For immediate release

28 September 2017

 

 

CITYFIBRE INFRASTRUCTURE HOLDINGS PLC

('CityFibre' or the 'Group' or the 'Company')

 

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2017

 

Focusing on densification and active layer commercialisation of our 42 revenue generating cities

 

CityFibre (AIM: CITY), a leading designer, builder, operator and owner of duct and fibre optic infrastructure in 42 UK towns and cities, is pleased to announce unaudited financial results for the half year to 30 June 2017.

 

Overview

 

CityFibre is now the largest alternative owner of wholesale duct and fibre infrastructure outside London, having materially completed the acquisition of substantially all the major fibre related duct infrastructure available across the UK.

 

Following the successful finance raise and Entanet acquisition in August, the Group is now focused on the densification of its existing city networks and expanding active layer services across our footprint to accelerate value creation.

 

Ownership of our existing metro duct infrastructure is expected to accelerate our FTTH/P ("Fibre To The Home" residential consumer and "Fibre To The Premises" enterprise products) roll-out per city by up to 18 months and reduce the cost per home passed by up to 25%.

 

Financial Highlights:

 

·     Turnover up 36% to £9.0m (H1 2016: £6.6m);

·     Gross margin improved to 88% (H1 2016: 86%);

·     Adjusted EBITDA^* up 302% to £1.7m (H1 2016: £0.4m);

·    New contracts with initial contract value ('ICV') of £11.0m added, taking total cumulative ICV to £135.9m, and unrealised ICV to £103.1m;

·     Period end cash and cash equivalents of £7.9m, with net debt of £57.4m.

 

Operating Highlights:

 

·    New contracts sold comprising 712 new customer connections (H1 2016: 3,702, of which 1,782 were organic), bringing cumulative connections sold to 7,993;

·     Total connected customer premises up 21% YoY, to 4,235 (H1 2016: 3,490);

·     Total core metro network route fibre kilometres increased 20% YoY, to 2,417 (H1 2016: 2,011);

·    York FTTH/P trial passed 13,582 homes at period end, with 896 customer premises connected in the period, for total penetration of 28% with several early cabinets over 40%; CityFibre remains the designer, builder, and operator of the network, anchored on our owned core 125km metro infrastructure.

 

*Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, also excluding share-based payments and significant non-recurring expenses.

Post-period Highlights:

 

·   Completion of Share Placing and Offer for Subscription on 28 July 2017, raising gross proceeds of £201.8m. Principal uses of proceeds include:

·    The commencement of construction of Fibre to the Home/Premises ('FTTH/P'), addressing the residential and enterprise markets in five to ten UK towns and cities during 2018;

·     The expansion of CityFibre's fibre metro networks from 42 UK towns and cities today to not less than 50 towns and cities by 2020; and

·  Acquisition of Entanet International Limited ('Entanet') for £29.0m on a cash and debt-free basis, completed on 2 August 2017, adding c.1,500 channel partners, 45,000 broadband customer circuits and 3,500 leased line circuits with a significant recurring revenue base. This deal supports the Company's focus on wholesale active and passive fibre services and accelerates the commercialisation of CityFibre's fibre assets.

 

 

Regulatory developments:

 

·     The Competition Appeal Tribunal's ('CAT') dismissal of the Business Connectivity Market Review ('BCMR') and associated dark fibre regulatory remedy, leaving CityFibre as the only willing dark fibre provider within our footprint in the near term;

·     Launches of both HM Treasury's Digital Infrastructure Investment Fund ('DIIF') and the Department for Culture Media and Sport's ('DCMS') Local Fully Fibre Networks ('LFFN') government stimulus packages of a minimum £1.5 billion for full fibre infrastructure investment demonstrating the government's commitment to competitive fibre-based infrastructure;

·     The introduction of 100% business rates relief on new fibre builds for five years; and

·     The launch of an in-depth review by the Advertising Standards Authority to address confusion in the full fibre market from the advertising approach of partial fibre operators.

 

 

Greg Mesch, CEO of CityFibre, commented:

 

"Our focus since the IPO has been on consolidating our position across the UK's second tier cities by anchoring new city builds and acquiring existing duct and fibre infrastructure. Having materially completed the acquisition of significantly all major duct infrastructure available across the UK's cities outside London, CityFibre is now the largest alternative owner of critical fibre and duct infrastructure across 42 UK towns and cities. I am pleased we have now completed a truly transformational financing and accelerative acquisition. We can now begin the next phase of delivering Gigabit Britain - driving deeper into all of our cities and preparing them for full fibre roll-outs over a period of time."

