Final Results

RNS Number : 3357B

Redcentric PLC

16 June 2016

 

16 June 2016

Redcentric plc

("Redcentric", "the Company" or "the Group")

Audited Results for the year ended 31 March 2016

Redcentric plc (AIM:RCN), a leading UK IT managed services provider, today announces its audited results for the year ended 31 March 2016.

Highlights

·     Strong revenue growth: revenue up 16% to £109.5m (2015: £94.3m), representing 8% organic growth

o  Recurring revenue up 17% (11% organic) to £90.2m (2015: £76.8m)

o  Recurring revenue 82% of total (2015: 81%)

·     Improved profitability: adjusted EBITDA* up 21% to £25.8m (2015: £21.4m)

o  Adjusted EBITDA* margin of 23.6% (2015: 22.7%)

o  Operating profit £8.4m (2015: £8.7m)

·     Adjusted EPS** up 24% to 10.5p (2015: 8.5p). Statutory EPS 3.6p (2015: 5.5p)

·     Final dividend up 20% to 3.0p per share (2015: 2.5p), growing total dividends for the year by 29% to 4.5p per share (2015 3.5p)

·     Total net borrowings of £25.3m (2015: £7.2m)

·     Calyx acquisition fully integrated, and City Lifeline on track. Capacity available to support additional growth through acquisition

Fraser Fisher, Chief Executive Officer of Redcentric commented:

"The good progress seen in the first half continued into the second half of the year, and we're pleased with the 17% growth in our recurring revenue base and the increase in profitability. The two acquisitions we completed during the year have been integrated and are performing well. We are continuing to invest in the business to provide our customers with a broad range of solutions delivered from our own infrastructure, allowing them to concentrate on growing their own businesses."

Chris Cole, Chairman of Redcentric commented:

"These results show that Redcentric has continued to follow its strategic plan with very solid organic growth and recurring revenue being augmented by two successful acquisitions in the year.  This combination reflects the strength of the underlying platform, and the Board's confidence in continuing to deliver shareholder value in the future."

* Earnings before interest, tax, depreciation, amortisation of acquired intangibles, transaction and integration costs and share based payments.

** Adjusted Earnings per Share excludes amortisation of acquired intangibles, transaction and integration costs and share based payments and replaces the reported tax charge or credit with a notional tax charge at the full rate of corporation tax.

An analyst presentation will be held at 10.00am today, Thursday 16th June 2016, at Tulchan Communications, 2nd Floor, 85 Fleet Street, EC4Y 1AE, London.

Enquiries:

Redcentric plc	[phone]
Fraser Fisher, Chief Executive Officer
Tim Coleman, Chief Financial Officer
Numis Securities Limited - Nomad & Joint Broker	[phone]
Simon Willis / Oliver Hardy / Ben Stoop
finnCap Ltd - Joint Broker	[phone]
Stuart Andrews / Rhys Williams
MXC Capital Markets LLP - Financial Adviser	[phone]
Marc Young / Charlotte Stranner
Tulchan	[phone]
James Macey White / Matt Low

Chairman's Statement

I am delighted to present the annual results for Redcentric plc for the year to 31 March 2016.  Redcentric has continued along its established strategic plan with solid organic growth and increased recurring revenue which was complemented by two successful acquisitions in the year.  We have continued to invest in the business in support of future sustained growth.

Summary trading results

The revenue for the year grew by 16% to £109.5m (2015: £94.3m).  This was a combination of organic growth of 8% and the contribution from the acquisitions of Calyx Managed Services and City Lifeline.  Management's key focus, recurring revenue, grew organically by 11% and now represents 82% of the total revenue.

Operating profit was £8.4m (2015: £8.7m). Underlying profitability increased with adjusted EBITDA* up 21% to £25.8m (2015 £21.4m) and adjusted EBITDA margins were 23.6% (2015: 22.7%), reflecting improvements in the quality of revenue, the benefits of scale and successful execution of the business model.

Business Development

Following a year with no acquisitions and the consolidation of our platform, in April 2015 Redcentric acquired Calyx Managed Services Ltd and in January 2016 acquired City Lifeline Ltd. Calyx has been integrated, the integration of City Life Line is proceeding to plan and both businesses are performing in line with expectations.  The ability of the business to successfully augment organic growth with selective acquisitions enables the strength of the core platform to be leveraged.  The Board will remain alert to further appropriate acquisition opportunities which will be undertaken to the Board's strict investment criteria.

Returns to shareholders

The strong performance of the business was reflected in underlying earnings per share growth, with adjusted EPS** growing by 24% to 10.5p (2015 8.5p). Earnings per share on an unadjusted basis were 3.6p (2015: 5.5p). The Board is pleased to announce a final dividend of 3.0p per share (2015 2.5p), which means an increase of 29% in the total dividend in respect of the year to 4.5p (2015: 3.5p).

The Group is cash generative and has access to a wide range of financial sources to support future investments.  Given this financial strength and flexibility, the Board is committed to a progressive dividend policy aligned to the Group's performance.

Board and employees

In November 2015 Fraser Fisher, previously Chief Operating Officer, took over from Tony Weaver as Chief Executive Officer. Tony remains on the Board as a non-executive Director. There have been no other changes to the Board during the year. The Board is well-balanced, with four Non-Executive Directors and two Executive Directors, with a range of complementary and relevant skills and experience.

Our growth and good performance have as always been possible through the commitment and hard work of our Management and Staff and the Board is grateful to them for their contribution.

Outlook

There is significant opportunity for Redcentric to establish itself as a market leader in IT managed services for the mid-market. Customers continue to be attracted to the ability of the business to deliver reliable and innovative services from its own secure and well invested infrastructure. In addition it is a highly fragmented market, which provides opportunity to augment organic growth with acquisitive growth. The Board remains confident in the ability of the business to deliver increasing shareholder value over the coming years.

Chris Cole

Non-Executive Chairman

16 June 2016

* Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation of acquired intangibles, transaction and integration costs and share based payments.

