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Iomart Group Plc LSE:IOM London Ordinary Share GB0004281639 ORD 1P
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Iomart Group PLC Final Results

24/06/2020 7:00am

UK Regulatory (RNS & others)


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TIDMIOM

RNS Number : 8495Q

Iomart Group PLC

24 June 2020

24 June 2020

iomart Group plc

("iomart" or the "Group" or the "Company")

Final Results

Increased organic growth and continued resilience

iomart (AIM:IOM), the cloud computing company, is pleased to report its consolidated final results for the year ended 31 March 2020.

FINANCIAL HIGHLIGHTS

 
                                           2020        2019   Change 
 Revenue                              GBP112.6m   GBP103.7m      +9% 
                                     ----------  ----------  ------- 
 Adjusted EBITDA(1)                    GBP43.5m    GBP42.2m      +3% 
                                     ----------  ----------  ------- 
 Adjusted profit before tax(2)         GBP22.8m    GBP25.5m     -11% 
                                     ----------  ----------  ------- 
 Profit before tax                     GBP16.8m    GBP16.2m      +4% 
                                     ----------  ----------  ------- 
 Adjusted diluted eps(3)                  16.3p       18.6p     -12% 
                                     ----------  ----------  ------- 
 Basic eps                                12.5p       11.9p      +5% 
                                     ----------  ----------  ------- 
 Proposed final dividend per share        3.93p       5.01p     -22% 
                                     ----------  ----------  ------- 
 

-- Revenue up by 9% to GBP112.6m, with the majority of the growth derived organically in the year

   --      Adjusted EBITDA(1) benefitted by GBP3.0m from transition to IFRS 16 'Leases' 

-- Adjusted profit before tax(2) and adjusted earnings per share(3) reflects over GBP1m annualised investment in sales engine and broader mix of revenue

-- Cash generated from operations in the year of GBP41.3m (2019: GBP39.1m before exceptional items) which retains the consistently strong profit-to-cash conversion ratio (95% conversion of adjusted EBITDA) (2019: 93%)

-- Year-end cash position of GBP15.5m (2019: GBP10.1m) with net debt of GBP57.6m (GBP37.3m pre the adoption of IFRS 16) (2019: GBP39.2m), at a comfortable level of 1.3 times EBITDA (4)

OPERATIONAL HIGHLIGHTS

   --      Cloud Services organic growth rate increased to 6% in the year (2019: 2%) 

-- Increased investment in sales engine has led to several multi-million pound, multi-year contracts being secured, adding to future revenue visibility

   --      Continued market leading profitability and low customer attrition 

-- Acquisitions of ServerChoice in February 2020 and Memset Limited in March 2020, provide good quality customer base, with integration already underway

-- Appointment of Reece Donovan as Chief Operating Officer to prepare Group for next stage of growth

CURRENT TRADING AND OUTLOOK

-- Robust business model and strength of offering is providing resilience during Covid-19 lockdown

-- The Group has traded in line with management expectations in the first two months of the new financial year, consistent with the Group's high recurring revenue business model

   --      Group current cash balances remain at a similar level to the year end 

-- Business development continues, with good discussions with both new and existing customers, although timing of new projects is likely to be more uncertain for the remainder of this calendar year

Statutory Equivalents

A full reconciliation between adjusted and statutory profit before tax is contained within this statement. The largest variance year on year within the adjustments relates to the GBP1.9m reduction in contingent consideration on the 2018 LDeX acquisition which translates to a gain within the consolidated statement of comprehensive income. In the prior year a similar accounting entry was recorded for the 2017 Sonassi acquisition but in that situation it was a loss of GBP1.4m on the finalisation of the earn-out final payment which was higher than previously expected.

Angus MacSween, CEO commented,

"This is the twelfth consecutive year of growth since the transition of the business to cloud services in 2008 with the acquisition of our first data centres. Since that time, revenues and profits have grown considerably, with revenue reaching GBP112.6m, through the combination of continued organic growth and acquisitions.

"As we look forward to the next stage of growth, we do so with our teams all working remotely and the world around us considerably changed due to the global impact of Covid-19. Our focus must be first and foremost on the well being of our people, all of whom have risen to the challenge fantastically, for which I and the Board are extremely grateful.

"Together we have built a strong, resilient business, providing mission critical infrastructure to a wide spread of customers across diverse industries. This resilience will serve us well as we progress through the months ahead. The switch to remote working across the world has only accelerated the move to the cloud which we believe will be a growth driver for our business over the longer term.

"Our high levels of recurring revenues, breadth of customer base, industry leading profit margins and strong cash generation, mean we are confident iomart is well positioned to withstand the current challenges and deliver long-term growth."

(1) Throughout these financial statements adjusted EBITDA (disclosed in the consolidated statement of comprehensive income) is earnings before interest, tax, depreciation and amortisation (EBITDA) before share-based payment charges, acquisition costs and gain/(loss) on the revaluation of contingent consideration. Throughout these financial statements acquisition costs are defined as acquisition related costs and non-recurring acquisition integration costs.

(2) Throughout these financial statements adjusted profit before tax (disclosed in the Chief Financial Officer's report) is profit before tax, amortisation charges on acquired intangible assets, share-based payment charges, acquisition costs, accelerated write off of arrangement fees on bank facility and gain/(loss) on revaluation of contingent consideration.

(3) Throughout these financial statements adjusted diluted earnings per share (disclosed in note 6) is earnings per share before amortisation charges on acquired intangible assets, share-based payment charges, acquisition costs, accelerated write off of arrangement fees on bank facility and gain/(loss) on revaluation of contingent consideration.

   (4)   EBITDA is earnings before interest, tax, depreciation and amortisation. 

This announcement contains forward-looking statements, which have been made by the directors in good faith based on the information available to them up to the time of the approval of this report and such information should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking information.

For further information:

 
 
 iomart Group plc                          Tel: 0141 931 
                                            6400 
 Angus MacSween, Chief Executive Officer 
 Scott Cunningham, Chief Financial 
  Officer 
 
 Peel Hunt LLP (Nominated Adviser and      Tel: 020 7418 
  Broker)                                   8900 
 Edward Knight 
  Edward Allsop 
  Nick Prowting 
 
   Alma PR                                   Tel: 020 3405 
                                             0212 
 Caroline Forde 
 Helena Bogle 
 

About iomart Group plc

For over 20 years iomart Group plc (AIM: IOM) has been helping growing organisations to maximise the flexibility, cost effectiveness and scalability of the cloud. From data centres we own and operate in the U.K., and from connected facilities across the globe, we deliver 24/7 storage and protection for data across the most complex of cloud and legacy infrastructures. Our team of over 400 dedicated staff work with our customers at the strategy stage through to delivery and ongoing management, to implement the secure cloud solutions that deliver to their business requirements. For further information about the Group, please visit www.iomart.com

CHAIRMAN'S STATEMENT

I am pleased to report that iomart (the "Group") has delivered another year of revenue growth, strong profitability and cash generation, in line with expectations. Due to the timing of the year end, the Group experienced minimal impact on trading in the year from the effects of Covid-19.

As we publish this report, Covid-19 continues to impact people and economies around the world. In times such as these, our purpose as a Board comes into clear focus: to ensure all employees are safe and supported; to ensure that the business continues to operate to the highest standards for the benefit of all stakeholders; and to protect and enhance the long-term future of the business. I am pleased to report that during these challenging times, this has indeed been the case. Having implemented remote working across our sites from early March 2020, the Group has continued to operate to its customary high standards, ensuring 100% uptime and high levels of customer support while continuing to develop prospects for future growth. The teams have responded positively to the changes asked of them, and I and the Board wish to thank them for their increased efforts in what have been challenging times for all.

iomart is a well-funded, well-managed, profitable and cash-generative business with high levels of recurring revenue. The cash position at year end had increased to GBP15.5m, up from GBP10.1m at the prior year end, demonstrating the financial strength of the business. The management team has run reasonable downside scenario tests and is confident we have the resources to withstand a significant economic downturn. We will continue to be vigilant in terms of monitoring business levels and the Group's cash position, however with greater than 85% of the Group's revenue recurring in nature, a wide customer base across multiple industry sectors and our offering delivering mission critical infrastructure, the Board is confident iomart is in a strong and robust position to address any future broader economic concerns.

During the year we paid an interim dividend of 2.60p per share which was paid to shareholders in January. In addition, the Board is now proposing to pay a final dividend of 3.93p per share. With this final dividend payment, the total for the year will be 6.53p, equivalent to the maximum pay-out ratio under our current policy of 40% of adjusted diluted earnings per share. We are aware of the focus from the wider community on dividend payments in the current economic situation, but believe that, given our funding position, our decision not to apply for the government's furlough scheme, our robust business model and our focus on being as fair and supportive as we can be to all stakeholders during the recent unprecedented events, including employees, customers and suppliers, we should recognise the support from our shareholders by continuing our dividend policy.

On 30 March 2020, we were delighted to welcome Reece Donovan to the Board as Chief Operating Officer. Reece has significant experience in the technology and telecommunication industries, with a demonstrable track record of achievement in roles both in the UK and internationally. Given the growth of the business and our plans for the future it was important to strengthen our executive team and we welcome Reece to the Group.

The progress we have made this year and the continued strong financial performance is a result of a great deal of hard work by our executives and staff and I thank them all on behalf of the Board and the shareholders for their efforts over the year.

Ian Steele

Non-Executive Chairman

24 June 2020

CHIEF EXECUTIVE OFFICER'S REPORT

Introduction

This is the twelfth consecutive year of growth since the transition of the business to cloud services in 2008 with the acquisition of our first data centres. Since that time, revenues and profits have grown considerably, reaching GBP112.6m (2019: GBP103.7m), an increase of 9% on the prior year through the combination of continued organic growth and the impact of acquisitions.

A key point of focus in the last 18 months has been the refresh of our sales and marketing operations to ensure we have the right mix of skills, processes and tools to deliver the next stage of growth. We have been encouraged by the early signs of success, securing several multi-million pound contracts in the year, which add to our long-term visibility of revenues. While adjusted EBITDA margins have naturally reduced as a result of this investment and the specific mix of revenues in the current year, we retain market leading adjusted EBITDA margins of above 38%, strong cash generation and high levels of customer retention. Our statutory profit before tax increased by 4% to GBP16.8m.

Covid-19

In the three months since the response to the Covid-19 pandemic was initiated in the UK, there has been limited impact on iomart's trading. We take great comfort from the resilience of our business model, especially the diversity and limited concentration of our customer base. We are not significantly exposed to industries that are suffering the worst effects. The level of customer churn across all segments of the business has been low, renewal levels high and cash collection in line with our typical profile. However, we remain vigilant to the economic impact the ongoing situation may create, particularly on the SME segment of the market.

Our priority has been the wellbeing and health of our staff and our teams have responded fantastically to the changes placed upon them. iomart has always had the technological capability to enable home working and implemented this mode of operation with no disruption from 9 March, while mission critical on-site roles, such as in data centres, have been manned in compliance with social distancing rules. As a result, our business has continued to operate 24/7 as near to normal as possible. Each of our data centres remains operational to high standards of security and resilience and all customer support has been maintained.

We have increased the monitoring of cash flow, and cash management has been strong. We have not applied for any support from the government's furlough scheme, preferring instead to continue to pay the salaries of the small number of the team whose roles are not currently required, while encouraging them to offer their time to the support of their communities.

Market and Strategy

We operate in a dynamic market with new products and solutions being developed at an ever-increasing pace. We are focussed on ensuring our product portfolio remains relevant to support customers in the journey to cloud based solutions, be that of a public, private, hybrid nature or indeed "on premise", as a substantial number of organisations still continue to acquire elements of what they need in this way.

The growth in data requirements sees no slow down, with the number of users, devices, content rich data and applications increasing demand for computer power, storage and connectivity. Development around such areas as machine learning, internet of things and big data will ensure this is a long-term trend. The complexity of hosting environments is putting pressure on resourcing and capabilities of in-house IT teams, driving outsourcing demand. The market for cloud computing solutions which we identified in 2007 presents us with as much opportunity now as it did then and our strategy is well positioned to deliver continued success. The current situation around Covid-19 may see the acceleration in the adoption of digital transformation and remote working, both of which are likely to be long-term drivers to the Cloud.