 

 

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

 

 

 

For further information, please contact:

CityFibre Infrastructure Holdings plc	www.cityfibre.com
Greg Mesch, Chief Executive Officer	Tel: 020 3510 0602
Terry Hart, Chief Financial Officer
James Enck, Investor Relations	Tel: 0333 150 6283
Morten Singleton, Investor Relations	Tel: 0333 150 6270
finnCap (Nomad and Joint Broker)	www.finncap.com
Stuart Andrews / Christopher Raggett (Corporate Finance)	Tel: 020 7220 0500
Simon Johnson (Corporate Broking)
Liberum (Joint Broker)	www.liberum.com
Steve Pearce / Richard Bootle	Tel: 020 3100 2000
Vigo Communications	www.vigocomms.com
Jeremy Garcia / Fiona Henson / Natalie Jones	Tel: 020 7830 9703

 

About CityFibre:

 

CityFibre is the national builder of Gigabit Cities, as the UK's largest alternative provider of wholesale fibre network infrastructure. It has major metro duct and fibre footprints in 42 towns and cities across the UK and a national long distance network that connects these cities to major data-centres across the UK and to key peering points in London.

 

The company has an extensive customer base spanning service integrators, enterprise and consumer service providers and mobile operators. Providing a portfolio of active and dark fibre services, CityFibre's networks address 44,000 public sites, 7,300 mobile masts, 349,000 businesses and over 4 million homes.

 

CityFibre is based in London, United Kingdom, and its shares trade on the AIM Market of the London Stock Exchange (AIM: CITY). Further information on the company can be found at www.cityfibre.com

 

 

Operational Review

The six months to 30 June 2017 marked a period of continued strong growth for the Group, despite a challenging macro environment in the public sector market due to the general election and delays to government funding announcements. The post-period acquisition of Entanet, £201.8m fundraise, and launch of the FTTH/P initiative leave the Group extremely well-placed and well-capitalised to capture the very significant market opportunities emerging as the UK continues to transition to a digital based service economy and the rebuilding of the digital infrastructure begins to accelerate.

Contracts, connections and network enablement

CityFibre added £11.0m in new initial contract value ('ICV') in the period, taking gross cumulative ICV to £135.9m, and unrealised ICV to £103.1m.

Customer connections sold in the period totalled 712, taking cumulative connections sold to 7,993. In the first half of 2016 the Group added 3,702 connections sold, of which 1,920 were added through the KCOM asset acquisition.

In the public sector we added 83 connections sold in the half year versus 449 in the same period last year, largely a reflection of the effect of the snap election call, associated purdah, and the effect of the delays to the launches of the DIIF and LFFN schemes.

In the enterprise sector we added 616 connections sold in the half year versus 1,306 in the same period last year. 1,200 of these additions in H1 2016 related to launch partner contracts in the larger city networks acquired from KCOM. This year's launch deals are proportionately smaller, securing 440 additional connections sold, largely associated with the smaller city networks acquired from KCOM. During the period, the Group signed new launch partners on acquired assets in Wakefield, Exeter, Plymouth, Cambridge, Cheltenham and Gloucester, comprising 410 connections and total ICV of £6.2m. Additionally, in the Tier 1 carrier market, the Group also on-boarded Zayo Group, Colt Technology Services, and Gamma during H1 2017.

The order book should not be expected to fully translate into an immediate delivery of connections and associated revenues, but will come through over time:

·     Certain launch contracts include time limited exclusivity arrangements of up to 24 months in return for committed revenues over the contract term of typically 4 to 6 years, contributing significant additions to the order book. Once the exclusivity periods end the cities become open to the full wholesale channel. Our focus in the first half of this year has been on fulfilling these launch partner contracts, which required enablement of active services across our network as well as delivery to associated orders.

·     The order book includes several large dark fibre commitments, but currently relates mainly to orders for active layer services, including major call off contracts for 18 cities, of which 16 relate to KCOM acquired city infrastructure. Dark fibre services are available across all 42 of our towns and cities. 15 cities are currently enabled for delivery of active layer services with a further 6 expected to be enabled by the end of the year, and more subsequently.