** Adjusted Earnings per Share excludes amortisation of acquired intangibles, transaction and integration costs and share based payments and replaces the reported tax charge or credit with a notional tax charge at the full rate of corporation tax.

Operational Review

Overview

This year has been a period of great success for Redcentric, achieving growth both organically, and through the successful execution of acquisitions. Since it started life as a new company in April 2013, Redcentric has grown and developed into one of the leading businesses in the UK managed services market, successfully delivering critical services to over 2,000 mid-market customers. We have built a strong platform, delivering a broad range of core services to our customers, enabling them to focus on improving their own businesses.

Performance

The financial performance of the company is covered in more detail in the Financial Review, however the headline revenue growth of 16% to £109.5m (2015: £94.3m) is pleasing as it was delivered partly from strong organic growth of 8%, and partly through the contribution from acquisitions. We focus particularly on recurring revenue, which grew by 17% to £90.2m (2015: £76.8m), of which 11% was organic growth. The organic growth was derived broadly 40:60 from winning new customers and from existing customers taking more services.

We have continued to experience good sales momentum, with 2016 proving to be a record year for sales order intake. On average our contracts are three years long, which provides a good level of revenue visibility. Customer churn remains low by industry standards at 5% p.a. Our qualified sales pipeline at the year-end stood at £95m, around 12% higher than at September 2015.

Redcentric's financial performance is covered in more detail elsewhere in this report, however the Company delivered a very strong performance on all of the following key metrics:

Key Performance Indicator	FY16	FY15	Growth	Organic growth
Revenue	£109.5m	£94.3m	16%	8%
Recurring revenue	£90.2m	£76.8m	17%	11%
Recurring revenue as % of total	82%	81%
Operating profit	£8.4m	£8.7m	(3%)
Adjusted EBITDA	£25.8m	£21.4m	21%
Adjusted EBITDA margin	23.6%	22.7%
Ratio of net debt to adjusted EBITDA	0.98x	0.34x
Earnings per share	3.6p	5.5p	(35%)
Adjusted earnings per share	10.5p	8.5p	24%

Acquisitions

Following a year with no M&A activity, this year we completed two acquisitions to complement our organic growth.

In April 2015 we acquired Calyx Managed Services Ltd for an agreed Enterprise Value of £12.0m. Calyx had previously disposed of its Break-Fix and Carrier Services divisions, and the remaining business delivered managed services to a very similar, and complementary, customer base. Calyx was sub-scale however and was unprofitable, and following consultation with staff, its main office in Didsbury, Manchester was closed in September 2015. From that date, all services have been provided to the Calyx customers from Harrogate and Hyderabad, the business has been completely integrated within Redcentric, and is delivering services profitably and in line with expectations. We have retained a small office in Hyde, Manchester, from which specialist contract support is provided.

City Lifeline Ltd was acquired in January 2016 for an agreed Enterprise Value of £4.8m. City Lifeline operates a well-established and well-connected data-centre in the heart of London's Tech City. The acquisition provides Redcentric with its own London data-centre, with plenty of expansion capacity. The integration is underway and is relatively straightforward, and the business is performing in line with our expectations.

Both of the acquisitions were acquired for cash, with no residual earn-outs or liabilities to the previous owners. The acquisitions were fully in line with our growth strategy, providing additional customers, services and infrastructure similar to those already existing within Redcentric.

Strategy

There are multiple different views of the size of the UK IT services market, however they all indicate a very significant market, worth in excess of £100bn spend per annum, showing low single digit growth. Within this market are a wide range of differing sub-sectors, from high-growth new technologies, to declining legacy markets. Redcentric is not exposed to markets in structural decline, and our focus on connectivity, infrastructure and cloud-based solutions means the markets we operate in are growing steadily.

Our strategy for future growth is threefold;

·     Firstly, we will continue to invest in expanding and enhancing our own infrastructure so that we can provide our customers with the very highest levels of security and service.

·     Secondly, we will use our scale to explore and invest in new technologies so that our customers can benefit from the high levels of innovation across the whole industry.

·     Thirdly, we continue to look for suitable acquisitions to enhance our business.

Our acquisition criteria are strict, and mean that we would only consider buying a business which is similar to our own, would accrete earnings, have high recurring revenue, have synergies available, and would not over-leverage the Company.

We have a stable, growing and well-funded business, operating in a growing market, and we are confident that our strategy will deliver shareholder value in the coming years.

People

Redcentric's success has been created through the hard work and dedication of its employees. The successful business they have helped to build has in turn created opportunities for others to join the business. Staff numbers have grown this year from 455 at the start of the year to 513 at the year-end, with around 25% being located in our Hyderabad office. We are investing in additional space in both our Harrogate and Hyderabad offices to support our planned growth.

Our Save-As-You-Earn share-save plan has continued its popularity; in December 2015 we operated the second annual grant of options to employees. Since its launch in December 2014, over 200 employees have committed to the plan, representing well over half of those eligible. The plan provides employees with a risk-free means of sharing in the success of the Company, and I am delighted that so many have been able to participate.

Outlook

Redcentric has continued along the path established since its creation, with strong organic growth, low customer churn and high levels of recurring revenue. We have been able to strengthen our core platform through well-executed acquisitions and continuing organic investment. We are operating in growing markets, with no exposure to those markets in structural decline. Our well established teams support our customers from the UK and India, with the scale and flexibility to invest and innovate. The sales pipeline is growing, with solid order intake momentum, and we are looking forward to further success in the years ahead.