Overall, our market continues to grow strongly. As has been well documented, a large part of this growth is dominated by the 'hyper-scalers', primarily Amazon, Microsoft and Google. These organisations are now established parts of the landscape and what has been shown, especially given the trend to multiple cloud architectures, is that there is plenty of space for organisations like iomart and the hyper-scalers to coexist. We strongly believe our differentiation is that we provide advice, help, great customer service and flexibility. In addition, for organisations with a stable baseload of computer power, iomart's bespoke cloud solutions can compete head to head on full life costs. The untidy nature of the vast majority of the world's legacy IT infrastructure provides us with the reassurance that there will always be customers who are looking for a trusted advisor in this space.

We have already established a strong position as a leading provider of managed cloud computing services which has customer relationships and excellence in service at the heart of the business. We plan to build on this position by focussing on:

-- Growing our managed cloud services by excelling in customer service and ensuring innovation in our customer offering continues to match the needs of the market;

-- Growing our self-managed infrastructure brands by differentiating with products, solutions and support which add value and help solve business problems;

-- Retaining our presence in the mass consumer domain name and web hosting market via selective marketing and dynamic pricing;

   --     Building a high performance team supported by best in class systems, processes and tools; 

-- Continued optimisation of our data centre estate with cost efficiency achieved via asset planning, procurement and automation;

   --     Ensuring robust and resilient infrastructure, connectivity and security at all times; and 

-- Continuation of our disciplined acquisition strategy, with earning enhancing deal valuations and clear integration to the existing business.

Acquisitions

We again augmented our overall growth during the year through the acquisition of:

-- The managed private cloud division of privately owned ServerChoice Limited ("ServerChoice") on 28 February 2020, seeing the transfer of around 30 customers, some equipment and a small number of staff into our core managed Cloud Services business; and

-- Memset Limited ("Memset") on 12 March 2020. Memset is a well-established business providing dedicated and virtualised private cloud infrastructure to around 2,000 customers from a team and data centre based in Dunsfold, Surrey.

The timing of these acquisitions means they had no material impact on revenue and profit in the year ended 31 March 2020 and planning for integration is already underway as we enter the new financial year. Strict criteria continue to be applied to any potential acquisition target, ensuring they enhance our overall strategy and are accretive to the financial strength of the Group. We expect M&A activity will continue as an important growth driver for the Group in what remains a highly fragmented market.

Operational Review

While all of our activities involve the provision of services from common infrastructure, we are organised into two operating segments, Cloud Services (GBP99.8m revenue) and Easyspace (GBP12.8m revenue).

Cloud Services

Revenues in this segment have grown by 10% to GBP99.8m (2019: GBP90.6m). While the full year contribution from the prior year acquisitions was a positive factor, it was pleasing to see organic growth being the largest element of our overall growth in the current year. Revenue growth in the Cloud Services segment, excluding the impact of acquisitions, was 6% (2019: 2%). The Cloud Services adjusted EBITDA (before share-based payments, acquisition costs and central group overheads) was GBP42.3m being 42.4% of revenue (2019: GBP40.4m being 44.6% of revenue), or GBP39.3m on a like-for-like basis, excluding the impact of IFRS 16 'Leases'. We continue to expect Cloud Services to be the driver of revenue and profit growth for the Group going forward.

Within our Cloud Services division, we have three core offerings, recognising the differing complexity of the solutions designed and the level of ongoing managed services we provide. This means we are able to supply products and services across the full cloud spectrum and do so using shared resources and common platforms across the Group:

-- iomart Cloud Services: provides fully managed, complex bespoke designs, resulting in resilient solutions involving private, public and hybrid cloud infrastructure. This can range from the provision of managed online backup and disaster recovery solutions, through to an entity's entire online live presence where all revenue generated by the entity's activities are transacted through the cloud infrastructure we provide, delivered with the reassurance of a full 24/7 management service.

-- Infrastructure as a Service (IaaS): delivers dedicated, physical, self-service servers to customers. We provide many thousands of physical servers for our customers using highly automated systems and processes which we continue to develop and improve. Over the last few years we have been a consolidator of the UK market within this area, via our M&A activity, including for example our most recent acquisition of Memset. In a considered manner, ensuring minimum disruption to the customer experience, we continue to consolidate legacy brands.

-- Cristie Data: supplies computer equipment to customers' premises along with associated support services. The continued revenue growth of this brand, including a higher mix of recurring business, confirms the move to the consumption of computing power in the cloud by established organisations is happening over a long period and establishing relationships at this early stage has allowed us to support customers as they start the journey to the cloud.

The improvement in the revenue in the current year benefited from a strong performance by Cristie Data. The provision of IaaS saw some reductions in revenue primarily from the smaller customers, which while not material to the overall net revenue growth achieved, is high margin business. We achieved improved momentum in new business wins within the Cloud Services division, where the highest level of management effort and investment has been in the last year. Two large enterprise wins were achieved in the year which are both around GBP1m of annual recurring revenue. These were great examples of the full utilisation of our capability and service to support the move from fragmented on-premise IT infrastructure into a scalable, resilient and secure private cloud environment needed to support global operations.

We believe controlling our own infrastructure is important to delivering high quality, secure and robust solutions to customers. In June 2020, subsequent to the year end, we extended our London data centre property lease to June 2035. Following this, we plan to upgrade the main cooling and the electrical systems on the site over the coming 18 months, improving resilience but also adding to our energy efficiency.

Easyspace

The Easyspace segment which provides a range of products to the micro and SME markets including domain names, shared, dedicated and virtual servers and email services, saw a small reduction in revenue in the year to GBP12.8m (2019: GBP13.1m). To grow Easyspace significantly would mean competing in a more commoditised market with the need for a high marketing budget. As a result, our target for Easyspace is to retain our existing presence in the UK market via selective marketing and responding to market conditions with dynamic pricing. As in the past, Easyspace delivered strong profitability with an adjusted EBITDA (before share-based payments, acquisition costs and central group overheads) of GBP5.6m being 44.2% of revenue (2019: GBP6.2m being 47.1% of revenue). The business benefits from use of the Group infrastructure meaning this profitability translates to strong cash flow for the Group.

Current trading and outlook

The first two months of the new financial year have performed in line with our expectations, consistent with our high recurring revenue business model. As evidenced by our robustness during the Covid-19 period, our current cash balances remain at a similar level to the year end. Business development continues, with good discussions with both new and existing customers, although timing of new projects is likely to be more uncertain for the remainder of this calendar year.

While visibility of sales pipeline conversion remains less clear, we believe the medium-term impact of the social distancing measures implemented across the world will prompt the acceleration in the adoption of digital transformation and remote working, both of which are long-term drivers to the cloud. Our high levels of recurring revenues, breadth of customer base, industry leading profit margins and strong cash generation, mean we are confident iomart is well positioned to withstand the current challenges and deliver long-term growth.

Angus MacSween

Chief Executive Officer

24 June 2020

CHIEF FINANCIAL OFFICER'S REPORT

Financial Review

Key Performance Indicators

                                          2020              2019 
 
 Revenue                                                     GBP112.6m   GBP103.7m 
 Gross Profit %                                                  60.8%       64.4% 
 Adjusted EBITDA                                              GBP43.5m    GBP42.2m 
 Adjusted EBITDA margin %                                        38.6%       40.7% 
 Adjusted profit before tax                                   GBP22.8m    GBP25.5m 
 Adjusted profit before tax margin %                             20.2%       24.6% 
 Profit before tax                                            GBP16.8m    GBP16.2m 
 Profit before tax margin %                                      14.9%       15.6% 
 Basic earnings per share                                        12.5p       11.9p 
 Adjusted earnings per share (diluted)                           16.3p       18.6p 
 Cash flow from operating activities before exceptional 
  costs / Adjusted EBITDA %                                        95%         93% 
 Net debt / Adjusted EBITDA leverage ratio                         1.3         0.9 
----------------------------------------------------------  ----------  ---------- 
 

Revenue

Revenue for the year grew by 9% to GBP112.6m (2019: GBP103.7m) through the combination of continued organic growth and the full year impact of acquisitions made in the prior year.

Our Cloud Services segment grew revenues by 10% to GBP99.8m (2019: GBP90.6m), 6% excluding the impact of acquisitions (2019: 2%). A full year contribution from Bytemark and LDeX, acquired in August 2018 and late December 2018, respectively, contributed to the overall growth rate. The timing of our latest two acquisitions, completed in February and March 2020 means they made no material impact to the trading results in the year. The segment benefited from a strong performance by our hardware reseller brand, Cristie Data, with revenue from our higher margin Infrastructure as a Service offerings being slightly down. We achieved improved momentum in new business wins within the managed cloud services, where the highest level of management effort and investment has been in the last year, with the majority of revenue from these multi-year contracts being recognised in future years, increasing our monthly run-rate of revenue.

Our Easyspace segment has performed in line with expectations over the year with revenues reducing only slightly to GBP12.8m (2019: GBP13.1m).

Business model

Our business model in both segments generally involves the provision of cloud and managed hosting services from our data centres, delivering the computing power, storage, and network capability our customers require for the operation of their own businesses. We have invested in an estate of data centres, an extensive fibre network and for each customer the servers, routers, firewalls etc that are necessary to create the IT infrastructure they require. Customers pay us for the provision of that infrastructure, with the potential to add a managed services wrapper.

Larger customers tend to have multi-year contracts for complex cloud solutions, which are invoiced and paid on a monthly basis. Many of our smaller customers pay in advance for the provision of services which results in a substantial sum of deferred revenue, which is then recognised over the period of the service provision. A very large proportion of our revenue is therefore recurring and the combination of multi-year contracts and payment in advance provides us with excellent revenue visibility.

Gross Profit

Gross profit in the year, which is calculated by deducting from revenue variable cost of sales such as domain costs, public cloud costs, the cost of hardware and software sold, power, sales commission and the relatively fixed costs of operating our data centres, increased by 3% to GBP68.5m (2019: GBP66.7m). In percentage terms, gross margin has reduced to 60.8% (2019: 64.4%) due primarily to two factors. Sales by Cristie Data are typically lower gross margin given the inclusion of the reselling element of their solutions, plus some of the larger managed cloud solutions recently signed have initial contribution levels lower than the smaller infrastructure only deals from the past, although we anticipate their gross profit margin will increase over time. We have not seen any significant individual price change in any of the components of the purchased cost base in the 12 months.

Gross profit within our Easyspace segment reduced slightly from the previous year due to the specific bundle of packages sold to hosting customers in the year.

Adjusted EBITDA

Our adjusted EBITDA performance in the year reflects the increased investments we have made in the organisation to provide us with the right platform for accelerated future growth, plus the impact of the revenue mix described above. While our adjusted EBITDA margin has decreased to 38.6%, we retain market leading margins and are confident this level is now sustainable, striking the right balance between investment in the organisation to better align the business with higher growth areas of the market and high levels of profit generation.

Adjusted EBITDA for the year was GBP43.5m (2019: GBP42.2m) an increase of 3% which in EBITDA margin terms translates to 38.6% (2019: 40.7%). The adoption of IFRS 16 'Leases' ("IFRS 16"), which reclassifies previous operating lease rentals to a depreciation and interest charge, has a benefit of GBP3.0m in the year to the adjusted EBITDA metric. The previously flagged investment in our commercial operation, combined with the overhead base of the prior year acquisitions, resulted in a GBP3.4m increase in our administrative expenses versus the prior year. This, along with the broader mix of revenue, has reduced our underlying EBITDA generation in the year.

