Redcentric blames accounting scandal for H1 woes

MSP expects 'modest' revenue growth from H2 onwards

Redcentric's H1 revenue was affected by the FCA's ongoing investigation, according to non-exec chairman Ian Johnson.

Recurring revenue now makes up 90 per cent of the MSP's overall turnover, which slipped nine per cent year on year to £43.2m for the six-month period ending 30 September 2019.

However, adjusted EBITDA was up eight per cent to £8.8m and adjusted operating profit was up 23 per cent to £5m.

Operating margins improved due to cost-cutting measures the MSP implemented in the second half of FY19.

"Visibility of future revenues remains strong, with recurring revenues reaching 90 per cent," stated Ian Johnson, non-executive chairman at Redcentric.

"New customers were added in the period which, together with effective cross-selling, led to quarter-on-quarter revenue growth. This revenue growth has been achieved despite the ongoing FCA investigation, which continues to impact the pace at which we win new business."

The FCA launched its investigation two and a half years ago, after accounting errors saw the firm overstate its post-tax net profits and assets by £20.8m.

PwC was fined £4.5m earlier this year by a separate financial regulation authority for a "lack of competence" in auditing the MSP's accounts.

CEO Peter Brotherton stated in the results that the continuing investigation has been a distraction for Redcentric's management and is limiting its business growth.

"The FCA investigation is still ongoing and continues to deflect management's attention and to restrict the markets into which the company can sell," he stated.

"The FCA has not communicated how it intends to proceed and what, if any, action it might bring against the company. The company continues to co-operate fully with the FCA and would like to bring the matter to a close as soon as possible."

Earlier this year, however, when reporting its FY19 results, the chief exec said the company had "worked through" the issues caused by the accounting scandal.

Non-recurring revenues were down 29 per cent to £1.8m, which Brotherton attributed to customers delaying their discretionary spending because of Brexit, as well as the "industry trend" to move away from on-premise to the cloud.

The company expects that its cost measures, which includes moving away from third-party datacentres, will result in savings of at least £3.8m from FY21 onwards.

"Management continues to improve the operational efficiency of the business. The strategic datacentre and network portfolios review now underway is expected to lead to the realisation of annual savings of at least £2.8m and further improvements in operating margins," said Johnson.

"Cashflow remains strong, allowing significant investment into our network and a further reduction to net debt in the period.

"The board is confident that the business will continue to generate strong cashflows, enabling it to return cash to shareholders by way of dividend and further share purchases via the share buy-back programme."

Redcentric is "cautiously optimistic" for the future because of the changes it has implemented in recent years, though it expects "modest" revenue growth from H2 onwards.

"We have invested significantly in our networks and platforms over the last two years to position the business for the future," said Brotherton.

"Given this level of upfront investment, we expect lower levels of capital expenditure over the medium term.

"This, combined with the cost efficiencies identified through the ongoing review of our datacentre and network portfolio, should lead to further strong cash generation."