Final Results

Manx Telecom Plc

Results for the year ended 31 December 2015

Manx Telecom Plc (AIM:MANX), ("Manx Telecom" or the "Company") the leading communication solutions provider on the Isle of Man, announces its results for the year ended 31 December 2015.

Financial Highlights

- Revenues up 0.4% to £79.6m (2014: £79.3m)

• Fixed Line, Broadband and Data revenues grew 2.2%, driven by good take-up of high speed broadband

• Mobile revenues increased 9.3% boosted by 4G adoption and mobile data revenues

• Strong growth in Data Centre revenues, up 20.3%, driven by one-off equipment sales

• Global Solutions revenues declined 15.3% in line with expectations, due to lower SMS termination revenue, partially offset by higher core product revenues

- Underlying EBITDA increased 2.0% to £27.7m (2014: £27.1m)

- Underlying Profit Before Tax increased 27.9% to £16.6m (2014: £12.9m)

- Underlying diluted EPS up 19.4% to 14.53p (2014: 12.17p)

- Continued strong cash generation with operational cash flow at £25.4m (2014: £27.0m) equating to cash conversion from underlying EBITDA of 92%

- Net debt at the period end of £52.2m (2014: £53.7m), equivalent to net debt/EBITDA ratio of 1.9x

- Final dividend of 6.9p (2014: 6.6p) making 10.4p for the full year (2014: 9.9p), in line with the Company's progressive dividend policy

Operational Highlights

- 4G launched to pay as you go customers and adoption rates growing steadily

- Superfast broadband product "Ultima Plus" launched, offering customers download speeds of up to 80 Mbps and upload speeds of up to 10 Mbps

- Renewal of 5 year Isle of Man government contract

- Expansion of data centres continued with completion of phase 2 of the Greenhill Data Centre ("GDC") and its anchor tenant, in place from October 2015

Gary Lamb, Chief Executive Officer, said:

"I am pleased to report a solid performance for the full year which was in line with the Board's expectations. The highly cash generative core business of fixed line and mobile services continues to perform strongly, with revenue growth driven by good take up of our high speed broadband products and an increase in the number of mobile customers returning to Manx Telecom following our investment in 4G. During the year we completed the development of phase 2 of our Greenhill Data Centre and our anchor tenant moved in during Q4. We also made a number of changes to strengthen our Global Solutions business during H2 which has resulted in an increase in sales momentum as we have entered 2016.

"Looking ahead, we remain confident in the outlook for the group, reflected in our commitment to maintain our progressive dividend policy. We have developed a highly attractive market proposition, and I was delighted to renew our long term relationship with the Government of the Isle of Man. We continue to generate strong cash flow, which enables us to create value for shareholders, while continuing to invest in our infrastructure projects at an average of £10m per year over the last 3 years."

* 2014 after the listing and associated refinancing costs, pension scheme reorganisation and equipment impairment

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Chairman's Statement

Introduction

I am pleased to report a positive set of results for 2015 which are in line with the Board's expectations. The core business performed particularly well with good growth from our broadband and mobile businesses.

Results

Revenue grew by 0.4% in the year to £79.6m and underlying EBITDA was 2.0% higher than last year at £27.7m. Cash generation from operating activities was strong at £25.4m and we continue to make significant investment to support future growth.

Underlying profit before tax was 27.9% higher at £16.6m (2014: £12.9m). This was due to the higher level of EBITDA coupled with lower interest costs as a result of reduced debt and improved terms under the renegotiated debt facility. There was also lower depreciation due to mobile asset decommissioning in 2014. Underlying diluted earnings per share increased by 19.4% to 14.5p.

Trading Performance

It was a busy year operationally for the business, with the introduction of several new exciting products for our customers and the retention of key strategic customers for the group. At the beginning of the year we launched a superfast broadband product, "Ultima Plus", offering customers broadband with download speeds of up to 80mbps and upload speeds of 10mbps, and this has been adopted by 26% of the Ultima customer base by the end of the year. We also launched our 4G pay as you go service, which provides speeds up to 10 times faster than the previous 3G network service which has helped to drive an increase in our prepaid data revenue by over 50% compared to last year.

