Redcentric plc (RCN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Redcentric plc, Final Results Investor Presentation. [Operator Instructions] Before we begin, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Redcentric plc, Michelle, good morning.

Thank you, Jake. I appreciate that. And a warm welcome to everybody from our headquarters here in Harrogate. I'm Michelle Senecal De Fonseca, the CEO of Redcentric, having just completed my first year here in the chair after having been the NED the year before. And as you'll recall, I think some of you were with us last year when we tried this. My partner in crime at that time was Tony Ratcliffe, who has now completed his assignment with the sale of the data center, and we now have a new CEO -- CFO, excuse me, that I'd like to hand over to. And Tim, why don't you introduce yourself?

Yes, sure. Good morning, everyone. So my name is Tim Sykes. I've been working with AIM-listed company since 2006 when I was part of the float for Avacta Group plc and Proactis Holdings plc at that time. I don't know if anybody followed Proactis, but it was very relevant to Redcentric's position right now, as Michelle will describe later on in the presentation. I helped support the team as CFO for a business that grew from GBP 2 million to north of GBP 50 million over the time involved before, as Chief Executive, taking it private in 2021. So, looking forward to joining the team, we feel really lucky to be part of that opportunity. And I'll let Michelle take you through the rest of the story from here.

Great. Thanks, Tim. Into next slide. Well, all I can say is FY '26 was a transformative year for the company. A lot of effort went into the final separation of the data center business from the MSP business and with the successful conclusion of the sale to Stellanor for GBP 124.9 million. Going through that process, it is disruptive. But in parallel, we were able to come up with a new strategic plan. We undertook increasing our service capabilities and capacity. We changed things around quite a bit, which I'm going to go through. And at the end of the day, we delivered in line with market expectations in terms of the financials through all of that. We're still maintaining a very high level of recurring revenues. Our customers are not churning out. And so we are very excited now to be able to look forward in a more simplified business, and being able to scale and continue to deliver shareholder value. So...

Okay. Just a little bit about the corporate highlights. Slightly post-year-end really, dominated by the finalization of the sale of the data center business for GBP 125 million with before-cost of about GBP 5 million. That was slightly more than the market was expecting. We initially estimated at GBP 122.5 million, but took a couple of extra million on the completion accounts, which was super. We're not quite through with the data center business because we have a Transition Services Agreement, which runs through the end of April '27. So 1 year of support to the new business Stellanor that took the company from us. As Michelle described to me, and I finished this contract up and I've been with the company since the 1st of June, which is a fantastic start to the career here, which is super. The new strategic vision and the road map for that is defined. Michelle will take us through that later on in the presentation. And with all of that change that Michelle has described and will describe, the company was voted one of the best 100 Places to Work in the U.K. So lots of change, lots of challenge for the people, but the people really enjoy working here at Redcentric, which is a fantastic testament to the culture that Michelle is building here as Chief Executive.

Well, and I think that's really important because when you're going through these high volume of change and transition, it can be a very unsettling period. And that the fact that people are engaged, moving forward, excited about where it is, I hope that you'll all be excited by the story. But what were all those people doing in FY '26? Well, when we came and came up with -- when I came on board, it became pretty clear that through the history of the business, a lot of the focus had been on M&A, mainly around the data center business. And the MSP was sort of a little bit of a lost child, and they did a good job of maintaining it, but that's what they were doing. It was account management that we weren't going out and scaling and bringing in new business. So, a fundamental remit is we need to start having new sales and expanding our customer set. So, I changed out the Chief Marketing Officer, the Chief Revenue Officer. We structured marketing. So, it's more about -- less about brand development and more about field sales, getting that pipeline and driving that to allow the sales then to be able to convert it. We also needed to take a look at how do we bring in new customers. So, we built a new business pursuit team in Q2 and started delivering results throughout the rest of the year. 11% of the FY '26 sales came from new logos, which is fantastic. What I'd like to get to over the next couple of years is driving that to a 15% annual reoccurring event, where new customers are coming and refreshing our customer base. One of the things that I noticed is we didn't have many routes to market other than our direct sales force. And you can't scale a business that way. So, one of our key areas, of course, is the public sector. We have about 45% of revenues derived from the public sector. And most of that comes through public frameworks. And given some financial issues that the company had in its history, these frameworks aren't available every year. They come over sort of like the Olympics every 4 or 5 years. And we missed out on a couple of the frameworks due to our financial situation. That's not the case anymore. And so we reinvested in the bid, in the frameworks team, making sure that we're culminating and looking through the market through AI and helping us drive and expand as much as possible. So, we were able to get on to the Telecommunication Services framework #4. We're now on G-Cloud 15. We have 3 other big procurements, the biggest one being Network Services 4, that will come out in February of next year. So, all of this prep work takes about a year to deliver. It is quite important, specifically for our connectivity business, because a lot of the business comes through these particular frameworks. You also might know, in the public sector, we're very deep into the health care sector, and NHS England had a major reorganization last year. They had 47, 49 ICBs, Integrated Care Boards, that consolidated down to 26. And so there's a real delay as 3 different divisions came together, who's going to be in charge, how do you get a procurement or a purchase order through the system, where are the budgets? So that's been naturally moving to the right. What we've done is reorganize our public sector team to be territorially based around these new ICB territories. So that allows us to be better aligned with the decision-makers in each of these territories. And I think that's going to bode us well moving into FY '27. Meanwhile, as we're starting to ramp up the commercial side and being able to scale, we have to take out costs from the business from all of those former previous M&A. We have a lot of debt, as you can imagine. So we did about GBP 1.6 million in savings in-year on platform and infrastructure rationalizations, almost 30% of our original IT systems estates, well over 1,000 were decommissioned. That also helps us reduce our complexity for cyber-service attacks. But that's -- and we reduced headcount by about 10%. But importantly, we're taking that money and we're reinvesting it in our customer experience. And just with the things that we did last year, we were able to raise our customer NPS by almost 60%. And I think also making sure that we are changing the leadership so that we're going to be fit for purpose moving forward was a really big effort for this past year.

