiaries of the Company are included in Note 31 to the financial statements.

16. Property, plant and equipment

Group

Company

17. Deferred taxation

The deferred tax (liability)/asset is made up as follows:

18. Inventories

As at 31 March 2018, inventories of £100,171 (2017: £74,036) were fully provided for. During the year £26,135 has been recognised as an expense in the statement of comprehensive income.

There is no material difference between the replacement cost of inventories and the amount stated above.

19. Trade and other receivables

As at 31 March 2018, trade receivables of £121,298 (2017: £215,939) were impaired and fully provided for. The ageing of the trade receivables which are past due and not impaired is as follows:

All debts which are older than 90 days relate to interim amounts in respect of large customer projects which have not yet fully completed and are considered to be fully recoverable on completion. The movement of the provision for impairment of trade receivables is as follows:

The creation and release of a provision for impaired receivables has been included in administration expenses in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering cash. Management regularly reviews the outstanding receivables and does not consider that any further impairment is required. The other asset classes within trade and other receivables do not contain impaired assets.

20. Trade and other payables

The contingent consideration liability of £4,359,527 (2017: £6,735,837) represents the year-end fair value of the contingent consideration liabilities arising on the acquisitions made during the year. The fair value of the contingent consideration liability was initially determined by reference to the forecast growth rate for the customer base and applying the contingent consideration matrix as specified in the share purchase agreement. Further details are included in Note 29.

21. Long-term borrowings