In February 2015, we announced the renewal of a contract with our biggest customer, the Isle of Man Government, for mobile, local area network, wide area network, fixed line, internet and network services for five years. We announced in April that the Isle of Man Government would be the anchor tenant for Phase 1 of the GDC. In Q4, we completed Phase 2 at the GDC, before welcoming an anchor tenant into the facility in October. Both facilities are now over 50% occupied and our focus is on continuing to attract further co-location and managed service business into our data centre portfolio.

As expected, Global Solutions experienced revenue headwinds at the start of 2015 as a result of a reduction in termination revenues. Following targeted investment and the implementation of specific initiatives, including additional resource, we saw an improvement in performance in the second half, with momentum continuing into the current financial year.

Our People

The solid performance during 2015 is once again a testament to the excellent customer service that our experienced and professional workforce at Manx Telecom provides. During the period we wished our former Chief Executive Officer, Mike Dee, a happy retirement and welcomed Gary Lamb, our former Chief Financial Officer, following a thorough selection process into the role of Chief Executive Officer. We have recently announced the appointment of Danny Bakhshi as Chief Financial Officer, who joined us on 1 February 2016. Danny has an excellent track record in the industry and will be a valuable addition to the Board.

Dividend

The Board has declared a full year dividend of 10.4p per share (2014: 9.9p), and will pay a final dividend of 6.9p on 24 June 2016. The shares will trade ex-dividend on 26 May 2016 and will have a record date of 27 May 2016.

Outlook

We will continue to follow the dual strategy of strengthening our position in our core market on the Isle of Man through high quality customer service and value for money offerings, whilst looking for growth on and off island by exploiting our data centre capacity and leveraging our mobile technology platform.

The completion of Phase 2 at the GDC provides additional capacity to the data centre business and we will focus on increasing occupancy by using our co-location and managed services to attract new customers looking for a full-service offering.

We have seen a good start to the year in Global Solutions where we have continued to build a good pipeline of business, continuing the momentum seen throughout the second half of 2015.

Steady performance during the period, combined with the solid start to trading this year, confirming our confidence in the Company's prospects for the year. This, together with our outlook for continued strong cash generation, allows us to reiterate our progressive dividend policy. 

CEO Review

Overview

Following my appointment as Chief Executive Officer on 1 July 2015, I am delighted to present the full year results, after another good twelve month period for the business. It has been a busy year with a number of achievements to report.

The Company continues to provide a wide range of telecommunications services to consumers, businesses and the public sector on the Isle of Man, and we pride ourselves on our excellent customer service. Our core domestic business performed well during the year, with growth in fixed, broadband and data services, and mobile revenues. Following the launch of our 4G mobile network in 2014 we have seen an increase in the number of customers returning to Manx Telecom, high customer satisfaction levels and a resultant increase in mobile revenue for the year.

The Data Centre business has seen strong revenue growth during the period. This reflects a higher than usual level of equipment sales, as customers moved into the first phase of the GDC (GDC 1). We completed the second phase of our GDC (GDC 2) and welcomed our anchor tenant into the facility in the fourth quarter. Both GDC 1 and GDC 2 are now over 50% occupied and we continue to focus on attracting further co-location and managed service business into the portfolio.

The Global Solutions business has seen good growth in its core products, M2M, Strongest Signal Mobile (branded Chameleon) and the international traveler market, which helped to partially offset the expected decline in our SMS termination business.

The renewal of our long-term contract with the Isle of Man Government for mobile, local area network, wide area network, fixed line, internet and network services and the securing of an anchor tenant for phase 2 of our Greenhill data centre development are testament to the hard work of our teams on the ground and strong business partnerships on the Isle of Man.

