Preliminary Results

Avanti Communications Group plc

Preliminary Results Announcement

London - 10 October 2012. Avanti Communications Group plc (AIM: AVN, "Avanti" or "the Company"), the satellite operator, has published today its unaudited preliminary results for the year ended 30 June 2012.

Operational Highlights

·; Announcement today that HYLAS 2 has entered service, open for business on all beams

·; 22% more capacity available for sale than originally expected due to technical successes (11GHz versus 9GHz)

·; HYLAS 3 fully financed and under construction for launch in 2015

Financial Highlights

·; Revenues and Other Operating Income increased by 246% to £15.0 million (2011: £6.1 million)

·; Cash at year end of £76.7 million

·; Backlog increased by 57% to £268 million

·; Strong sales momentum - the average monthly target of £11m new Backlog continues to be achieved

·; Although the phasing of Backlog is more back-ended than expected, existing satellites are expected to be full at current run rate in 2016

Commenting, John Brackenbury, CBE, Avanti Chairman said:

"This has been a year of very strong growth for Avanti. The momentum of launching our second satellite in as many years to expand coverage to a total of 53 countries has created very significant demand. This is now evidenced in our contract backlog which grew by 57% in the year. Within the emerging markets that Avanti serves our flexible and resilient technology is winning business from customers who urgently need reliable, high quality communications. 

"The formal launch of service today on HYLAS 2 over Africa and the Middle East gives us access to markets showing high economic and structural growth in demand for telecoms services. We look forward to the continued development of Avanti with growing confidence." 

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About Avanti

·; Avanti sells satellite data communications services to telecoms companies which use them to supply residential, enterprise and institutional users.

·; Avanti's first satellite called HYLAS 1, launched on November 26th 2010 and was the first superfast broadband satellite launched for Europe.

·; Avanti's second satellite, called HYLAS 2, launched on August 2nd 2012. It extended Avanti's coverage to Africa, Caucasia and the Middle East.

·; Avanti's third satellite HYLAS 3, to be launched in partnership with ESA in 2015, will provide further capacity in the EMEA region.

·; 83% of Avanti's fleet capacity will address the Emerging telecommunications markets of Africa, Caucasia and the Middle East.

Chairman's Statement

I am pleased to present the results for the year ended 30th June 2012, a year of significant achievement. With the first full year of revenues from HYLAS 1, the launch of our second satellite, HYLAS 2 shortly after the financial year end and the commencement of construction of our third satellite, HYLAS 3, Avanti now has a significant presence in the satellite industry.

With two operational satellites, Avanti is now a resilient, market leading operator of genuine scale, and this is reflected in changing customer perceptions and the order intake which results. Avanti has broader international Ka-band coverage than any other satellite operator in the World, and having pioneered unique technologies and business models is at the forefront of developments in the emerging markets which it prioritises.

The very significant increase in our Backlog of contracted customer orders during the year results from several factors. Firstly, HYLAS 1 continues to grow in the high value added, higher margin applications areas we target in Europe. Secondly, the experience of operating HYLAS 1 for over a year has given great confidence to our customers in Africa and the Middle East, who have been able to test real services in advance of the HYLAS 2 launch and see for themselves the quality and resilience Avanti has designed into its system. Thirdly, the emerging markets are experiencing high demand resulting from strong underlying economic growth and poor existing telecoms supply. The financial performance we expect to deliver in the next few years is increasingly well underpinned by Backlog. Performance for the year to June 2012 was in line with management expectations. Moreover, we have consistently achieved the target of an average £11m of new backlog every month that we set ourselves in December 2011. This is a useful metric and is the key performance measure applied to our sales efforts. If we continue to sign contracts to this value each month, then we could expect to achieve our target to have finished filling our current fleet in 2016. Backlog of customer contracted revenues has increased from £171m to £268m. We are approaching full capacity on a number of our beams.

Whilst backlog is strong, it is a little more back-ended than expected as customers have typically committed to five year contracts with bandwidth usage which sharply escalates during the later period of the contract. Thus they lock in availability whilst minimising risks as they build their business. The benefit of 18 months selling on both satellites now gives the Board more empirical data with which to plan future activity, and the Company has used this data to offer conservative guidance to the market. 

During the year, we entered into an agreement for the construction of HYLAS 3 in a project on a spacecraft shared with the European Space Agency ("ESA"). ESA's project has been in preparation for a number of years and we were very pleased to be chosen as their partner following a competitive tender. At the same time as finalising contracts with ESA, we were able to raise £75m in equity to finance fully the entire HYLAS 3 project. ESA played a critical role in the development of HYLAS 1 and we are pleased to have HYLAS 3 under construction and scheduled for launch in late 2015.