Fraser Fisher

Chief Executive Officer

16 June 2016

Financial Review

Trading performance

Revenue for the year increased by 16% to £109.5m (2015: £94.3), which was through a combination of 8% organic growth supplemented by contributions from acquisitions during the year. The following table summarises the breakdown of revenue for the year:

	FY16 £m	FY15 £m	Reported growth	Organic growth
Recurring	90.2	76.8	17%	11%
Services	12.3	11.6	6%	4%
Product	7.0	5.9	19%	-19%
Total	109.5	94.3	16%	8%

The underlying growth in recurring revenue continued the pattern seen previously, with low churn levels of 5% enabling contract wins during the year to grow the recurring base. Customers typically engage through multi-year contracts which allows both the customer and Redcentric to plan ahead against a background of stability. Growth in the recurring contract base was driven by a combination of new business wins, and by expanding services to existing customers. Recurring revenue comprised 82% of total revenue in the year, and this proportion looks set to increase in the current year. Services revenue grew by 4% on an organic basis following a significant increase in FY15. Although there was an increase in headline revenue for Product sales, the underlying performance was a decline of 19%, continuing the pattern previously established. Product sales attract low margins, is a highly competitive market with little room for differentiation, and is not considered to be of strategic significance to the Group.

Operating profit was £8.4m (2015: £8.7m). Adjusted EBITDA grew by 21% to £25.8m (2015: £21.4m) representing an adjusted EBITDA margin of 23.6% (2015: 22.7%). The margin increase was driven by a combination of an improved revenue mix, cost synergies from acquisitions, the benefits of scale, and the effective execution of the Company's business model.

The Group uses adjusted EBITDA to monitor the trading performance of the business. Adjusted EBITDA is reconciled to statutory operating profit as follows:

	FY16 £m	FY15 £m
Adjusted EBITDA	25.8	21.4
Depreciation	(5.8)	(5.1)
Amortisation of acquired intangible assets	(5.6)	(5.5)
Transaction and integration costs	(4.6)	(0.5)
Share-based payments	(1.4)	(1.6)
Operating Profit	8.4	8.7

Acquisitions and amortisation of acquired intangibles

A central element of the Group's growth plan is the successful identification, execution and integration of complementary businesses. Following a year with no acquisition activity, during FY16 the Group acquired two businesses.

On 10 April 2015, Redcentric completed the acquisition of the entire share capital of Calyx Managed Services Ltd for an Enterprise Value of £12.0m. During 2015 Redcentric implemented an integration programme with Calyx, transferring most of its activities from its previous location in Didsbury, Manchester to provide service to customers from Redcentric's existing offices. As part of this integration, the office in Didsbury was closed in September 2015. The group has booked a provision to cover the remaining lease liabilities, and incurred redundancy costs through the integration, part of which were funded by the vendors. The Calyx business has now been completely integrated within Redcentric, and is operating in line with the original acquisition plan.

On 28 January 2016, Redcentric completed the acquisition of City Lifeline Ltd for an Enterprise Value of £4.8m from its founders. City Lifeline operates a well-connected and well-invested data centre in Tech City, London, which has been trading for over 20 years. The City Lifeline acquisition provides Redcentric with a low-risk means of expanding its owned infrastructure footprint, and will allow Redcentric to provide services to customers from a location in London which is completely controlled, managed and integrated with the rest of the business.

In FY16 the Group recorded an amortisation charge on acquired intangibles of £5.5m (2015: £5.5m). This charge was flat year on year as the amortisation of new intangibles acquired with Calyx and City Lifeline offset a reduction in underlying amortisation from previous acquisitions.

Capital expenditure and depreciation

Capital expenditure for the year grew significantly to £9.0m (2015: £6.1m) reflecting the nature and mix of contracts won during the year, £4.4m of which was funded through finance leases (2015: £2.4m). Around a third of the Group's capital expenditure programme is driven by investment in the core underlying infrastructure, with the balance being driven by the requirements of new customer contracts. Following this increased investment, the depreciation charge grew by 14% to £5.8m (2015: £5.1m).

Transaction and integration costs

The Group's transaction and integration costs in the year were £4.6m (2015: £0.6m). The costs relate to the acquisition and integration of two acquisitions during the year, and are separately analysed in detail in note 5 to the accounts in order to improve visibility and understanding of the Group's underlying performance. The costs are summarised as follows:

	FY16 £m	FY15 £m
Professional fees and costs of integrating subsidiaries	0.8	0.6
Fees and costs incurred in the acquisition of Calyx Managed Services	0.6	-
Fees and costs incurred in the acquisition of City Lifeline	0.2	-
Vacant property provision	1.7	-
Redundancy costs	1.3	-
Total	4.6	0.6

The largest single item is the provision for the closure of Calyx's Didsbury office which has now been shut, with all activities transferred to Redcentric's Harrogate office. The cash cost in respect of transaction and integration costs was £3.1m (2015: £2.3m).

Cash-flow

The business has inherently strong cash-flow characteristics, with high levels of recurring monthly billing providing a stable platform from which to invest. Operating cash conversion before transaction and integration costs for the year was 62% (2015: 74%) reflecting an increase in working capital of approximately £4m when compared to historical patterns, caused partly by a structural change in the timing of some monthly billing, and partly by collection issues, which are being addressed.

Operating cash-flow for the year was flat for the year at £15.2m (2015: £15.1m) with increases in profitability being offset by higher transaction and integration costs and working capital requirements. As noted above, capital expenditure was significantly higher, although the increased use of finance leases reduced the impact on cash balances. Finance leases at the end of the year had grown by £3.0m to £5.4m (2015: £2.4m).

At 31 March 2016, the Group had net debt of £25.3m (2015: £7.2m), representing a ratio of 0.98x EBITDA (2015: 0.34x).

Financing

On 2 April 2015, the Group entered into new long-term bank facilities. The facilities were established to re-finance the Company's previous bank facility, and provide cost effective and long-term funding stability for Redcentric.

The current facilities comprise a five-year £40m Revolving Credit Facility ("RCF"), along with a £5m Asset Financing Facility and a £5m Overdraft Facility, providing Redcentric with £50m of available financing. In addition, the RCF has a £20m accordion feature, with the potential to extend the RCF by a further £20m on the same terms, subject to lender approval. The structure of the facilities provides the Group with very flexible, cost effective credit arrangements, which support a range of potential future expansion opportunities.

