Vanco Share Discussion Threads

[jaydeee] 05/6/2007 12:32

and for those who missed the announcement.


ADDITIONAL FINANCIAL INFORMATION FOR THE YEAR ENDED 31 JANUARY 2007



Further to the announcement of Vanco's preliminary results for the year ended 31 January 2007 on 18 April 2007, the Board has decided to provide additional financial information on the results and the Group's accounting policies in order to assist analysts and investors in their understanding of the Group's business model and accounting. Most of this additional financial
information-
as set out at the end of this announcement- will be provided by the Group on an ongoing basis, starting with the interim results for the six months ending 31 July 2007.



Accounting policies- general



The accounting polices used in preparing the accounts for the year ended
31
January 2007 and the audited accounts which were published at the end of May are the same as those used in prior periods since conversion to IFRS and have been consistently applied.



Split of revenue between initial phase revenue and ongoing management phase revenue



Total revenue for the year can be analysed as follows:



2007 2006

#m #m

Initial phase Contracts signed in year
52 47
Contracts signed in prior years
17 20
Management phase Contracts signed in year
7 5
Contracts signed in prior years
80 62
Universal Access
27 13

183 147

Total revenue from contracts signed in prior years
97 82



The initial phase revenue in respect of contracts signed in prior years represents the value of work done in completing the design and implementation of networks sold on or prior to the start of the relevant financial year.
It is
common for many contracts to be rolled out over an extended period of time. This period can extend up to 18 months in exceptional circumstances.



The revenue from Universal Access was $49.3m in the year ended 31 January 2007, compared to $22.6m in the six months ended 31 January 2006. This represents an annualised growth rate of 9.1%.




The revenue from contracts signed in the year can be further analysed as
follows:



2007 2006

#m #m

New name business Initial phase
25 26
Management phase
3 3
Account management Initial phase
27 21
Management phase
4 2

59 52



New name business is defined as being derived from businesses who were not customers at the start of the financial year (1 February). Account management is business generated from customers who were Vanco customers at the start of the financial year and includes MACs (Moves, Adds and Changes).



Growth rates



Excluding the effect of the acquisition of Universal Access on 1 August 2005, the revenue for the second half of each of the years ended 31 January 2005, 31 January 2006 and 31 January 2007 was #56m, #73m and #90m respectively.
This
represents growth of 23% year on year between the six month periods ended on 31 January 2006 and 31 January 2007, compared with 30% growth between the six month period ended 31 January 2005 and the six month period ended 31 January 2006.
Looking at year on year growth for the second half of each financial year is representative of the underlying growth, as it excludes the distortion in trend caused by the investment in the business in the six months ended 31 July 2006.
This was mainly in connection with the development of the channel partner strategy.



The market expectation for the year ending 31 January 2008 is that revenue will be 25% higher than it was in the year ended 31 January 2007.



Split of trade and other receivables and current liabilities



Trade and other receivables can be analysed as follows:



2007 2006

#m #m

Due within one year Trade debtors
15 18
Other debtors
10 5
Employee share scheme
4 2
Prepayments
15 12
Accrued income
33 25
Due after more than one year Employee share scheme
4 4
Prepayments
5 5
Accrued income
55 28

141 99



The relatively low value of trade debtors at 31 January 2007 is impacted by the #8m of short term timing differences mentioned below in the explanation of the movement in accrued income.



Current liabilities can be analysed as follows:



2007 2006

#m #m

Trade creditors
37 31
Other loans
3 -
Finance leases
2 4
Corporation tax
1 1
Overseas tax
2 2
Other taxes
5 4
Other creditors
3 -
Employee share scheme
4 2
Accruals
6 5
Deferred income
39 26

102 75



All current liabilities are due in less than one year.



Accrued income and revenue recognition



Vanco's revenue recognition policy is in accordance with IAS. Revenues and costs are matched and recognised in the income statement in the period in which the goods and services are delivered. During the initial phase of a managed network services contract, the revenue recognised may exceed the amount of cash received from a customer. Any such amounts are carried in the balance sheet as accrued income. This occurs in situations where customers pay for some or all of the value of the work done during the initial phase of the contract over an extended period of time. Similarly in the management phase normally a customer will be invoiced in advance of the service being delivered and this will be held on the balance sheet as deferred income.