With HYLAS 3 fully financed and under construction, 83% of Avanti's capacity addresses emerging markets. This focus is critical for Avanti. These countries continue to exhibit strong economic growth, and this, combined with the limited telecoms infrastructure, presents a strong opportunity, capitalised upon by our early backlog success. We are also pleased that our focus on building resilient, flexible networks is bearing fruit. As a result of this and product innovation we made significant breakthroughs this year in carrier services and enterprise markets where margins are strong and we have technological advantages. We are also playing to our strengths in broadband, choosing our partners carefully and focussing on areas of technical advantage. 

The Board believes that a move to the Full List is in the best interests of the Company and Shareholders and is actively working on preparations for this. The Company also continues to evaluate options for additional satellites, but only if they can be prudently debt financed without recourse to shareholders. Bearing in mind these forthcoming activities, the Board has adopted an increasingly conservative accounting treatment for certain FY12 transactions, particularly relating to the deferral of income over the lifetime of contracts, regardless of upfront cash inflows. We continue to prepare the Board and corporate governance standards for life on the Full List.

Finally I am pleased to announce that HYLAS 2 has completed all test and commissioning activities, and is now open for business in all beams and territories. Following a successful campaign, we have also verified that the conservative engineering margins that were built into our plans are no longer necessary. This means that we now have 11GHz of capacity available for sale to customers, rather than the 9GHz originally planned. 

This has been a year of very strong growth for Avanti. The momentum of launching our second satellite in as many years to expand coverage to a total of 53 countries has created very significant demand. This is now evidenced in our contract backlog which grew by 57% in the year. Within the emerging markets that Avanti serves our flexible and resilient technology is winning business from customers who urgently need reliable, high quality communications. The formal launch of service on HYLAS 2 over Africa and the Middle East gives us access to markets showing high economic and structural growth in demand for telecoms services. We look forward to the continued development of Avanti with growing confidence. 

I should like to take this opportunity to give the Board's appreciation to our executive team and staff for their dedication to a successful launch of HYLAS 2 and the good work this year in building the Company.

Chief Executive's Report

Overview

Our results for the year show the first full year of revenues from HYLAS 1. In the year we made significant progress with products in Enterprise and Carrier Services. We made good progress in broadband in Northern Europe, although Southern Europe remains challenging.

The experience of operating this satellite has also greatly assisted us in building backlog for HYLAS 2 to a level which now provides significant underpinning to trading. Backlog increased very significantly during the last year, as our sales efforts in preparation for HYLAS 2 launch generated noticeable success. We are already almost fully sold out on a number of our beams with good progress in many others. Middle East and Southern Africa are particularly strong markets and demand has been evenly split between Carrier Services, Enterprise and Broadband, with some Defence and Security orders coming through slowly.

The construction of HYLAS 2 was finished within budget and the satellite launched shortly after the year-end, only a couple of months beyond the original guidance. We are pleased to announce that HYLAS 2 is open for service on all beams. Also it is satisfactory to note that the significant margin for error built into the satellite design by our engineers has not been necessary, and as a result we are able to sell 11GHz of capacity, not the 9GHz originally planned. Advances made in customer modems in the last few years are also resulting in very high efficiency in converting raw capacity into IP services. We are therefore delighted with the outcome of the HYLAS 2 procurement, and have a highly competitive, as well as resilient and flexible service offering. During the year, the HYLAS 1 Orbital filings at 33.5°West were finalised in the ITU Master Register, and Avanti's Bringing Into Use of its filings at 31°East were accepted by the ITU BR and are therefore progressing towards finalisation in the usual way. We have received the necessary Space Licenses for HYLAS 1 and 2 from UK Space Agency. It is significant for a satellite operator to achieve these milestones, as it provides underpinning to the solidity and future capabilities of the business.

During the year we also signed contracts for the construction of HYLAS 3 and raised the capital to fully finance it. With 83% of our satellite capacity focused on emerging markets, we are very encouraged by the resilience that these economies are showing in the current global environment and that demand is coming through strongly.

Current Trading and Outlook

Our Backlog of contracted orders and the Pipeline of potential contracts have both increased sharply during the year. Backlog has jumped by 57% and now stands at £ 268 million, (2011: £ 171 million) while Pipeline has increased to £552 million (2011: £ 473 million). We are satisfied that orders are flowing at the level necessary to meet our long term targets to fill our fleet, although the shape of the curve to get us there varies a little from plan. We are applying the right strategy in Europe, focussing on high value added business opportunities with our unique technical advantages. We are also delighted to have launched service in Africa and the Middle East during a period of unprecedented high demand growth in those regions.

