Philip Carse, Analyst at Megabuyte.com, examines Daisy's improving revenue mix following the Group's year-end financial statement last month.
Last month Daisy Group reported revenues and EBITDA for the year to March 2014 up marginally at £353m and £58m respectively, suggesting organic declines of approximately 7%, down from 11-12% the previous year due to growing data and other revenues offsetting voice pressures. The Lancs-based company has increased its M&A war chest to an estimated £150m, and also announced two small recent deals - ABSE and Layer 7.
For the year to March 2014, business communications provider Daisy reported small headline growth in all key measures; revenues up 0.3% to £352.7m, EBITDA up 2.8% to £57.9m and adjusted EPS up 6% to 13.85p, while the full year dividend has been increased by 15% to 4.6p. The headline operating loss increased marginally to £17.9m, including £7.1m of exceptional costs and £63.8m of goodwill amortisation. Finance costs of £6.7m contributed to a loss before tax of £24.4m, up £0.8m.
Operating cash flow of £44.2m (76% of EBITDA) was down marginally, impacted by exceptional costs and working capital requirements of large managed service contracts. This was more than consumed with acquisitions of £45.5m, dividends of £14.2m, interest of £5.8m, tax of £4.9m, and capex of £1.9m. Net debt rose by £32.8m to £114.0m, or just under 2x EBITDA.
The picture was somewhat mixed by division. Daisy Retail (£300m, 65% of revenues) suffered a 6% revenue decline, maintained gross profit in absolute terms (lifting the margin 2.7pp to 43.7%), while EBITDA fell 5% to £43m. The main culprit as ever was Networks, with revenues down 13% to £114m, while data revenues rose 25% to £59m, helped by the ex-2e2 data centre deal. Meanwhile, mobile gross profit increased marginally on revenues down 15% at £40m, reflecting new commercial arrangements with MNOs.
Daisy Wholesale (£73m, 21% of revenues) saw revenues rise 18% and EBITDA by 45%, helped by the Indecs acquisition. Daisy Distribution (mobile products) reported revenues up 11% to £50m and EBITDA up 20%, helped by MoCo.
The company noted strong contributions from acquisitions announced during the year - the ex-2e2 data centres, MoCo and Indecs - and also said that it acquired public sector focused network operator ABSE in February 2014 for an initial £7.9m (with up to a £4.4m earn out), and LAN and WiFi specialist Layer 3 for £1.8m at the end of May. M&A remains a target, with CEO Matt Riley noting that the company remains on the lookout for a 'transformational' deal. To this end, Daisy has negotiated to lift its bank debt availability from 2.5x to 3x EBITDA, giving about £150m current headroom including the potential to borrow against the target's EBITDA.
First thoughts
The broad numbers had been flagged in a trading update and therefore come as no surprise. What they do show, however, is a continued improvement in underlying revenues, with an estimated organic revenue decline for the year of just under 7% (with £23.6m contributed by the acquired businesses) and by 5% for EBITDA (with £3.1m contributed). This contrasts with 11-12% for the previous financial year and 7.8% for the first half. Broadly speaking, contributions from growth areas such as Data are increasingly outweighing market declines in calls and regulatory driven reductions in mobile termination rates. There was also a welcome improvement on operating cash flow in the second half, contributing nearly two thirds of the total for the year.
The focus on growth is reflected in M&A, with the acquisitions undertaken during the year and the two new deals (LANs/WiFi and public sector networks - the latter presumably a la Updata) being far from the distressed voice base that Daisy might once have acquired. The £150m plus firepower from the enlarged facilities gives it considerable scope for a transformational deal, though it has seen InTechnology and Updata slip by in the last year or so.•