·     The enablement of a city for active services requires the procurement or securing of a site for a PoP, the deployment of associated PoP electronics and the construction of a fibre connection from the PoP to our metro network. This can take up to and sometimes over a year. For several of the assets acquired from KCOM last year we additionally need to refurbish the duct and fibre network infrastructure mainly through the blow-through of incremental fibre in the core ring. We focused our attention on enabling the larger cities acquired from KCOM in 2016, leaving the smaller cities for enablement through 2017 and 2018.

Our progress has been marginally slower than we had anticipated, but we are comfortable launch partner commitments are ultimately coming through to fulfilment and we are making good progress on our active layer network enablement.

Connected customer premises and network

At the end of June 2017 the Group had 4,235 connected customer premises and a total of 3,556 route kilometres of operational ducted fibre (2,417 kilometres of metro local access and 1,139 kilometres of long distance network). This compared with 3,490 connected customer premises and 3,150 route kilometres of network at the end of the first half of 2016. Principal organic additions to the network footprint included Southend, Stirling, and the network extension in Peterborough.

Products and services

At period end, CityFibre operated dark fibre services across its entire footprint and active services (Ethernet and Internet access) across a growing proportion of the network. The Group's established track record of offering wholesale Ethernet and Internet access products to partners has seen revenues from active services grow to approximately one fifth of Group revenues in the period under review. This proportion is expected to increase. Firstly with the addition of Entanet's leased line estate and large Channel Partner ecosystem to the Group in August 2017 - significantly expanding the Group's scale and scope of operation in Ethernet and associated product sets. And secondly with an accelerated roll-out of active services across the full network.

 

Board and employees

On 28 February 2017 Christopher ('Chris') Stone was appointed as the Company's Non-Executive Chairman, following the departure from the Board of Peter Manning in January 2017.

 

Chris is a technology and services industry veteran with a strong track record of building successful, global businesses in the sector. Most notably he was responsible for leading the transformation of Northgate Information Solutions (then called McDonnell Douglas Information Systems) between 1999 to 2011 to become the world's second largest specialist HR technology and services business and the leading provider of software and services to the UK public sector.

 

Chris is currently Executive Chairman of NCC Group plc, a cyber security and risk mitigation solutions provider. He is also a Non-Executive Director (formerly Chief Executive Officer) of Radius Worldwide, an expansion services company offering accounting, HR, legal, tax and compliance support to companies' international operations. He led the business during its successful acquisition by private equity firm, HG Capital, in August 2013.

 

Chris has also previously held senior roles at Accenture, Electronic Data Systems, Digital Equipment Company, Fitness First and CSR, where he served as Non-Executive Director and Chairman of the Remuneration Committee.

 

Post period end the Group announced that Leo Van Doorne has stepped down from the Board as Non-Executive Director of the Company with effect from 20 September 2017. The Board would like to thank him for his immense contribution.

 

Also on 20 September, CityFibre appointed Spencer Lake ('Spencer') as a Non-Executive Director of the Company. Spencer was also appointed as a member of the Company's Audit Committee.

 

Spencer has built a 29-year career in investment banking, most recently as Vice Chairman of HSBC Global Banking & Markets, a role he held until 2016. During his decade-long tenure with HSBC, Spencer held several global senior roles in areas such as running Debt Capital Markets and Acquisition Finance for four years; Global Markets (including FICC, equities and research) for three years; and Capital Financing (structured and unstructured lending, financing and investment banking products) for three years. Prior to HSBC, Spencer spent 17 years at Merrill Lynch in senior roles spanning real estate finance, investment banking, and debt capital markets in New York, Hong Kong and London. Before Merrill Lynch, Spencer worked for two years at JP Morgan in real estate investment banking.

 

Earlier this year, Spencer was appointed as Vice Chairman of Fenergo, a client lifecycle management software provider for financial services companies. Spencer is also a senior advisor to nCino (cloud-based bank operating system), Callsign (AI-based identity authentication), Astuta (data management), and the International Capital Market Association (ICMA).

 

In addition to the Directorate changes, the Group added 20 new employees and contractors during the period, ending the first half with 163 full-time equivalent staff (FTEs).

 

 

Post period developments

Focusing on network densification and active layer roll-out

On 5 July 2017 CityFibre announced both a £201.8m equity finance raising, through a combination of a placing and an offer for subscription, and the acquisition of Entanet International Limited. A Prospectus containing full details of the Capital Raising was published on 11 July 2017 and a General Meeting in connection with the Capital Raising was held on 27 July 2017, with all resolutions duly passed and the finance raising completed at 55p per share on 28 July.