The Isle of Man economy continues to perform well, with unemployment at 1.9%, 31 years of unbroken GDP growth and economic growth forecast to continue. We look to support the Isle of Man Government in attracting business to the Island, and our telecommunications infrastructure and the services we provide form an important part of the Island's continued success.

The Company was also pleased to have renegotiated its £80m credit facility on improved terms and extended the term to June 2020.

Results Overview

The Company's performance for the period was in line with the Board's expectations. Revenue grew by 0.4% to £79.6m, driven by increases in Fixed, Broadband and Data, Mobile and Data Centre services, partially offset by a decline in Global Solutions revenues.

Underlying EBITDA was 2.0% higher than last year at £27.7m and the margin was maintained at 34.7% (2014: 34.2%). A reduction in the lower margin, wholesale SMS and voice elements of the Global Solutions business was partly offset by a high level of equipment sales and increases in the broadband and mobile business.

Cash generation has remained strong with cash generated from operations of £25.4m (2014: £27.0m), equating to cash conversion of 92% of EBITDA.

Underlying profit before tax increased by 27.9% to £16.6m (2014: £12.9m) primarily due to the increased EBITDA, lower interest costs (£1.3m reduction), lower depreciation (£0.4m reduction) and a positive movement in the fair value of interest rate swaps (£1.6m positive variance to prior year). This translates into a 19.4% increase in underlying diluted earnings per share to 14.53p (2014: 12.17p).

We continue to invest in capital projects on the Isle of Man and have spent £8.0m (2014: £12.6m) in the year. This includes the development of the second phase of the GDC and the upgrade of our CRM, billing and charging platform which will enhance our consumer offering on the Isle of Man from 2016.

Fixed, Broadband and Data Services

Fixed, Broadband and Data Services provide fixed line voice, broadband and connectivity services for customers, connecting approximately 37,000 homes and 4,000 businesses on the Isle of Man. Fixed, Broadband and Data is our largest business, representing 40% of all Company revenues. In 2015 revenue increased by 2.2% to £32m (2014: £31.3m).

On 1 September 2015 we opened up our fixed network, providing a wholesale fixed line product to our competitors. As part of this process, we re-balanced our tariffs, with fixed line tariffs increasing and VDSL broadband tariffs reducing. This has brought a competitive fixed line product to the market and a further incentive for customers to move to our higher speed broadband products. Fixed line revenues remained flat in the year, as the decline in fixed line usage was offset by line rental increases.

We continue to roll out high speed VDSL broadband services (up to 40mbps download) across the Island and now reach 91% of households, and is now at almost 30% penetration. Earlier this year we launched "VDSL plus" superfast broadband - Ultima Plus - which delivers download speeds of up to 80 mbps and upload speeds of 10 mbps. The sale of Ultima and Ultima Plus has helped Broadband revenues to increase by 4.3% to £8.7m.

Mobile

Mobile had a strong year, with revenue up 9.3% to £20.1m (2014: £18.4m), driven primarily by increased inbound roaming revenue and increased post paid contract revenue.

Our 4G network, which provides 99% population coverage at speeds of up to 10 times faster than 3G services, is now available to contract and pay as you go customers who have a 4G compatible handset. Launched in 2014, it continues to achieve high levels of customer satisfaction with adoption rates growing steadily across both the pay as you go and contract bases.

By the end of 2015, we had approximately 34.5k pre-paid customers (2014: 35.1k) and 30.1k post-paid customers (2014: 28.9k). The introduction of 4G and general up-selling of data packages has contributed to a 2.0% increase in post-paid Average Revenue Per User (ARPU) and 4.3% increase in prepaid ARPU over the past 12 months.

Data Centre

The data centre business offers co-location, managed hosting, cloud and disaster recovery services to an international and local corporate client base. These services are supplied by three data centres at Douglas North, Douglas Central and Greenhill Data Centre. The data centres at GDC and Douglas North are Tier III designed data centres (according to Telecommunications Industry Association standards). This provides high standards of data security, resilience, and expandable hosting capacity, including business continuity and distributed denial of service protection (DDoS).

