Special Report by Philip Carse, Principal Analyst, Megabuyte: Having issued a cautious outlook in April, Daisy's full year results showed weakness at the revenue, gross profit and cash flow level, but continued improvements in EBITDA margins. However, the company is guardedly optimistic, is promising a material increase in cash generation this year, and has raised the prospect of a dividend in the event that no further large acquisitions are completed.
For the year ended March 2012, Daisy reported revenues of £348.6m, gross profit of £132.9m, EBITDA of £56.3m and an operating loss of £13.1m. The year on year growth rates are fairly meaningless given the significant acquisitions made at the start of the year (Ipitomi and Outsourcery Vodafone base), so second half versus first half numbers give a better feel for business progress.
These give a mixed picture. Revenues and gross profit were both down half on half - revenues by 1.9% to £172.6m and gross profit by 3.1% to £65.4m. However, EBITDA was up by 11.5% to £29.7m, with the margin expanding 2.1pp to 17.2%. The decline in revenue would have been greater in like-for-like terms given that Daisy acquired Outsourcery's O2 mobile base for £3m in early January, adding 3,000 customers and almost a quarter's revenues to the second half.
Cash flow was also relatively poor due to the significant working capital requirements highlighted at the half year stage, due to larger customers, shorter supplier payment terms and growth in the mobile business, plus £9.8m of exceptional cash costs mainly relating to restructurings. Operating cashflow was £29.1m, compared with EBITDA of £56.3m, which went on acquisitions (£32.6m), interest (£4m), tax (£2.8m) and net capex (£2.2m). Net debt increased £11.8m to £78m; Daisy has since spent £28m cash on Worldwide Group.
Turning to divisions, Daisy Retail is the largest, with revenues of £248.7m, gross margins of 44.9% (down 0.3pp) and EBITDA margins of 19.9% (up 0.9%). The second on first half splits highlight the top line pressures on Daisy overall, with Network revenues down 14.7% to £50.4m and Systems down 16.5% to £14.6m, but Data was up 16.1% to £28.7m and Mobile was broadly static (no doubt helped by the Outsourcery O2 acquisition).
Despite the significant revenue decline in Networks, Daisy managed to grow gross profit 12% to £48.7m, helped by the new BT supply relationship and arbitraging mobile termination rate reductions (ie not immediately passing on or in full the wholesale reductions from the network operators).
Daisy's Mobile Distribution business saw revenues of £51.9m, with gross margin up 2.4pp to 21.8% and EBITDA margin up 5pp to 15.2%. This business was broadly stable in revenue terms half on half. In contrast, Daisy Wholesale reported revenues of £47.9m, but gross margin down 2.4pp to 20.7% and EBITDA margin down 6.1pp to 5.6%. Within this, the Network element saw revenues broadly stable, in contrast to the big declines at the Retail level.
The company has given a guardedly optimistic outlook, noting macroeconomic headwinds, but also highlighted an expected ‘material' increase in free cash flow generation this financial year, no doubt due to working capital normalising and a lower level of restructuring costs reflecting much lower levels of M&A activity (only Worldwide Group since year end). Daisy continues to be on the lookout for acquisitions, but has for the first time raised the prospect of a dividend if it is unable to complete a material transaction.
Daisy has been a consistent share price under-performer since its debut as a public company in Summer 2009, and these results give ammunition to both bulls and bears. For the first time, Daisy has had two consecutive halves of a relatively stable business (apart from the Outsourcery O2 deal), and this shows a decline in both revenues and gross profit second half on first, due in part to significant Network and Systems declines at the Retail level. Conversion of EBITDA to operating cash flow was also poor, partly because of the M&A/restructuring-related exceptional costs and partly because of some big working capital hits.
On the other hand, the success of Daisy's buy and build is evident at the EBITDA level, where is has grown EBITDA further despite the reductions in revenues, though of course it is by no means unique among resellers in doing this (see recent Alternative Networks and Adept results). The promise of a material increase in FCF this year and the prospect of a dividend from next year should at least highlight the fundamental attraction of the reseller model; its cash generating abilities. Daisy thus needs to weigh up the benefits of further material transactions, but the subsequent ongoing lack of visibility and restructuring cash impacts that dampen investor enthusiasm, against the clear signal that a dividend sends out.
"Customers require more from a UC distributor than simply product stocking and shipping. They want a distributor that helps to drive innovation as a technology enabler."
Steve Harris, Managing Director, VCOMM