In addition to the bank facilities, the Group has access to vendor financing to assist with the funding of capital expenditure. During the year, the group took advantage of the facilities to increase the proportion of capital expenditure funded through finance leases, both through the Asset Financing Facility and various vendor funding programmes.

Interest expense in the year was £1.0m (2015: £0.8m), which consists of interest payments on bank facilities and finance leases of £0.9m (2015: £0.6m) and amortisation of loan arrangement fees of £0.1m (2015: £0.2m).

During the year the Company issued 1,152,277 new ordinary shares as a result of the exercise of options and warrants over the Company's shares, raising a total of £1.0m additional capital (2015: 817,754 shares issued, raising £0.6m).

Taxation

Redcentric has the benefit of significant tax trading losses, which are being offset against corporation tax liabilities wherever possible. As at 31 March 2016 the losses totalled approximately £17.5m (2015: £15.4m), and a deferred tax asset of £1.6m (2015: £5.9m) has been recognised in respect of them.

The income statement shows an accounting tax charge of £2.2m (2015: credit £0.2m) reflecting the unwinding of the deferred tax assets during the year. The Group paid no Corporation Tax during the year, as a result of utilising historic tax losses, and does not expect to any Corporation Tax in respect of the year to 31 March 2016. The ability to utilise historic losses will diminish thereafter, and the Group expects to start paying Corporation Tax on a proportion of its profits during 2018 in respect of the current financial year.

Share based payments, EPS and dividends

The Group recorded a charge for share based payments during the year of £1.4m (2015: £1.6m), with the year on year reduction being due to the profile of some of the options generating a higher charge in earlier vesting periods. 

The statutory earnings per share ("EPS") in the year was 3.6p (2015: 5.5p). On a diluted basis, EPS was 3.4p (2015: 5.3p), with the reduction being due to the higher level of one-off transaction and integration costs in the year and the increase in the accounting tax charge. The Group also calculates an adjusted EPS figure to measure underlying performance, which excludes the effect of amortisation of acquired intangibles, share option charges and transaction and integration costs, and applies a normalised** tax charge. Adjusted EPS grew by 24% in the year to 10.5p (2015: 8.5p), with diluted adjusted EPS growing 22% to 9.9p (2014: 8.2p).

During the year Redcentric returned £5.8m (2015: £2.9m) to shareholders in the form of dividends. The Board has proposed a final dividend of 3.0p per share, which together with the interim dividend of 1.5p per share paid in February 2016 will make a total dividend in respect of the financial year of 4.5p per share. This is an increase of 29% on the 3.5p paid in respect of the previous financial year and represents the commitment of the Board to growing shareholder value. If approved by shareholders at the AGM on 26 July 2016, the Company intends to pay the final dividend on 21 September 2016 with an associated record date of 26 August 2016.

Tim Coleman

Chief Financial Officer

16 June 2016

** The normalised tax charge applies a full rate of UK corporation tax of 20% (2015: 21%) to adjusted earnings, ignoring the effect of tax losses and movements in deferred tax balances.

Consolidated Income Statement

For the year ended 31 March

		2016		2015
	Note	£000		£000
Revenue	1	109,526		94,321
Cost of sales		(45,050)		(40,596)
Gross profit		64,476		53,725
Selling and distribution costs		(8,688)		(9,285)
Administrative expenses		(47,349)		(35,770)
Adjusted EBITDA*		25,844		21,403
Depreciation		(5,825)		(5,099)
Amortisation of acquired intangibles		(5,548)		(5,507)
Transaction and integration costs included within administrative expenses	3	(4,591)		(558)
Share-based payments	12	(1,441)		(1,569)
Operating profit		8,439		8,670
Finance costs	4	(995)		(843)
Profit on ordinary activities before taxation		7,444		7,827
Tax (charge)/ credit on profit on ordinary activities	5	(2,188)		150
Profit for the year (attributable to owners of the parent)		5,256		7,977
Earnings per share
Basic earnings per share	6	3.62p		5.53p
Diluted earnings per share	6	3.43p		5.32p

*Earnings before interest, tax, depreciation, amortisation, transaction and integration costs and share-based payments

Consolidated Statement of Comprehensive Income

	2016 £000		2015 £000
Profit for the year	5,256		7,977
Total comprehensive income	5,256		7,977

Consolidated Statement of Changes in Equity

		Called up share capital	Share premium	Other reserves	Retained earnings	Total equity
		£000	£000	£000	£000	£000
At 31 March 2014		144	62,055	(9,454)	34,860	87,605
Total comprehensive income		-	-	-	7,977	7,977
Transactions with owners:
Share based payments (SBP)		-	-	-	1,403	1,403
Deferred tax on SBP		-	-	-	26	26
Share issues less costs		1	613	-	-	614
Dividends		-	-	-	(2,888)	(2,888)
At 31 March 2015		145	62,668	(9,454)	41,378	94,737
Total comprehensive income		-	-	-	5,256	5,256
Transactions with owners:
Share based payments (SBP)		-	-	-	1,336	1,336
Deferred tax on SBP		-	-	-	935	935
Share issues less costs		1	999	-	-	1,000
Dividends		-	-	-	(5,806)	(5,806)
At 31 March 2016		146	63,667	(9,454)	43,099	97,458

Consolidated Balance Sheet

As at 31 March

		2016		2015
	Note	£000		£000
Assets
Non-current assets
Property plant and equipment		28,669		23,397
Intangible assets		92,285		82,572
		120,954		105,969
Current assets
Trade and other receivables	7	35,762		18,350
Cash and short term deposits		8,492		3,199
		44,254		21,549
Total assets		165,208		127,518
Equity and liabilities
Equity
Called up share capital	10	146		145
Share premium account		63,667		62,668
Other reserves		(9,454)		(9,454)
Retained earnings		43,099		41,378
Total equity		97,458		94,737
Non-current liabilities
Provisions	11	1,940		489
Borrowings	9	31,912		9,412
Deferred tax liability	5	5,139		1,631
		38,991		11,532
Current liabilities
Trade and other payables	8	26,570		18,542
Corporation tax payable		-		1,488
Borrowings	9	1,855		1,033
Provisions	11	334		186
		28,759		21,249
Total liabilities		67,750		32,781
Total equity and liabilities		165,208		127,518

