AdEPT Telecom plc (LON:ADT) Chief Financial Officer John Swaite caught up with DirectorsTalk for an exclusive interview to discuss their latest interim results
Q1: Now, the interim results show that the financials of the group have grown considerably from the prior year, can you give us some detail behind this growth?
A1: Yes, we have seen some change across the group, mainly driven through some acquisitions that were done over the last 12-18 months. The business has transformed really, if you’d looked at this 2.5 years ago, we were very much just a telecoms business, but we have completely transformed now a proper managed services business. In fact, we’ve now got more than two thirds of our revenue is coming from managed services, so we are definitely a long way down the road for transition, we’re suppling full IT capability, unified communications, connectivity and voice.
If you looked at the business in March 2015, the revenue stream at that point was generating £22 million per year with EBITDA of £4.6 million but if you look at the run rate of where we are today, at September ’17, it’s grown to £48 million revenue and £10.5 million EBITDA.
So, we’ve grown in scale but also the quality of the revenue stream has improved as well, we’ve shifted from 53% managed services to 68% managed services year-on-year and since March ’15, that number has increased from 27% up to 68% so we’ve made a significant transition.
The revenue year-on-year is up 36%, EBITDA is up 34%, adjusted profit before tax is up 29% and on the back of that, the EPS is up 20% and so, on all key metrics the business has really pushed forward particularly in the last 12-18 months.
Q2: The acquisition of Atomwide, the IT for Education in London specialist, was completed in August 2017, can you give us a bit more detail on the strategic rationale for AdEPT Telecom?
A2: Atomwide was actually our second acquisition of an IT business, we bought a commercial IT business called OurIT back in February 2017 which is an excellent business and a great fit for AdEPT as a group. The one thing that it didn’t give us was the public sector element which we’ve been focussing on as a group for a while, so we had the commercial offering, we just didn’t have that public sector offering.
Atomwide are a business which gives us a real foothold into IT in the public sector. It’s a business that’s making around £7.5-£8 million revenue and on that, about £2 million EBITDA so it’s a good-sized business and it is particularly focussed on IT for Education. Atomwide itself has got around 3,000 schools that they’re supplying IT for, it is the number one provider to IT for Education across London, supplying over 2,500 schools in London.
What it’s supplying on there are bespoke software and apps and network support and there are around 50 apps that are being used by more than 2 million users so it’s a proper grown-up business. Other things that it’s supplying is things like Office365, they’ve got more than 1 million users on Office365, and it’s got web-filtering products in there, we now web-filter more than a billion web requests a day.
So, it’s a really good business and it’s a great fit with the rest of the group, plenty of cross-sale opportunity in there. The other opportunity that Atomwide has got is to try and extend the sale of all of its products etc. into schools and academies outside of the London area and also, into other public-sector bodies. We believe that some of these products are not just restricted to education, they can be used across a wider number of sectors.
Q3: The group has continued to deliver high EBITDA to free cash flow conversion, what is the group policy to using this cash?
A3: We have continued to generate high cash conversion, in the current period it’s an 86% conversion rate which is within our normal range of 80%-100% and we’re still a very capex-like business, non-infrastructure so capex is less than 0.5% revenue in the interim period.
The policies of the group really is to generate high EBITDA, convert it into cash and then doing two things with it, we’re either paying it out through dividend back to the shareholders or reinvesting it through acquisitions. In this period, we announced a 13% increase to the dividend up 4.25p, which has still got 3.1 times dividend cover on there so plenty of cover there, and we’ve reinvested some of it back into acquisitions. I don’t see that policy changing going forward, it’ll probably be a combination of both, we’ll be returning some of it to shareholders in the dividend and reinvesting the rest in acquisitions.
Q4: Now, I think you touched on this a little earlier, the business model, has it changed as a result of the acquisitions recently?
A4: No, not at all. In fact, the businesses we’ve bought are all very similar in terms of the metrics, EBITDA percentage conversion on sales was 21% in the first half. If we look across at all five of our group businesses, they’re all within a fairly tight band as 19%-23% EBITDA on sales so, it’s a very consistent across the group.
All of them are trading very similarly with the same business model, all of them are capex-light with cash conversion, they’re all 80% or more recurring revenue and recurring margin so really what we’ve done is we’ve built on very similar businesses and they’ve been strategic acquisitions for skill sets.
What we think now is we’ve got pretty much complete managed service offering for both the commercial and the public sector but we’re focussing very much on London and the South East in terms of where we’re targeting customers.
Q5: What does the second half hold in store for AdEPT Telecom plc?
A5: Well, the second half is going to be probably more of the same, sticking to our knitting and carry on. You’ll probably see more of a transition towards managed services and the telecoms part might start to shrink a little bit more as we continue to focus on bringing in new managed service customers and new products on board. We’ll continue to review strategic and earnings-enhancing acquisitions as we always have done but we’re not in a position where we need to do acquisitions but if the right thing comes up at the right price then we’ll have a look at it.