Adjusted EBITDA in the Cloud Services segment was GBP42.3m (2019: GBP40.4m), an increase of 5%. This reported result includes the impact from the adoption of IFRS 16, the specific mix of business and our investment into our commercial operations previously mentioned which are all solely applicable to the Cloud Services segment. We do not anticipate any more significant increases in investments into the overheads moving forward as the reorganisation of our commercial operation is complete. These factors mean that in percentage terms, the full year adjusted EBITDA margin in the Cloud Services segment has decreased to 42.4% (2019: 44.6%).

The Easyspace segment's adjusted EBITDA was GBP5.6m (2019: GBP6.2m) reflecting the impact of slightly lower revenue this year plus some reduction in gross margin due to specific products sold. In percentage terms the adjusted EBITDA margin is reduced to 44.2% (2019: 47.1%).

Group overheads remained stable at GBP4.4m (2019: GBP4.4m). These are costs which are not allocated to segments, including the cost of the Board, the running costs of the headquarters in Glasgow, Group marketing, human resource, finance and design functions and legal and professional fees for the year.

Adjusted profit before tax

Excluding the impact of additional depreciation of GBP2.9m following the adoption of IFRS 16, depreciation charges have remained broadly consistent with prior year at GBP15.6m (2019: GBP13.1m). There were no material project type investments made in the year with most of the CAPEX spend being on operational items such as servers and storage to support customer deployments and growth.

The charge for amortisation of intangibles, excluding amortisation of intangible assets resulting from acquisitions ("amortisation of acquired intangible assets"), of GBP2.9m (2019: GBP2.5m) has increased as a result of an increase in the level of software investment.

Finance costs of GBP2.2m (2019: GBP1.2m), has increased primarily due to the adoption of IFRS 16, which reclassifies previous operating lease rentals to a depreciation and interest charge. The new interest charge created by this was GBP0.6m.

After deducting the charges for depreciation, amortisation (excluding the charges for the amortisation of acquired intangible assets) and finance costs (excluding the accelerated write off of arrangement fees on bank facility) from the adjusted EBITDA, the Group's adjusted profit before tax reduced by 11% to GBP22.8m (2019: GBP25.5m), representing an adjusted profit before tax margin of 20.2% (2019: 24.6%).

Profit before tax

The measure of adjusted profit before tax is an alternative profit measure which is commonly used to analyse the performance of companies particularly where M&A activity forms a significant part of their activities.

A reconciliation of adjusted profit before tax to reported profit before tax is shown below:

 
 Reconciliation of adjusted profit before            2020       2019 
  tax to profit before tax                        GBP'000    GBP'000 
 Adjusted profit before tax                        22,768     25,524 
 Less: Amortisation of acquired intangible 
  assets                                          (6,159)    (6,492) 
 Less: Acquisition costs                            (438)      (351) 
 Less: Share-based payments                       (1,243)    (1,008) 
 Add/(Less): Gain/(loss) on revaluation 
  of contingent consideration                       1,856    (1,394) 
 Less: Accelerated write off of arrangement 
  fees on bank facility                                 -       (63) 
 Profit before tax                                 16,784     16,216 
----------------------------------------------  ---------  --------- 
 

The adjusting items are: charges for the amortisation of acquired intangible assets of GBP6.2m (2019: GBP6.5m) which is the net impact of the acquisitions made in the year and the specific amortisation profile of items from acquisitions made in previous years; acquisition costs of GBP0.4m (2019: GBP0.4m) as a result of professional fees associated with acquisitions made and share-based payment charges of GBP1.2m (2019: GBP1.0m) an increase due to the issue of additional share options.

In addition, the adjusting items also include a gain on the revaluation of contingent consideration of GBP1.9m (2019: GBP1.4m net loss). The current year gain relates to the reduction in the earn-out payment on the LDeX acquisition. This contingent payment relates to the EBITDA achieved during the 12 months to 31 December 2019 for which a multiple of six is applied. As a result, the reduction represents a GBP0.3m EBITDA variance to previous forecasts. In prior year, the final payment due on the Sonassi acquisition was GBP1.8m higher than the previous estimate. The structure of the Sonassi earn-out arrangement, with a high multiple factor under a ratchet mechanism, meant that a modest change in profitability within a certain range resulted in a substantial change in the amount due under the earn-out terms. The brand's performance exceeded management expectations in the final months of the earn-out period to July 2018. Offsetting this loss in prior year was a gain of GBP0.4m on the revaluation of the Bytemark contingent consideration with settlement paid in full.

In the prior year comparatives there was one additional adjustment: non-cash accelerated write off of previously capitalised arrangements fees of GBP0.1m following the Group entering into a new banking facility on 6 June 2018.

After deducting these items from the adjusted profit before tax; the reported profit before tax was GBP16.8m (2019: GBP16.2m) an increase of 4%. In percentage terms the profit before tax margin was a slight reduction to 14.9% (2019: 15.6%) with favourable movement on the gain/(loss) on contingent consideration offsetting trading result reductions.

Taxation

The tax charge for the year is GBP3.1m (2019: GBP3.3m). The tax charge for the year is made up of a corporation tax charge of GBP3.6m (2019: GBP5.0m) with a deferred tax credit of GBP0.5m (2019: GBP1.7m). The effective rate of tax for the year is 18.7% (2019: 20.6%). The movement in the year is heavily influenced by three main factors being: the swing in the tax charge in the current year from the non-taxable gain on revaluation of contingent consideration compared to the non-taxable deductible loss in prior year, tax effect from share-based remuneration and adjustments in the current year tax relating to prior period. We believe 19%, being the UK headline corporation tax rate, is considered a reasonable recurring effective tax rate for underlying profits. Further explanation of the tax charge for the year is given in note 4.

Profit for the year

After deducting the tax charge for the year from the profit before tax the Group has recorded a profit for the year from total operations of GBP13.7m (2019: GBP12.9m) an increase of 6%.

Earnings per share

The calculation of both adjusted earnings per share and basic earnings per share is included at note 6.

Basic earnings per share from continuing operations was 12.5p (2019: 11.9p), an increase of 5%.

Adjusted diluted earnings per share, based on profit for the year attributed to ordinary shareholders before amortisation charges of acquired intangible assets, acquisition costs, share-based payment charges, the gain/(loss) on the revaluation of contingent consideration, accelerated write off of arrangement fees on the bank facility, and the tax effect of these items was 16.3p (2019: 18.6p), a reduction of 12%.

The measure of adjusted diluted earnings per share as described above is a non-statutory measure which is commonly used to analyse the performance of companies particularly where M&A activity forms a significant part of their activities.

Acquisitions

On 28 February 2020, iomart acquired the managed private cloud division of privately owned ServerChoice Limited, for an initial consideration of GBP2.0m after a deduction of GBP0.1m for working capital, with a further maximum consideration of GBP0.9m. The initial payment was funded from a drawdown from the Company's revolving credit facility. The contingent consideration will be based on achievement of certain monthly recurring revenue targets in June 2020 and September 2020. Based on estimates of the probabilities of various levels of revenue, we expect the amount to be paid in respect of the final contingent consideration due will be GBP0.8m (note 12). The business purchase agreement saw the transfer of around 30 customers, GBP0.3m of fixed assets and a small number of staff based in Stevenage into our core managed cloud services business.

On 12 March 2020, iomart completed the acquisition of Memset Limited for an initial consideration of GBP2.7m, with a further maximum consideration of GBP1.0m. This initial payment included a deduction of GBP0.6m to settle the adjustments required to the locked box accounts in respect of the cash, debt and working capital position. The initial payment was funded from a drawdown from the Company's revolving credit facility. The contingent consideration will be based on achievement of certain monthly recurring revenue targets in December 2020. Based on estimates of the probabilities of various levels of revenue, we expect the amount to be paid in respect of the final contingent consideration due will be GBP0.5m (note 12). Memset is a well-established business based in Dunsfold, Surrey providing dedicated and virtualised private cloud infrastructure to around 2,000 customers.

Dividends

Our dividend policy, which has been in place for several years now, is based on the profitability of the business in the period. We have committed to a pay-out policy of up to 40% of the adjusted diluted earnings per share we deliver in a financial year.

This year we paid an interim dividend of 2.60p (2019: 2.45p) which was paid in January 2020. We have now proposed a final dividend payment of 3.93p per share (2019: 5.01p) which would result in a total dividend for the year of 6.53p (2019: 7.46p) representing a pay-out ratio of 40% of the adjusted diluted earnings per share for the year. The Board has taken the decision to pay a final dividend to shareholders as a result of the recurring revenue nature of the Group, the level of operating cash which we now deliver and the low level of indebtedness within the Group. Should the impact of Covid-19 increase in the year ahead, the Board will keep the level of future dividend payment under review. However, it should be noted the Group has not, to date, utilised any of the government furlough schemes and therefore believes that there is no impediment in this respect to paying a dividend to shareholders.

Cash flow and net debt

Net cash flows from operating activities

The Group continued to generate high levels of operating cash over the year. Cash flow from operations was GBP41.3m (2019: GBP39.1m before exceptional non-recurring costs) which represents a 95% conversion of adjusted EBITDA (2019: 93%). This strong level of cash flow conversion has been a constant feature over the years, recognising the strength of our business model and cash cycle. The adoption of IFRS 16, which reclassifies previous operating lease rental payments to lease repayments and interest represents a reclassification from net cash flows from operating activities of GBP3.0m to net cash flows from financing activities.

Payments of taxation in the year remained reasonably stable at GBP4.7m (2019: GBP5.4m) and results in a net cash flow from operating activities in the year of GBP36.6m (2019: GBP31.4m after paying GBP2.3m of non-recurring software licence fees).

Cash flow from investing activities

Given our strong position, in a growing market, we continue to invest large sums on investing activities split between both internal investments into our global infrastructure but also in the continuation of our disciplined acquisition strategy. The Group invested a total of GBP21.2m (2019: GBP35.3m) during the year.

The Group continues to invest in property, plant and equipment through expenditure on data centres and on equipment required to provide managed services to both its existing and new customers. As a result, the Group spent GBP14.7m (2019: GBP10.4m) on assets, net of related lease drawdowns, trade creditor movements and non-cash reinstatement provisions. This is broadly similar to last year after recognising the Maidenhead freehold purchase in December 2018 for GBP5.4m (excluding GBP0.3m of fees and taxes). We remain focused on increased automation and asset planning within the infrastructure estate with the aim of ensuring cost and utilisation efficiency.

Expenditure was also incurred on development costs of GBP1.4m (2019: GBP1.4m) and on intangible assets of GBP1.1m (2019: GBP1.1m).

In line with our strategy of accelerating our growth by acquisition the Group spent GBP4.2m (2019: GBP12.0m), net of cash acquired, in relation to the acquisitions of the managed private cloud division of privately owned ServerChoice Limited and Memset Limited, as described above. In the current year, the Group did not incur any expenditure in respect of contingent consideration due on previous acquisitions (2019: GBP4.7m).

Cash flow from financing activities

Drawdowns of GBP6.2m (2019: GBP25.9m) were made from the revolving credit facility in the year to fund the purchase of the acquisitions. Bank loan repayments of GBP2.0m (2019: GBP12.2m) were made in the year. We received GBP0.6m (2019: GBP0.3m) from the issue of shares as a result of the exercise of options by employees. We also made dividend payments of GBP8.3m (2019: GBP8.0m); paid finance costs of GBP1.7m (2019: GBP1.1m); and made lease repayments of GBP4.7m (2019: GBP0.5m). The adoption of IFRS 16, which reclassifies previous operating lease rentals appearing within cash flow from operations to repayment of lease liabilities and additional finance costs paid is the reason for the increase in these related cash outflows within financing activities.

Net cash flow

As a consequence, our overall cash generated during the year was GBP5.4m (2019: GBP0.6m) which resulted in cash and cash equivalent balances at the end of the year of GBP15.5m (2019: GBP10.1m).

Net Debt

The net debt position of the Group at the end of the period was GBP57.6m (2019: GBP39.2m) as shown below, of which nearly GBP20m is as a result of the adoption of IFRS 16. This represents a multiple of 1.3 times our annual adjusted EBITDA which we believe is a comfortable level of debt to carry given the recurring revenue business model and strong cash generation in the business. The level of net debt has increased purely as the result of the introduction of GBP20.3m of lease liability on the adoption of IFRS 16 (note 11).

