Additional Financial Info.
05 Junio 2007 - 2:00AM
UK Regulatory
RNS Number:7647X
Vanco PLC
04 June 2007
VANCO PLC
ADDITIONAL FINANCIAL INFORMATION FOR THE YEAR ENDED 31 JANUARY 2007
Further to the announcement of Vanco's preliminary results for the year ended 31
January 2007 on 18 April 2007, the Board has decided to provide additional
financial information on the results and the Group's accounting policies in
order to assist analysts and investors in their understanding of the Group's
business model and accounting. Most of this additional financial information-
as set out at the end of this announcement- will be provided by the Group on an
ongoing basis, starting with the interim results for the six months ending 31
July 2007.
Accounting policies- general
The accounting polices used in preparing the accounts for the year ended 31
January 2007 and the audited accounts which were published at the end of May are
the same as those used in prior periods since conversion to IFRS and have been
consistently applied.
Split of revenue between initial phase revenue and ongoing management phase
revenue
Total revenue for the year can be analysed as follows:
2007 2006
#m #m
Initial phase Contracts signed in year 52 47
Contracts signed in prior years 17 20
Management phase Contracts signed in year 7 5
Contracts signed in prior years 80 62
Universal Access 27 13
183 147
Total revenue from contracts signed in prior years 97 82
The initial phase revenue in respect of contracts signed in prior years
represents the value of work done in completing the design and implementation of
networks sold on or prior to the start of the relevant financial year. It is
common for many contracts to be rolled out over an extended period of time. This
period can extend up to 18 months in exceptional circumstances.
The revenue from Universal Access was $49.3m in the year ended 31 January 2007,
compared to $22.6m in the six months ended 31 January 2006. This represents an
annualised growth rate of 9.1%.
The revenue from contracts signed in the year can be further analysed as
follows:
2007 2006
#m #m
New name business Initial phase 25 26
Management phase 3 3
Account management Initial phase 27 21
Management phase 4 2
59 52
New name business is defined as being derived from businesses who were not
customers at the start of the financial year (1 February). Account management is
business generated from customers who were Vanco customers at the start of the
financial year and includes MACs (Moves, Adds and Changes).
Growth rates
Excluding the effect of the acquisition of Universal Access on 1 August 2005,
the revenue for the second half of each of the years ended 31 January 2005, 31
January 2006 and 31 January 2007 was #56m, #73m and #90m respectively. This
represents growth of 23% year on year between the six month periods ended on 31
January 2006 and 31 January 2007, compared with 30% growth between the six month
period ended 31 January 2005 and the six month period ended 31 January 2006.
Looking at year on year growth for the second half of each financial year is
representative of the underlying growth, as it excludes the distortion in trend
caused by the investment in the business in the six months ended 31 July 2006.
This was mainly in connection with the development of the channel partner
strategy.
The market expectation for the year ending 31 January 2008 is that revenue will
be 25% higher than it was in the year ended 31 January 2007.
Split of trade and other receivables and current liabilities
Trade and other receivables can be analysed as follows:
2007 2006
#m #m
Due within one year Trade debtors 15 18
Other debtors 10 5
Employee share scheme 4 2
Prepayments 15 12
Accrued income 33 25
Due after more than one year Employee share scheme 4 4
Prepayments 5 5
Accrued income 55 28
141 99
The relatively low value of trade debtors at 31 January 2007 is impacted by the
#8m of short term timing differences mentioned below in the explanation of the
movement in accrued income.
Current liabilities can be analysed as follows:
2007 2006
#m #m
Trade creditors 37 31
Other loans 3 -
Finance leases 2 4
Corporation tax 1 1
Overseas tax 2 2
Other taxes 5 4
Other creditors 3 -
Employee share scheme 4 2
Accruals 6 5
Deferred income 39 26
102 75
All current liabilities are due in less than one year.
Accrued income and revenue recognition
Vanco's revenue recognition policy is in accordance with IAS. Revenues and costs
are matched and recognised in the income statement in the period in which the
goods and services are delivered. During the initial phase of a managed network
services contract, the revenue recognised may exceed the amount of cash received
from a customer. Any such amounts are carried in the balance sheet as accrued
income. This occurs in situations where customers pay for some or all of the
value of the work done during the initial phase of the contract over an extended
period of time. Similarly in the management phase normally a customer will be
invoiced in advance of the service being delivered and this will be held on the
balance sheet as deferred income.
The Group's accounting policy in respect of revenue recognition is set out in
the Annual Report and Audited Accounts. This accounting policy has been
consistently applied since the implementation of IFRS and was used in preparing
the preliminary announcement of the results for the year ended 31 January 2007
which was issued on 18 April 2007. As part of the normal year end review and in
addition to advice provided by Deloitte as part of the audit, the Board sought
independent advice on the Group's accounting policies in relation to revenue
recognition. The Board was advised that the policies are similar to the stated
policies of other significant competitors in Vanco's markets.