The Group's accounting policy in respect of revenue recognition is set out in the Annual Report and Audited Accounts. This accounting policy has been consistently applied since the implementation of IFRS and was used in preparing the preliminary announcement of the results for the year ended 31 January 2007 which was issued on 18 April 2007. As part of the normal year end review and in addition to advice provided by Deloitte as part of the audit, the Board sought independent advice on the Group's accounting policies in relation to revenue recognition. The Board was advised that the policies are similar to the stated policies of other significant competitors in Vanco's markets.




Debtors as at 31 January 2007 due within one year plus debtors due after one year total #141m (2006- #99m) as analysed above. The elements of this total that relate to accrued income and prepayments are as follows:



2007 2006

#m #m

Due within one year Prepayments
15 12
Accrued income
33 25
Due after more than one year Prepayments
5 5
Accrued income
55 28

108 70




Total accrued income therefore increased to #88m at 31 January 2007 from #53m at
31 January 2006.



The ageing of the accrued income is as follows:



2007 2006

#m #m

Due within one year
33 25
Due in between one and two years
25 11
Due in between two and three years
18 10
Due in between three and four years
9 3
Due in greater than four years
3 4

88 53



The total new accrued income in respect of initial phase work completed in the year ended 31 January 2007 was #47m. This differs from the balance sheet movement of #35m, by a net #12m, for the following reasons:



* During the year ended 31 January 2007, #20m of accrued income
that was
on the balance sheet at 31 January 2006, was invoiced to customers and converted into cash.



* The accrued income balance at 31 January 2007 includes #8m of
very
short term timing differences not related to the initial phase of a contract.
These are items that were identified as billable in the year to 31 January 2007 and were recognised as revenue in the period, but were not invoiced until after the year end. These will all be converted into cash during the year ending 31 January 2008.



The difference of #5m between the #25m of accrued income due in less than one year shown on the balance sheet at 31 January 2006, and the #20m that was invoiced in the year ending 31 January 2007, is due to timing differences in respect of when amounts were invoiced against what was expected. The majority of these timing differences will reverse in the year ended 31 January 2008.
In
addition, as at 31 January 2005, there was #15m of accrued income due in less than one year and #13m of this was converted into cash in the year ended
31
January 2006. The difference of #2m reverses in full prior to 31 January 2008.



Based on data that is currently available, it is anticipated that of the #33m of accrued income due in less than one year shown on the balance sheet at
31
January 2007, all of this will convert into cash during the year ending
31
January 2008.



The revenue recognised in the year ended 31 January 2007 in respect of the initial phase of contracts was #72m (2006- #69m).



As stated above, #47m (2006- #33m) was booked to the balance sheet as accrued income and the remaining #25m (2006- #36m) was supported by cash, paid either directly or via Vanco Finance. This means that 65% of initial phase work done/ invoiced in the year was via accrued income and 35% was backed by cash compared to a 48%: 52% split in the year ended 31 January 2006.



A significant part of the increase in the proportion attributable to accrued income in the year ended 31 January 2007 is due to two specific deals that between them contributed some #8m to the accrued income written in the year.
This is not expected to repeat in the year ending 31 January 2008, and during this period, the directors expect the proportion of work done during the initial phase of the contract that is backed by cash (including Vanco Finance deals), to move back towards the levels seen in the year ended 31 January 2006.



Cash cycle



The reported net debt as at 31 January 2007 was #20m. However, during a typical year, the net debt fluctuates as follows:



* Q1- this is generally the weakest trading quarter and when the
company
invests in extra capability for expansion in the year. Accordingly net debt for the year tends to peak around the end of the first quarter at a level higher than at the end of the previous financial year. Net debt then typically reduces during the rest of the year assuming normal trading cash flows. The year ending
31 January 2008 will follow this trend as despite Q1 order intake being strong, the majority of the cash related to the new business signed was not received prior to 30 April 2007.