 
 
                                          2020        2019 
                                       GBP'000     GBP'000 
 Bank revolver loan                     52,791      48,536 
 Lease liabilities                      20,347         777 
 Less: cash and cash equivalents      (15,497)    (10,069) 
 Net Debt                               57,641      39,244 
-----------------------------------  ---------  ---------- 
 

The banking facility, which provides an GBP80m revolving credit facility, matures in September 2022.

Financial position

The strength of our business model, with high recurring revenue, low customer concentration across wide sectors and a positive cash cycle is well established and creates a very strong financial position, even in the current challenging environment caused by the Covid-19 virus. The Group continues to generate substantial amounts of operating cash. The generation of that cash flow together with the committed bank loan facility for acquisitions, capital expenditure and general business purposes, means that the Group has the liquidity it requires to continue its growth through both organic and acquisitive means.

Scott Cunningham

Chief Financial Officer

24 June 2020

Definition of alternative profit measures:

Gross profit margin % is defined as Gross Profit / Revenue as a % (both as disclosed in the consolidated statement of comprehensive income)

Adjusted EBITDA margin % is defined as adjusted EBITDA (as defined earlier) / Revenue (as disclosed in the consolidated statement of comprehensive income) as a %

Adjusted PBT margin % is defined as adjusted PBT (as defined earlier) / Revenue (as disclosed in the consolidated statement of comprehensive income) as a %

Profit before tax margin % is defined as Profit before Tax / Revenue (both as disclosed in the consolidated statement of comprehensive income) as a %

Cash flow from operating activities before exceptional costs / Adjusted EBITDA % is defined as cash flow from operating activities before exceptional costs (as disclosed in the consolidated statement of cash flows) / Adjusted EBITDA (as defined earlier) as a %

Net debt / Adjusted EBIDTA level ratio is defined as Net Debt (as disclosed in the Chief Financial Officer's report) / Adjusted EBITDA (as defined earlier)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

YEARED 31 MARCH 2020

 
                                                              2020       2019 
                                                   Note    GBP'000    GBP'000 
 Revenue                                                   112,581    103,709 
 
 Cost of sales                                            (44,093)   (36,965) 
                                                         ---------  --------- 
 
 Gross profit                                               68,488     66,744 
 
 Administrative expenses                                  (51,387)   (47,952) 
 
 
 Operating profit                                           17,101     18,792 
 
 Analysed as: 
 Earnings before interest, tax, depreciation, 
  amortisation, acquisition costs and 
  share-based payments                                      43,510     42,232 
 Share-based payments                                      (1,243)    (1,008) 
 Acquisition costs                                           (438)      (351) 
 Depreciation                                       9     (15,635)   (13,091) 
 Amortisation - acquired intangible 
  assets                                            8      (6,159)    (6,492) 
 Amortisation - other intangible assets             8      (2,934)    (2,498) 
 
 
 Gain/(loss) on revaluation of contingent 
  consideration                                              1,856    (1,394) 
 Finance income                                                 39         21 
 Finance costs                                             (2,212)    (1,203) 
                                                         ---------  --------- 
 
 Profit before taxation                                     16,784     16,216 
 
 Taxation                                           4      (3,135)    (3,339) 
                                                         ---------  --------- 
 
 Profit for the year attributable 
  to equity holders of the parent                           13,649     12,877 
 
 
 Other comprehensive income 
 
 Amounts which may be reclassified 
  to profit or loss 
 Currency translation differences                               98        (8) 
------------------------------------------------  -----  ---------  --------- 
 Other comprehensive income for the 
  year                                                          98        (8) 
------------------------------------------------  -----  ---------  --------- 
 
 Total comprehensive income for the 
  year attributable to equity holders 
  of the parent                                             13,747     12,869 
 
 
 
 Basic and diluted earnings per share 
 Basic earnings per share                           6        12.5p      11.9p 
 Diluted earnings per share                         6        12.2p      11.6p 
------------------------------------------------  -----  ---------  --------- 
 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2020

 
 
                                               2020       2019 
                                   Note     GBP'000    GBP'000 
-------------------------------   -----  ----------  --------- 
 ASSETS 
 Non-current assets 
 Intangible assets - goodwill       8        86,479     85,382 
 Intangible assets - other          8        24,631     25,211 
 Trade and other receivables                  2,760      2,520 
 Property, plant and equipment      9        72,344     47,045 
                                            186,214    160,158 
 Current assets 
 Cash and cash equivalents                   15,497     10,069 
 Trade and other receivables                 23,237     20,794 
                                             38,734     30,863 
 
 Total assets                               224,948    191,021 
 
 LIABILITIES 
 Non-current liabilities 
 Trade and other payables                   (2,283)          - 
 Non-current borrowings             10     (70,109)   (48,957) 
 Provisions                                 (1,956)    (1,115) 
 Deferred tax                       5       (1,146)      (939) 
                                           (75,494)   (51,011) 
 Current liabilities 
 Contingent consideration due 
  on acquisitions                   12      (2,480)    (3,009) 
 Trade and other payables                  (31,948)   (30,933) 
 Current tax liabilities                        (3)    (1,315) 
 Current borrowings                 10      (3,029)      (356) 
                                           (37,460)   (35,613) 
 
 Total liabilities                        (112,954)   (86,624) 
 
 Net assets                                 111,994    104,397 
--------------------------------  -----  ----------  --------- 
 
 EQUITY 
 Share capital                                1,092      1,085 
 Own shares                                    (70)       (70) 
 Capital redemption reserve                   1,200      1,200 
 Share premium                               22,147     21,518 
 Merger reserve                               4,983      4,983 
 Foreign currency translation 
  reserve                                        50       (48) 
 Retained earnings                           82,592     75,729 
--------------------------------  -----  ----------  --------- 
  Total equity                              111,994    104,397 
--------------------------------  -----  ----------  --------- 
 

CONSOLIDATED STATEMENT OF CASH FLOWS

YEARED 31 MARCH 2020

 
                                                                  2020                2019 
                                                Note           GBP'000             GBP'000 
 
Profit before taxation                                          16,784              16,216 
(Gain)/loss on revaluation of 
 contingent consideration                                      (1,856)               1,394 
Finance costs - net                                              2,173               1,182 
Depreciation                                    9               15,635              13,091 
Amortisation                                    8                9,093               8,990 
Share-based payments                                             1,243               1,008 
Movement in trade receivables                                  (1,107)            (1,226) 
Movement in trade payables                                       (627)             (1,563) 
--------------------------------------------  ------  ----------------  ------------------ 
Cash flow from operations (before payment 
 of exceptional non-recurring cost)                             41,338              39,092 
Payment of exceptional non-recurring 
 cost                                                                -             (2,312) 
--------------------------------------------  ------  ----------------  ------------------ 
Cash flow from operations                                       41,338              36,780 
Taxation paid                                                  (4,719)             (5,353) 
Net cash flow from operating activities                         36,619              31,427 
 
Cash flow from investing activities 
Purchase of property, plant and 
 equipment                                      9             (14,688)            (10,383) 
Purchase of Maidenhead freehold                 9                    -             (5,729) 
Development costs                               8              (1,405)             (1,412) 
Purchase of intangible assets                   8              (1,065)             (1,107) 
Payments for current period acquisitions 
 net of cash acquired                                          (4,156)            (11,970) 
Contingent consideration paid                                        -             (4,688) 
Finance income received                                             39                  21 
Net cash used in investing activities                         (21,275)            (35,268) 
 
Cash flow from financing activities 
Issue of shares                                                    636                 292 
Drawdown of bank loans                                           6,150              25,860 
Repayment of lease liabilities                  11             (4,686)               (471) 
Repayment of bank loans                                        (2,000)            (12,200) 
Finance costs paid                                             (1,734)             (1,075) 
Dividends paid                                                 (8,282)             (7,991) 
Net cash (used in)/generated from 
 financing activities                                          (9,916)               4,415 
 
Net increase in cash and cash equivalents                        5,428                 574 
 
Cash and cash equivalents at the 
 beginning of the year                                          10,069               9,495 
-------------------------------------------   ------  ----------------  ------------------ 
 
Cash and cash equivalents at the end of 
 the year                                                       15,497              10,069 
 
 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

YEARED 31 MARCH 2020

 
                                               Foreign 
                                     Own      currency        Capital       Share 
                        Share     shares   translation     redemption     premium      Merger     Retained 
                      capital        EBT       reserve        reserve     account     reserve     earnings     Total 
                      GBP'000    GBP'000       GBP'000        GBP'000     GBP'000     GBP'000      GBP'000   GBP'000 
 ----------------  ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 
 Balance at 1 
  April 
  2018                  1,080       (70)          (40)          1,200      21,231       4,983       70,088    98,472 
 
 Profit for the 
  year                      -          -             -              -           -           -       12,877    12,877 
 Currency 
  translation 
  differences               -          -           (8)              -           -           -            -       (8) 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 Total 
  comprehensive 
  income                               -           (8)              -           -           -       12,877    12,869 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 
 Dividends - 
  final 
  (paid)                    -          -             -              -           -           -      (5,336)   (5,336) 
 Dividends - 
  interim 
  (paid)                    -          -             -              -           -           -      (2,655)   (2,655) 
 Share-based 
  payments                  -          -             -              -           -           -        1,008     1,008 
 Deferred tax on 
  share-based 
  payments                  -          -             -              -           -           -        (253)     (253) 
 Issue of share 
  capital                   5          -             -              -         287           -            -       292 
---------------- 
 Total 
  transactions 
  with owners               5          -             -              -         287           -      (7,236)   (6,944) 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 
 Balance at 31 
  March 2019            1,085       (70)          (48)          1,200      21,518       4,983       75,729   104,397 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 
 
 Profit for the 
  year                      -          -             -              -           -           -       13,649    13,649 
 Currency 
  translation 
  differences               -          -            98              -           -           -            -        98 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 Total 
  comprehensive 
  income                    -          -            98              -           -           -       13,649    13,747 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 
 Dividends - 
  final 
  (paid)                    -          -             -              -           -           -      (5,448)   (5,448) 
 Dividends - 
  interim 
  (paid)                    -          -             -              -           -           -      (2,834)   (2,834) 
 Share-based 
  payments                  -          -             -              -           -           -        1,243     1,243 
 Deferred tax on 
  share-based 
  payments                  -          -             -              -           -           -          253       253 
 Issue of share 
  capital                   7          -             -              -         629           -            -       636 
---------------- 
 Total 
  transactions 
  with owners               7          -             -              -         629           -      (6,786)   (6,150) 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 
 
 Balance at 31 
  March 2020            1,092       (70)            50          1,200      22,147       4,983       82,592   111,994 
----------------   ----------  ---------  ------------  -------------  ----------  ----------  -----------  -------- 
 
 

NOTES TO THE FINANCIAL INFORMATION

YEARED 31 MARCH 2020

   1.         GENERAL INFORMATION 

iomart Group plc is a public listed company listed on the Alternative Investment Market ("AIM"), incorporated and domiciled in the United Kingdom and registered in Scotland under the Companies Act 2006. The address of the registered office is Lister Pavilion, Kelvin Campus, West of Scotland Science Park, Glasgow, G20 0SP.

   2.         ACCOUNTING POLICIES 

Basis of preparation

The financial information set out in the announcement does not constitute the Group's statutory accounts for the years ended 31 March 2020 and 31 March 2019 within the meaning of section 434 of the Companies Act 2006. The financial information for the year ended 31 March 2019 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The financial information for the year ended 31 March 2020 is derived from the statutory accounts for that year which were approved by the directors on 24 June 2020. The statutory accounts for the year ended 31 March 2020 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors reported on those accounts; their report was unqualified and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The Group's financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the Companies Act 2006 applicable to companies reporting under IFRS.

The Group's financial statements have been prepared under the historical cost convention.

Adoption of new and revised Standards - Amendments to IFRS that are mandatorily effective for the current year

In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective in the current year.