The finance raising enables the Group to move on to the next phase of our development focusing on the densification and active commercialisation of our existing city networks.

 The proceeds of the Placing and the Offer for Subscription will be used as follows:

1.    The commencement of construction of Fibre to the Home/Premises ('FTTH/P'), addressing the residential and enterprise markets in five to ten UK towns and cities during 2018;

2.    The expansion of CityFibre's metro networks from 42 UK towns and cities to no fewer than 50 towns and cities by 2020. This expansion of our metro model includes the extension of active layer services across our fibre network, where demand and economics justify this; and

3.    The acquisition of Entanet, a provider of wholesale communications services, for a consideration of £29 million in cash (on a cash-free, debt-free basis and subject to adjustments). This deal supports the Company's  focus on wholesale active and passive fibre services and accelerates the commercialisation of CityFibre's fibre assets. Entanet adds c.1,500 channel partners that will be enabled to sell across our 42 towns and cities.

 

 

1. FTTH/P and densification of cities

We have announced that we will commence FTTH/P roll-outs in five to ten cities and we now are working on city selection, enabling these cities to support full FTTH roll-outs and arranging service provider agreements to effect this critical step. These will be in conjunction and consultation with our service provider customers. Accordingly, we are in the advanced stages of discussions with major service providers across public sector, business, mobile and consumer markets.

One critical component of these discussions is the pricing for consumer FTTH/P services, which we believe can be equal or lower, depending on volume commitments, to the existing copper-based infrastructure pricing of the incumbent. So we aim to offer a superior product at a competitive price, without the need for service providers to pay incremental fees for the recovery of investments made relatively recently in outdated legacy infrastructure.

Our focus on network densification follows CityFibre's successful participation in the FTTH/P trial in York. The trial demonstrated strong demand from ISPs and consumers for gigabit speed FTTH/P services, and showed the propensity for consumers to switch to FTTH/P connections.  York was chosen as the site of the trial roll-out specifically because it is considered to be representative of a typical UK city, including in terms of its market demographics, home density and partial (39%) Virgin cable presence. This remains the largest wholesale trial of its kind in the UK. The trial demonstrated the commercial viability of FTTH/P in the UK, with deployment costs in line with expectations and penetration in some cabinet areas already above 40% after less than two years in commercial production. 

In addition to the demand dynamics, the York trial also provided proof points around the cost estimates for FTTH/P roll-out. Having existing core network and PoP facilities infrastructure in the cities in which we initially plan to roll-out FTTH/P we estimate we will save up to 18 months of deployment time per city. We expect this to also save up to 25% on the total costs of rolling out the network. The rollout of FTTH/P will also enhance the value of our associated metro networks by providing us with a far greater network capillarity which puts us in a better position to win incremental public sector, small cell, macro cell and smart city connections.  Furthermore, FTTH/P will enable CityFibre to offer fibre-based services to SMEs which are significantly cheaper than point-to-point fibre leased lines, by deploying dense GPON based architecture covering entire business parks, for example. There is also significant scope to flex both speeds and reliability of the FTTH/P roll-out through adding better splitter ratios to GPON deployment selectively and relatively inexpensively through a straight-forward re-patching exercise.

One further benefit of a full-fibre network to homes and businesses is the dramatically lower fault rates typical of such networks, which we estimate are significantly less than those of a typical copper-based network, perhaps as much as 1/20^th the fault rate.

2. Expansion of Metro footprint from 42 towns and cities to 50

CityFibre will continue to extend its current metro footprint selectively, ensuring that each new metro project is anchored by long term contracts that deliver a satisfactory return on the initial capital investment required while also covering a substantial portion of projected capital expenditure. The same policy will apply to the extension or expansion of existing town and city networks to serve public sector, business and mobile customers.

3. Entanet acquisition

On 5 July 2017, the Group announced the proposed acquisition of Entanet International Limited ('Entanet') for £29.0 million on a cash-free and debt-free basis, net of a deferred element of £4.7 million. The acquisition completed on 2 August 2017.

 

Entanet is a wholesale communications provider that uses third party networks owned by other suppliers such as BT Wholesale, Openreach, Virgin, Vodafone, TalkTalk Business and others, to deliver a wide range of connectivity and broadband products and services to Channel Partners, including Ethernet, private and wide area networks, IP and PSTN telephony, colocation, hosting and associated services.