HYLAS 3 procured and fully financed

In January 2012, Avanti was selected by ESA as its partner in a new satellite project following a competitive tendering process and in February we raised £75m to enable us to fully finance our share of the project. We have now commenced the construction of HYLAS 3 in a partnership with them. Avanti and ESA have worked together successfully in the past on projects: in particular ESA and Avanti collaborated on ESA's first Public Private Partnership which led to the successful launch of HYLAS 1. We are very pleased to have been selected by them to participate in this innovative project.

HYLAS 3 will provide Avanti with a payload under our control delivering 4GHz of Ka band capacity. This will be configured across eight beams within a single steerable antenna that can provide coverage of an area equivalent to a region the size of Southern Africa and can be moved anywhere in Africa and the Middle East throughout the life of the satellite. Delivery into orbit is expected in 2015. 

The advantage for us of entering into a partnership agreement with ESA is that Avanti reduces costs relating to the satellite platform, launch vehicle, insurance and project management. We have entered into fixed price contracts for our payload and launch. Given the overlapping geographic coverage of HYLAS 2 and HYLAS 3, there should be little additional operating expenditure relating to HYLAS 3.

Business Overview

We have delivered strong service quality on HYLAS 1 and a flawless launch and entry into service of HYLAS 2. Our focus on prioritising flexibility to customers in terms of how they buy and use our services, along with the very high resilience we have built in space and ground infrastructure, is winning us a good reputation with expert customers.

We have continued to see steady growth in orders and enquiries for our services on HYLAS 1 and 2. The extra credibility we have from operating two satellites covering a significant part of the Globe has led to a compression in the average sales cycle, although larger transactions are still taking longer than six months to conclude. The opportunity for HYLAS 2 potential customers to trial products on HYLAS 1 before they enter into contracts helped us to speed up the buying process on that satellite.

We are also seeing a significant number of existing customers make repeat purchases in existing territories, or extending their operations into new territories. We have a full strength field sales force of seventeen professionals (plus sales support staff), with offices in South Africa, Kenya, Cyprus and UK. We made significant improvement in marketing in the year, creating a new communications plan, undergoing a modest re-brand and further refining and developing our end-user Applications, which can be summarised as follows:

Enterprise

Our Enterprise applications include for example Business Internet Continuity, SCADA for utilities, connections for oil rigs, and movie distribution for Digital Cinema projects. Our flexible, resilient, power networks are uniquely well suited to the demands of professional users in challenging environments. Our networks can be customised to a very high degree, enabling Avanti to say "Yes" to a customer request far more often than our competitors can. During the year, we also chose to launch a number of discrete products to Enterprise users targeting specific niches with common needs. For example, in September 2012 we announced the launch of our Satellite News Gathering ("SNG") product which uses our pioneering Ka band technology to deliver a flexible range of services to news gathering organisations operating on the move. Our SNG products are already contracted by one national broadcaster with another on trial.

Broadband

Avanti's broadband customers range from governments and incumbent telcos to small resellers. The flexibility of our networks, platforms and commercial approaches enables us to accommodate almost every market strategy. Good demand in Northern Europe has been evident during the year, and in order to convert the demand to sales Avanti has focused its marketing resources on supporting a small number of key service providers in their drive to increase penetration. In Southern Europe, the picture is weaker, with service providers struggling to make commitments to their own sales and marketing expenditure necessary. For this reason, Avanti launched a ground breaking Pay As You Go product, whereby a service provider is billed only for the data actually used by each customer. The flexibility of our Network, and the advanced Business Operations System which we designed and built ourselves makes such a product technically straight forward for Avanti, and this is creating helpful marketing differentiation. In Africa, not only is broadband demand very strong, but also it is not very price sensitive amongst the early movers. High end consumers and businesses in Africa simply cannot be without broadband, and today the services available even in big cities are often low quality, if available at all. This has been partly responsible for driving the growth in backlog on HYLAS 2.

Carrier Services

Fixed line and wireless network operators are constantly looking for new ways to extend their network coverage and also to cope with the ever increasing demand for bandwidth from existing customers. The relatively slow pace of terrestrial infrastructure growth caused by cost and operational difficulties has led to significant opportunities for Avanti's products. Having proven our capabilities with HYLAS 1, we have launched products in both IP Trunking and wireless backhaul in the year.