IFRS 16 - Leases

In the current year, the Group has applied IFRS 16 that is effective for annual periods that begin on or after 1 January 2019. The date of initial application of IFRS 16 for the Group is 1 April 2019. IFRS 16 introduces significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a lease liability at the commencement of all contracts that are, or contain a lease, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value (below GBP5,000).

Approach to transition

The Group has applied IFRS 16 using the modified retrospective adoption method, with no restatement of prior year comparatives, and has recognised leases on balance sheet as at 1 April 2019. From 1 April 2019, the Group recognises a right-of-use asset and corresponding lease liability on the balance sheet with respect of all lease arrangements in which it is a lessee, except for short-term leases and low value leases. At this date, the Group has elected to measure the right-of-use assets to an amount equal to the lease liability.

For contracts in place at the date of transition, the Group has elected to apply the definition of a lease from IAS 17 and IFRIC 4 and has not applied IFRS 16 to arrangements that were previously not identified as leases under IAS 17 and IFRIC 4.

The Group has elected not to include initial direct costs in the measurement of the right-of-use asset for operating leases in existence at the date of transition.

Instead of performing an impairment review on the right-of-use assets for operating leases in existence at the date of transition, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16.

On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets, the Group has applied the optional exemptions to not recognise the right-of-use assets but to account for the lease expense on a straight line basis over the remaining lease term.

On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 2.85%.

Judgements applied in the adoption of IFRS 16 include determining the lease term for those leases with termination or extension options and determining an incremental borrowing rate where the rate implicit in a lease could not be readily determined. The directors do not consider that there have been material judgements made.

Full details of lease liabilities are set out in note 11.

The following is a reconciliation of total operating lease commitments at 31 March 2019 to the lease liabilities recognised at 1 April 2019:

 
                                                              GBP'000 
   --------------------------------------------------------   ------- 
 Total operating lease commitments disclosed at 31 
  March 2019                                                   21,610 
  Discounted using the lessee's incremental borrowing 
   rate at the date of initial application                    (3,126) 
  Less: low value and short-term leases recognised 
   on a straight line basis as expense                        (1,516) 
  Add: adjustments as a result of a different treatment 
  of extension and termination options *                        3,453 
Total lease liability recognised under IFRS 16 at 
 1 April 2019 (note 11)                                        20,421 
-----------------------------------------------------------   ------- 
 

* On adoption of IFRS 16, lease extension options have been extended beyond the non-cancellable period under IAS 17 and rental payments increased on a significant property lease following a rent review in the current period .

Leases - Accounting policy applicable from 1 April 2019 following the adoption of IFRS 16

For any new contracts entered into on or after 1 April 2019, the Group will consider whether a contract is, or contains a lease. A lease is defined as a contract, or part of a contract, that conveys the right to use of an asset (the underlying asset) for a period of time in exchange for consideration. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group; the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract; and the Group has the right to direct the use of the identified asset throughout the period of use.

Measurement and recognition of leases as a lessee

At the lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability measured at the present value of future lease payments, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).

The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group assesses the right-of-use asset for impairment under IAS 36 'Impairment of Assets' where such indicators exist.

The lease liability is initially measured at the present value of lease payments that are not paid at the commencement date, discounted using the rate implicit in the lease. If this rate cannot readily be determined, the Group applies an incremental borrowing rate. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and by reducing the liability by payments made. The Group re-measures the lease liability (and adjusts the related right--of--use asset) whenever the lease term has changed or a lease contract is modified and the modification is not accounted for as a separate lease.

Lease payments included in the measurement of the lease liability can be made up of fixed payments, variable payments based on an index or rate, amounts expected to be payable under a residual guarantee and payments arising from options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is re-measured to reflect any reassessment or modification, or if there are changes in fixed payments. When the lease liability is re-measured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.

The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight line basis over the lease term.

Under IFRS 16, the Group recognises depreciation of the right-of-use asset and interest on lease liabilities in the consolidated statement of comprehensive income over the period of the lease. On the balance sheet, right-of-use assets have been included in property, plant and equipment and software and lease liabilities have been included in borrowings due within one year and after more than one year.

Under IFRS 16, the Group also separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within financing activities) in the consolidated statement of cash flows. In the prior year, operating rental costs were presented within operating activities.

In accordance with IAS 17 Leases, the economic ownership of a leased asset is deemed to have been transferred to the Group (the lessee) if the Group bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of inception of the lease at the fair value of the leased asset or, if lower, the present value of the minimum lease payments plus incidental payments, if any, to be borne by the lessee. A corresponding amount is recognised as a lease liability. The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to profit or loss (finance costs) over the period of the lease.

All other leases are regarded as operating leases and the payments made under them are charged to profit or loss on a straight line basis over the lease term. Lease incentives are spread over the term of the lease.

   3.     sEGMENTAL ANALYSIS 

The chief operating decision-maker has been identified as the Chief Executive Officer ("CEO") of the Company. The Group has two operating segments and the CEO reviews the Group's internal reporting which recognises these two segments in order to assess performance and to allocate resources. The Group has determined its reportable segments which are also its operating segments based on these reports.

The Group currently has two operating and reportable segments being Easyspace and Cloud Services.

-- Easyspace - this segment provides a range of shared hosting and domain registration services to micro and SME companies.

-- Cloud Services - this segment provides managed cloud computing facilities and services, through a network of owned data centres, to the larger SME and corporate markets. The segment uses several routes to market including iomart Cloud, Infrastructure as a Service (IaaS), SystemsUp, Cristie Data, Sonassi, LDeX, Bytemark plus Memset which was acquired in the year.

Information regarding the operation of the reportable segments is included below. The CEO assesses the performance of the operating segments based on revenue and a measure of earnings before interest, tax, depreciation and amortisation (EBITDA) before any allocation of Group overheads, charges for share-based payments, costs associated with acquisitions and any gain or loss on revaluation of contingent consideration and material non-recurring items. This segment EBITDA is used to measure performance as the CEO believes that such information is the most relevant in evaluating the results of the segment.

The Group's EBITDA for the year has been calculated after deducting Group overheads from the EBITDA of the two segments as reported internally. Group overheads include the cost of the Board, all the costs of running the premises in Glasgow, the Group marketing, human resource, finance and design functions and legal and professional fees.

The segment information is prepared using accounting policies consistent with those of the Group as a whole.

The assets and liabilities of the Group are not reviewed by the chief operating decision-maker on a segment basis. Therefore none of the Group's assets and liabilities are segmental assets and liabilities and are all unallocated for segmental disclosure purposes. For that reason the Group has not disclosed details of segmental assets and liabilities.

All segments are continuing operations. No customer accounts for 10% or more of external revenues. Inter-segment transactions are accounted for using an arms-length commercial basis.

Operating Segments

Revenue by Operating Segment

 
                          2020      2019 
                       GBP'000   GBP'000 
----------------      --------  -------- 
 Easyspace              12,792    13,113 
 Cloud Services         99,789    90,596 
                      --------  -------- 
                       112,581   103,709 
-----------------     --------  -------- 
 

Geographical Information

In presenting the consolidated information on a geographical basis, revenue is based on the geographical location of customers. There is no single country where revenues are individually material other than the United Kingdom. The United Kingdom is the place of domicile of the parent company, iomart Group plc.

Analysis of Revenue by Destination

 
                                   2020      2019 
                                GBP'000   GBP'000 
-------------------------      --------  -------- 
 United Kingdom                  95,333    86,246 
 Rest of the 
  World                          17,248    17,463 
                               --------  -------- 
 Revenue from operations        112,581   103,709 
--------------------------     --------  -------- 
 

Profit by Operating Segment

 
                                       2020                                         2019 
                                Depreciation,                                Depreciation, 
                                amortisation,                                amortisation, 
                                  acquisition                                  acquisition 
                                    costs and                                    costs and 
                    Adjusted      share-based        Operating   Adjusted      share-based        Operating 
                      EBITDA         payments    profit/(loss)     EBITDA         payments    profit/(loss) 
                     GBP'000          GBP'000          GBP'000    GBP'000          GBP'000          GBP'000 
-----------------  ---------  ---------------  ---------------  ---------  ---------------  --------------- 
 Easyspace             5,649          (1,459)            4,190      6,182          (1,595)            4,587 
 Cloud Services       42,307         (23,269)           19,038     40,447         (20,486)           19,961 
 Group overheads     (4,446)                -          (4,446)    (4,397)                -          (4,397) 
 Acquisition 
  costs                    -            (438)            (438)          -            (351)            (351) 
 Share-based 
  payments                 -          (1,243)          (1,243)          -          (1,008)          (1,008) 
-----------------  ---------  ---------------  ---------------  ---------  ---------------  --------------- 
                      43,510         (26,409)           17,101     42,232         (23,440)           18,792 
 Gain/(loss) 
  on revaluation 
  of contingent 
  consideration                                          1,856                                      (1,394) 
 Group interest 
  and tax                                              (5,308)                                      (4,521) 
                   ---------  ---------------  ---------------  ---------  ---------------  --------------- 
 Profit for the 
  year                                                  13,649                                       12,877 
-----------------  ---------  ---------------  ---------------  ---------  ---------------  --------------- 
 

Group overheads, acquisition costs, share-based payments, interest and tax are not allocated to segments.

   4.     TAXATION 
 
                                                   2020      2019 
                                                GBP'000   GBP'000 
 ------------------------------------------    --------  -------- 
Corporation Tax: 
  Tax charge for the year                       (3,976)   (4,920) 
  Adjustment relating to prior years                357     (119) 
-------------------------------------------    --------  -------- 
  Total current taxation charge                 (3,619)   (5,039) 
 
  Deferred Tax: 
  Origination and reversal of temporary 
  differences                                       367     1,661 
  Adjustment relating to prior years                266        24 
  Effect of different statutory tax rates 
   of overseas jurisdictions                       (13)       (8) 
  Effect of changes in tax rates                  (136)        23 
-------------------------------------------    --------  -------- 
  Total deferred taxation credit                    484     1,700 
 
  Total taxation charge                         (3,135)   (3,339) 
-------------------------------------------    --------  -------- 
 

The differences between the total taxation charge shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax are as follows:

 
 
 
                                                           2020       2019 
                                                        GBP'000    GBP'000 
 -------------------------------------------------    ---------  --------- 
 
  Profit before tax                                      16,784     16,216 
--------------------------------------------------    ---------  --------- 
 
  Tax charge @ 19% (2019: 19%)                            3,189      3,081 
 
  Expenses disallowed for tax purposes                       20         76 
  Tax effect of net (loss)/gain on revaluation 
  of contingent consideration                             (353)        265 
  Adjustments in current tax relating to prior 
  years                                                   (357)        119 
  Tax effect of different statutory tax rates 
   of overseas jurisdictions                                  6         22 
  Movement in deferred tax relating to changes 
  in tax rates                                              136       (23) 
  Tax effect of share-based remuneration                    651      (192) 
  Movement in unprovided deferred tax related 
   to development costs                                      40         11 
  Movement in unprovided deferred tax related to 
   property, plant and equipment                             69          4 
  Movement in deferred tax relating to prior 
   years                                                  (266)       (24) 
 
  Total taxation charge for the year                      3,135      3,339 
--------------------------------------------------    ---------  --------- 
 

The weighted average applicable tax rate for the year ended 31 March 2020 was 19% (2019: 19%). The effective rate of tax for the year, based on the taxation charge for the year as a percentage of the profit before tax, is 18.7% (2019: 20.6%). The net decrease of 1.9% of the effective tax rate for the year is largely due to the following:

-- the decrease in the tax effect as a result of a net gain on revaluation of contingent consideration in the year (2019: net loss) and the movement relating to adjustments in current tax relating to prior years;

-- the increase in the tax effect of share-based remuneration as a result of the decrease in the year end share price from 2019 to 2020; and

   --     the impact of the increase in the deferred tax rate from 17% to 19%. 

