Redcentric (LSE:RCN) — Final results for the year ended 31 March 2026

0:01 Good morning, ladies and gentlemen, and welcome to the REDCENTRIC PLC final results investor presentation. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and we'll publish our responses where it's appropriate to do so on the Investor Meet company platform. Before we begin, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to the executive management team from REDCENTRIC PLC. Michelle, good morning. Thank you, Jake. We appreciate that. And a warm welcome to everybody from our headquarters here in Harrogate. I'm Michelle Senecalde Franseca, the CEO of REDCENTRIC, having just completed my first year here in the chair after having been the NED the year before.

0:55 And as you'll recall, I think some of you were with us last year when we tried this. My partner in crime at that time was Tony Radcliffe, who has now completed his assignment with the sale of the data center. And we have now have a new CEO CFO, excuse me, that I'd like to hand over to. And why don't Tim, why don't you introduce yourself? Yeah. Sure. Morning, everyone. So my name is Tim Sykes. I've been working with a industry company since 2006 when I was part of the float for a Vactor Group PLC and Proactis Holdings PLC at that at that time. I don't know if anybody followed Proactis, but it was very relevant to to REDCENTRIC's position right now, as Michelle will describe later on in the presentation. I helped support the team as CFO for a business that grew from 2,000,000 to north of 50 over the time involved before as chief executive, taking it private in 2021.

1:49 So looking forward to joining the team. We we feel feel really lucky to be part of that opportunity. I'll let Michelle take you through the rest of the story from here. Great. Thanks, Tim. Next slide. Well, all I can say is FY twenty six was a transformative year for the company. A lot of effort went into the final separation of the data center business, from the MSP business and with the successful conclusion of the sale to Stellanor for a £124,900,000. Going through that process, it is disruptive, but in parallel, we were able to come up with a new strategic plan. We undertook increasing our service capabilities and capacity. We changed things around quite a bit, which I'm gonna go through. And in the end of the day, we delivered in line with market expectations in terms of the financials through all of that.

2:44 We're still maintaining a very high level of recurring revenues. Our customers are not churning out. And so we are very excited now to be able to look forward in a more simplified business and being able to scale and continue to deliver shareholder value. So, Tim? Okay. So just a little bit about the corporate highlights. So it's slightly post year end really, but dominated by the finalization of the sale of the data center business for a 125,000,000 with a bit before costs of about 5. That was slightly more than the market was expecting. We'd initially estimated at a 122.5, but took a a couple of extra million on the completion accounts, which was super. We're not quite through with the data center business because we have a transition services agreement, which runs to the end of April twenty seven. So one year of support to the new business, Stellanov, that took took the company from us. As Michelle described, Tony finished his contract open. I've been with the company since the June 1, which is fantastic start to the to the career here, which is super.

3:51 The new strategic vision and the road map for that is defined. Michelle will take us through that later on in the in the presentation. And with all of that change that Michelle has described and will describe, the company was voted one of the best 100 places to work in The UK. So lots of change, lots of challenge for the people, but the people really enjoy working here at REDCENTRIC, which is fantastic testimony to the culture that Michelle's building here as chief executive. Well, and I think that's really important because when you're going through these high volume of change transition, it can be a very unsettling period. And that the fact that people are engaged, moving forward, excited about where it is, I hope that you'll also be excited by the story. But what were all those people doing in f y twenty six? Well, when we came and came up with, when I came on board, it became pretty clear that through the history of the business, a lot of the focus had been on m and a mainly around the data center business.

4:51 And the MSP was sort of a little bit of the lost child, and, they did a good job of maintaining it, but that's what they were doing. It was account management, but we weren't going out and scaling and bringing in new business. So my fundamental, remit is we need to start having new sales and expanding our customer set. So I changed out to the chief marketing officer, the chief revenue officer, restructured marketing. So it's more about less about brand development and more about field sales, getting that pipeline and and driving that to allow the sales then to be able to convert it. We also needed to take a look at how do we bring in new customers. So we built a new business pursuits team in q two and started delivering results throughout the rest of the year.

5:39 11% of the f y twenty six sales came from new logos, which is fantastic. Fantastic. What I'd like to get to over the next couple of years is driving that to a 15% annual reoccurring event where new customers are coming and refreshing our our customer base. One of the things that, I noticed is is we didn't have many routes to market other than our direct sales force, and you can't scale a business that way. So one of our, key areas, of course, is the public sector. We're about 45% revenues derived from the public sector, And most of that comes through public frameworks and given some financial issues that the company had in its history, these frameworks aren't available every year. They come over sort of like the Olympics every four or five years. And we missed out on a couple of the frameworks due to our financial situation.