So, a bit more on the detail of the numbers on the outturn for FY '26. So, overall revenue reduced by 2.3%, and that was matched in the recurring revenue. Now there's really interesting statistics in behind that, which are important to understand as the reason why that reduction happened. So there are 3 key factors as to why that reduction is there for us. We refer to these in the RNS as the drag factors. But essentially, they are headwinds that we're facing for the next year or so and has covered us with difficulty for the last few years. So, the first 3 factors or the factors are as follows. Number one, when we acquired -- went through the acquisition spree maybe 2 or 3 or 4 years ago, particularly the Sungard acquisition, which was a company that was bought out of administration. Many of its customers have already taken the contractual decision to not renew with Sungard at the time. And therefore, we've had this -- and these systems take quite a number of years to unwind. And therefore, we faced this drag on ARR throughout that period, and it still remains a little bit today, but we expect that to flow out during the course of FY '27. The second factor was that we had an unprofitable contract with a specific customer, which we determined we should not renew. So, that was a drag on revenue, but earnings-enhancing. So, we took that decision over a year ago, and that -- the impact of that reduced revenue has come through into FY '26. And then finally -- Michelle will talk about this in more detail later. There's a market movement through the acquisition by Broadcom and VMware, which led to some very short-term revenue increases in '25, which have unwound in FY '26. And therefore, those 3 factors, actually, when we extract the ARR impact of those, we see a marginal growth in ARR. So, our statement here is that whilst our headline revenue and ARR has reduced, there are known key factors which won't recur for the long term. Indeed, we expect them to close out in '27, maybe a little bit into '28, but they're certainly diminishing factors. And underlying that, we have growth. Other than that, margins remain reasonably constant. So, as Michelle described, we were able to adjust the OpEx cost base through the course of the year to get in-year savings, which matched the reduction in revenue, allowing us to report EBITDA, which is a pretty consistent margin and operating profit on the next page, exactly equivalent margins of just north of 6%. Now that bodes well for the future, of course, because we've got a part-year saving in FY '26, but we get a full-year impact of savings in FY '27, which points us towards higher margins going forward. And then in terms of the interest charge, a slightly reduced level of borrowing at a reduced borrowing rate led to a lower interest charge and a normalized tax charge in that case. So, let's talk a little bit more about net debt after the processes and the corporate activity that's gone through over the last 6 months. So, we completed the transaction with RDC on the 30th of April, and there was a down payment of GBP 115.5 million or so at that time. We completed the completion accounts process during September and received the final installment to take us to GBP 125 million. We've paid down our bank debt of GBP 21 million and returned GBP 90 million of cash to shareholders, plus a little top-up through the share buy-back program that's completing today. We spent GBP 1.2 million of that by Friday last week, at the date of this presentation was created, and we're expecting to have completed with GBP 1.5 million by the end of today. And indeed, we also tidied the shareholder register, which was very difficult to manage, more expensive than it ought to be, and had 7,000 shareholders with less than 20 shares. And we allowed them to exit that elegantly at GBP 1.6 at the same price as the tender offer. And after all of that, as at Friday, which I should report is the 25th of September, not the 30th of September, we have net debt of only GBP 2.8 million. And the analyst note is predicting a net debt position at the end of March next year, so our financial year-end of just GBP 6 million, which is less than 1/3 of our LTM EBITDA. So this gives us a very powerful balance sheet compared with the competition. So it's a commercial positive for us, which is well recognized in the market. And allied to that, we've also created new bank facility or made arrangements for new bank facilities. So we have a 3-year term plus 1-year discretion -- at our discretion rather -- so long-term facilities, we would say, GBP 30 million will be drawn at GBP 10 million of that come tomorrow. So under-utilized facility, which gives us room to breathe and flexibility, which is excellent. The bank is seeing this as a low-risk lend because the margin is only at 1.65% at the levels of debt we have drawn against it and the level of profitability that we have. And our covenants are relaxed, but that really means there's lots of headroom inside of those covenants for us. So we have no financial pressures at all at this point, and we're looking forward to be able to use that power, that financial power, in our commercial growth.