 

The Entanet acquisition brings together two complementary wholesale capabilities: CityFibre's national wholesale fibre infrastructure and Entanet's established wholesale Ethernet product portfolio and commercial relationships with Channel Partners. Entanet will become the primary route for CityFibre to market its full-fibre connectivity through Entanet's network of Channel Partners.

 

Entanet's strategy is focused on the development and growth of wholesale communications services. It packages data communications products, including broadband and leased line internet connectivity, IP telephony and hosting services and makes these products and services available nationally, with approximately 1,500 Channel Partners that serve the business and residential markets having conducted business with Entanet in the 12 months ended 31 December 2016. The Directors believe that the Entanet acquisition will significantly enhance the Group's wholesale fibre capability and accelerate its future growth. By combining CityFibre's fibre infrastructure with Entanet's established Ethernet and other wholesale products, systems and relationships with Channel Partners, the Group expects to realise the following synergies and benefits, estimated by the Directors to deliver cost synergies of over £3 million per annum within three years of completion of the acquisition:

 

·     Increase Relationships with Channel Partners - The acquisition is expected to give CityFibre access to new Channel Partners due to Entanet's existing position as a wholesale provider with approximately 1,500 Channel Partners having conducted business with Entanet in the 12 months ended 31 December 2016. This represents a significant potential increase in CityFibre's indirect routes to market;

·     Achieve Synergies - Entanet's services operate on the networks of a number of suppliers, including BT Wholesale, Openreach, Virgin Media, Colt Technology,  TalkTalk Wholesale and Vodafone. It currently services over 45,000 broadband connections and over 3,500 leased lines. A proportion of these connections originate and/or terminate in CityFibre's existing or expanded city footprint, giving rise to the opportunity to migrate these connections to the Company's fibre infrastructure over time;

·     Trading and Support Interfaces - The acquisition is expected to give CityFibre access to Entanet's wholesale systems that provide a layer of automated order and billing capabilities as well as customer portals and support systems;

·     Complementary Products - The acquisition is expected to enable CityFibre to utilise Entanet's wholesale product portfolio enhancing CityFibre's own wholesale fibre capabilities;

·     National Ethernet Capability - The national networks leased by Entanet from other suppliers support the end-to-end Ethernet capabilities that are required as part of CityFibre's product development. The acquisition is expected to accelerate both the timescale and scope of CityFibre's Ethernet strategy, enabling faster take up of the Group's fibre connectivity by national Channel Partners. The acquisition is expected to enable Entanet to offer the delivery of wholesale services across CityFibre's fibre infrastructure in both existing and future metro towns and cities, providing differentiated gigabit speed full-fibre connectivity services through its established base of Channel Partners.

 

We have already commenced the engineering and resourcing required to enable Entanet to fully leverage the CityFibre suite of products and services across all 42 towns and cities. Enablement of Entanet active layer services on CityFibre infrastructure requires the lighting up of our LDN, city PoPs and cable links in several cities between CityFibre and Entanet PoPs. Edinburgh has already been connected with an order sold, ordered and delivered. A further 11 cities are planned for enablement this year, and 11 more in 2018.

Debt refinancing process

As the Group evolves and matures, management expects that the debt capacity of the business will increase and the cost of debt will become significantly lower than those of its existing facilities.  Generally, infrastructure businesses are well-suited to long-term debt structures and are anticipated to form a material proportion of our optimised mature capital structure. Following the recent equity raise, Management is in the early stages of reviewing the Group's near term capital structure requirements and has begun a process to assess its options for refinancing its existing debt facilities in 2018. It is expected that this should bring down the cost of debt significantly from the early stage facilities secured with Proventus (when the business was EBITDA-negative) and will provide further capital for our development of the FTTH/P opportunity.

Market environment and outlook

Momentum in the Public Sector market was affected by the snap general election call, and associated purdah, as well as the delays to the announcement of both the DIIF and LFFN stimulus programmes. These caused public sector customers to defer infrastructure investment decisions. Two material public sector opportunities have now shifted into 2018 which will cause revenue for this segment to fall marginally below our initial expectations. Despite this backdrop, the pipeline of opportunities in public sector networks has actually increased significantly. Though we did not close any major PSN deals in H1, none have been lost. The creation of the LFFN stimulus programme by the DCMS has provided further impetus for cities to commission the creation of more core gigabit fibre networks to serve their own estate and local businesses, and we welcome this new catalyst to the development of the market.