6:30 That's not the case anymore. And so we reinvested in a bid in the frameworks team, making sure that we're culminating and looking through the market through AI and, you know, helping us drive and expand as much as possible. So we were able to get onto the telecommunication services framework number four. We're now on g cloud 15. We have three other big procurements, the biggest one being network services for that will come out in February of next year. So all of this prep works, it takes about a year to deliver it, is quite important, specifically for our connectivity business because a lot of the business comes through these particular frameworks. You also might know in the public sector, we're very deep into the health care sector, and NHS England had a major reorganization last year.

7:18 They had 47, 49 ICBs integrated care boards that consolidated down to 26. And so there's a real delay as, you know, three different divisions came together. Who's gonna be in charge? How do you get a procurement or a purchase order through the system? Where are the budgets? So that's been naturally moving to the right. What we've done is reorganized our public sector team to be territorial based around these new ICB territories. So that allows us to be better aligned with the decision makers in each of these territories And I think that's going to bode us well moving into FY '27. Meanwhile, as we're starting to ramp up, you know, the commercial side and being able to scale, we have to take out cost from the business From all of those former previous, m and a, we have a lot of tech debt as you can imagine.

8:10 So we did about 1,600,000 in savings in year on platform and infrastructure rationalizations, almost 30% of our original IT, systems estates, well over a thousand we've decommissioned. That also helps us reduce our complexity for cyber service attacks, but that's not we reduced headcount by about 10%. But importantly, we're taking that money and we're reinvesting it in our customer experience. And just with the things that we did last year, we were able to raise our customer NPS by almost 60%. And I think also making sure that we are changing the leadership that we're going to be fit for purpose moving forward was a really big effort for this past year.

8:56 Okay? It's a bit more on the detail of the numbers than on the outturn for FY '26. So overall revenue reduced by 2.3%, and that was matched in the recurring revenue. Now there's really interesting statistics in behind that, which which are important to understand and as the reason why the that reduction happens. So there are three key factors as to why that reduction is there for us. We call we refer to these in the RNS as the drag factors, But, essentially, they're they're headwinds that we're facing for the next year or so, and it's covered us with difficulties for the last few years. So the first three factors or the factors are as follows. Number one, when we acquired I went through the acquisitions pre maybe two or three or four years ago, particularly the SunGuard acquisition, which was a company that that was bought out by administration.

9:52 Many of its customers had already taken the contractual decision to not renew with SunGuard at the time. And therefore, we've had this and these systems take quite a long quite a long number of years to unwind. And therefore, we faced this drag on ARR throughout that period, and it still remains a little bit today, but we expect that to flow out during the course of f y twenty seven. The second factor was that we had an unprofitable contract with a specific customer, which we determined we should should not renew. So that was a drag on revenue, but earnings enhancing. So we took that decision over a year ago, and that's the the impact of that reduced revenue has come through into FY twenty six. And then finally, Michelle will talk about this in more detail later, there's a market moment through the acquisition by Broadcom, VNY, which led to some very short term revenue increases in '25, which have unwound in FY '26.

10:54 And therefore, three factors, actually, when we extract the ARR impact of those, we see a marginal growth in ARR. So our statement here is that whilst our headline revenue and ARR is reduced, there are no key factors which won't recur for the long term. And indeed, we expect them to close out in '27, maybe a little bit into '28, but there are certainly diminishing factors and underlying that we have growth. Other than that, margins remain reasonably constant. So as Michelle described, we were able to adjust the OpEx cost cost base through the course of the year to get in year savings, which matched the reduction in revenues, allowing us to report EBITDA, which is a pretty consistent margin and operating profit on the next page at exactly equivalent margins of just just north of 6%.

11:50 Now that bodes well for the future, of course, because we've got a part year saving FY '26, but we'll get a full year impact of savings in FY '27, which points us towards higher margins going forward. And then in terms of the interest charge, a slightly reduced level of borrowing at a reduced borrowing rate led to a lower interest charge and a normalized tax charge in that case. So let's talk a little bit more about net debt after the processes and the corporate activity that's gone through over the last six months. So we completed the transaction with REDCENT on the April 30, and there was a down payment of a 115,500,000 also at that time. We completed the completion accounts process during September and received the final installment to take us to 01/25.