During 2015 we completed the development of the second phase of our Greenhill Data Centre and welcomed an anchor tenant into the facility during the fourth quarter. Both GDC 1 and GDC 2 are now over 50% occupied. Data centre revenues increased by 20.3% in the period, to £8.0m (2014: £6.6m), however this was driven by lower margin equipment sales as a result of new customers entering GDC 1.

We have seen a trend towards co-location data centre business and our focus is to secure more managed service business to better utilise our investment.

Global Solutions

The Global Solutions business generates revenue from services which run on our domestic mobile technology platform and utilise our international roaming agreements. This enables us to offer a variety of products to UK and international partners who use our Global Solutions sim cards. There are four key revenue areas: wholesale SMS and voice, international traveller market, M2M and Strongest Signal Mobile (branded Chameleon).

As expected, revenues declined in the period with turnover down 15.3% during the year to £14.1m, (2014: £16.7m) driven by the decline in SMS termination revenue. A number of initiatives including the addition of additional resource, helped to increase revenues in the second half of the year and generate momentum into 2016. The higher margin core revenue from M2M and Chameleon, increased by 20% during the year, helping to offset some of the decline from reducing termination revenues, and supporting the positive long term outlook for Global Solutions. 

Other Revenues

Other revenues include the advertising revenue from our telephone directory, hardware equipment sales, interconnection fees and managed services.

Other revenue declined by 13.4% during the year to £5.4m (2014: £6.3m). This was primarily due to lower equipment sales and the expected decline in directory advertising revenues, which accounted for 10% of the revenue decline in the period.

Financial review

Group revenue increased by 0.4% to £79.6m (2014: £79.3m), with growth in our core on-island fixed, broadband and data business, supplemented by good growth in our data centre business, but offset by a decline in global solutions and other revenue streams.

The fixed line, broadband and data business continued to perform well, with steady revenue growth of 2.2% to £32.0m (2014: £31.3m). The data centre business saw a significant increase in revenue to £8.0m (2014: £6.6m), driven by increased equipment sales. Mobile revenues also increased significantly in 2015 to £20.1m (2014: £18.4m) driven by increased post paid contract revenue, sales of mobile handsets and inbound roaming revenue. Global Solutions had a challenging 2015 with full year revenue of £14.1m (2014: £16.7m), a fall of 15.3%, as a result of a decline in mobile termination rates. Some of this decline has been offset by growth in the Chameleon product and international traveller market. Other revenues were down 13.4% to £5.4m (2014: £6.3m) due to one off revenues for equipment sales which were not repeated from 2014 and declining revenue from directory sales.

The Group generated underlying EBITDA of £27.7m (2014: £27.1m), in line with expectations, and up 2.0% on the previous year. The Group's EBITDA margin increased 50bp to 34.7% (2014: 34.2%) due to good performance from the core business, and changing business mix within Global Solutions towards more sustainable products.

Depreciation and amortisation was £9.1m (2014: £9.5m), down £0.4m primarily due to network assets being fully written down in 2014. This includes charges for network infrastructure (fixed network, broadband network and mobile network) as well as IT equipment and office equipment.

Underlying operating profit increased by 5.5% to £18.6m (2014: £17.6m) due to the improvement in EBITDA and aided further by the lower depreciation and amortisation charge.

Underlying profit before tax increased by 27.9% to £16.6m (2014: £12.9m) primarily due to the higher EBITDA, lower depreciation and lower interest charges due to improved terms following the renegotiation of the lending facility effective from 30 June 2015.

Underlying diluted EPS was up 19.4%, in line with the Board's expectations at 14.53p (2014: 12.17p).

The Company paid an interim dividend of 3.5p per share in November 2015 and declared a final dividend for 2015 of 6.9p per share on 30 March 2016 resulting in a full year dividend for 2015 of 10.4p per share, a 5% increase from 2014.

