REG - TPXimpact Holdings - Q3 Trading Update

Tpximpact HoldingsAnnouncement

31/01/2023 07:00

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RNS Number : 3273O  TPXimpact Holdings PLC  31 January 2023

31 January 2023

 

TPXimpact Holdings PLC

("TPXimpact", "TPX", the "Company" or the "Group")

 

Q3 Trading Update

Trading below expectations.  Full-year guidance revised.

 

TPXimpact Holdings PLC (AIM: TPX), the technology-enabled services company
focused on digital transformation, announces its Q3 trading update for the
three months ended 31 December 2022.

 

Q3 and 9M Financial highlights:

 ·    New business wins show increasing momentum with £41m won in Q3 (Q2:
 £26m)

 ·    Q3 Revenue down 3.9% to £19.0m (Q3 2022: £19.8m) and down 14.6%
 like-for-like
 ·    Q3 Gross profit down 15.0% to £5.2m (Q3 2022: £6.1m) and down 27.3%
 like-for-like
 ·    Q3 Gross margin of 27.4% (Q3 2022: 30.8% and 32.0% like-for-like)
 ·    Q3 Adjusted EBITDA(1) margin of 3.1% (Q3 2022: 12.9%)

 ·    9M Revenue up 3.7% to £59.4m (9M 2022: £57.3m) and down 9.2%
 like-for-like

 ·    9M Gross profit down 9.3% to £15.7m (9M 2022: £17.3m) and down
 22.9% like-for-like

 ·    9M Gross margin of 26.4% (9M 2022: 30.2% and 31.0% like-for-like)

 ·    9M Adjusted EBITDA(1) margin of 3.0% (9M 2022: 13.8%)
 ·    Net debt(1) as at 31 December 2022 of £17.5m (30 September 2022:
 £14.1m)

 

Post-period outlook:

 ·    TPXimpact is revising its guidance on full year revenues for the
 financial year ending 31 March 2023 to c.£80m and Adjusted EBITDA margin to a
 range of 2-3%
 ·    £9m of new orders won in the month of January 2023; £56m of FY 24
 revenue in backlog

 ·    The Group is maintaining its guidance on revenue growth for the next
 financial year at 10-15% like-for-like

 ·    The Group's FY 24 budgeting/planning process is proceeding as
 planned. The Group will publish a trading update in late April which will
 include guidance on FY 24 Adjusted EBITDA margins

 

Bjorn Conway, Chief Executive Officer, commented:

 

"I am pleased by the strong momentum in our new business win rate which
exceeded £41m in the last quarter and has continued into January with £9m
won in the month. However, trading performance in Q3 23 was below our
expectations: an encouraging performance in November was followed by a
disappointing December, reflecting external factors largely outside the
Group's control.

 

"Having conducted a thorough review of our latest reforecast with all our
businesses, we have revised our full-year estimates to reflect current
expectations of performance in Q4 23. We have faced some challenges in
recruiting the right mix of resource and skill sets on a timely basis to
support our new business wins, and this has led to pressure on margins.
Combined with client-driven challenges in some parts of the business, these
factors have led to a reduction in our revenue and margin expectations for the
remainder of the financial year. The business also continues to be impacted by
the structural and personnel changes implemented at the start of the year and
the loss of capability that resulted.

 

"Given the updated reforecast for Q4 23, the Group is unlikely to pass its
debt covenants at 31 March 2023, the next measurement date. We are actively
engaged with our bankers on appropriate actions to address this event
(including a waiver), although these discussions are yet to conclude. We are
committed to managing the business in an efficient and productive way, whilst
maintaining our collective responsibility for impactful change.

 

"The market opportunity available to TPX remains significant with
organisations across public and commercial sectors needing to adapt to the
evolving market challenges and invest in digital transformation, as supported
by our very healthy sales pipeline. I continue to be impressed by the talent
and commitment of our people in the face of the challenging circumstances we
are encountering. Working collaboratively is key to achieving our goals, and I
am certain that, together, we will see progress as the coming year unfolds."

 

(1)In measuring our performance, the financial measures that we use include
those which have been derived from our reported results in order to eliminate
factors which distort period-on-period comparisons. These are considered
non-GAAP financial measures, and include measures such as like-for-like
revenue, adjusted EBITDA and net debt. All are defined in the Group's 2022
Annual Report.

 

Enquiries:

 TPXimpact Holdings

 Bjorn Conway, CEO                Via Alma PR

 Steve Winters, Group CFO

 Stifel Nicolaus Europe Limited

 (Nomad and Joint Broker)         +44 (0) 207 710 7600

 Alex Price

 Fred Walsh

 Ben Burnett
 Dowgate Capital Limited

 (Joint Broker)                   +44 (0) 203 903 7715

 James Serjeant

 David Poutney

 Russell Cook
 Alma PR                          tpx@almapr.co.uk (mailto:tpx@almapr.co.uk)

 (Financial PR)                   +44 (0) 203 405 0209

 Josh Royston

 Kieran Breheny

 Matthew Young

Third quarter trading

New business wins totalled £41m in the third quarter, building on the solid
foundation of new business won in the first half of the year. However, trading
performance in Q3 was below expectations. Although November performance was
largely in line with our forecasts, the month of December was impacted by a
markedly higher rate of client staff absence due to sickness and holidays,
which led to client-side delays in commencing projects and lower client
availability for projects that were already underway. This pattern was
consistent across almost all our businesses and led to a significant reduction
in billable time and, therefore, utilisation rates, revenues and gross profit.
Revenue for the third quarter was £19.0m, down 3.9% against the same period
last year and down 14.6% on a like-for-like basis. Gross profit for the same
period was £5.2m, down 15.0% against the same period last year and down 27.3%
on a like-for-like basis. Gross margins therefore decreased to 27.4% against
30.8% in Q3 last year (and against 32.0% on a like-for-like basis). These
challenges impacted Adjusted EBITDA margin for Q3, which was 3.1%.