·; We launched our IP Trunking product in May. The advances made in ground equipment have been significant recently, and Avanti's flexible network is well positioned to benefit. This enables communications for voice and data at speeds of up to 365 Mbps, providing fibre equivalent speeds across large markets that would otherwise never experience such a high level of service. Combined with the very high power and efficiency available on HYLAS 2, we are now experiencing spectral efficiency on HYLAS 2 of greater than five times, meaning that IP trunking customers with special purpose ground equipment can realise effective pricing as low as they would achieve over fibre in some markets. This makes a major difference to the efficiency of ISPs in many African countries, and the product has already driven significant purchase of capacity in Southern and Eastern Africa.

·; Avanti has established a leading position in the deployment of small cell wireless backhaul solutions, which provide wireless operators with the capability to extend their network reach and to provide service on a seasonal or occasional basis. Avanti signed its first fully commercial wireless backhaul service and launched the network with good performance. Two other network operators are now trialling the products in Europe with further traction expected in Africa.

We see strong potential growth in Carrier Services as operators compete to extend their networks and mobile phone companies continue to seek ways to shift rapidly growing data traffic off their limited spectrum. The commercial breakthroughs made in the year position Avanti strongly to benefit from these trends. The full roll-out of a small number of these networks could fully consume our available capacity, and so it has been very important that we prioritised R&D in this market and we are delighted to see the results coming through.

Defence & Security

Ka-band is revolutionising the delivery of high-speed operational and welfare services for the defence and homeland security sectors. Ka-band offers significant cost savings without compromising on data throughput or security. The flexibility and resilience of Avanti's satellites puts us at the forefront of providing this service. A number of our service providers are already providing welfare services, and we also completed trials in a number of more advanced application areas during the year.

Financial Review

Turnover and Other Operating Income for the year increased 246% to £15.0 million (2011: £6.1 million). This reflects the benefit of a 12 month period of sales for HYLAS 1 and is in line with the acceleration we expected. Revenue from HYLAS 2 will start to be realised in the fourth quarter of calendar 2012.

Our performance was in line with our management expectations for the year. The Board, giving consideration to the move to the Full List elected to adopt more conservative accounting treatments for certain FY12 transactions, particularly relating to the deferral of income over the lifetime of contracts, regardless of upfront cash inflows.

The Group reported an EBITDA loss of £5.3 million, which is down from £9.7 million in 2011. As anticipated, costs increased during the year as we incurred a full 12 month's depreciation on HYLAS 1 as opposed to only three months in 2011, and we continued to invest heavily in our staff. Staff numbers, which increased by 41 overall to 152, were involved principally in the ramp up of the HYLAS 3 project and in boosting our sales and marketing teams in the run-up to HYLAS 2's launch.

Avanti continues to hedge all currency exposures as they become certain. The HYLAS 2 companies have a functional currency of US dollars and have borrowings similarly denominated, creating a natural hedge for our current major exposures. Transactional exposures are hedged using a variety of low risk instruments available from our banking relationships.

As we reported in the interim statements we settled an on-going dispute with a former supplier fully in our favour. The settlement was made by way of new goods and services received from the Supplier that will be used during the current financial year. The other operating income represents the value agreed at the arbitration.

The loss from operations was £15.76 million (2011: loss £12.86 million).

After an interest charge of £0.25 million, the Group reported a loss before tax of £16.0 million (2011: loss £12.7 million). The Group has carried forward net tax losses of £22 million (2011: £12 million). The loss per share was 14.86p (2011: 12.14p loss).

During the year we raised £75m in an equity placing to fully fund HYLAS 3, our joint venture project with ESA. We have a stable long term balance sheet structure with an extended debt repayment profile.

In addition, as the construction of HYLAS 2 approached its close, we drew an additional $76 million on our Export Credit Agency debt facilities. Our gross debt at the year-end increased from £119.0 million to £175.0 million. 

UNAUDITED CONSOLIDATED INCOME STATEMENT

Year ended 30 June 2012

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 30 June 2012

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2012

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 June 2012

UNAUDITED STATEMENT OF CHANGES IN EQUITY

Year ended 30 June 2012

UNAUDITED NOTES TO THE PRELIMINARY ANNOUNCEMENT

1. Basis of preparation

This unaudited preliminary consolidated financial information has been prepared in accordance with the International Financial Reporting Standards (IFRS) and the IFRS Interpretation Committee (IFRIC) interpretations as endorsed by the European Union (EU). The accounting policies applied are consistent with those described in the financial statements of the Company for the year ended 30 June 2011.This preliminary consolidated financial information does not constitute statutory consolidated financial statements for the year ended 30 June 2012 or the year ended 30 June 2011 as defined in section 434 of the Companies Act 2006. The financial statements for the year ended 30 June 2011 were approved by the Board of Directors on 30 September 2011 and have been filed with the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. The financial statements for 2012 will be filed with the Registrar in due course. The auditors have not yet signed their audit report, however, they have confirmed that they are not aware of any matter that may give rise to a modification to it.