Costs

Costs of sales decreased by 2.7% in the year as a result of the reduction in Global Solutions revenue and the associated 18.1% reduction in roaming costs.

Administrative expenses increased by 25.4% to £29.1m (2014: £23.2m) predominantly due to a one off credit of £7.0m in the prior year arising from the closure of the defined benefit scheme to future accrual. Adjusting for this, administration expenses reduced by £1.1m, primarily due to various exceptional items in 2014, including a £0.6m impairment charge and the cost of transferring members of the defined benefit pension scheme to the defined contribution scheme (£0.8m). The main component of administrative costs is staff, the cost of which decreased by 3.2% in the period, including bonus payments.

Energy costs were up 4.6% during 2015 reflecting increased occupancy of our new data centre. Mobile handset costs were 21.9% higher due to significant increase in corporate customer sales, whilst maintenance charges increased very slightly by less than 2%.

Net finance costs

Reduction in Net finance costs to £2.4m (2014: £8.4m) mainly as a result of a £4.6m charge in 2014 against previously capitalised transaction charges, following the changes to financing arising from the IPO in February 2014. Included in this figure is the cost of interest at £2.3m (2014: £3.3m), the reduction being due to lower interest rates secured from the renegotiation of external lending facilities. Interest payable on shareholder loan notes reduced to nil (2014: £0.3m).

One off costs associated with the IPO and related restructuring, charged to the income statement, were nil (2014: £8.0m).

We recorded an unrealised gain of £0.3m on interest rate swaps due to increases in market interest rates since the prior year end. No swaps have been exited during the year, therefore there are no realised gains or losses.

Taxation

There is no corporate taxation payable on our profits for either 2015 and the comparative year. We have the benefit of an Isle of Man 0% corporate tax rate.

Cash flow

Cash generated from operating activities decreased by 5.8% to £25.4m (2014: £27.0m). This year on year reduction, despite the increase in EBITDA, is due to a working capital outflow of £1.7m, primarily due to large trade and roaming debtor balances at the year end, compared to an inflow of £1.6m in 2014.

Our free cash flow after investing activities was 5.1% higher at £15.6m (2014: £14.8m), out of which we serviced our borrowings and paid our dividend to shareholders.

Capital expenditure

The 2015 capital expenditure, including intangibles, was £8.0m (2014: £12.6m). Prior year included a £3.0m accrual for our 4G mobile network relating to final payments due in 2015. Adjusting for the 4G accrual, capital expenditure including intangibles for current and prior year averaged £10.3m per year, in line with our guidance.

Significant capital expenditure in the period included the completion of Phase 2 of our new data centre in September 2015 which cost £2.7m, and £2.3m on fixed voice and mobile network upgrades.

The remaining capital expenditure was spread across a number of business areas including network enhancements, an upgrade to our CRM, billing and charging platform and customer projects.

Balance sheet

Property, plant and equipment decreased during the year by £1.1m to £64m. Capital additions were £7.9m (2014: £12.4m), of which £2.7m related to GDC 2 and £2.3m on fixed and mobile networks. Depreciation of £8.9m (2014: £9.3m) was lower than last year by £0.4m.

We retain goodwill of £84.3m on the balance sheet arising from the purchase of Manx Telecom from Telefónica in 2010, which is robustly supported by current valuations.

The Group operates two pension schemes, a defined benefit scheme, and a defined contribution plan. During 2014 the defined benefit scheme was closed to future accruals, and all current members transferred to a defined contributions scheme. Under accounting standard IAS19 the defined benefit scheme is shown as an asset of £0.4m (2014: £2.2m).

Current assets increased to £36.4m (2014: £32.7m). Cash held at the end of the period, increased to £16.6m (2014: £15.2m). Trade and other receivables increased by £4.3m, of which trade receivables increased by £1.6m, due to late settlements of some key trade debts and an increase in roaming debtors compared to prior year.