12:42 We've paid down our bank debt of 21,000,000 and returned £90,000,000 of cash to shareholders, plus a little top up through the share buyback program that's completing today. We'd spent £1,200,000 of that by Friday last week at the date of this presentation was created, and we're expecting to have completed with £1,500,000 by the end of of today. And indeed, we also tidied the shareholder register, which was very difficult to manage, more expensive than it ought to be, and had 7,000 shareholders with less than 20 shares. And we allowed them to exit that elegantly at £1.60, the same price as the as the tender offer. And after all of that, as at Friday, which I should report is the September 25, not the September 30, we have net debt of only £2,800,000.

13:33 And the analyst note is predicting a a net debt position at the end of March next year, so our financial year end of of just £6,000,000, which is less than a third of our LTM EBITDA. So this gives us a very powerful balance sheet compared with the competition. So it's a commercial positive for us, which is well recognized in the market. And allied to that, we've also created new bank facilities or made arrangements for new bank facilities. So we have a three year term plus one year discretion at our discretion rather. So long term facilities, we would say, million will be drawn at £10,000,000 of that come tomorrow. So underutilized facility, which gives us room to breathe and flexibility, which is excellent. The bank is seeing this as a low risk lend because the margin is only at 1.65 at the levels of debt we we have drawn against it and the level of profitability that we have. And our covenants are put relaxed, but that really means there's lots of headroom inside of those covenants for us. So we have no financial pressures at all at this point, and we're looking forward to be able to use that power, that financial power in our commercial growth.

14:50 So exiting FY twenty six as a stronger financial organization, more simplified, where are we going to put our focus on? And essentially, we would like to be The UK's preferred provider of sovereign, compliant, and or regulated IT services. We sort of think we're already there, but we need to be able to demonstrate to the market in a a grander way that we're able to scale and to have more visibility on what we actually deliver for this country. Our portfolio hasn't changed, we're still providing network connectivity, voice and data services, private cloud. We run a national, dedicated government cloud. It's private. And then we also then help all of our customers move into hyperscalers and use public cloud services. So the portfolio hasn't changed, but it's where we need to be able to make our, differentiation and that's really around our sovereign and our compliance stories.

15:51 Most of our customer base, are in verticals such as healthcare, defense, blue light services, local authorities, and then the private sector that actually sells into that. So it'd be, you know, life sciences, pharmaceuticals, GPs and surgeries, pharmacies, the like. And, you know, those people need the same level of regulated, and compliant services that match who their end customers are at. And all of this is really important because customers are signing up for three, five, and seven years. They want to make sure that their partner who's going to help support them is going to be there for the long term. And as Tim had just talked about, at the moment, we're probably very unparalleled in having a balance sheet, our, cash position, low debt, our stability.

16:46 It's one of the key things in talking with our customer base that's kind of setting us apart from the competition. So moving forward, one of the best ways that we're going to be able to scale is, as I talked about earlier, moving away from just simply direct sales to a partner ecosystem. And one of the biggest partner ecosystems that we are, placing our bets on is our work with Broadcom VMware. Go to the next slide. Oh, I guess that's a little bit further down. Sorry. Thank you. For those of you who may not be aware, Broadcom purchased VMware a couple of years ago and they have been reducing their partner program. So they are now having a small set of what they call pinnacle partners around the world. And in The UK, there are seven of them, of which, REDCENTRIC is one.

17:36 And what they're doing is for any customer, an end customer meaning a business, or if you're a communication service provider who has your own platform that you sell on to end customers, they can no longer go directly to VMware. You're going to have to come through one of these seven, businesses. And that is the deadline is 03/31/2027. So when Tim was talking about a market moment, the market is shifting and trying to decide what they want to do. And when you look at those who have used, VMware in the past, we can honestly say about 40% of those customers will move away from VMware. They don't want to be vendor locked in. So they're looking alternatives on hyperscalers or they will try to find an alternative hypervisor like Nutanix to move to.