Debtors as at 31 January 2007 due within one year plus debtors due after one
year total #141m (2006- #99m) as analysed above. The elements of this total that
relate to accrued income and prepayments are as follows:
2007 2006
#m #m
Due within one year Prepayments 15 12
Accrued income 33 25
Due after more than one year Prepayments 5 5
Accrued income 55 28
108 70
Total accrued income therefore increased to #88m at 31 January 2007 from #53m at
31 January 2006.
The ageing of the accrued income is as follows:
2007 2006
#m #m
Due within one year 33 25
Due in between one and two years 25 11
Due in between two and three years 18 10
Due in between three and four years 9 3
Due in greater than four years 3 4
88 53
The total new accrued income in respect of initial phase work completed in the
year ended 31 January 2007 was #47m. This differs from the balance sheet
movement of #35m, by a net #12m, for the following reasons:
* During the year ended 31 January 2007, #20m of accrued income that was
on the balance sheet at 31 January 2006, was invoiced to customers and converted
into cash.
* The accrued income balance at 31 January 2007 includes #8m of very
short term timing differences not related to the initial phase of a contract.
These are items that were identified as billable in the year to 31 January 2007
and were recognised as revenue in the period, but were not invoiced until after
the year end. These will all be converted into cash during the year ending 31
January 2008.
The difference of #5m between the #25m of accrued income due in less than one
year shown on the balance sheet at 31 January 2006, and the #20m that was
invoiced in the year ending 31 January 2007, is due to timing differences in
respect of when amounts were invoiced against what was expected. The majority of
these timing differences will reverse in the year ended 31 January 2008. In
addition, as at 31 January 2005, there was #15m of accrued income due in less
than one year and #13m of this was converted into cash in the year ended 31
January 2006. The difference of #2m reverses in full prior to 31 January 2008.
Based on data that is currently available, it is anticipated that of the #33m of
accrued income due in less than one year shown on the balance sheet at 31
January 2007, all of this will convert into cash during the year ending 31
January 2008.
The revenue recognised in the year ended 31 January 2007 in respect of the
initial phase of contracts was #72m (2006- #69m).
As stated above, #47m (2006- #33m) was booked to the balance sheet as accrued
income and the remaining #25m (2006- #36m) was supported by cash, paid either
directly or via Vanco Finance. This means that 65% of initial phase work done/
invoiced in the year was via accrued income and 35% was backed by cash compared
to a 48%: 52% split in the year ended 31 January 2006.
A significant part of the increase in the proportion attributable to accrued
income in the year ended 31 January 2007 is due to two specific deals that
between them contributed some #8m to the accrued income written in the year.
This is not expected to repeat in the year ending 31 January 2008, and during
this period, the directors expect the proportion of work done during the initial
phase of the contract that is backed by cash (including Vanco Finance deals), to
move back towards the levels seen in the year ended 31 January 2006.
Cash cycle
The reported net debt as at 31 January 2007 was #20m. However, during a typical
year, the net debt fluctuates as follows:
* Q1- this is generally the weakest trading quarter and when the company
invests in extra capability for expansion in the year. Accordingly net debt for
the year tends to peak around the end of the first quarter at a level higher
than at the end of the previous financial year. Net debt then typically reduces
during the rest of the year assuming normal trading cash flows. The year ending
31 January 2008 will follow this trend as despite Q1 order intake being strong,
the majority of the cash related to the new business signed was not received
prior to 30 April 2007.
* Q2- this is generally stronger than Q1.
* Q3- this is generally less strong than Q2, mainly due to the effect of
the holiday season. This has a particularly significant effect in mainland
Europe.
* Q4- historically, this is the Group's strongest trading quarter.
During the year ended 31 January 2007, average net debt was c#55m and the
company had total debt facilities of around #90m. Of the #90m, #70m was in
respect of the UK bank facility and the remaining #20m was in respect of non UK
bank facilities, other loans and finance lease facilities.
Since 31 January 2007, Vanco has renegotiated its bank facilities in line with
its annual practice of reviewing facilities in the light of the growth of the
business and has increased the total UK bank facility from #70m to #96m. The
Group's current debt facilities now total some #115m.
Cash conversion
The Group has now adopted Free Cash Flow (FCF) as the relevant metric for the
cash generation of the business, where FCF is defined as cash generated from
operating activities less net interest less tax paid less capital expenditure
less finance lease payments. Accordingly, the Group will be focussing on
improving this metric going forward. As previously indicated, the Group expects
to be FCF neutral or slightly positive in the current financial year. In order
to achieve this, around 300 staff, comprising all of the relevant directors, new
business and account management team, plus a number of other staff, are now
incentivised to maximise cash generation as part of their remuneration plans.
In addition, during the year ended 31 January 2007, the group made cash payments
in respect of capital expenditure of #4.6m and made finance lease payments of
#4.8m, which together amount to #9.4m (defined as Cash Capital Expenditure). The
Cash Capital Expenditure in the year ending 31 January 2008 is likely to be
#2-3m lower than the amount incurred in the year ended 31 January 2007. This
will also contribute to the expected improvement in FCF.
Looking further out, the opportunities for improved FCF generation are
significant as the #88m of accrued income carried forward on the balance sheet
at 31 January 2007 is converted into cash.