The Group continues to develop significant commercial opportunities in the mobile connectivity segment, to improve economics and performance for macro cell sites. Although there have been no major signings in H1, we now have near-term regulatory clarity around dark fibre. The CAT's rejection of Ofcom's BCMR findings this summer means CityFibre is now left as the only major willing provider of dark fibre into the UK market outside London. This is an ideal position for CityFibre as mobile operators look to future-proof their macro and micro site networks for both existing and future 5G services, and we remain excited by the scale of the opportunity here.

The Business segment continues to develop in line with our previously stated five-year penetration target of 7.5% to 10% per city. A number of our key cities now stand at more than 5% penetration in terms of connections sold, and we believe the Entanet acquisition will accelerate the introduction of a broader range of products and price points into the Business segment and will drive further continued incremental sales.

Our organic progress to date in signing up channel partners has been significantly enhanced by the acquisition of Entanet, which we closed in August. Our combined offering, now leveraging Entanet's c.1,500 channel partner network and service provision platform and CityFibre's extensive network footprint, is already showing early signs of accelerating the take-up of our services. Overall Group revenue for the financial year will be significantly increased as Entanet begins to contribute. 

Having completed the raising of significant funds the main focus for CityFibre is now on the densification of its existing cities and the incremental investment in FTTH/P deployment. The exact timing and quantum remains under discussion with potential ISP partners and, as set out previously, we are in advanced discussions with ISPs. In anticipation of the fund raising we committed investment during H1 on detailed planning, engineering work and construction contracting for FTTH/P roll-outs across several of our cities and further resources are now being applied to detailed city designs, construction planning, colocation facilities and construction firm contracting. Over £0.3m of costs were incurred in H1 in relation to FTTH/P roll-out activities, and these costs are expected to increase into the second half of 2017, and 2018.

Overall the Board is very comfortable with the outlook for the Group and confident in CityFibre's strong strategic position.

 

Regulatory Developments

Since we last reported there have been a number of significant developments that have continued the trend towards a more supportive evolution of the regulatory environment towards CityFibre and UK broadband infrastructure investors more generally.

BCMR

On 6^th July 2016 CityFibre lodged an appeal against Ofcom's 2016 Business Connectivity Market Review ('BCMR') on concerns that the regulation could harm competitive investment in full fibre infrastructure to businesses. TalkTalk and BT also lodged appeals with the Competition Appeal Tribunal ('CAT').

In August 2017 the CAT issued its ruling in relation to the market definition issues arising in the BCMR. The CAT found unanimously in favour of the appellants' arguments, and against Ofcom, effectively annulling the 2016 BCMR and remitting it back to Ofcom for reconsideration.

The BCMR had been the foundation for the pricing controls of all leased lines and the basis for Ofcom's Dark Fibre Access ('DFA') remedy. As a result of the CAT ruling, these remedies cannot now be introduced in the form prescribed in the BCMR. Ofcom must now undertake a new review in consultation with the industry, likely to delay implementation of a dark fibre remedy for perhaps 18 months. Consequently, CityFibre remains the only wholesale provider of scale of dark fibre services into the UK market.

Digital Infrastructure Investment Fund

On 3 July 2017 the UK Government officially launched the Digital Infrastructure Investment Fund ('DIIF'). The fund, initiated with £400m of HM Treasury funds and expected to be at least matched by other institutional investors, has been set up to incentivise and accelerate full-fibre deployment across the UK by alternative providers.

The exact details of the DIIF are still to be finalised, but three fund managers have been appointed to allocate the fund's investments, and CityFibre is already engaged in early stage discussions with them to scope out how the DIIF might serve as a potential source of additional future funding for future CityFibre projects.

Local Full Fibre Networks ('LFFN') programme

In the Spring budget the DCMS announced its intent to engage with both communications providers and local bodies to develop delivery approaches and incorporate these into a first wave of investment projects totalling £200m. The aim is to fund locally-led projects across the UK to leverage local and commercial investment in full fibre. By harnessing public sector internet demand, upgrading connections to schools and other public sector buildings, and offering new full fibre connection vouchers to increase business take-up, the LFFN aims to incentivise substantial new commercial investment to connect homes and businesses with full fibre networks, such as those developed by CityFibre.

Business rates relief

On 4 July 2017 the Telecommunications Infrastructure Bill was introduced to Parliament, delivering on the Government's promise to introduce 100 per cent relief on non-domestic business rates on investments in new fibre for a period of five years. This should act as another accelerator for full-fibre deployment in the UK.