* Q2- this is generally stronger than Q1.



* Q3- this is generally less strong than Q2, mainly due to the
effect of
the holiday season. This has a particularly significant effect in mainland Europe.



* Q4- historically, this is the Group's strongest trading
quarter.



During the year ended 31 January 2007, average net debt was c#55m and the company had total debt facilities of around #90m. Of the #90m, #70m was in respect of the UK bank facility and the remaining #20m was in respect of non UK bank facilities, other loans and finance lease facilities.



Since 31 January 2007, Vanco has renegotiated its bank facilities in line with its annual practice of reviewing facilities in the light of the growth of the business and has increased the total UK bank facility from #70m to #96m.
The
Group's current debt facilities now total some #115m.



Cash conversion



The Group has now adopted Free Cash Flow (FCF) as the relevant metric for the cash generation of the business, where FCF is defined as cash generated from operating activities less net interest less tax paid less capital expenditure less finance lease payments. Accordingly, the Group will be focussing on improving this metric going forward. As previously indicated, the Group expects to be FCF neutral or slightly positive in the current financial year. In order to achieve this, around 300 staff, comprising all of the relevant directors, new business and account management team, plus a number of other staff, are now incentivised to maximise cash generation as part of their remuneration plans.



In addition, during the year ended 31 January 2007, the group made cash payments in respect of capital expenditure of #4.6m and made finance lease payments of #4.8m, which together amount to #9.4m (defined as Cash Capital Expenditure). The Cash Capital Expenditure in the year ending 31 January 2008 is likely to be #2-3m lower than the amount incurred in the year ended 31 January 2007.
This
will also contribute to the expected improvement in FCF.



Looking further out, the opportunities for improved FCF generation are significant as the #88m of accrued income carried forward on the balance sheet at 31 January 2007 is converted into cash.



Capital expenditure



The correct split of cash payments in the cash flow statement for the year ended
31 January 2006, is to allocate #0.8m to the purchase of property, plant and equipment and #3.2m to the purchase of intangible fixed assets (previously all #4.0 million was allocated to property, plant and equipment). The corresponding numbers for the year ended 31 January 2007 are #0.9m in respect of property, plant and equipments and #3.6m in respect of intangible fixed assets.



Accounting treatment of commissions



All salaries and other related costs incurred on bids, prior to becoming preferred supplier, are immediately expensed in the profit and loss account as required by IAS. Commissions are due to salesmen when new business and account management deals are signed and are paid in the few months following signature.
These are carried forward in the balance sheet and recognised in the profit and loss account over a period which is the shorter of three years and the term of the contract. This policy is applied to agreements where contractually customers cannot break contracts without paying the lost gross margin to the end of the contract. The vast majority of contracts fall into this category. The costs associated with earning this gross margin are therefore expensed over a similar period to that over which the gross margin generated by the contract is recognised in the profit and loss account. This is in accordance with IAS.



At the inception of IFRS, both our auditors and another Big 4 firm of accountants were asked to specifically review this policy and concluded that it was appropriate. The policy has been consistently applied since the implementation of IFRS and was used in the preparation of the preliminary announcement of the results for the year ended 31 January 2007.



As at 31 January 2007, the total value of commissions carried forward in prepayments was #7.2m (2006- #5.7m). The amount of commissions capitalised in the year ended 31 January 2007 was #4.0m (2006- #3.5m) and the amount amortised during the year was #2.5m (2006- #2.1m).



Accounting treatment of Oracle and other systems development



During the year ended 31 January 2007, the Oracle Enterprise Resource Planning
("ERP") system was launched globally, following a pilot and an extended period of development and testing. It is now in use across all Vanco's principal offices globally and is supporting the business's processes in a robust and fully scaleable way, in preparation for future growth.



The ERP system brings an automated connection between the operational and commercial functions of the business, delivering greater cost control as Vanco continues to grow. It also provides the management team with consistent information across the entire business. All customers were transferred to the new system by the year end.