Consolidated Cash Flow Statement

For the year ended 31 March

		2016		2015
	Note	£000		£000
Cash flows from continuing operating activities
Cash generated from operations (before Transaction and integration costs)	13	19,148		18,222
Cash absorbed by Transaction and integration costs		(3,066)		(2,315)
Cash generated from operations		16,082		15,907
Interest paid		(927)		(809)
Corporation tax paid		-		-
Net cash generated from operating activities		15,155		15,098
Cash flows from investing activities
Acquisitions of subsidiaries net of cash acquired	16	(19,348)		-
Purchase of property, plant and equipment		(9,030)		(6,094)
Net cash used in investing activities		(28,378)		(6,094)
Cash flows from financing activities
Proceeds of issue of shares less costs of issue		1,000		614
Increase / (decrease) in bank loans and finance leases		23,323		(7,445)
Dividends paid to shareholders		(5,806)		(2,888)
Net cash flows generated from / (used in) financing activities		18,517		(9,719)
Net increase / (decrease) in cash and cash equivalents		5,294		(715)
Cash and cash equivalents at end of year		8,492		3,199

Selected notes to the Consolidated Financial Statements

Year ended 31 March 2016

1 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been identified as the Group Chief Executive and the Chief Financial Officer. The CODM is jointly responsible for resources allocation and assessing the performance of the operating segments. The operating segments are defined by distinctly separate product offerings or markets. All of the revenue derives from customers located in the United Kingdom. No single customer accounted for more than 10% of the revenue of any operating segment. All segment revenue is derived from external customers, and all segment results are derived from the United Kingdom.

Recurring revenue is derived from the provision of the Group's services to customers under long-term agreements, including data, connectivity, hosting, cloud, and support services. Services revenue is derived from the provision of consultancy, or installation services regarding the provision and set-up of a new service. Product revenues are derived from the sale of third party products, which comprises mostly hardware.

Results for the year ended 31 March 2016

	Recurring	Services	Product	Central	Total
	£000	£000	£000	£000	£000
Total segment revenue	90,172	12,310	7,044	-	109,526
Adjusted operating costs*	(66,401)	(8,906)	(6,876)	(1,499)	(83,682)
Adjusted EBITDA**	23,771	3,404	168	(1,499)	25,844
Depreciation	(5,825)	-	-	-	(5,825)
Share based payments	-	-	-	(1,441)	(1,441)
Amortisation of acquired intangible assets	(5,548)	-	-	-	(5,548)
Transaction and integration costs	-	-	-	(4,591)	(4,591)
Segment result	12,397	3,404	168	(7,531)	8,439
Net finance costs	-	-	-	(995)	(995)
Tax	(1,699)	(466)	(23)	-	(2,188)
Profit / (loss) for the year	10,699	2,938	145	(8,526)	5,256

Other segment information
Capital expenditure
Property, plant and equipment	9,029	-	-	-	9,029

Results for the year ended 31 March 2015

	Recurring	Services	Product	Central	Total
	£000	£000	£000	£000	£000
Total segment revenue	76,807	11,598	5,916	-	94,321
Adjusted operating costs*	(57,411)	(8,909)	(5,693)	(905)	(72,918)
Adjusted EBITDA**	19,396	2,689	223	(905)	21,403
Depreciation	(5,099)	-	-	-	(5,099)
Share based payments	-	-	-	(1,569)	(1,569)
Amortisation of acquired intangible assets	(5,507)	-	-	-	(5,507)
Transaction and integration costs	-	-	-	(558)	(558)
Segment result	8,790	2,689	223	(3,032)	8,670
Net finance costs	-	-	-	(843)	(843)
Tax	112	35	3	-	150
Profit / (loss) for the year	8,902	2,724	226	(3,875)	7,977
Other segment information
Capital expenditure
Property, plant and equipment	6,094	-	-	-	6,094

* Operating costs excluding amortisation and transaction and integration costs

** Earnings before interest, tax, depreciation, amortisation, Transaction and integration costs and share-based payments.

All of the depreciation, amortisation and capital expenditure has been allocated to the recurring revenue stream as this is the primary element of the business within which investment is focused. The Services and Product revenue streams have no capital expenditure, depreciation or acquired intangibles associated with them. All of the acquired goodwill has also been allocated to the recurring revenue segment as this was the segment that was expected to benefit from the synergies of the combination.

3   Transaction and integration costs

In accordance with the Group's policy of separately identifying transaction and integration costs, the following charges were recognised in the year:

	2016		2015
	£000		£000
Redundancy costs	1,256		-
Contractors and one-off closure costs	388		-
Professional fees and costs incurred in the acquisition of subsidiaries	489		-
Professional fees and costs of integrating subsidiary	760		558
Vacant property provisions	1,698		-
	4,591		558

As part of the acquisition and integration of other businesses, the Group incurs a range of one-off costs as set out in the table above. These costs are incurred on the basis that substantial cost savings and operational improvements are generated through the integration of acquired companies.

During the year the Group acquired Calyx and City Lifeline, and commenced integrating them into Redcentric. Redundancy costs were paid to staff who left the Group as a result of the acquisition and integration of the business. The contractor and one-off closure costs were incurred during the integration of Calyx and City Lifeline. The Group incurred professional fees in relation to the acquisition of Calyx and City Lifeline, and incurred further costs in relation to the team of external integration professionals who manage the integration activities. The vacant property provision was recorded in respect of the closure of the main trading office of Calyx, which was no longer needed following the integration with Redcentric.