Current liabilities reduced to £24.9m (2014: £26.5m) and include a reduction in trade payables of £0.6m.

Non-current liabilities reduced to £69.6m (2014: £70.0m). Interest bearing loans and borrowings were relatively unchanged at £68.8m (2014: £68.9m). In September 2015 the Company entered an interest rate swap which covered £50m of its banking debt (£70m) from July 2018 through to its maturity in June 2020, extending the period for which interest rates are hedged to match the lending terms. The fair value of the previously existing interest rate swaps was a £0.8m liability (2014: £1.0m), while the new interest rate swap fair value was a £0.1m asset.

Net debt at the period end was £52.2m (2014: £53.7m), aided by good cash generation, resulting in net debt to underlying EBITDA of 1.9 times.

consolidated statement of comprehensive income

for the year ended 31 December 2015

The Directors consider that all results are derived from continuing operations.

consolidated statement of financial position

as at 31 December 2015

consolidated statement of changes in equity

for the year ended 31 December 2015

consolidated statement of cash flows

for the year ended 31 December 2015

notes

1 Operating segments

The Group has five reportable revenue segments which management report on and base their strategic decisions on:

The segmental analysis shows revenue classified according to market source. However, the Group is not structured on a divisional basis and has functional departments, processes, assets and obligations which serve each of these revenue streams. These are not allocated in the financial reports received by the Board and its decisions are not routinely based on any such identification. Consequently the analysis shown above does not extend to any segmentation of profits and net assets.

There is no inter-segmental trading.

The products and services included within each of the five segments are as follows:

Fixed line, broadband and data includes revenues from ADSL and VDSL rental and connection charges, fixed line call charges, fixed line rental and connection charges, and private circuit rental and connection charges.

Mobile includes revenues from mobile calls, SMS and data charges, mobile rental charges, mobile handset and accessory sales, and roaming.

Global solutions includes revenues from mobile termination, products such as Strongest Signal Mobile (Chameleon) and M2M (machine to machine).

Data centre includes revenues from hosting services provided.

Other includes kit sales, directory revenues and managed service rental charges.

2 Operating profit

The operating profit is stated after charging/(crediting) the following:

Listing costs incurred as a result of the Admission to AIM in 2014 and refinancing costs relating to the Admission were charged to equity, profit or loss or capitalised as set out below:

Listing costs were recognised as a reduction to share premium within equity to the extent that they related to the newly issued shares. All other costs that did not qualify for recognition in equity were recognised in financial expenses in profit or loss.

Non-GAAP measures

The adjustments made to reported profit before tax and operating profit are income and charges that are one-off in nature, significant and distort the Group's underlying performance. No such adjustments have been made in respect of the year ended 31 December 2015.

3 Finance income and expense

Recognised in profit or loss

Refinancing costs incurred as a result of refinancing in April 2013 of £5,239,115 were capitalised in 2013. The debt was subsequently repaid as a result of the Admission and refinancing in February 2014. The remaining unamortised financing costs of £4,567,000 were charged to the Consolidated Statement of Comprehensive Income in 2014.

A new debt arrangement entered into in 2014 incurred directly related expenses of £1,475,000 which were capitalised in accordance with IAS 39 and amortised over the period of the loan facility. In 2015, the terms of this debt arrangement were amended, incurring additional directly related expenses of £437,000 which were capitalised. These expenses, together with the remaining unamortised element of the initial capitalised expenses, are being amortised over the amended loan term. Amortisation of £314,000 is included within financial expenses in the current year.

4 Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

4.1 Reported Earnings per Share

The calculation of the Reported Earnings per Share has been based on the weighted average number of shares outstanding during the period and the Profit/(loss) for the period after tax attributable to the owners of the Group ('Earnings').

4.2 Underlying Earnings per Share

The calculation of Underlying Earnings per Share has also been included to enable shareholders to assess the results of the Group excluding income and charges that are one-off in nature, significant and distort the Group's underlying performance.