Gamma’s trading update for the first half of its current financial year highlights strong revenue and margin growth across all business areas. The upbeat announcement says that management expects the results for the full year ‘to be at the higher end of the range of Board expectations’. With the Group required to report its interims under new accounting standards in September, we are leaving estimates unchanged at present but will update numbers to reflect first half trading and the effects of IFRSs 9, 15 and 16 at that time. We note, however, that the Group ended the half year with a healthy cash balance which is ahead of our current year-end estimate. New CEO Andrew Taylor took over from Bob Falconer following May’s AGM with the handover ‘well received and successfully completed’. In all, the update presents a welcome continuation of momentum and growth.
The update highlights further strong growth in both the direct and indirect channels in SIP Trunking, Cloud PBX and data services. Margins are consistent with the prior period suggesting that those differentiated products continue to present an attractive proposition to channel partners in particular.
Connect, the fixed/mobile converged product that integrates mobile with the Gamma Cloud PBX service, Horizon, was first launched to a number of channel partners in December 2017. The first half of 2018 saw the full market launch take place.
Gamma’s new high capacity national optical fibre network project was delivered on schedule and on budget by Gamma’s partner CityFibre. Gamma has also introduced CityFibre into its Ethernet build out programme.
The closing cash balance for the half year was approximately £36.9 million compared to £31.6 million at the end of the previous year and is already ahead of our FY 2018E estimate of £34.6 million. Cash conversion from EBITDA is expected to be in line with previous experience (which was 92% to 93% over the last two full years).
Gamma has previously provided a detailed update on the new accounting standards relating to revenue recognition (IFRS 15) and leases (IFRS 16) which it is expected to adopt with the interim reporting - producing a likely negative net impact of around £1.5m on EBITDA. We shall update our estimates to include the effect of the new standards at that time. Fully diluted EPS, both adjusted and non-adjusted, are not expected to be materially affected by the proposed changes.