18:24 And when we started this motion in f y twenty six, a lot of people came and said, we're leaving. We don't need your services. But interestingly enough, they're coming back because the, features and functionalities of the alternatives weren't what they were looking for. They started too late and so they're going to have to remain with VMware. But there's 60% of the market that really want to maintain being with the market leader. And so therefore, we have many different ways to onboard these customers, whether we help them with their licensing and a little bit of light management until they run out their platform and it has to be refreshed, then they have to come into ours. We have been taking, some of the cost savings that we had last year and investing in the frontier AI platform that VMware is developing, VCF nine. We're one of sort of their beta entities.

19:17 And if you want to be able to scale with the market leader, you're going to have to come through one of these seven pinnacle partners. And today, if you had seven divided by what's available, everybody would have 12%. We already have 15% of the addressable market. Our pipeline is another 12. I'm pushing the team to try to take 30% market share, and this is where we think a little bit more of the scale is gonna come from the business, and that's quite critical. I'm sorry. If you could flip back to the one before, Tim. So besides, you know, expanding our roots to market, our cloud modernization is where we're investing in along with our security and compliance story. So the cloud modernization really is for our private sector customers. It will be the VMware AI platform.

20:03 And for our private sector customers who need to be off of public clouds, we already run the largest UK, sovereign cloud. People like home office and police forces and stuff are utilizing it. And with a bit more investment over f y twenty seven, we know that we're gonna be able to expand into other areas of the defense market. So these are the kind of the critical areas that we're putting our effort into moving forward. Alright. So in summary, f y twenty six, major busy year, but very transformative and is allowing us to now come out into f y twenty seven as a pure play, very focused and with a business that's been right sized and optimized. There's still more to play for. At the moment, we're, you know, 14% in our adjusted EBITDA. We're intending to get that up to 20% over the next couple of years, which would be, you know, market leading and trying to get back to double digit growth.

21:03 Top line is gonna take a little bit longer than we'd like, and so that's why we're moving the company to understanding what ARR is. Tim talked about that earlier, but that has definitely, not been a motion within REDCENTRIC. And so understanding, motivating, compensating people about this promotion is a key one moving forward. Obviously, we have a lot of efficiency gains still yet to go. Our investment in automation and AI is an ongoing process. But overall, company's solid, it's financially set, we have a good plan in place, we've got a really motivated team. So even whatever comes out in the October, budget, hopefully, we're gonna be here and ready to deal with the consequences moving forward.

21:50 And with that, I think we'll open up the lines. And if you have questions, we'd be more than happy to answer them. And if you don't have a question now, but it comes back, please make sure to reach out to both Tim and I, we'd be more than happy to answer them. So Jake? Absolutely, guys. If I may just jump back in there, thank you very much indeed for your presentation this morning. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated on the right hand corner of your screen. Just while the company take a few moments to review those questions that have been submitted already, I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q and A, can all be accessed via your investor dashboard. Guys, as you can see there, we have received a number of questions, and thank you to all of those on the call for taking the time to submit their questions.

22:35 But Michelle, Tim, if I may just hand back to you to address those questions where appropriate. And if I pick up from you at the end, that would be great. Thank you. Thanks, Jake. Yeah. So the first question comes through from Richard, who is asking about the Broadcom pipeline and how we might see that in a time frame contract moving to contracted ARR. Now I know that we have a dedicated slide on Broadcom and there may be no more to add, but don't know if you wanna just repopulate the highlights of the Broadcom and how that might convert to ARR over the next over the next period. Oh, we've already converted 15%, but I can't necessarily give you what the strip out of the ARR compared to the rest of the revenue. I think that would be something that we'll probably talk about in the interims a little bit more because we're just now completing today. It's still, you know, end of quarter.

23:23 And where are our customers in that conversion process? It's been a very interesting road to hoe in that the emotion in the market is very anti VMware when this all happens. And admittedly, I worked for Citrix before I came to REDCENTRIC and, Tom Krausz used to be the CEO over at, VMware, Broadcom, and then he rinsed and repeat the same thing at Citrix. I know firsthand how antagonistic is. You've built a business around a certain business model and that gets pulled out from you. So I have a lot of sympathy with the market players today, and it's taken them a long time to figure out what they're going to change their business models moving forward. So the process, what I thought we would have landed in q four last year, is really now being migrated to q three and q four of this year.