A UK corporation tax rate of 19% has been applied based on the rate substantively enacted at the balance sheet date. Deferred tax assets and liabilities at 31 March 2020 have been calculated based on the rate of 19% enacted at the balance sheet date.

   5.         DEFERRED TAX 

The Group recognised deferred tax assets and liabilities as follows:

 
                                                          2020      2019 
                                                       GBP'000   GBP'000 
-------------------------------------------------     --------  -------- 
 
 Share-based remuneration                                1,069     1,378 
 Capital allowances temporary 
  differences                                            1,364     1,632 
 Deferred tax on development 
  costs                                                      -     (422) 
 Deferred tax on acquired assets with no capital 
  allowances                                              (88)     (157) 
 Deferred tax on customer relationships                (3,298)   (3,173) 
 Deferred tax on intangible 
  software                                               (193)     (197) 
----------------------------------------------------  --------  -------- 
 Deferred tax liability                                (1,146)     (939) 
----------------------------------------------------  --------  -------- 
 

At the year end, the Group had no unused tax losses (2019: GBPnil) available for offset against future profits.

The movement in the deferred tax account during the year was:

 
                                                                     Deferred 
                                          Capital                      tax on 
                                       allowances                    acquired 
                       Share-based      temporary    Development       assets        Customer    Intangible 
                      remuneration    differences          costs      with no   relationships      software      Total 
                           GBP'000        GBP'000        GBP'000      capital         GBP'000       GBP'000    GBP'000 
                                                                   allowances 
                                                                      GBP'000 
-------------------  -------------  -------------  -------------  -----------  --------------  ------------  --------- 
 
Balance at 1 April                                                                                            (1,319 
 2018                    1,588          1,455          (329)         (235)        (3,581)         (217)          ) 
Acquired on 
 acquisition 
 of subsidiaries           -            (226)            -             -           (841)            -         (1,067) 
Credited to equity       (253)            -              -             -             -              -          (253) 
Credited/(charged) 
 to statement of 
 comprehensive 
 income                   43             394           (108)          87           1,249            20         1,685 
Effect of different 
 tax rates of 
 overseas 
 jurisdictions             -              -              -             -            (8)             -           (8) 
Effect of changes 
 in tax rates              -              9             15            (9)            8              -           23 
Balance at 31                                                                                                  (939 
 March 2019              1,378          1,632          (422)         (157)        (3,173)         (197)          ) 
Acquired on 
 acquisition 
 of subsidiaries           -            (82)             -             -           (875)            -          (957) 
Charged to equity         253             -              -             -             -              -           253 
Credited/(charged) 
 to statement of 
 comprehensive 
 income                  (724)          (373)           472           87           1,131            27          620 
Effect of different 
 tax rates of 
 overseas 
 jurisdictions             -              7              -             -             6              -           13 
Effect of changes 
 in tax rates             162            180           (50)          (18)          (387)           (23)        (136) 
Balance at 31                                                                                                 (1,146 
 March 2020              1,069          1,364            -           (88)         (3,298)         (193)          ) 
-------------------  -------------  -------------  -------------  -----------  --------------  ------------  --------- 
 

The deferred tax asset in relation to share-based remuneration arises from the anticipated future tax relief on the exercise of share options.

The deferred tax on capital allowances temporary differences arises mainly from plant and equipment in the Cloud Services segment where the tax written down value varies from the net book value.

The deferred tax on development costs arises from development expenditure on which tax relief is received in advance of the amortisation charge.

The deferred tax on acquired assets arises from data centre equipment acquired through the acquisition of iomart Datacentres Limited on which depreciation is charged but on which there are no capital allowances available.

The deferred tax on customer relationships and intangible software arises from permanent differences on acquired intangible assets.

   6.         EARNINGS PER SHARE 

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, after deducting any own shares held in Treasury and held by the Employee Benefit Trust. Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the total of the weighted average number of ordinary shares in issue during the year, after deducting any own shares, and adjusting for the dilutive potential ordinary shares relating to share options.

 
 Total operations 
                                                          2020        2019 
                                                       GBP'000     GBP'000 
------------------------------------------------    ----------  ---------- 
 Profit for the financial year and basic 
 earnings attributed to ordinary shareholders           13,649      12,877 
------------------------------------------------    ----------  ---------- 
 Weighted average number of ordinary                        No          No 
  shares:                                                  000         000 
 
 Called up, allotted and fully paid at 
  start of year                                        108,510     107,990 
 Own shares held by Employee Benefit 
  Trust                                                  (141)       (141) 
 Issued share capital in the year                          436         396 
------------------------------------------------ 
 Weighted average number of ordinary 
  shares - basic                                       108,805     108,245 
 
 Dilutive impact of share options                        2,861       2,909 
 
 Weighted average number of ordinary 
  shares -diluted                                      111,666     111,154 
------------------------------------------------    ----------  ---------- 
 
 Basic earnings per share                                 12.5        11.9 
                                                             p           p 
 Diluted earnings per share                               12.2        11.6 
                                                             p           p 
-------------------------------------------------   ----------  ---------- 
 
 
 
                                                         2020       2019 
   Adjusted earnings per share                        GBP'000    GBP'000 
------------------------------------------------    ---------  --------- 
 
 Profit for the financial year and basic 
  earnings attributed to ordinary shareholders         13,649     12,877 
 - Amortisation of acquired intangible 
  assets                                                6,159      6,492 
 - Acquisition costs                                      438        351 
 - Share-based payments                                 1,243      1,008 
 - Net (gain)/loss on revaluation of 
  contingent consideration                            (1,856)      1,394 
 - Accelerated write off of arrangement 
  fees on bank facility                                     -         63 
 - Tax impact of adjusted items                       (1,406)    (1,462) 
-------------------------------------------------   ---------  --------- 
 Adjusted profit for the financial 
 year and adjusted earnings attributed 
 to ordinary shareholders                              18,227     20,723 
------------------------------------------------    ---------  --------- 
 
 Adjusted basic earnings per share                       16.8       19.1 
                                                            p          p 
 Adjusted diluted earnings per share                     16.3       18.6 
                                                            p          p 
-------------------------------------------------   ---------  --------- 
 
 
   7.         ACQUISITIONS 

On 12 March 2020, the Company acquired the entire share capital of Memset Limited, and on 28 February 2020, iomart Hosting Limited, a 100% owned subsidiary of the Company, acquired the net assets of the managed private cloud business formerly operated by ServerChoice Limited. Total cash paid on acquisitions, net of cash acquired, in the year ended 31 March 2020 was GBP4.2m.

Memset Limited

The Group acquired 100% of the issued share capital of Memset Limited ("Memset") on 12 March 2020.

Memset provides a range of cloud VPS and dedicated servers to around 2,000 customers from its data centre in Dunsfold, Surrey and a third party data centre in Reading.

The acquisition is in line with the Group's strategy to grow its operations, both organically and by acquisition, and provides the Group with additional data centre space.

During the current year, the Group incurred GBP172,000 of third party acquisition related costs in respect of this acquisition. These expenses are included in administrative expenses in the Group's consolidated statement of comprehensive income for the year ended 31 March 2020.

The following table summarises the consideration to acquire Memset, and the amounts of identified assets acquired and liabilities assumed at the acquisition date, which are provisional.

 
                                                  Book     Fair value      Final 
                                                 value    adjustments       fair 
                                               GBP'000        GBP'000      value 
                                                                         GBP'000 
-------------------------------------------  ---------  -------------  --------- 
 Recognised amounts of net assets acquired 
  and liabilities assumed: 
 Cash and cash equivalents                         547              -        547 
 Trade and other receivables                       740              -        740 
 Property, plant and equipment                   2,894              -      2,894 
 Intangible assets                                  56          2,308      2,364 
 Trade and other payables                      (1,427)              -    (1,427) 
 Current borrowings                            (1,088)              -    (1,088) 
 Borrowings due after more than 1 year           (628)              -      (628) 
 Deferred tax liability                           (82)          (438)      (520) 
-------------------------------------------  ---------  -------------  --------- 
 Identifiable net assets                         1,012          1,870      2,882 
 Goodwill                                                                    331 
-------------------------------------------  ---------  -------------  --------- 
 Total consideration                                                       3,213 
-------------------------------------------  ---------  -------------  --------- 
 
 Satisfied by: 
 Cash - paid on acquisition                                                2,713 
 Contingent consideration - payable                                          500 
 Total consideration transferred                                           3,213 
-------------------------------------------  ---------  -------------  --------- 
 

The acquisition of Memset was completed using a "locked box" mechanism, on a no cash, no debt, and normalised working capital basis. An initial payment of GBP2,713,000 was made at completion. This initial payment included a deduction of GBP587,000 to settle the adjustments required to the locked box accounts in respect of the cash, debt and working capital position at the locked box date.

The share purchase agreement included a provision requiring the Company to pay the former shareholders of Memset an additional amount contingent on the level of a particular portion of the monthly recurring revenue ("MRR") in December 2020 ("the Deferred Payment").

The potential undiscounted amount of the Deferred Payment that the Company could be required to pay is between GBPnil and GBP1,000,000. The amount of contingent consideration payable, which was recognised as of the acquisition date, was GBP500,000. The level of the relevant MRR was estimated by considering different scenarios based on the current level of the MRR, historic performance, known and agreed changes to the current level, and forecasts. In addition to the minimum and maximum, those scenarios reviewed had a range of outcomes for the amount of the Deferred Payment of GBP320,000 to GBP700,000. A weighted average, based on management estimates of the probability of the achievement of the various levels of MRR, was then calculated to give the expected outcome of the amount of the Deferred Payment of GBP500,000.

The goodwill arising on the acquisition of Memset is attributable to the premium payable for a pre-existing, well-positioned business and the specialised, industry specific knowledge of the management and staff, together with the benefits to the Group in merging the business with its existing infrastructure and the anticipated future operating synergies from the combination. The goodwill is not expected to be deductible for tax purposes.

The name "Memset" is not actively advertised or promoted. The standard Memset contracts restrict the ability of Memset to sell, distribute or lease any personal information it holds on customers unless the customer's permission is given. As a consequence, there is no significant value in either the trade name/brand or customer lists acquired at the acquisition date and therefore no value has been attributed to either intangible asset.

The fair value of the financial assets acquired includes trade receivables with a fair value of GBP740,000. The gross amount due under contracts is GBP740,000 all of which is expected to be collectable.

The fair value included in respect of the acquired customer relationships intangible asset is GBP2,308,000.

To estimate the fair value of the customer relationships intangible asset, a discounted cash flow method, specifically the income approach, was used with reference to the directors' estimates of the level of revenue, which will be generated from them. A pre-tax discount rate of 11.9% was used for the valuation. Customer relationships are being amortised over an estimated useful life of 8 years.

Memset earned revenue of GBP282,000 and generated profits, before allocation of group overheads, share-based payments and tax, of GBP25,000 in the period since acquisition.

Net assets of the managed private cloud business formerly operated by ServerChoice Limited

On 28 February 2020, the Group acquired the net assets of the managed private cloud business formerly operated by ServerChoice Limited ("the ServerChoice assets"). The acquisition of the net assets and the transfer of employees engaged in the business, together satisfy the criteria for the definition of a business under IFRS 3 and the acquisition has therefore been treated as a business combination.

The acquisition is in line with the Group's strategy to grow its operations both organically and by acquisition and provides an additional high quality customer base.

During the current year, the Group incurred GBP35,000 of third party acquisition related costs in respect of this acquisition. These expenses are included in administrative expenses in the Group's consolidated statement of comprehensive income for the year ended 31 March 2020.

The following table summarises the consideration to acquire the business, and the amounts of identified assets acquired and liabilities assumed at the acquisition date, which are provisional.