So, exiting FY '26 as a stronger financial organization, more simplified, where are we going to put our focus on? And essentially, we would like to be the U.K.'s preferred provider of sovereign, compliant, and/or regulated IT services. We sort of think we're already there, but we need to be able to demonstrate to the market in a grander way that we're able to scale and to have more visibility on what we actually deliver for this country. Our portfolio hasn't changed. We're still providing network connectivity, voice and data services, private cloud. We run a national, dedicated government cloud; it's private. And then we also then help all of our customers move into hyperscalers and use public cloud services. So, the portfolio hasn't changed, but it's where we need to be able to make our differentiation, and that's really around our sovereign and our compliance stories. Most of our customer base are in verticals such as health care, defense, blue light services, local authorities, and then the private sector that actually sells into that. So it would be life sciences, pharmaceuticals, GPs and surgeries, pharmacies, and healthcare the like. And those people need the same level of regulated and compliant services that match who their end customers are at. And all of this is really important because customers are signing up for 3, 5, and 7 years. They want to make sure that their partner, who's going to help support them, is going to be there for the long term. And as Tim has just talked about, at the moment, we're probably very unparalleled in having a balance sheet, our cash position, low debt, our stability. It's one of the key things in talking with our customer base that's kind of setting us apart from the competition. So, moving forward, one of the best ways that we're going to be able to scale is, as I talked about earlier, moving away from just simply direct sales to a partner ecosystem. And one of the biggest partner ecosystems that we are placing our bets on is our work with Broadcom, VMware. Go to the next slide. I guess it's a little bit further down. For those of you who may not be aware, Broadcom purchased VMware a couple of years ago, and they have been reducing their partner program. So, they are now having a small set of what they call Pinnacle Partners around the world. And in the U.K., there are 7 of them, of which Redcentric is one. And what they're doing is for any customer, an end customer, meaning a business, or if you're a communication service provider who has your own platform that you sell on to end customers, they can no longer go directly to VMware. You're going to have to come through one of these 7 businesses. And that is -- the deadline is March 31, 2027. So, when Tim was talking about a market movement, the market is shifting and trying to decide what they want to do. And when you look at those who have used VMware in the past, we can honestly say about 40% of those customers will move away from VMware. They don't want to be vendor-locked in. So, they're looking for alternatives on hyperscalers, or they will try to find an alternative hypervisor like Nutanix to move to. And when we started this motion in FY '26, a lot of people came and said, we're leaving, we don't need your services. But, interestingly enough, they're coming back because the features and functionalities of the alternatives weren't what they were looking for. They started too late, and so they're going to have to remain with VMware. But there's 60% of the market that really want to maintain being with the market leader. And so, therefore, we have many different ways to onboard these customers, whether we help them with their licensing and a little bit of rights management until they run out their platform and it has to be refreshed, then they have to come into ours. We have been taking some of the cost savings that we had last year and investing in the frontier AI platform that VMware is developing, VCF 9, we're one of, sort of, the beta entities. And if you want to be able to scale with the market leader, you're going to have to come through one of these 7 Pinnacle Partners. And today, if you had 7 divided by what's available, everybody would have 12%. We already have 15% of the addressable market. Our pipeline is another 12%. I'm pushing the team to try to take 30% market share. And this is where we think a little bit more of the scale is going to come from the business. And that's quite critical. I'm sorry, if you could flip back to the one before 2. So, besides expanding our routes to market, our cloud modernization is where we're investing in along with our security and compliance story. So, the cloud modernization really is for our private sector customers, it will be the VMware AI platform. And for our private sector customers who need to be off of public clouds, we already run the largest U.K. Sovereign Cloud. People like Home Office and police forces and stuff are utilizing it. And with a bit more investment over FY '27, we know that we're going to be able to expand into other areas of the defense market. So, these are the kind of the critical areas that we're putting our efforts into moving forward. So, in summary, FY '26, major busy year, but very transformative, and it is allowing us to now come out into FY '27 as a pure-play, very focused, and with a business that's been rightsized and optimized. There's still more to play for. At the moment, we're 13%, 14% in our adjusted EBITDA. We're intending to get that up to 20% over the next couple of years, which would be market-leading and trying to get back to double-digit growth. Top line is going to take a little bit longer than we'd like. And so that's why we're moving the company to understanding what ARR is. Tim talked about that earlier, but that has definitely not been a motion within Redcentric. And so understanding, motivating, compensating people about this motion is a key one moving forward. Obviously, we have a lot of efficiency gains still yet to go. Our investment in automation and AI is an ongoing process. But overall, the company is solid. It's financially set. We have a good plan in place, and we've got a really motivated team. So, even whatever comes out in the October budget, hopefully, we're going to be here and ready to deal with the consequences moving forward. And with that, I think we'll open up the lines. And if you have questions, we'd be more than happy to answer them. And if you don't have a question now, but it comes back, please make sure to reach out to both Tim and I would be more than happy to answer them.

[Operator Instructions] I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. [Operator Instructions]

So the first question comes through from Richard, who is asking about the Broadcom pipeline and how we might see that in the time frame moving to contracted ARR. Now, I know that we have a dedicated slide on Broadcom that maybe, little more to, I don't know if you want to just repopulate the highlights of the Broadcom and how that might convert to ARR over the next few years.