IDE : Annual financial report 2020

IDE Group Holdings plc

Annual report and financial statements

Year ended 31 December 2020

Directors and Advisers

Directors

Andy Parker (Non-Executive Chairman)

Ian Smith (Executive Director)

David Templeman (Executive Director)

Company Secretary

Delgany Corporate Services Limited

Registered Office

24 Dublin Street

Edinburgh EH1 3PP

Company Number SC368538

Nominated Adviser and Broker

finnCap Limited

1 Bartholomew Ct London EC1A 7BL

Solicitors

DAC Beachcroft LLP

25 Walbrook London EC4N 8AF

Auditor

RSM UK Audit LLP

Portland

25 High Street

Crawley

West Sussex

RH10 1BG

Share Registrar

Computershare Investor Services PLC

44 North St Andrew Street

Edinburgh EH2 1HJ

Principal Banker

RBS Natwest Plc

250 Bishopsgate London EC2M 4AA

1

IDE Group Holdings plc

Annual report and financial statements

Year ended 31 December 2020

Company Profile

The principal activities of IDE Group Holdings plc are the provision of network, hosting and managed services to public and private companies.

The country of incorporation is Scotland; the Company's registered number is SC368538 and the Company is limited by shares. The main country of operation is the United Kingdom.

Further information on the Company can be found at www.idegroup.com.

Business summary

• While revenues declined in 2020 to £24.1 million from £28.2 million in 2019, gross margins have increased to 24.0% (2019: 22.8%) reflecting continued strong performance of our Manage business more than offsetting continued margin pressure in our Connect business. Adjusted EBITDA** declined to £0.5 million from £1.1 million in 2019. Losses on ordinary activities before taxation amount to £21.6 million (2019: £10.9 million).
• While 2020 saw reductions in both revenues and Adjusted EBITDA, the Group results reflect the consolidated position across two core businesses which operate in very distinct sectors. Our Connect business operates in the very congested market for networking and connectivity and experiences continued pressures on both revenues and margins. Our Manage business on the other hand operates very successfully within the managed services arena and has demonstrated continued revenue and margin growth with strong momentum.
• We have made an excellent start to 2021 within our Manage business, demonstrating significant growth in revenues and profitability. These results are based on developing long-term relationships with third-party system integrators and supply contracts typically with 3-5 year terms. Therefore, as we experience further growth we are generating a strong annuity income stream. With a pipeline of prospects within our Manage operations we can look forward to continued strong financial performance. Our Connect business is returning modest profits before the allocation of overheads.
• Given that the Group results reflect the very different levels of performance across two distinct business sectors we have commenced a full review of our operations. This review is focussed on growing momentum within our managed services business while we decide how best to return value to our shareholders in the networking and connectivity arena, which may or may not include the divestment of the Connect business. This review is ongoing and is a priority for the Board and management team.
• We have made key leadership appointments in 2020 and 2021 and have an experienced senior management team in place. The Group remains debt-free other than to key shareholders.

We have built a strong base to support a period of sustained growth and we are exploring organic and acquisitive methods to accelerate this development.

• Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, impairment charges, exceptional items, loss on disposal of fixed assets and share-based payments

2

IDE Group Holdings plc

Annual report and financial statements

Year ended 31 December 2020

Chairman's Statement

2020 was an important year in the ongoing rationalisation of our trading businesses and we have continued the good work from 2019 in positioning the Group for a period of sustained growth which is now bearing fruit in 2021.

One key activity that we continued to focus on in 2020 and into the current year is the delineation between the core service- offerings across our Manage and Connect businesses. Our Manage business encompasses service lines broadly covering field and site engineering, projects and lifecycle, network monitoring and service desk support. Our Connect business services are broadly networking and connectivity, cloud and hosting, and voice/telephony.

During 2020 we continued to realign customer relationships more clearly associating them with the respective Manage or Connect offerings and allowing us to focus sales and marketing activity within the management team, and to allow a clear understanding of the shared overheads across the two businesses. This process has allowed us to target our sales activity and to improve management focus.

Manage

We appointed a new Managing Director of the Connect business in June 2020 (see also below) allowing our existing senior team to focus on developing our successful Manage business, with strong relationships being built with key customers. This has greatly benefitted the group's performance as we win significant long-term contracts in our Manage business, giving us excellent visibility of income in that business and strong performance moving into 2021. Our relationship with third-party system integrators has continued to develop on the excellent grounding already put in place, and we have seen further growth in opportunities both in service provision and project work through this channel particularly into the public sector. We are delivering IT services into a growing number of government departments and blue-chip institutional clients.

Securing and developing our partnership channels has proven to be a successful model with new customer wins in both the public and private sectors. We can look forward with great confidence to continued success in this area.

2020 saw revenues fall to £11.5 million (2019: £14.7 million). This was largely due to some cyclical variability in our supplies to system integrators (at somewhat less than £1m) and the novation of contracts to our Connect business. The division has seen strong improvement in gross profit margins to 39% (2019: 31% and 2018: 21%) and a continued reduction in overheads. The sum of these moved adjusted EBITDA to a profit in 2020 of £2.1 million (2019: profit of £1.1 million).

This significant improvement in financial performance, shows that this division is successfully being right-sized, further consolidation of field engineering is underway, and that continued profitable growth will be achieved in 2021.

Connect

In June we brought a new Managing Director on-board to develop and grow our Connect business, together with a small managed services business called Nimoveri Limited which we acquired as part of that onboarding. We began a comprehensive review of the Connect business in 2019 after declines in revenue and complexities in its operations and in 2020 we have continued a rationalisation programme, concentrating our sales efforts and building a management team around him to drive the business forward. We have continued to concentrate our network and datacentre offerings wherever possible and have built stronger relationships with our customers. As I reported in my last Statement, this is a significant project which will take time to conclude, but we are confident that it is providing the foundations for growth of our datacentre, cloud and connectivity business.

Revenues in Connect were down year-on-year at £13.1 million (2019: £14.6 million) despite the novation of contracts from Manage valued at £1.7m, and we were disappointed to lose more cloud customers. The net result was a deterioration in gross margins to 8.5% (2019: 13%). There has been an increase in overheads level to £5.9 million from £4.5 million. The resulting adjusted EBITDA deteriorated to a loss of £0.8 million (2019: profit £0.7 million).

Our objectives in 2021 are to further reduce costs through datacentre and network consolidation and leverage these savings into more competitive pricing to generate new, and extend existing, business opportunities.

3