Advertising standards

On 10 July 2017 the Advertising Standards Authority announced it would conduct an in-depth review of fibre advertising. This followed on from evidence presented by CityFibre and other UK full-fibre players showing that the current advertising rules on fibre broadband have the potential to mislead consumers. At present, advertising rules allow broadband products that rely on a final copper connection to the premises to be advertised as "fibre". We believe that reform of these rules, so that "fibre means fibre", is essential to empower consumers to make informed choices between copper-based and full-fibre products.

 

Financial review

Profit and loss

 

Turnover in the period was £9.0m, an increase of 36% over the comparable prior period driven by revenue of £1.9m from new contracts sold since H1 2016.

 

Gross margin increased to 88% from 86%, reflecting the ongoing high operating leverage characteristic of the business model as the Group continues to add new business at a gross margin above 90%. 

 

Administrative expenses decreased to £9.4m, largely attributable to transaction and transition fees associated with the acquisition of KCOM assets in H1 2016. Removing the effect of these costs, the underlying administrative costs (excluding depreciation and amortisation) increased by 18%. Staff costs grew by 17% to £4.2m reflecting headcount growth of 24% to 163 Full Time Employees at period end. Sales, General and Administrative expenses grew by 21% to £2.0m.

 

Reported EBITDA profit was £0.7m, an improvement of £3.0m from the prior period loss of £2.3m, principally due to the effect of non-recurring costs from 2016.

 

Adjusted EBITDA was £1.7m, a significant improvement from the £0.4m profit posted in the first half of 2016. This also includes over £0.3m of costs incurred in H1 in relation to FTTH/P roll-out activities. A reconciliation of reported EBITDA to adjusted EBITDA appears overleaf.

 

Net finance costs were £4.3m, up from £3.3m in the prior period. Finance costs are based on interest costs on debt drawn down plus amortised finance costs. The difference reflects a higher level of debt drawn down this period as well as timings of the draw downs.  

 

Net loss for the period of £5.9m, an improvement of £1.6m from 2016, reflects the improved gross margin and the reduction in administrative expenses.

 

 

 

EBITDA reconciliation

		Six months to 30 Jun 2017	Six months to 30 Jun 2016	Twelve months to 31 Dec 2016
		£'000	£'000	£'000
Operating loss per interim accounts		(1,502)	(4,193)	(5,141)
Add-back:
Depreciation		2,125	1,745	3,572
Amortisation		70	117	358
EBITDA*		693	(2,331)	(1,211)
Fees in connection with regulatory review		368	466	904
Share-based payments charge		600	556	908
Operational and financing costs in respect of the Acquisition**		-	1,722	1,884
Adjusted EBITDA***		1,661	413	2,485

 

*EBITDA is a non-statutory classification, defined as earnings before interest, tax, depreciation and amortisation.

** Operational and financing costs in respect of the Acquisition include performance-related bonuses for key staff connected with the KCOM transaction.

***Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, also excluding share-based payments and significant non-recurring expenses, and serves as a proxy for the underlying financial performance of the business.

 

Balance sheet

The increase in net property, plant and equipment posted in the period is due to the continued expansion of the Group's metro footprint.

During the first half, the Group drew down a further £5.5m of its £100m senior secured debt facilities, leaving a total of £65.3m drawn at period end. Total borrowings include £4.1m of unamortised finance costs, giving a figure of £61.2m on the balance sheet. The £30m Revolving Credit Facility included in the facilities remains undrawn. The Board continues to review the Group's options regarding debt refinancing in the first half of 2018.

Period end cash was £7.9m and net debt was £57.4m.

Cash flow

Cash outflow from operations decreased to £1.2m from £3.8m in the prior period, although the first half of 2016 included the classification of £3.1m of inventory purchased as part of the asset acquisition from KCOM. Excluding this non-recurring item, there is a negative movement of £0.5m in the first of 2017 compared to the first half of 2016.

Total acquisition of property, plant and equipment was £7.7m in the period, principally comprising network capex.