Capital expenditure
The correct split of cash payments in the cash flow statement for the year ended
31 January 2006, is to allocate #0.8m to the purchase of property, plant and
equipment and #3.2m to the purchase of intangible fixed assets (previously all
#4.0 million was allocated to property, plant and equipment). The corresponding
numbers for the year ended 31 January 2007 are #0.9m in respect of property,
plant and equipments and #3.6m in respect of intangible fixed assets.
Accounting treatment of commissions
All salaries and other related costs incurred on bids, prior to becoming
preferred supplier, are immediately expensed in the profit and loss account as
required by IAS. Commissions are due to salesmen when new business and account
management deals are signed and are paid in the few months following signature.
These are carried forward in the balance sheet and recognised in the profit and
loss account over a period which is the shorter of three years and the term of
the contract. This policy is applied to agreements where contractually customers
cannot break contracts without paying the lost gross margin to the end of the
contract. The vast majority of contracts fall into this category. The costs
associated with earning this gross margin are therefore expensed over a similar
period to that over which the gross margin generated by the contract is
recognised in the profit and loss account. This is in accordance with IAS.
At the inception of IFRS, both our auditors and another Big 4 firm of
accountants were asked to specifically review this policy and concluded that it
was appropriate. The policy has been consistently applied since the
implementation of IFRS and was used in the preparation of the preliminary
announcement of the results for the year ended 31 January 2007.
As at 31 January 2007, the total value of commissions carried forward in
prepayments was #7.2m (2006- #5.7m). The amount of commissions capitalised in
the year ended 31 January 2007 was #4.0m (2006- #3.5m) and the amount amortised
during the year was #2.5m (2006- #2.1m).
Accounting treatment of Oracle and other systems development
During the year ended 31 January 2007, the Oracle Enterprise Resource Planning
("ERP") system was launched globally, following a pilot and an extended period
of development and testing. It is now in use across all Vanco's principal
offices globally and is supporting the business's processes in a robust and
fully scaleable way, in preparation for future growth.
The ERP system brings an automated connection between the operational and
commercial functions of the business, delivering greater cost control as Vanco
continues to grow. It also provides the management team with consistent
information across the entire business. All customers were transferred to the
new system by the year end.
We also rolled out the Voyence secure router configuration tool across our
entire customer base. This allows greater control and access security for the
management of router configurations across the customer base. Additionally, we
improved our 'trouble ticket' integration with channel partners (this is the
means by which network faults are spotted, logged and managed), delivering
greater efficiency and customer service to these channel partners' enterprise
clients.
In accordance with IAS, the costs associated with this project have been
capitalised in intangible fixed assets as they provide material future economic
benefits to the business. They will be amortised from the date that each system
goes live. During the year ending 31 January 2008, the level of investment in
further software development will fall below historical levels. The net effect
is that it is expected that amortisation will exceed the value of further
amounts capitalised by c#2m in the current financial year.
Additional Reporting Information
Going forward, the following data will be reported by the Group:
* The split of revenue between initial phase revenue, management phase
revenue and Universal Access
* An analysis of revenue from contracts signed in the year split between
new business and account management and between initial phase and management
phase revenues
* The split of initial phase revenue recognised in the period split
between that which is backed by cash and the amounts that have been funded from
accrued income
* The split of the line item described on the face of the balance sheet
as "Prepayments and accrued income"
* The ageing of the accrued income balance
* Average contract size and length
Vanco Finance (VF)
Syscap plc, the owner and controller of VF, has decided to re-brand VF as Global
Network Finance going forward. We understand that this change of name is in the
process of being executed. The purpose of Global Network Finance is to provide
financial arrangements to Vanco's customers which will assist them in paying for
the initial costs of investing in a new data network with Vanco. The business is
neither owned nor controlled by Vanco and is not consolidated within the Group
accounts.
Current trading
FCF for the six months ending 31 July 2007 is expected to be better than in the
six months ended 31 July 2006. Trading is always weighted to the second half of
the financial year. Finance lease and capital expenditure payments have an
adverse effect on the FCF trend in relation to cash generated from operating
activities in the first half as they are paid fairly evenly throughout the year.
In addition interest payments will be weighted towards the first half of the
year ending 31 January 2008 and tax payments are weighted towards the second
half of the year.
The Directors remain confident of meeting the consensus market expectations for
the year ending 31 January 2008. As previously indicated, there is an increased
focus on the financial profile of new contracts and on improving FCF, which the
Group expects to be neutral to slightly positive for the full year. The
directors believe that this would represent a strong performance given that the
market is expecting revenue to continue to grow at c25% in the period.
The first Interim Management Statement for the year ending 31 January 2008 will
be published in due course.
For further information please contact:
Vanco plc
Simon Hargreaves, Managing Director, Vanco Solutions & Group Finance Director
T. +44 (0) 208 6361700
Michael Piddock, Marketing Manager
T. +44 (0) 208 6361721
michael.piddock@vanco.co.uk
Katie Tzouliadis, Biddicks
T. +44 (0) 207 4481000
Ends
This information is provided by RNS
The company news service from the London Stock Exchange
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