4   Finance costs

Finance costs	2016 £000		2015 £000
Interest payable on bank loans and overdrafts	927		637
Amortisation of loan arrangement fees	68		206
	995		843

5  Tax on profit on ordinary activities

(a) Tax on profit on ordinary activities

	2016 £000		2015 £000
Current income tax:
Current income tax	-		(1,914)
Prior year adjustment	1,914		-
Deferred tax:
Origination and reversal of timing differences            - Deferred  tax asset: prior year adjustments	(2,393)		1,947
- Deferred  tax asset: current year	(3,217)		(984)
- Deferred  tax liability	1,508		1,101
Total income tax (charge)/credit reported in the income statement	(2,188)		150

(b) Reconciliation of the total income tax charge/(credit)

The tax on the Group's profit 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:

	2016   £000	2015   £000
Profit before taxation	7,444	7,827
Profit multiplied by the UK standard rate of corporation tax of 20% (2015: 21%)	1,489	1,644
Expenses not deductible for tax purposes	65	121
Effect of rate changes on deferred tax	(255)	6
Effect of tax losses for which no deferred tax asset was recognised	410	-
Prior year adjustment in deferred tax	2,393	(1,921)
Prior year adjustment to current income tax	(1,914)	-
Total income tax charge/(credit)  reported in the income statement	2,188	(150)

(c) Deferred tax

Deferred Tax

	2016 £000		2015 £000
Deferred tax liability	(9,418)		(8,997)
Deferred tax assets	4,279		7,366
Net deferred tax liability at 31 March	(5,139)		(1,631)

 (d) Deferred tax liability

	2016 £000		2015 £000
Opening balance	8,997		10,098
Acquisition of subsidiaries	1,743		-
Acquired with subsidiaries	186		-
Credited to the income statement	(1,508)		(1,101)
At 31 March	9,418		8,997

Deferred tax liabilities arose in respect of the amortisation of intangible assets recognised on acquisitions made.

(e) Deferred tax assets

	Share based Payments temporary differences £000	Tax losses £000	Property, plant and equipment temporary differences £000	Total £000
At 31 March 2015	709	5,888	769	7,366
Acquired with subsidiaries	-	1,587	-	1,587
Recognised in the income statement	267	(3,014)	(470)	(3,217)
Prior year adjustment	-	(2,818)	425	(2,393)
Recognised in equity	936	-	-	936
At 31 March 2016	1,912	1,643	724	4,279

Deferred tax assets have been recognised where it is the view of the Directors that it is probable that there will be future sustainable taxable profits from which prior tax losses can be offset. This is based on projections of future taxable profits and indicators such as the level of orders that support the Directors' projections.

Deferred tax assets have been netted off with deferred tax liabilities on the face of the Balance sheet. This is because the Group has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority, being the UK's HMRC. The Group operates as one tax group and settles its tax liabilities on a net basis. This is not expected to change in the foreseeable future.

During the year, the UK main corporation tax rate was reduced from 21% to 20% from 1 April 2015. The Finance Act 2015 set the main corporation tax rate at 20% for the Financial Year 2016. On 18 November 2015 Royal Assent was given for a reduction in the rate from 20% to 19% for the year beginning 1 April 2017, with a further reduction from 19% to 18% for the year beginning 1 April 2020.

6   Earnings per share 

Basic earnings per share has been calculated using profit after tax for the year of £5,256,000 (2015: £7,977,000) and a weighted average number of shares of 145,223,982 (2015: 144,225,164). The dilutive effect of share options at 31 March 2016 increased the weighted average number of shares to 153,314,134 (2015: 149,887,342).

In addition the Board uses adjusted earnings per share figure, which has been calculated to reflect the underlying performance of the business. This measure is derived as follows:

	2016 £000		2015 £000
Profit from operations for the year	5,256		7,977
Tax charge / (credit)	2,188		(150)
Amortisation of acquired intangibles	5,548		5,507
Share based payments	1,441		1,569
Transaction and integration costs	4,591		558
Adjusted earnings before tax	19,024		15,461
Notional tax charge at standard rate of 20%/21%	(3,805)		(3,247)
Adjusted earnings	15,219		12,214
Weighted average number of shares in issue	145,223,982		144,225,164
Weighted dilutive effect of options and warrants in issue	8,090,152		5,662,178
Diluted weighted average number of shares in issue	153,314,134		149,887,342
Statutory basic earnings per shares	3.62p		5.53p
Statutory diluted earnings per share	3.43p		5.32p
Adjusted basic earnings per share	10.48p		8.47p
Adjusted diluted earnings per share	9.93p		8.15p

7 Trade and other receivables

	2016 £000		2015 £000
Trade receivables	21,693		10,208
Less: provision for impairment of trade receivables	(661)		(76)
Trade receivables - net	21,032		10,132
Other receivables	8		25
Prepayments	5,777		2,833
Accrued income	8,945		5,360
	35,762		18,350

8 Trade and other payables

	2016 £000		2015 £000
Current
Trade payables	12,126		7,582
Other payables	971		111
Taxation and social security	4,866		3,063
Accruals	3,959		3,871
Deferred income	4,648		3,915
	26,570		18,542

9   Borrowings

	2016 £000		2015 £000
Non-current
Bank loan	28,674		8,000
Finance leases	3,510		1,412
Unamortised loan arrangement fee	(272)		-
Total non-current	31,912		9,412
Current
Finance leases	1,855		1,033
Total current	1,855		1,033

At 31 March 2016 the Group was party to £50.0m of bank facilities with a termination date of 1 April 2020. The facilities comprise a Revolving Credit Facility ("RCF") of £40.0m with a £20.0m accordion, a £5.0m Overdraft Facility and a £5.0m Asset Financing Facility.

The RCF has been provided jointly by Barclays Bank PLC and The Royal Bank of Scotland PLC, with Lombard Technology Services Ltd providing the Asset Financing Facility and Barclays Bank PLC the Overdraft Facility.