We also rolled out the Voyence secure router configuration tool across our entire customer base. This allows greater control and access security for the management of router configurations across the customer base.
Additionally, we
improved our 'trouble ticket' integration with channel partners (this is the means by which network faults are spotted, logged and managed), delivering greater efficiency and customer service to these channel partners'
enterprise
clients.



In accordance with IAS, the costs associated with this project have been capitalised in intangible fixed assets as they provide material future economic benefits to the business. They will be amortised from the date that each system goes live. During the year ending 31 January 2008, the level of investment in further software development will fall below historical levels. The net effect is that it is expected that amortisation will exceed the value of further amounts capitalised by c#2m in the current financial year.



Additional Reporting Information



Going forward, the following data will be reported by the Group:



* The split of revenue between initial phase revenue, management
phase
revenue and Universal Access



* An analysis of revenue from contracts signed in the year split
between
new business and account management and between initial phase and management phase revenues



* The split of initial phase revenue recognised in the period
split
between that which is backed by cash and the amounts that have been funded from accrued income



* The split of the line item described on the face of the balance
sheet
as "Prepayments and accrued income"



* The ageing of the accrued income balance



* Average contract size and length



Vanco Finance (VF)



Syscap plc, the owner and controller of VF, has decided to re-brand VF as Global Network Finance going forward. We understand that this change of name is in the process of being executed. The purpose of Global Network Finance is to provide financial arrangements to Vanco's customers which will assist them in paying for the initial costs of investing in a new data network with Vanco. The business is neither owned nor controlled by Vanco and is not consolidated within the Group accounts.



Current trading



FCF for the six months ending 31 July 2007 is expected to be better than in the six months ended 31 July 2006. Trading is always weighted to the second half of the financial year. Finance lease and capital expenditure payments have an adverse effect on the FCF trend in relation to cash generated from operating activities in the first half as they are paid fairly evenly throughout the year.
In addition interest payments will be weighted towards the first half of the year ending 31 January 2008 and tax payments are weighted towards the second half of the year.



The Directors remain confident of meeting the consensus market expectations for the year ending 31 January 2008. As previously indicated, there is an increased focus on the financial profile of new contracts and on improving FCF, which the Group expects to be neutral to slightly positive for the full year. The directors believe that this would represent a strong performance given that the market is expecting revenue to continue to grow at c25% in the period.



The first Interim Management Statement for the year ending 31 January
2008 will
be published in due course.



For further information please contact:

[jaydeee] 05/6/2007 12:30

Nabeel - it's never too late. The shares are still trading low relative to both Goldman's and DRKW's recommendation.

At last they have come out with "clarification" and finally put to rest all the lies being spread.
This is Vanco's time - just think about it.
What multiple would you give a business do with £400m of contracted business (i.e. their revenue is guaranteed to exceed £400m, taking into account their renewal rates of 98%), with a growth rate of 25% p.a. and a margin of over 35%. Based on DRKW's forecast for 2008 of PBT of £23.8m they are only trading on a 11 times PE. To me that sounds low, especially when most of the top line is guranteed revenue.

Before anyone talks about cashflow, it's a miracle that the Company has not absorbed more cash at that kind of growth rate. They are getting to the postive cash flow point, very soon.

And if anyone still has their doubts and think Delloitte are fiddling the books and massaging the figures, do you think that the largest accouting firm in the world, Ernst and Young, would award a $100m contract to a company that even "might" run out of cash, or does not have solid balance sheet. Of course they would have done a full due diligence.

It's time to wake up to the fact that Vanco's time has arrived and this share should be trading at 20 times PE in the 600-700p range already and at this rate will be worth more than £10 within 18 months.

Good luck to all

[robow] 05/6/2007 11:18

Dresdner have put out a BUY rating and 519p target for Vanco (from Citywire)

[nabeel4975] 05/6/2007 11:05

A bit late, perhaps, for many shareholders who must have been slaughtered over the last few days - why did not the company issue this statement there and then (post 57)?

Anyway, even after addressing their accounting irregularities, they are still trading at a very high P/E (imo) - which may not be justified especially if there is a market correction.

P.S. I have no position. Good luck to all.

[curious] 05/6/2007 09:37

I agree with you Naked Trader.