2. Principal accounting policies

Full disclosure of the group accounting policies can be found in the 2011 Annual Report and Accounts as presented on the Avanti plc website. These have been consistently applied throughout the 2012 financial year and the disclosures made in this statement.

Principal risks and uncertainties

·; Fill rates on HYLAS 1 and 2

·; Pricing

·; Counterparty credit risk

As in prior years the two key risks to the profitability and liquidity of the business is the rate at which we can fill both satellites and the prices at which we can do that. We have maintained our guidance that we expect to fill both Satellites by 2016. To date we have not seen evidence of any significant downward price pressure.

With the enhanced Geographical spread with HYLAS 2, Avanti has developed processes to ensure that credit risk is minimised.

Critical accounting policies

The presentation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(a) Revenue recognition

The group uses the percentage-of-completion method in accounting for its consultancy and space projects. Use of the percentage-of completion method requires the group to estimate the services performed to date as a proportion of the total services to be performed.

(b) Impairment of satellites

The carrying amount of the satellites is dependent on the Group's ability to sell sufficient capacity in the satellites over their useful economic lives. In management's view, at this early stage in the life of the HYLAS 1 and 2 satellites, the sale of capacity is progressing well and in line with plans. The Group will assess impairment annually.

(c) European Space Agency ("ESA") Funding and Sale of Capacity

In April 2006 the group entered into a contract with ESA to receive funding for the build of the satellite and also giving ESA the right to use up to 10% of capacity on HYLAS 1 for a period of 3 years if the capacity is available. An assessment of the fair value of the revenues for the sale of capacity has been performed in order to account for this as a multiple element arrangement. The fair value of the capacity sales will be recognised as revenue on a straight line basis over a 3 year period. This 3 year period commenced when Hylas 1 became operational in the year ended June 2011. Management has made their best estimate of the fair value of the revenue element of the transaction based on market prices of the capacity at the inception of the arrangement. The residual fair value represents the value of the capital grant and this will be released to other operating income over a period of 15 years to match the useful economic life of the satellite. If the fair value of the capacity sale was altered by 10% the impact on the revenue figure would be £450,000.

3. Other operating income

The arbitration settlement of £1,821,000 includes interest of £25,000.

4. Income tax (credit)/expense

The tax on the group's loss before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:

5. Loss per share

The calculation of basic loss per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year.

6. Loans and other borrowings

(i) Finance lease obligations are secured by retention of title to the related assets. The borrowings are on fixed interest rate debt with repayment periods not exceeding 5 years.

In December 2009 the group announced that it had agreed debt financing for Hylas 2 with US Exim bank and COFACE. The total facility in this agreement is $328.2m at an interest rate of 5.5%.

This borrowing is repayable over a period of 7 years from December 2012 and the lenders have a charge over the assets of the company. The company has to meet certain financial covenants which are tested every 6 months.

In accordance with IAS 23 - Borrowing Costs, qualifying borrowing costs have been capitalised as part of the cost to HYLAS 2, recognised as Satellite in Construction.

7. Business combinations/intangible assets and goodwill

On 1 November 2011 the Group took effective control of Filiago GmbH & Co ("Filiago") by enhancing the security over its loans with Filiago. From 1 November 2011 ("the date of acquisition") Filiago is accounted for as a subsidiary in the consolidated financial statements because of the control now held but, because the Group has not purchased any equity shares in the company, a 100% non-controlling interest is recognised on the balance sheet removing the impact of the acquisition from shareholders' funds.

Filiago GmbH & Co is a broadband reseller and has multiple distributors in several countries as well as a large direct customer base. The fair value of net assets acquired, identifiable intangibles assets and the operating results of Filiago GmbH & Co are included in the consolidated financial statements since the date of acquisition. From the date of acquisition to 30 June 2012, Filiago contributed to the group's results with revenue of £1.1m, and a loss of £0.5m. The loss of £0.5m is removed from shareholders' funds as a non-controlling interest.

The above goodwill and intangibles have been reduced by amortisation and foreign exchange revaluations totalling £203K at 30 June 2012.

8. Cash generated from operations