The movement in total net debt balances can be reconciled as follows:

	2016 £000		2015 £000
Net cash generated from operating activities	15,155		15,098
Purchase of property, plant and equipment	(9,030)		(6,094)
Acquisitions of subsidiaries net of cash acquired	(19,348)		-
Share issues	1,000		614
Dividends	(5,806)		(2,888)
Other non-cash movements in debt	-		(34)
Total (increase) / decrease in net debt	(18,029)		6,696

10 Called up share capital

Ordinary shares of 0.1p each	2016 Number	2016 £000	2015 Number	2015 £000
Allotted, called up and fully paid share capital
Issued during the year	1,152,277	1	817,794	1
Issued shares as at 31 March	145,881,185	146	144,728,908	145

The number of share authorised is the same as the number of shares issued. Ordinary shareholders have the right to attend, vote and speak at meetings, receive dividends, and receive a return on assets in the case of a winding up.

Share issues

During the year the following shares were issued:               

	2016 Number	2015 Number
Issued on the exercise of share options	354,251	291,000
Issued on the exercise of warrants	798,026	526,794
	1,152,277	817,794

The shares issued on the exercise of warrants relate to 1,381,055 warrants to certain shareholders ("Cornerstone Investors") on 6 December 2013 in connection with early stage commitment to raise equity to fund the acquisition of Intechnology Managed Services Limited. The warrants issued to the Cornerstone Investors have all either been exercised or have lapsed.

As at 31 March 2016 the Company had a total of 350,000 warrants in issue with an exercise price of 36p.  The warrants were issued to Barclays Bank PLC on demerger in April 2013 in exchange for warrants previously held in Redstone Plc, and can be converted to shares at any time before the sale of the entire share capital of the Company.

11 Provisions

	Dilapidations provision	Vacant property provision	Total provision
	£000	£000	£000
At 1 April 2014	796	448	1,244
Charged/(credited) to Income statement:
Used during the year	(154)	(415)	(569)
At 31 March 2015	642	33	675
Charged/(credited) to Income statement:
Additional provisions created during the year	-	1,698	1,698
Used during the year	(49)	(50)	(99)
At 31 March 2016	593	1,681	2,274

The provisions have been discounted to present value using a risk free discount rate. The remaining terms of these property leases range from 1 to 6 years.

Current and non-current analysis of provisions:

		2016				2015
	Dilapidations provision	Vacant property provision	Total provision		Dilapidations provision	Vacant property provision	Total provision
	£000	£000	£000		£000	£000	£000
Current	-	334	334		153	33	186
Non-current	593	1,347	1,940		489	-	489
Total	593	1,681	2,274		642	33	675

12 Share-based payment plans

Share-based payments

During the year the Group recognised an expense for the following share-based payments:           

	2016 £000	2015 £000
Equity-settled share-based charge arising from share options*	1,336	1,403
National insurance and other charges arising on share options	105	166
	1,441	1,569

* This is an IFRS 2 charge arising from share options issued in terms of a share-based payment plan.

13   Net Cash flows from continuing operating activities

	2016 £000		2015 £000
Profit on ordinary activities before tax	7,444		7,827
Adjustments for:
Transaction and integration costs	4,591		2,315
Net finance costs	995		843
Depreciation of property, plant and equipment	5,825		5,099
Amortisation of acquired intangible assets	5,548		5,507
Share based payments	1,441		1,569
(Increase)/decrease in trade and other receivables	(17,412)		2,279
Increase/(decrease) in trade and other payables	10,716		(7,217)
Cash generated by continuing operations	19,148		18,222

14   Related parties

The Group has taken exemption not to disclose transactions with entities wholly-owned by the Group.

MXC Capital

The Group has engaged MXC Advisory LLP to provide corporate finance advice and consultancy. MXC Advisory LLP is owned by MXC Capital Limited ("MXC"), which is an AIM quoted merchant bank specialising in investing in technology companies. MXC is a shareholder in Redcentric plc and has options over the ordinary shares of Redcentric plc (as disclosed below and in note XX) and therefore its interests are aligned with Redcentric plc's other shareholders. Tony Weaver, a Director of Redcentric plc, has an interest in MXC. Under the terms of the agreement, a fee representing a maximum of 2.5 per cent. of the enterprise value of successful transactions consulted upon is payable by the Company to MXC.

During the year, fees of £497,124 were paid to MXC (£2015: £224,000), which included £137,629 (2015: £204,000) for Tony Weaver's Director's fees, £59,495 (2015: £20,000) for the provision of corporate finance advice, and £300,000 (2015: £nil) for advisory fees in respect of the acquisition of Calyx. The acquisition of Calyx from MXC on 10 April 2015 for an Enterprise Value of £12.0m was a related party transaction.

As at 31 March 2016 MXC has the following interest in shares and options over ordinary shares in the Company:

	Quantity	Grant date	Exercise price	Expiry date
Ordinary shares	5,849,108	-	-	-
Options (a)	1,692,988	18 April 2013	32p	18 April 2023
Options (b)	7,000,000	15 November 2013	80p	15 November 2023

(a)   the performance conditions with respect to 564,330 of these options have been met, and the options have fully vested. There is a performance condition in respect of 1,128,658 options linked to the occurrence of a qualifying transaction that will deliver a predefined return to shareholders. 846,494 of the options are held by Tony Weaver as a Trustee under a Declaration of Trust, the beneficiary of which is MXC Capital Ltd.

(b)   The options have a performance condition which allows the option to be exercised if the average mid-market closing price of the shares for the preceding 10 working days at any point after 15 November 2016 is greater than 112.4p.

Other

There were no other transactions with related parties in the year to 31 March 2016 other than those disclosed in note 14.

During the year ended 31 March 2015, a subsidiary of the Group was party to a lease agreement relating to Redcentric House, Banters Lane Trading Estate, Chelmsford, and paid rental and service charge payments of £124,000 to Moreland Limited, a company which Fraser Fisher is a Director and shareholder of. The company terminated the lease agreement on 31 March 2015, and paid £153,000 in respect of a contractual liability for dilapidations.

