REG - Iomart Group PLC - Acquisition of Atech and H1 trading update

iomartAnnouncement

01/10/2024 07:00

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RNS Number : 3483G  Iomart Group PLC  01 October 2024

1 October 2024

iomart Group plc

("iomart" or the "Group" or the "Company")

 

Acquisition of Atech and H1 trading update

Powerful combination of secure cloud offerings marks the next phase of
iomart's evolution

 

iomart Group plc (AIM: IOM), the secure cloud services company, is pleased to
announce that it has today agreed to acquire the entire issued share capital
of Kookaburra Topco Limited ("Kookaburra"), the holding company of Atech
Support Limited ("Atech" or the "Acquisition") for a total consideration of
£57m, funded through the Company's existing cash and banking facilities. In
addition, the Company also provides a trading update for the six months ended
30 September 2024, ahead of the announcement of its half year results expected
to be released in early December 2024.

 

Atech Acquisition

 

Atech is one the UK's most highly accredited Microsoft Solutions Partners and
the combination of the two businesses creates a powerful extended set of
offerings for mid-market customers, cementing the Group's position as a
leading 'Microsoft First' solutions provider in the UK.

 

Summary of the Acquisition

 

 ·         Positions iomart Group in the highest growth areas of the cloud computing
           market: modern workplace, public cloud Azure infrastructure and security
           managed services, in line with the Group's stated acquisitive growth strategy
 ·         Provides considerable cross sale opportunity into iomart's existing extensive
           customer base, providing a clear path to accelerated growth for both
           businesses and reduced churn
 ·         Brings an offshore support capability into the Group, providing operating
           margin enhancement opportunities
 ·         Enlarges the iomart team and brings additional management strength, through
           the addition of Atech CEO, Ryan Langley, to the Group's senior leadership team
 ·         Provides Atech with access to iomart's larger sales team and additional
           Microsoft engineering capabilities via iomart's Extrinsica Global team
 ·         Maintains the Group's focus on recurring revenue streams, with approximately
           75% of Atech revenues being recurring
 ·         Acquisition is being fully funded through existing cash and the newly
           increased £125m revolving credit bank facilities

 

Game Changing Acquisition - A Bigger, Better, Bolder iomart

 

Atech is a leading, rapidly growing, Microsoft Solutions Partner, delivering
complex, multi-platform solutions, digital transformation and specialised
managed security services to mid-sized enterprises. Atech has one of the
strongest sets of Microsoft credentials in the UK market, including five
Solution Partner Designations (Azure Infrastructure, Security, Data & AI,
Modern Work and Digital and Application Innovation), plus eleven
Specialisations, membership of Microsoft's exclusive Intelligent Security
Association ('MISA') and participation in Microsoft's Copilot jump-start
program. Earlier this year, Atech was recognised as a finalist at Microsoft's
Security Trailblazer's Awards. Its position has been further elevated this
month by being formally awarded Microsoft's coveted Azure Expert MSP
accreditation, an accreditation held by only c.60 organisations globally.

 

Based in Marlow, and with offshore operations established in India and Poland,
Atech has 150 people with a total of 128 different MS certifications. To
achieve such credentials required significant investment in Microsoft skills
and sustained growth over several years.

 

For the last 12 months to 30 June 2024, Atech generated revenues of £32.2m
(unaudited) and Adjusted EBITDA((3)) of £3.3m (unaudited), delivering a 3
year revenue CAGR of c.18%. Approximately 75% of annual revenues are recurring
in nature. The acquisition is a Substantial Transaction as defined in AIM Rule
12.

 

Powerful Combination - Leading Microsoft Partnership

 

Microsoft is the foundation technology for iomart's existing and target
customers, and the enlarged group will be strongly positioned to meet their
needs for infrastructure managed services (full public cloud through MS Azure,
private cloud or hybrid cloud), modern workplace management through Microsoft
365, Windows 365 and Azure Virtual Desktop, and Managed Security including
managed detection and response (MDR) and SoC services through Microsoft
Defender and Sentinel.

