Trading Statement

Trading Statement

Released : 02/08/2023 07:00

2 August 2023

Gamma Communications plc

("Gamma" or the "Group")

H1 trading update

Growth in all segments, continued high cash generation. Full year guidance reiterated.

Gamma Communications plc, a leading provider of Unified Communications as a Service ("UCaaS") to the business markets in the UK, Germany, Spain and the Netherlands, is pleased to announce a trading update for the six months ended 30 June 2023.  This update confirms the statements made at the time of the AGM on 17 May 2023.

Group overview

We are pleased to report that the Group performed well through the first six months of the year with all business segments contributing to healthy year-on-year adjusted EBITDA growth and high group operating cash conversion.

In both the UK and Europe, our resilient recurring revenue model, combined with selective price increases, helped mitigate the impact of inflationary cost increases. The Group remains well positioned to deliver growth in line with current market expectations for the year ending 31 December 2023.

United Kingdom

Gamma Business (formerly Indirect - see Note 1 below) continues to deliver a strong financial performance. Growth was primarily driven by our UCaaS portfolio, which includes our Horizon Cloud PBX solution as well as those SIP trunks supporting Microsoft Teams implementations and other non-Gamma Cloud PBX solutions. UCaaS unit growth continued with PhoneLine+ (Gamma's own software solution) take up accelerating, whilst Horizon Cloud PBX and additional module bolt ons net growth was lower than in prior periods (partially due to some switching from Horizon to PhoneLine+).

Gamma Enterprise (formerly Direct - see Note 1 below) has seen a number of significant contract wins, including an organisation-wide mobility solution for the Home Office in the public sector, and an SD-WAN for Lidl's UK store network. Additionally, there have been several wins for our omnichannel contact centre management solution, Smart Agent, within the NHS. Our Microsoft Teams voice enablement services continued to grow in the first half with the pipeline remaining strong.

Overheads across the UK remained within expectations during the first half with continued careful management of spend.

Europe: Germany, Spain and the Netherlands

Europe delivered healthy adjusted EBITDA growth in the period. Our results were further bolstered by foreign exchange movements, with a Euro that strengthened against Sterling compared to the prior year.

Product development

Gamma has continued to make progress in the development and delivery of products and solutions.  We are particularly pleased with Microsoft Teams voice enablement which is now available in all of the countries in which we operate, as well as the continued capability improvement we are making to our UCaaS portfolio.

Cash

Gamma's balance sheet remains strong, with significant cash generation from trading activities in line with our cash conversion guidance of more than 90%. Closing net cash at the half year was approximately £121.5m compared to £92.5m as at 31 December 2022.

Outlook

The Board remains positive about the prospects for Gamma. In line with the statement made at the time of the AGM, management expects adjusted EBITDA and adjusted EPS (fully diluted) for the year ending 31 December 2023 to be within the range of market forecasts.*

The Board will announce results for the half year ended 30 June 2023 on Tuesday 5 September 2023.

Andrew Belshaw, Chief Executive, commented on the results:

"I am pleased to report on a healthy first half performance across all segments.

Our products are business critical and combine reliability and innovation to support the ever-evolving communications challenges for businesses of all sizes. These products continue to support a financial model that has a high level of recurring revenue and exceptional cash generation which enables us to invest in and grow Gamma.

Our first half trading shows the value of sustained investment. Our newer products, from Microsoft Teams voice integration to PhoneLine+, are performing well and we are pleased with our improved progress in Europe.

Although we are not immune from macro challenges, communications services tend to be resilient through the cycle and we enter the second half with confidence."

* Company compiled range is based on known sell side analyst estimates.  The ranges are adjusted EBITDA £110.4m - £117.2m and adjusted EPS (fully diluted) 70.0 pence - 77.0 pence.

Enquiries:

Gamma Communications plc

Andrew Belshaw, Chief Executive Officer

Bill Castell, Chief Financial Officer

Rachael Matzopoulos, Company Secretary

Tel: +44 (0)333 006 5972

Investec Bank plc (NOMAD & Broker)

Patrick Robb / Virginia Bull

Tel: +44 (0)207 597 5970

Teneo (PR Adviser)

James Macey White / Matt Low / Rebecca Hamer

Tel: +44 (0)207 353 4200

Note 1 - Change in segmental reporting

In recent years, Gamma has widened its product and solution/services set to address the communications needs of a broader range of businesses. Post pandemic, customer requirements have evolved in respect of their telecommunications and IT infrastructure and methods of procurement for such products and services have broadened.  Because of this, the Group's business unit responsibilities have been realigned to allow the business units to focus more directly on customer needs and preferences.

Our two UK business units are now aligned with customer groups rather than routes to market. We have therefore updated our segmental reporting structure to reflect the way in which the Group now manages its operations.

Previously the reported segments were UK Indirect, UK Direct, Europe and Central Functions. The new segments are Gamma Business, Gamma Enterprise, Europe and Central Functions. Gamma Business consists of the former UK Indirect business with the addition of some customers and associated costs from the UK Direct business (now Gamma Enterprise). This has resulted in a £13.5m revenue movement between segments for FY 2022 (3% of group revenue) with no change in Executive Committee leadership.

The Group's main operating segments are outlined:

·      Gamma Business - This division sells Gamma's products to smaller businesses in the UK, typically with those with fewer than 250 employees. This division sells through different routes to market, including the channel, direct, digital and as well as through other carriers who sell to smaller businesses in the UK.

·      Gamma Enterprise - This division sells Gamma's products to larger businesses in the UK, typically with those with more than 250 employees. Larger organisations have more complex needs so this division sells Gamma's and other suppliers' products to Enterprises and Public Sector customers, together with an associated managed service wrap and ordinarily sells directly.

·     Europe- This division consists of sales made in Europe through Gamma's German, Spanish and Dutch businesses.

·      Central Functions - This comprises the central management team and wider Group costs.

This change in reporting structure has taken effect for reporting in 2023. In advance of the announcement of our H1 results for the six months ended 30 June 2023, we are providing the following restated views of our HY22 and FY22 financial results under this new segmentation to provide the correct comparability. Going forward, the assets and liabilities of the segments along with their depreciation and amortisation, which were previously provided as supplementary information, will no longer be shown.

This change in segmentation resulted in the following movements between the former Direct segment (now Gamma Enterprise) to the former Indirect segment (now Gamma Business) for HY 2022: Revenue of £6.7m, Gross Profit of £3.9m, Overheads of £3.1m, resulting in a £0.8m EBITDA movement between segments for the period ended 30 June 2022.

* We add back the depreciation and amortisation charged in the year to Profit from Operations (2022: £65.4m) to calculate a figure for EBITDA (2022: £92.6m).

This change in segmentation resulted in the following movements between the former Direct segment to the former Indirect segment for FY 2022: Revenue of £13.5m, Gross Profit of £8.1m and Overheads of £6.2m, resulting in a £1.9m EBITDA movement between segments for the year ended 31 December 2022.