There is an enormous amount of pure nonsense on this BB. Unfortunately for the bears, today's Vanco statement blows away all of the bear arguments. There still may be some hopeful bears out there. But their persistence is nothing more than the triumph of hope over objective facts.

The basic fact is that Vanco is a well-managed, growing company. The bear argument that they are playing with their financial numbers in some decpetive manner has now been blown out of the water. Institutions and big players are reacting by closing their down bets. As the price rises, more will flee, a combination of the Vanco release and the rising price.

I suspect this rush to the exit door forced by the Vanco release this AMwill probably boost the price by another 10% or more in the next few days. Christmas is coming early this year.

[renegade master] 05/6/2007 09:16

well done Vanco! This blows all all the shorters' arguments right out of the window. And in great detail too. I can see shorters scrambling to get out now because the shares are surely worth around 550 and would be up around there now if there hadn't been a concerted shorting campaign. Should head up to at least 500 now.

[riskblue] 05/6/2007 08:22

Interesting announcement - and unusual. i guess its in response to the bear raid that appears to be taking place in this stock. Interesting to see how it responds. early signs are positive.

[misscg] 04/6/2007 15:42

Dansjhall ---- I take it you must have entered today --- Thinks I may join you

[dansjhall] 02/6/2007 18:25

trendline support is at 405, and 400 has massive support, it might test these levels during intraday but i cant see it closing below 400 anytime soon as the support here is considerable. Im waiting until 405 to enter as i can limited downside from there.

[jaydeee] 31/5/2007 11:30

it needs some positive newsflow desperately. they also need to announce the appointment of a new FD already!!

[riskblue] 31/5/2007 09:36

£4.20 seems to be where the support is. If it breaks and holds through that I fear a drop under £4.00 is on the cards.

[kosinjames] 30/5/2007 13:27

As the indexes hasn't dropped like they did in Feb yet, this may be indeed an opportunity to buy at cheap. Only bought a tiny amount to try my luck as I believe it's could be the same scare of a global meltdown that didn't materialise. Touch wood.

[dansjhall] 30/5/2007 11:40

Fall is due to chinese stamp duty being trebled and this has adversely affected worldwide markets.If you remember it was the news of this possible increase that lead to the crash in asia in feb. Thus buyers are cautious today as there is a possibility of a fall today like there was in feb. This stock has been hit hard today because there is a fine balance between the buyers and sellers on this stock as opinion is split on the future direction. Thus the fall away of the buyers means the shorters have trashed it today. IMHO ofcourse.

[dansjhall] 30/5/2007 11:38

Great time to buy in again in my opinion, a fall to 408 would be ideal time as support is there

[father o toole] 30/5/2007 09:53

looks like a proper basket case.

[welshdragon2006] 30/5/2007 09:32

I did here something on the radio about a fall on the chinese stock market. Something about the tax on share trades has been trebled.

I am a complete newbie to shares though. So I have no real idea what goes down in this complex world

[riskblue] 30/5/2007 09:13

OK - anyone know what has happened this morning. News? or has the bear raid started in earnest?

[yotter] 30/5/2007 09:10

She's tanking, I wonder why ?

[t0pd0g] 27/5/2007 10:47

Well for what its worth VAN are a buy-if on britishbulls:-

[jaydeee] 24/5/2007 20:58

I still think it's abig buying opp.
Sarahbudd - what were Cawkwells commnents?

[sarahbudd] 24/5/2007 14:38

A correction in Shares today refuting Cawkwell's comments

[t0pd0g] 22/5/2007 21:24

drifting lower. Is this a buying opportunity or is there something fundamentally wrong with this company?

[yotter] 21/5/2007 18:10

maccack,

There's no reason why you can't keep a short position open for as long as it takes.

The good news is the overnight interest which is collected. It makes having the margin tied up a little more palatable.

[maccack] 21/5/2007 17:27

excuse my ignorance on shorting, but how long can you have an open short position? does it come with an expiry date? surely you can't have a short position indefinitely. Like sarah, I was hoping the shorters would have closed by now.