 

Increasing the scope and value of Microsoft services to its customers provides
the opportunity to increase iomart's share of overall spend and drive customer
loyalty. iomart's existing capabilities and practical experience in Azure
Cloud services (primarily acquired via Extrinsica Global acquisition in 2023)
augment and enhance the capabilities provided by Atech.

 

Ryan Langley, Atech CEO since 2021, will continue to oversee the business
supported by his highly skilled and experienced team. To support the
combination of the two businesses, Ryan will take up the post of Group CTO to
ensure the Group's technology roadmap is well placed to address customers'
digital needs now and into the future.

 

The largest shareholder of Kookaburra is Pelican Capital with c. 54% of all
the issued share capital, with two of the original founders having c.30%
between them. The balance is held between the management team who will remain
with the business.

 

Consideration and banking facilities

The purchase price for the Acquisition is £57m, on a cash free, normalised
working capital and debt free basis under a locked box completion mechanism.
The consideration includes £19.6m of debt repayments and working capital
adjustments at completion, with the balance paid to the Kookaburra
shareholders. The full consideration will be financed through a combination of
existing bank facilities and cash on the Company's balance sheet. Last week
the Group also increased its Revolving Credit Bank Facility, which expires on
30 June 2026, from £100m to £125m to provide additional undrawn sums for the
Group. The acquisition of Atech will take the Group's net debt position to
approximately £106m or around 2.6 times annualised enlarged Group proforma
Adjusted EBITDA, well within our bank facility terms and a comfortable level,
given the Group's recurring revenue business model and strong cash generation.
 

Group trading performance for H1

 

The Board anticipates reporting flat revenue for the six months at
approximately £62m (H1 FY23: £62.0m), with adjusted EBITDA((1)) and adjusted
profit before tax((2)) decreasing to approximately £17m (H1 FY24: £18.6m)
and £4.5m (H1 FY24: £7.6m), respectively. Whilst weaker H1 results were
expected, due to the higher costs of Broadcom's VMware licencing pricing
(£1.3m annual cost), combined with the reduced recurring revenue as the Group
started the year due to customer churn, trading results were further impacted
by some specific timing of order billings and the continuation of higher churn
which has negated the positive contribution from recent acquisitions. Given
iomart's relatively fixed cost base in some areas, including depreciation,
amortisation, and interest expenses, this has had a notable impact on H1
profitability.

 

Action has been taken to address some of the profitability trends experienced,
including cost efficiency and integration programmes which will benefit H2 and
onwards. These programmes will now be assessed within the context of the
enlarged Group following the Atech acquisition, including the opportunity that
a captive offshore operation in India provides.

 

The positive momentum in order bookings achieved in recent periods has
continued, with order booking levels at record levels, demonstrating the
ongoing demand for the Group's products and services. However, these take time
to flow through into revenue whilst lower renewal levels plus continued
revenue churn from the long tail of the self-management infrastructure
customer base, which has been higher than expected in the last 6 months, has a
more immediate impact. As a result, iomart has entered H2 with a lower run
rate of revenue than previously anticipated, which will have an impact on full
year FY25 results for the existing iomart business.

 

The Group's cash generation from trading continues to be strong and broadly
consistent with past performance at the half year stage. At 30 September 2024,
which is prior to the Atech acquisition today, the Group's net debt position
is expected to be approximately £49m (31 March 2024: £42.3m).

 

Outlook

 

Looking at the existing iomart business, the Board anticipates a flat year on
year revenue profile for the full year FY25, and whilst profit margins are
expected to partially recover in H2 from the positive actions taken on cost
efficiency and the gross margin contribution from the expected higher H2
revenue following the order bookings growth, overall results for the year to
31 March 2025 are expected to be below market expectations.

 

The addition of the growing Atech business will change the financial profile
of the Group, bringing an immediate return to revenue growth and a positive
EBITDA contribution. Atech has negligible CAPEX requirements, meaning EBITDA
is broadly similar to its operating profit and cash flow. As the funding of
the Atech acquisition is from the Group's cash and debt facility, the Group's
interest expense will increase from previous expectations by around £2m for
the second half.