 

 

consolidated statement of comprehensive income

               

For the Six Months ended 30 June

 

		Six months to 30 June 2017		Six months to 30 June 2016		Twelve months to 31 December 2016
		£'000		£'000		£'000
		(Unaudited)		(Unaudited)		(Audited)
Continuing operations
Revenue		9,036		6,632		15,363
Cost of sales		(1,117)		(937)		(1,827)
Gross profit		7,919		5,695		13,536
Administrative expenses		(9,421)		(9,888)		(18,677)
Operating loss		(1,502)		(4,193)		(5,141)
Finance cost		(4,315)		(3,311)		(7,341)
Finance income		15		24		45
Share of post-tax losses of equity accounted Joint Venture		(118)		(17)		(147)
Loss on ordinary activities before taxation		(5,920)		(7,497)		(12,584)
Income tax		-		5		-
Loss for the financial period and total comprehensive losses attributable to the equity holders of the parent company		(5,920)		(7,492)		(12,584)
Loss per share
Basic and diluted loss per share		£(0.02)		£(0.03)		£(0.05)

 

 

 

Consolidated Statement of Financial Position

               

 

		At 30 June 2017	At 30 June 2016	At 31 December 2016
		£'000	£'000	£'000
		(Unaudited)	(Unaudited)	(Audited)
Assets
Non-current assets
Property, plant and equipment		163,876	141,654	155,159
Intangible assets		1,282	1,208	1,211
Investment in Joint Venture		314	572	433
Total non-current assets		165,472	143,434	156,803
Current assets
Inventory		4,002	3,336	3,986
Trade and other receivables		11,122	7,657	8,070
Investment in short-term deposits		-	10,000	-
Cash and cash equivalents		7,892	8,146	16,722
Total current assets		23,016	29,139	28,778
Total assets		188,488	172,573	185,581
Equity
Issued capital		2,713	2,713	2,713
Share Premium		137,943	137,943	137,943
Share warrant reserve		85	85	85
Share-based payments reserve		2,700	1,638	2,100
Merger reserve		331	331	331
Profit and loss account		(40,548)	(29,537)	(34,628)
Total equity		103,224	113,173	108,544
Liabilities
Non-current liabilities
Interest bearing loans and borrowings		61,157	39,897	55,280
Deferred revenue		11,305	11,233	11,091
Deferred consideration		-	457	450
Total non-current liabilities		72,462	51,587	66,821
Current liabilities
Deferred revenue		3,163	2,159	2,864
Trade and other payables		9,639	5,654	7,352
Total current liabilities		12,802	7,813	10,216
Total liabilities		85,264	59,400	77,037
Total equity and liabilities		188,488	172,573	185,581

 

 

 

Consolidated statement of cash flows

                                                               

For the Six Months Ended 30 June 2017

 

		Six months to 30 June 2017	Six months to 30 June 2016	Twelve months to 31 December 2016
		£'000	£'000	£'000
		(Unaudited)	(Unaudited)	(Audited)
Cash flows from operating activities
Loss before tax		(5,920)	(7,498)	(12,584)
Amortisation of intangibles		70	117	358
Finance income		(15)	(24)	(45)
Finance costs		4,315	3,311	7,341
Depreciation		2,125	1,745	3,572
Share-based payments charge		600	557	908
Increase in inventory		(16)	(3,145)	(3,797)
Increase in receivables		(3,081)	(2,629)	(3,023)
Increase in payables		609	3,184	4,145
Right of use income		2	19	29
Share of loss from associated company		118	17	147
Transaction Fees		-	582	582
Net cash utilised in operating activities		(1,193)	(3,764)	(2,367)
Cash flows from investing activities
Interest received		15	72	73
Investment in short-term deposits		-	(10,000)	-
Acquisition of intangibles		(140)	(296)	(517)
Acquisition of property, plant and equipment		(7,686)	(98,246)	(110,560)
Costs of acquiring property, plant and equipment		-	(1,077)	(1,077)
Capitalised labour costs		(1,438)	(1,312)	(2,946)
Net cash utilised in investing activities		(9,249)	(110,859)	(115,027)
Cash flows from financing activities
Proceeds from issue of share capital		-	80,000	80,000
Costs of issuing share capital		-	(3,555)	(3,562)
Debt finance costs paid		-	(5,326)	(5,320)
Drawdown of borrowings		5,500	44,800	59,800
Interest paid		(3,888)	(2,880)	(6,533)
Net cash received from financing activities		1,612	113,039	124,385
Net (decrease)/ increase in cash and cash equivalents		(8,830)	(1,585)	6,991
Cash and cash equivalents at beginning of period		16,722	9,731	9,731
Cash and cash equivalents at end of period		7,892	8,146	16,722