The balances outstanding at 31 March 2016 in respect of related parties was £30,000 payable to MXC.

15  Dividends

The Company paid a final dividend in respect of the year to 31 March 2015 of 2.5p per ordinary share on 28 September 2015, with a total payment value of £3.6m, making a total of 3.5p per share for the year. The Company paid an Interim dividend of 1.5p per ordinary share on 17 February 2016, with a total payment value of £2.2m. Total dividends paid during the year amounted to £5.8m.

The Directors are proposing a Final dividend of 3.0p per share, which will make a total for the year of 4.5p per share. If approved by shareholders at the AGM, the final dividend, which the Directors expect to amount to £4.4m, will be paid on 21 September 2016 to shareholders on record on 26 August 2016.

16 Business combinations

16.1 Acquisition of Calyx

On 10 April 2015, Redcentric completed the acquisition of Calyx Managed Services Ltd ("Calyx") for an enterprise valuation of £12.0m. Calyx was acquired from MXC Capital following a period of significant restructuring, which included the disposals of the Break Fix and Carrier Services divisions. The remaining business was a focused IT managed services and professional and infrastructure services business. Calyx's portfolio of services and its range of customers are an excellent strategic addition for Redcentric.

The acquisition is considered a related party transaction under the AIM Rules for Companies on the basis that MXC is a substantial shareholder in the Company and Tony Weaver, a Director of Redcentric, is a substantial shareholder of MXC. In addition, Redcentric agreed a corporate finance advisory fee of £300,000 to MXC for advisory services in relation to the acquisition under an existing engagement with MXC, which is retained as corporate finance adviser to the Company (further details are in note 26 to the financial statements). The payment of the advisory fee is considered to be a related party transaction under the AIM Rules for Companies.

The book value of the Calyx net assets acquired and their fair values are summarised below:

		Book        value £000	Fair value adjustments £000	Fair value to Group        £000
Intangible assets		-	6,673	6,673
Deferred tax asset		-	1,587	1,587
Trade and other receivables		1,676	(93)	1,583
Prepayments		1,475	(192)	1,283
Cash and loans		5,465	-	5,465
Deferred revenue		(2,476)	-	(2,476)
Trade and other payables		(790)	-	(790)
Accrued costs and tax		(1,433)	-	(1,433)
Deferred tax liability		-	(1,201)	(1,201)
Net assets		3,917	6,774	10,691
Fair value of net assets				10,691
Goodwill				4,834
Total purchase consideration  paid in cash				15,525

The fair value adjustments relate to the recognition of newly identified intangible assets, and the writing off of unrecoverable debtors and accrued revenue. The purchase consideration paid included an adjustment to reflect the cash proceeds of £4.9m from the disposal of the Break Fix and Carrier Services divisions and an adjustment of £1.5m to reflect certain lease liabilities.

On acquisition the Directors assessed the business acquired to identify any intangible assets. Customer contracts and related relationships met the criteria for recognition as intangible assets as they have a measurable fair value, being the amount for which an asset would be exchanged between knowledgeable and willing parties in an arm's length transaction. For the customer contracts and related relationships the provisional fair value of the intangible assets was calculated by using the discounted cash flows arising from the existing contract base for the business. The reasonable economic life of the customer relationships was assumed to be ten years, and has been discounted using a rate of 10.6%.  The identifiable intangible asset was valued at £6.7m.

The goodwill arising on the acquisition is attributable to the expected synergies.

From the date of acquisition to 31 March 2016, Calyx achieved revenue of £6.7m and a profit before taxation of £0.6m. As Calyx was acquired close to the start of the year, the revenue and profit before tax if Calyx had been consolidated for the full year would not be materially different.

16.2 Acquisition of City Lifeline

On 28 January 2016, Redcentric completed the acquisition of City Lifeline Ltd ("City Lifeline") for an enterprise valuation of £4.8m from its founders.

City Lifeline is an established business, which has been trading for over 20 years. It was originally set up as a disaster recovery and back-up site, and has been developed over the years into an independent data centre offering hosting and colocation services from its well-connected and well-invested location in Tech City, London. The principal rationale behind the acquisition was to acquire a London data centre, enhancing Redcentric's go-to-market proposition based on the ownership and control of the underlying infrastructure from which services are delivered.

The book value of the City Lifeline net assets acquired and their fair values are summarised below:

		Book        value £000	Fair value adjustments £000	Fair value to Group        £000
Intangible assets		-	3,010	3,010
Property, plant and equipment		2,068	-	2,068
Trade and other receivables		94	-	94
Prepayments		216	-	216
Cash and loans		1,352	-	1,352
Borrowings		(722)	-	(722)
Trade and other payables		(251)	-	(251)
Accrued costs and tax		(330)	(383)	(713)
Deferred tax liability		(187)	(542)	(729)
Net assets		2,239	2,085	4,324
Fair value of net assets				4,324
Goodwill				744
Total purchase consideration  paid in cash				5,068

The fair value adjustments relate to the recognition of newly identified intangible assets, a provision for contractual staff bonuses which were crystallised at the point of acquisition, and a provision for corporation tax.

On acquisition the Directors assessed the business acquired to identify any intangible assets. Customer contracts and related relationships met the criteria for recognition as intangible assets as they have a measurable fair value, being the amount for which an asset would be exchanged between knowledgeable and willing parties in an arm's length transaction. For the customer contracts and related relationships the provisional fair value of the intangible assets was calculated by using the discounted cash flows arising from the existing contract base for the business. The reasonable economic life of the customer relationships was assumed to be ten years, and has been discounted at a rate of 10%.  The identifiable intangible asset was valued at £3.0m.

The goodwill arising on the acquisition is attributable to the additional data centre capacity acquired and expected synergies.

From the date of acquisition to 31 March 2016, City Lifeline achieved revenue of £0.6m and a profit before taxation of £0.1m. If City Lifeline had been consolidated for the full year it would have achieved revenue of £3.5m and profit before tax of £0.3m.

 

END

 

 

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