Big boys outperformed by smaller rivals

Philip Carse, Analyst at Megabuyte.com, reports on the recent performance of leading companies in the comms space during the last quarter.

This last quarter was a bad one for the UK telecoms big boys. BT further downgraded EBITDA guidance for fiscal 2017/18 (March). The £7.5-7.6bn EBITDA guidance compares with £7.654bn reported for 2016/17, and £7.9bn prior to the January profit warning - all due to the Italian accounting scandal and UK public sector and overseas corporate pressures. TalkTalk significantly undershot already reduced EBITDA guidance for 2016/17 (EBITDA rose 17% to £304m versus prior guidance of £320-360m), and Charles Dunstone marked his renewed involvement with a strategic shift towards growth over profitability that will impact EBITDA in the current year (guidance of £270-300m).

Weak ARPUs at Virgin Media led parent Liberty Global to downgrade EBITDA guidance, and following March's downwards revision of Project Lightning premises passed in 2016 due to misreporting, the company also said that the 2017 rollout will be below plan but refrained from publishing a new target. Vodafone UK continued to be a poor performer with fiscal 2016/17 EBITDA down 16% to €1,212m. The company's reasons included the well publicised billing system issue, increased competition in enterprise mobile and the loss of two fixed line contracts. Notably, TalkTalk Business and Virgin Media Business have been less impacted by trading issues than their consumer-focused sister companies.

In contrast to the bigger player woes, smaller company reporting (public and private) has again been dominated by decent numbers from several connectivity and network infrastructure players including Exponential-e, M24Seven, Ask4, Arqiva and CityFibre, as well as from some business comms providers including Gamma, Maintel, Adept, Charterhouse and Focus Group. In contrast, multi-utility reseller Telecom Plus reported below expectations numbers and guided for flat profits in the new financial year due to customer acquisition costs.

Period of interesting corporate activity
This last quarter saw an interesting range of corporate activity including substantial funding for Gigaclear (of £111m which will fund its fibre to the premise build for about 30 weeks) and contact centre player Starleaf (£31m). The quarter witnessed strategically or sizewise acquisitions for M24Seven/Metronet (Venus Communications, adding a London presence), Chess (Foursys, adding security) and Elite Telecom (Nexus, adding a quarter to EBITDA), maiden post-MBO acquisitions for Sabio (of Rapport) and Wavenet (of Swains and Talk Internet, together boosting revenues by a third), and a strategic review by Arqiva's private equity backers. With more of an IT focus, Claranet Group raised £90m in new equity and completed three acquisitions in France, Portugal and the UK, boosting revenues by 40% to £310m.

Share price
In share price terms, CityFibre (+38%) and Gamma (+23%) had a good last quarter which is more than can be said for BT (-13%). Over the last 12 months, Gamma has topped the charts with a 30% rise despite continued sales by a long term shareholder, followed by Telecom Plus (+23%) and Adept Telecom (+22). Major fallers included Redcentric (-54%) due to its accounting kerfuffle, BT (-29%) and TalkTalk (-17%).

Scorecard moves
Megabuyte has developed the Scorecard, which ranks company performance based on a mix of growth, margin, cash generation and FCF metrics. Student accommodation ISP Ask4 was a big gainer in the Scorecard this last quarter, jumping eight points to 82 (out of a possible 100, and versus a Megabuyte universe average of 59), into second place in the peer group. Other gainers off the back of 2016 results included Gamma, Maintel and LoopUp, while contact centre player Sabio was a notable faller due to cash flows associated with its MBO.

Notable additions to coverage include business comms provider Bistech and conferencing numbering provider Numeric Futures, which both enter the peer group Top 5, while G3 Comms is just outside the Top 10, but Network Telecom comes in at a lowly 38th place due to low OCF and FCF conversion.

IS Research publishes www.megabuyte.com, a company analysis and intelligence service covering over 400 public and private UK technology companies.
philip.carse@megabuyte.com