 
                                                  Book     Fair value      Final 
                                                 value    adjustments       fair 
                                               GBP'000        GBP'000      value 
                                                                         GBP'000 
-------------------------------------------  ---------  -------------  --------- 
 Recognised amounts of net assets acquired 
  and liabilities assumed: 
 Property, plant and equipment                     297              -        297 
 Intangible assets                                   -          2,302      2,302 
 Trade and other payables                        (111)              -      (111) 
 Deferred tax liability                              -          (437)      (437) 
-------------------------------------------  ---------  -------------  --------- 
 Identifiable net assets                           186          1,865      2,051 
 Goodwill                                                                    766 
-------------------------------------------  ---------  -------------  --------- 
 Total consideration                                                       2,817 
-------------------------------------------  ---------  -------------  --------- 
 
 Satisfied by: 
 Cash - paid on acquisition                                                1,990 
 Contingent consideration - payable                                          827 
 Total consideration transferred                                           2,817 
-------------------------------------------  ---------  -------------  --------- 
 

The business purchase agreement ("BPA") included provisions requiring the Group to pay to ServerChoice Limited two additional contingent amounts. These are based on the level of the total monthly recurring revenue ("MRR") invoiced to specific customers in June 2020 and September 2020, together the "Deferred Payments".

The potential undiscounted amounts of the Deferred Payments are between GBPnil and GBP887,000. The amount of contingent consideration payable, which was recognised as of the acquisition date, was GBP827,000. The levels of the relevant MRR, expected to be invoiced in June 2020 and September 2020, were estimated by considering different scenarios based on the current level of the MRR, historic performance, known and agreed changes to the current level, and forecasts.

In addition to the minimum of GBPnil and the maximum of GBP887,000, those scenarios reviewed for the Deferred Consideration had a range of outcomes for the Deferred Payment of GBP425,000 to GBP830,000. A weighted average, based on management estimates of the probability of the achievement of the various levels of MRR, was then calculated to give the expected outcome of the amount of the Deferred Payment of GBP827,000.

The goodwill arising on the acquisition of the former ServerChoice managed private cloud business is attributable principally to the benefits to the Group in merging the business with its existing infrastructure and the anticipated future operating synergies from the combination. The goodwill is not expected to be deductible for tax purposes.

Apart from the goodwill, the only intangible asset acquired is the customer relationships, which have been fair valued at GBP2,302,000.

To estimate the fair value of the customer relationships intangible asset, a discounted cash flow method, specifically the income approach, was used with reference to the directors' estimates of the level of revenue, which will be generated from them. A pre-tax discount rate of 13.0% was used for the valuation. Customer relationships are being amortised over an estimated useful life of 8 years.

The acquired managed private cloud business earned revenue of GBP139,000 and generated profits, before allocation of group overheads, share-based payments and tax, of GBP67,000 in the period since acquisition.

Pro-forma full year information

The following summary presents the Group as if the businesses acquired during the year had been acquired on 1 April 2019. The amounts include the results of the acquired business, depreciation and amortisation of the acquired property, plant and equipment plus a post-tax amount of GBP691,000 in respect of the amortisation of intangible assets recognised on acquisition. The amounts do not include any possible synergies from the acquisition. The information is provided for illustrative purposes only and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of the future results of combined companies.

 
                                    Pro-forma year 
                                    ended 31 March 
                                              2020 
-------------------------------  ----------------- 
                                           GBP'000 
-------------------------------   ---------------- 
 Revenue                                   119,497 
 Profit after tax for the year              13,779 
--------------------------------  ---------------- 
 
   8.    INTANGIBLE ASSETS 
 
                                                      Acquired                                       Domain 
                     Goodwill     Development         Customer                 Beneficial             names 
                                        costs    relationships    Software      contracts    & IP addresses      Total 
                      GBP'000         GBP'000          GBP'000     GBP'000        GBP'000           GBP'000    GBP'000 
----------------  -----------  --------------  ---------------  ----------  -------------  ----------------  --------- 
 Cost 
 At 1 April 2018       75,837           7,781           47,999       6,943             86               280    138,926 
 Additions                  -               -                -       1,082              -                 -      1,082 
 Currency 
  translation 
  differences               -               -             (13)           -              -                 -       (13) 
 Acquired on 
  acquisition 
  of 
  subsidiaries          9,545               -            4,780          14              -                 -     14,339 
 Development 
  cost 
  capitalised               -           1,412                -           -              -                 -      1,412 
 At 31 March 
  2019                 85,382           9,193           52,766       8,039             86               280    155,746 
 Additions                  -               -                -       2,490              -                 -      2,490 
 Currency 
  translation 
  differences               -               -               38        (33)              -                 -          5 
 Acquired on 
  acquisition 
  of 
  subsidiaries          1,097               -            4,610           -              -                56      5,763 
 Disposals                  -               -                -       (173)              -                 -      (173) 
 Development 
  cost 
  capitalised               -           1,405                -           -              -                 -      1,405 
 At 31 March 
  2020                 86,479          10,598           57,414      10,323             86               336    165,236 
----------------  -----------  --------------  ---------------  ----------  -------------  ----------------  --------- 
 
 Accumulated 
 amortisation: 
 At 1 April 2018            -         (5,424)         (27,303)     (3,115)           (41)             (280)   (36,163) 
 Charge for the 
  year                      -         (1,442)          (6,492)     (1,049)            (7)                 -    (8,990) 
----------------  -----------  --------------  ---------------  ----------  -------------  ----------------  --------- 
 At 31 March 
  2019                      -         (6,866)         (33,795)     (4,164)           (48)             (280)   (45,153) 
 Charge for the 
  year                      -         (1,507)          (6,159)     (1,420)            (7)                 -    (9,093) 
 Currency 
  translation 
  differences               -               -                -        (53)              -                 -       (53) 
 Disposals                  -               -                -         173              -                 -        173 
----------------  -----------  --------------  ---------------  ----------  -------------  ----------------  --------- 
 At 31 March 
  2020                      -         (8,373)         (39,954)     (5,464)           (55)             (280)   (54,126) 
----------------  -----------  --------------  ---------------  ----------  -------------  ----------------  --------- 
 
 Carrying 
 amount: 
 
 At 31 March 
  2020                 86,479           2,225           17,460       4,859             31                56    111,110 
----------------  -----------  --------------  ---------------  ----------  -------------  ----------------  --------- 
 
 At 31 March 
  2019                 85,382           2,327           18,971       3,875             38                 -    110,593 
----------------  -----------  --------------  ---------------  ----------  -------------  ----------------  --------- 
 

Of the total additions in the year of GBP2,490,000 (2019: GBP1,082,000), GBP1,425,000 was included within lease liabilities within borrowings (2019: GBPnil). There were no amounts included in trade payables at the year end (2019: GBPnil). Consequently, the consolidated statement of cash flows discloses a figure of GBP1,065,000 (2019: GBP1,107,000) as the cash outflow in respect of intangible asset additions in the year.

All amortisation and impairment charges are included in the depreciation, amortisation and impairment of non-financial assets classification, which is disclosed as administrative expenses in the statement of comprehensive income.

As disclosed in note 11, on 1 April 2019, the Group adopted IFRS 16. At 31 March 2020, a total of GBP1.4m is recognised within additions to software for appropriate lease transactions in the current year with a corresponding amortisation charge of GBP0.2m.

Included within customer relationships are the following significant items: customer relationships in relation to the acquisitions of Memset Limited of GBP2.3m with a useful life of 8 years, the managed private cloud business of ServerChoice Limited of GBP2.3m with a useful life of 8 years, Bytemark Limited with a net book value of GBP0.9m and LDeX Group Limited of GBP2.7m both with a remaining useful life of 7 years. Sonassi Limited with a net book value of GBP3.6m and a remaining useful life of 6 years, Dediserve Limited with a net book value of GBP1.4m and a remaining useful of 6 years, Simple Servers Limited with a net book value of GBP0.7m and a remaining useful life of 6 years, Backup Technology with a net book value of GBP0.8m and a remaining useful life of 2 years and United Hosting with a net book value of GBP1.4m and a remaining useful life of 4 years.

During the year, goodwill was reviewed for impairment in accordance with IAS 36 "Impairment of Assets". No impairment charges (2019: GBPnil) arose as a result of this review. For this review goodwill was allocated to individual Cash Generating Units (CGU) on the basis of the Group's operations. The goodwill acquired in the year on all acquisitions has been allocated to the Cloud Services CGU as this is the CGU expected to benefit from the business combination.

The carrying value of goodwill by each CGU is as follows:

 
 Cash Generating           2020       2019 
  Units (CGU)           GBP'000    GBP'000 
 Easyspace               23,315     23,315 
 Cloud Services          63,164     62,067 
                         86,479     85,382 
   -----------------  ---------  --------- 
 

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by the Board covering a three year period. These projections are the result of detailed planning and assume similar levels of organic growth as the Group has experienced in the previous years. As outlined previously, management remain confident in sustaining such levels of growth despite the current situation surrounding Covid-19. The impact of the pandemic has been considered in great detail when finalising these projections and they are perceived to be a reliable basis upon which to base our impairment testing.

The growth rates and margins used to extrapolate estimated future performance in the two years after the initial approved three year period continue to be based on past growth performance adjusted downwards to take into account the additional risk due to the passage of time. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. The growth rates used to estimate future performance beyond the periods covered by the annual and strategic planning processes do not exceed the long-term average growth rates for similar products.

In determining the value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Management continue to apply the judgement that there are two distinct CGUs within the Group, namely Cloud Services and Easyspace. These segments have been derived with due consideration to IAS 36. The assumptions used for the CGU included within the impairment reviews are as follows:

 
                                           Easyspace   Cloud Services 
-------------------------------------     ----------  --------------- 
 Discount rate                                 13.1%            12.5% 
 Future perpetuity rate                         0.0%             2.0% 
 Initial period for which cash flows 
  are estimated (years)                            5                5 
---------------------------------------   ----------  --------------- 
 

Based on an analysis of the impairment calculation's sensitivities to changes in key parameters (growth rate, discount rate and pre-tax cash flow projections) there was no reasonably possible scenario where the CGU's recoverable amount would fall below its carrying amount.

   9.      PROPERTY, PLANT AND EQUIPMENT 
 
                                            Leasehold 
                        Freehold             property   Data centre     Computer       Office       Motor 
                        property    and improve-ments     equipment    equipment    equipment    vehicles      Total 
                         GBP'000              GBP'000       GBP'000      GBP'000      GBP'000     GBP'000    GBP'000 
--------------------  ----------  -------------------  ------------  -----------  -----------  ----------  --------- 
 
 Cost: 
 At 1 April 2018           2,062                8,540        22,680       70,043        2,398          31    105,754 
 Additions in 
  the year                 5,729                   33           775        9,256           38           -     15,831 
 Acquisition 
  of subsidiaries          1,131                    -             -        2,376          567           -      4,074 
 Disposals in 
  the year                     -                (630)             -         (67)         (83)           -      (780) 
 Currency 
  translation 
  differences               (12)                    -             2            3            -           -        (7) 
 At 31 March 
  2019                     8,910                7,943        23,457       81,611        2,920          31    124,872 
 Additions in 
  the year                     -               21,287         1,482       14,847           57          11     37,684 
 Acquisition 
  of subsidiaries              -                  457         1,192        1,540            -           2      3,191 
 Disposals in 
  the year                     -                 (16)          (18)        (622)        (206)        (21)      (883) 
 Currency 
  translation 
  differences                  -                    -             -          216            -           -        216 
 At 31 March 
  2020                     8,910               29,671        26,113       97,592        2,771          23    165,080 
--------------------  ----------  -------------------  ------------  -----------  -----------  ----------  --------- 
 
 Accumulated 
 depreciation: 
 At 1 April 2018           (306)              (3,138)      (11,755)     (48,123)      (1,725)        (21)   (65,068) 
 Charge for the 
  year                     (112)                (570)       (1,880)     (10,317)        (209)         (3)   (13,091) 
 Disposals in 
  the year                     -                  198             -           67           83           -        348 
 Currency 
  translation 
  differences                  -                    -             -            1         (17)           -       (16) 
 At 31 March 
  2019                     (418)              (3,510)      (13,635)     (58,372)      (1,868)        (24)   (77,827) 
 Charge for the 
  year                     (279)              (3,610)       (1,853)      (9,625)        (262)         (6)   (15,635) 
 Disposals in 
  the year                     -                   16            18          622          206          21        883 
 Currency 
  translation 
  differences                  -                    -             -        (157)            -           -      (157) 
--------------------  ----------  -------------------  ------------  -----------  -----------  ----------  --------- 
 At 31 March 
  2020                     (697)              (7,104)      (15,470)     (67,532)      (1,924)         (9)   (92,736) 
--------------------  ----------  -------------------  ------------  -----------  -----------  ----------  --------- 
 
 Carrying amount: 
 At 31 March 
  2020                     8,213               22,567        10,643       30,060          847          14     72,344 
 
 At 31 March 
  2019                     8,492                4,433         9,822       23,239        1,052           7     47,045 
--------------------  ----------  -------------------  ------------  -----------  -----------  ----------  --------- 
 
 

Of the total additions in the year of GBP37,684,000, GBP20,421,000 relates to right-of-use assets brought on the balance at 1 April 2019 on transition to IFRS 16 (note 11). In addition, during the year there were additions of GBP824,000 in respect of reinstatement provisions and a further GBP119,000 in respect of leases (note 11). Of the total remaining additions in the year of GBP16,320,000 (2019: GBP15,831,000), GBP3,185,000 (2019: GBP1,553,000) was included in trade payables as unpaid invoices at the year end resulting in a net increase of GBP1,632,000 (2019: net decrease of GBP293,000) in trade payables. Consequently, the consolidated statement of cash flows discloses a figure of GBP14,688,000 (2019: GBP16,112,000) as the cash outflow in respect of property, plant and equipment additions in the year.