 

Over the longer term, the Board see this acquisition as transformational to
the growth profile of iomart Group, bringing a new growth engine and providing
considerable protection from customer churn and increased cross sale
opportunity. The demand for cloud computing continues to grow at pace, and
iomart will be firmly positioned at the forefront of that growing market.

 

Lucy Dimes, CEO of iomart Group plc, commented:

 

"We have made good progress on integrating our business, growing order
bookings and building better internal capabilities such as product and partner
management, to ensure stronger foundations as we move forward with our
strategy, during a challenging period of lower customer renewal rates.

"Our acquisition of Atech marks a significant milestone for iomart in
our'Bigger, Better, Bolder' strategy. Atech was a strategic target for us, and
creates a powerful combination of Microsoft credentials, managed security
services, high quality referenceable customer deployments, leading-edge
technology and global delivery capability. This accelerates and plays directly
into our vision to be the UK's leading secure public, private and hybrid cloud
services provider, marking the start of the next phase in the evolution of
iomart. The combined group will be well positioned to retain and grow revenues
with our existing customer base as well as present a market leading capability
to attract new customers."

 

Ryan Langley, CEO of Atech, commented:

 

"We are delighted to be joining Lucy and the wider iomart team. The businesses
share the same ambition, to be at the forefront of bringing the most in demand
secure cloud offerings to our customers, enabling them to modernise their
systems, harness the power of Microsoft AI capabilities, drive operational and
process efficiencies, all with a secure by design approach. With the increased
operational strength of iomart supporting us, and continued strengthening of
our Microsoft relationship, we are excited about what lies ahead."

 

Note: Company compiled range is based on known sell-side analyst estimates.
The latest known sell-side analyst estimates for the full year ended 31 March
2025 are:

·        Revenue in the range of £131m to £133.4m;

·        Adjusted EBITDA((1)) in the range of £36.2m to £37.7m; and

·        Adjusted PBT ((2) in the range of £14.4m to £16.0m

 

((1))adjusted EBITDA means earnings before interest, tax, depreciation,
amortisation, share based payment charges, gains or losses on revaluation of
contingent consideration, acquisition related costs and non-recurring items.

 ((2))adjusted profit before tax means profits before, tax, share based
payment charges, amortisation of acquired intangibles, gains or losses on
revaluation of contingent consideration, acquisition related costs and
non-recurring items.

((3))adjusted Proforma Atech EBITDA means earnings before interest, tax,
depreciation, amortisation, acquisition related costs, non-recurring items and
other costs particular to Atech's current ownership structure.

This announcement contains inside information for the purposes of assimilated
Regulation (EU) No.596/2014, as it forms part the laws of the United Kingdom
by virtue of the European Union (Withdrawal) Act 2018 (as amended). The person
responsible for releasing this announcement on behalf of the Company is Scott
Cunningham, CFO.

For further information:

 iomart Group plc                                                                      Tel: 0141 931 6400
 Lucy Dimes, Chief Executive Officer
 Scott Cunningham, Chief Financial Officer

 Investec Bank PLC (Nominated Adviser and                                              Tel: 020 7597 4000
 Broker)
 Patrick Robb, Virginia Bull

 Alma Strategic Communications                                                         Tel: 020 3405 0205
 Caroline Forde, Hilary Buchanan, Kinvara Verdon

 

 About iomart Group plc

iomart Group plc (AIM: IOM) is a leading secure cloud provider offering hybrid
cloud, data protection and cyber security managed services, underpinned by our
extensive data centre and network infrastructure. Our mission is simple: to
support our customers by enabling them to connect, secure and scale anywhere,
anytime. From our portfolio of data centres we own and operate across the UK
to connected sites around the world plus global technology vendor
relationships, our 500-strong team can design, deploy, secure and manage the
right cloud solution for our customers.

 

For further information about the Group, please visit  www.iomart.com
(http://www.iomart.com/)

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