For the nine months to 31 December 2022, revenue was £59.4m, up 3.7% against
the same period last year, but down 9.2% on a like-for-like basis. Gross
profit was £15.7m, down 9.3% against the same period last year, and down
22.9% on a like-for-like basis. Gross margins were therefore 26.4% against
30.2% for the same period last year (and against 31.0% on a like-for-like
basis). Adjusted EBITDA margin was 3.0% for the nine months to 31 December
2022.

In total, Group headcount of 740 people (on an FTE basis) at 31 December
compares with 659 people at 31 March 2022, an increase of 12% on a
like-for-like basis. Including contractors, the Group's aggregate workforce is
around 1,000 people.

Net debt

Net debt (excluding lease liabilities) was £17.5m at 31 December 2022 against
£14.1m at 30 September 2022. The cash outflow of £3.4m in the third quarter
was driven by the payment of the final dividend for FY 22, bank interest and
corporate taxes. £1.4m of the outflow was attributable to working capital
movements due to the holiday period and some changes in procurement approval
processes/systems at certain clients. The Group was within its banking
covenants at 31 December 2022.

Outlook for the full year

New business wins in January amounted to £9m, an encouraging start to the
quarter.

The Group has recently completed a fresh reforecast of the current financial
year. The outlook for Q4 23 reflects the evolution of the business and market
in Q3, and a number of challenges to specific parts of the business that have
emerged since the half year results announcement on 30 November 2022.

Whilst the high win rate of new business in Q2 and Q3 is beginning to flow
through into the Group's revenues, driven by some significant individual
contracts with public sector clients, the challenge of recruiting the right
mix of talent (including specialist skill sets) at an appropriate remuneration
level, will cause a disproportionate weighting towards contractor resource in
Q4, largely in our Consulting business (c. 40% of Group revenues). This will
impact the Group's gross profit and margins in Q4.

Although the Group has embarked on a significant recruitment campaign to bring
in the right mix of permanent talent to service these large contracts, the
time taken from launching a search to filling a role and commencement of
billable time is typically 2-3 months, which means our ability to switch
contractors to FTEs is limited in the short-term. A highly competitive
recruitment market, reflecting wider inflationary pressures, also means that
margins are currently less than anticipated on a number of major contracts
wins, where rates are fixed during a bidding process and (as is usual in the
public sector) not index-linked.

At the same time, our Digital Experience business (c. 17% of Group revenues),
which is heavily dependent on the charitable and not-for-profit sector, is
seeing increasing restraint in client spend, which will reduce forecast
revenues. With a cost base largely comprised of permanent staff, it is
unlikely that we will be able to offset the expected drop in revenue with a
reduction in staff costs in Q4.

The performance of the rest of the Group is expected to be mixed, with some
parts of the Group showing healthy growth, whilst others are being impacted by
client delays in commencing project work.

For these reasons, the January reforecast indicates revenue for the full year
of c.£80 million (vs c.£90 million previously), a gross margin of c.26% (vs
30% previously) and a FY Adjusted EBITDA margin in the range of 2-3%.

At this level of Adjusted EBITDA, the Group is unlikely to satisfy its debt
covenants at 31 March 2023, so management have engaged with the Group's
bankers with a view to securing a waiver of the covenant test. Our bankers
have been supportive in these discussions, although these are yet to conclude.

Outlook for FY 2024

The Group has commenced its budgeting process for the next financial year and
is constructing a three-year plan, although this process is not expected to be
completed until after the year-end of 31 March 2023.

The Group currently has around £56m of committed/backlog revenue for FY 24,
which is significantly higher than at the same time last year. Together with
the current run-rate of new business wins, this underpins our expectation of
10-15% like-for-like revenue growth for FY 24, in line with the Group's
previous guidance and historical targets. Management will issue a trading
update in late April which will include guidance on Adjusted EBITDA margins
for the next financial year.

We continue to believe the digital transformation market in the UK - in both
the public and private sectors - remains attractive, with plenty of potential
for continued growth, and that the Group is well-placed to take advantage of
these trends.

 

Bjorn Conway                       Steve Winters

Group CEO                            Group CFO

 

About TPXimpact

TPXimpact exists to transform the organisations, services and systems that
underpin society and that drive business success. It applies strategic and
creative thinking, technology, innovative design and user-centred approaches
to bring about numerous improvements which together multiply the impact of
change.

The Company works closely with its clients in agile, multidisciplinary teams
that span organisational design, technology, and digital experiences. It
shares a deep understanding of people and behaviours and a philosophy of
putting people and communities at the heart of every transformation.

The business is being increasingly recognised as a leading alternative digital
transformation provider to the UK public services sector, with c.65% of its
client base representing the public sector and c.35% representing the
commercial sector.

More information is available at www.tpximpact.com
(http://www.tpximpact.com/)  .

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