As disclosed in note 11, on 1 April 2019, the Group adopted IFRS 16 and recognised a right-of-use asset of GBP20.4m. At 31 March 2020, a total of GBP20.2m is recognised within additions to leasehold property and improvements in relation to the initial recognition along with subsequent additions in relation to IFRS 16, with a corresponding depreciation charge of GBP2.7m. In addition, a further GBP1.2m is recognised within additions to data centre equipment with a corresponding depreciation charge of GBP0.5m.

   10.       BORROWINGS 
 
                                        2020      2019 
                                     GBP'000   GBP'000 
-------------------------------     --------  -------- 
 
  Current: 
  Lease liabilities (note 11)        (3,029)     (356) 
  Current borrowings                 (3,029)     (356) 
 
  Non-current: 
  Lease liabilities (note 11)       (17,318)     (421) 
  Bank loans                        (52,791)  (48,536) 
  Total non-current borrowings      (70,109)  (48,957) 
 
  Total borrowings                  (73,138)  (49,313) 
----------------------------------  --------  -------- 
 

The carrying amount of borrowings approximates to their fair value.

Details of the Group's lease liabilities are included in note 11.

At the start of the year there was GBP48.5m (2019: GBP35.2m) outstanding on the multi option revolving credit facility and drawdowns of GBP6.2m (2019: GBP25.9m) were made from the facility during the year. Repayments totalling GBP2.0m (2019: GBP12.2m) were made resulting in a balance outstanding at the end of the year of GBP52.8m (2019: GBP48.5m).

The multi option revolving credit facility of GBP80m is able to be used by the Group to finance acquisitions, capital expenditure, general business purposes (up to a maximum of GBP8m each year) and for the issue of guarantees, bonds or indemnities. As at 31 March 2020, the facility is available until September 2022 at which point any advances made under the multi option revolving credit facility become immediately repayable. Each drawdown made under this facility can be for either 3 or 6 months and can either be repaid or continued at the end of the period. Interest is charged on this loan at an annual rate determined by the sum of the multi option revolving credit facility margin, LIBOR and the lender's mandatory costs. The multi option revolving credit facility margin is fixed at 1.5% (2019: 1.5%) per annum and a non-utilisation fee of 40% (2019: 40%) of the multi option revolving credit facility margin is due on any undrawn portion of the full GBP80m multi option revolving credit facility. The effective interest rate for multi option revolving credit facility in the current year was 2.17% (2019: 2.44%).

Given the terms of the revolving credit facility and the ability for any drawdowns made to be extended beyond 31 March 2021 at the discretion of the Group, the total amount outstanding has been classified as non-current.

The obligations under the multi option revolving credit facility are repayable as follows:

 
                                            2020                          2019 
                                 Capital  Interest     Total   Capital  Interest     Total 
                                 GBP'000   GBP'000   GBP'000   GBP'000   GBP'000   GBP'000 
------------------------------  --------  --------  --------  --------  --------  -------- 
 Due within one year                   -     (465)     (465)         -         -         - 
 Due within two to five years   (52,791)         -  (52,791)  (48,536)     (192)  (48,728) 
------------------------------  --------  --------  --------  --------  --------  -------- 
                                (52,791)     (465)  (53,256)  (48,536)     (192)  (48,728) 
------------------------------  --------  --------  --------  --------  --------  -------- 
 

The directors estimate that the fair value of the Group's borrowing is not significantly different to the carrying value. The capital element of the bank loans is GBP52,791,000 (2019: GBP48,536,000), in the prior year this figure differs from the net amount drawn down of GBP48,641,000 due to an effective interest rate adjustment.

 
 
                                             Cash and 
  Analysis of change in net          cash equivalents       Bank                       Total liabilities     Total net 
  cash/(debt)                                 GBP'000      loans  Lease liabilities              GBP'000   cash/(debt) 
                                                         GBP'000            GBP'000                            GBP'000 
---------------------------------  ------------------  ---------  -----------------  -------------------  ------------ 
 
  At 1 April 2018                               9,495   (35,239)              (830)             (36,069)      (26,574) 
 
  Repayment of bank loans                           -     12,200                  -               12,200        12,200 
  New bank loans                                    -   (25,860)                                (25,860)      (25,860) 
  Impact of effective interest 
   rate                                             -        363                  -                  363           363 
  Acquired on acquisition 
   of subsidiary                                  841          -              (430)                (430)           411 
  Currency translation 
   differences                                      -          -                 12                   12            12 
  Cash and cash equivalent 
   cash outflow                                 (267)          -                  -                    -         (267) 
  Lease liabilities cash outflow                    -          -                471                  471           471 
---------------------------------  ------------------  ---------  -----------------  -------------------  ------------ 
  At 31 March 2019                             10,069   (48,536)              (777)             (49,313)      (39,244) 
 
  Lease liabilities on transition 
   to IFRS 16                                                  -           (20,421)             (20,421)      (20,421) 
  Additions to lease liabilities                    -          -            (1,544)              (1,544)       (1,544) 
  Repayment of bank loans                           -      2,000                  -                2,000         2,000 
  New bank loans                                    -    (6,150)                  -              (6,150)       (6,150) 
  Impact of effective interest 
   rate                                             -      (105)                  -                (105)         (105) 
  Acquired on acquisition 
   of subsidiaries                                  -          -            (1,705)              (1,705)       (1,705) 
  Cash and cash equivalent 
   cash inflow                                  5,428          -                  -                    -         5,428 
  Lease liabilities cash outflow                    -          -              4,100                4,100         4,100 
                                                                                     ------------------- 
  At 31 March 2020                             15,497   (52,791)           (20,347)             (73,138)      (57,641) 
---------------------------------  ------------------  ---------  -----------------  -------------------  ------------ 
 
   11.        LEASES 

The Group leases assets including buildings, fibre contracts, colocation and software contracts. Information about leases for which the Group is a lessee is presented below:

 
 
  Right-of-use assets                        Leasehold  Data centre 
                                              Property    equipment    Software     Total 
                                               GBP'000      GBP'000     GBP'000   GBP'000 
----------------------------------------     ---------  -----------  ----------  -------- 
 
  Balance at 31 March 2019*                          -          509           -       509 
  Adjustment on transition to IFRS 
   16                                           19,748          673           -    20,421 
  Balance at 1 April 2019 after 
   adoption of IFRS 16                          19,748        1,182           -    20,930 
 
  Additions                                         47           72       1,425     1,544 
  Acquired on acquisition of subsidiary            457            -           -       457 
  Depreciation                                 (2,758)        (466)           -   (3,224) 
  Amortisation                                       -            -       (190)     (190) 
 
  Balance at 31 March 2020                      17,494          788       1,235    19,517 
------------------------------------------   ---------  -----------  ----------  -------- 
 
 

*net book value of leased assets under IAS 17 as at 31 March 2019

The right-of-use assets in relation to leasehold property and data centre equipment are disclosed as non-current assets and are disclosed within property, plant and equipment at 31 March 2020 (note 9). The right-of-use assets in relation to software are disclosed as non-current assets and are disclosed within intangibles at 31 March 2020 (note 8).

Lease liabilities

Lease liabilities are presented in the balance sheet within borrowings as follows:

 
                                   2020     2019* 
                                GBP'000   GBP'000 
--------------------------     --------  -------- 
 
  Current: 
  Lease liabilities             (3,029)     (356) 
 
  Non-current: 
  Lease liabilities            (17,318)     (421) 
 
  Total lease liabilities      (20,347)     (777) 
-----------------------------  --------  -------- 
 

*lease liabilities under IAS 17

 
 The maturity analysis of undiscounted lease liabilities are shown 
  in the table below:                                         2020     2019* 
                                        GBP'000   GBP'000 
  --------------------------------     --------  -------- 
 
    Amounts payable under leases: 
    Within one year                     (3,536)     (356) 
    Between two to five years           (9,823)     (421) 
    After more than five years          (9,709)         - 
 
                                       (23,068)     (777) 
    Add: unearned interest                2,721         - 
  -----------------------------------  --------  -------- 
    Total lease liabilities            (20,347)     (777) 
  -----------------------------------  --------  -------- 
 
  *lease liabilities under IAS 17 
 
 

The Group has elected not to recognise a lease liability for short-term leases (leases with an expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight line basis. During the year ended 31 March 2020, in relation to leases under IFRS 16, the Group recognised the following amounts in the consolidated statement of comprehensive income:

 
                                       Year ended 
                                         31 March 
                                             2020 
                                          GBP'000 
 ---------------------------------     ---------- 
  Short-term and low value lease 
  expense                                 (1,662) 
  Depreciation charge                     (3,224) 
  Amortisation charge                       (190) 
  Interest expense                          (649) 
                                          (5,725) 
----------------------------------     ---------- 
 

Amounts recognised in the consolidated statement of cash flows:

 
                                                         Year ended 
                                                           31 March 
                                                               2020 
                                                            GBP'000 
 ---------------------------------------------------     ---------- 
  Short-term and low value lease 
  expense                                                   (1,662) 
  Repayment of lease liabilities within cash flows 
   from financing activities                                (4,686) 
                                                            (6,348) 
----------------------------------------------------     ---------- 
 

Included in repayment of lease liabilities within cash flows from financing activities is a repayment of GBP1.0m in relation to the settlement of lease liabilities on the acquisition of Memset Limited.

   12.       CONTINGENT CONSIDERATION 
 
                                                           2020      2019 
                                                        GBP'000   GBP'000 
 -----------------------------------------------  ---  --------  -------- 
 
  Contingent consideration due on acquisitions 
  within one year: 
 
    *    LDeX Group Limited                             (1,153)   (3,009) 
 
    *    Memset Limited                                   (500)         - 
 
    *    ServerChoice Limited                             (827)         - 
 
  Total contingent consideration due on 
   acquisitions                                         (2,480)   (3,009) 
------------------------------------------------       --------  -------- 
 

The final consideration due on LDeX Group Limited, agreed with the previous shareholder and paid subsequent to the year end, is GBP1,153,000. This has resulted in gain on revaluation of contingent consideration of GBP1,856,000 recorded in the consolidated statement of comprehensive income.

Contingent consideration for Memset Limited and ServerChoice Limited are based on the directors' best estimate of payments due at 31 March 2020. Details of the range of possible outcomes are disclosed in note 7.

   13.       POST BALANCE SHEET EVENT 

On 23 June 2020, the lease of our London data centre was extended by a further 5 years to June 2035. As part of this extension, GBP2.3m of total lease deposits will be returned to the Group post year end.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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