24:15 So we will see it in contracted ARR, but we're not gonna see that revenue flowing through until f y twenty eight to be fair. But I think at the moment, what's important is people make decisions and where they're going to make their investments and, hopefully, REDCENTRIC will be the top of that. Fantastic. Thank you, Sean. And Richard also asks a question around sustainable EBITDA margin. Now I know you did touch on that and mentioned that on a like for like basis with the and maybe I can pick this one up. On a like for like basis, we're we're presenting the results this time around. We have a mid term expectation of achieving 20% EBITDA margin. So there has a lot of savings have already been made, but the business process automation opportunity that I've come into is very, very high.

25:04 The tech stack in behind the systems that we provide is also heavy still and there's still rationalizations within that. So there's lots of opportunity inside of the business to achieve much stronger margins than we've been able to certainly report in 'twenty six and beyond what we're expecting to see in 'twenty seven. I think we could also add to that other areas that, for optimization is that our transition service agreement with the company who bought our data centers, we're still having to run that out until the end of April next year. And therefore, we're not able to take out additional cost as you have people who are bifurcated still in in two different camps. As well as we have a team in Hyderabad, India, which we haven't maximized to its greatest advantage.

25:50 We've got great talent down there. But now that we have changed the business, as I should indicate, when I inherited the company, it was tower based, so product towers. And that probably made sense five years ago when maybe the cloud services were not as developed and you needed to have more specialization. But now that we're at parity with connectivity, you don't need two delivery teams, two product development teams. And so in the first half of this year, we've shifted the operating model of the company to being functionally oriented. And as such, we also then need to reevaluate within those functions which ones can live more effectively in India. So that should also give us some another bucket of to go after to get to our targets. I'll ask. And then Wajid asks, and it's something that we haven't mentioned specifically in the discussion so far, is around with a strengthened balance sheet, which is effectively now delevered.

26:47 What's our hurdle rate for m and a, and how might this compare with a threshold for returning capital to shareholders? If I cover the latter point first, and then maybe Michelle will talk about m and a in a bit more detail. So, I mean, we see clear line of sight now on revenue growth and ARR growth coming through. We see the opportunity for improving EBITDA margins and cash margins and free cash flow coming through. We have reported in the in the RNS that we will reinstate the dividend policy, which will start against the FY '27 year end. So we'll do an interim dividend declared against the first half of twenty seven's results, payable in calendar year quarter one of calendar twenty seven, and then six monthly, thereafter with opportunistic share buybacks mirroring what we've done over the last month and a half or so. So we're committed to returning capital or continuing returning capital to shareholders.

27:48 But there is still firepower if we require it for M and A, but I'll leave that to Michelle. Well, I promised my board no m and a in FY twenty seven because really we need to have stronger foundations so that if you did m and a in the future, you have something appropriate to lay it on top of, and we're having to sort of clean up from the previous, buying sprees over the last few years. But in reality, I think organic growth at the moment is the important thing to be driving and then opportunistically, we might be able to pick up something, but we need to be very specific about where are the gaps. Is it a technology piece that we need or is it a customer set or whatnot? But at the moment, I'm not seeing that. Our portfolio has what we need at the moment. We just need to do better in scaling it.

28:38 But you have to leave the opportunity, and, you know, Tim's done a great job of giving us enough firepower that we can can manage that post this year. Okay. Thank you. So I think that's all of the questions that we've received, but we have had a very nice comment from Tony who's on the on the line. Thank you for that, Tony. So, yeah, I think that that then ends the questions that we have posted up so far. Perfect, guys. If I may just jump back in there. Thank you very much indeed for addressing all of those questions. And, of course, if there are any further questions that do come through, we'll make these available to you afterwards just for you to review to add any additional responses where appropriate. But, Michelle, perhaps before really now, just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and If the I could please just ask you for a few closing comments just to wrap up with, that'd be great.

29:31 Thanks, Jake. Well, overall, just thank you for taking the time today to listen to Tim and I. We know it's a very busy day and with 17 companies we're all doing this, so that you took the time to listen to REDCENTRIC, it's great. And I hope that you're going to be a bit more excited about our focus, the momentum that we're building, the financial strength that's behind us, and a very targeted way of how we want to deliver more value to our shareholders, both, know, in the short term with dividends and in the long term with an increased, robust business. So if you would ever want to discuss anything deeper with the business, Tim and I are always here for you and really appreciate you taking the time with us today. That's great. Michelle, Tim, thank you once again for updating investors this morning. I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback, which will help the management team better understand your views and expectations.

30:26 This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of REDCENTRIC PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.