Financial review

Overall, the performance of the UK Indirect Business unit has been strong. Growth has been driven by both UCaaS and data products. ARPU has been supported through the successful up-sell of additional modules to UCaaS customers. Gross margin has been broadly consistent with previous periods, in line with expectations, as the mix of UCaaS and connectivity products is now reasonably stable.

The significant levels of sales activity in late 2021 that started to flow through to the financials in early 2022 led to a 10% growth in revenue and 9% growth in gross profit. There were a number of significant SIP contract wins driven by Microsoft Teams users, including the Department for Work and Pensions. Minimal impact from the well-publicised supply chain shortage was seen in 2022. As expected there has been a small decrease in the gross margin due to mix, with a slightly higher proportion of installations and hardware sales.

Overall there was modest growth in European revenue and gross profit. The revenue and gross profit growth in UCaaS in our German business was relatively strong along with a good performance in the Epsilon business (our mobile focused distribution business in that market). Challenging local market economic conditions mean achievement of future business performance targets will take longer than originally forecast resulting in an impairment of the Spanish cash generating unit in 2022. The Spanish business started to show the benefit of the NeoTel acquisition in the second half of the year offsetting a small decrease in the Netherlands as a result of a reduction in call usage. The decline in our traditional products was in line with expectations.

Operating expenses

Operating expenses grew from £160.2m in 2021 to £182.3m (£169.8m net of £12.5m exceptional items outlined below). We break these down as follows:

Of the movements in “Expenses included within cash generated from operations” shown above, which increased by 7% (or a 6% increase when taking into account the immaterial £1.6m German commission reclassification from cost of sales to operating expenses):

• The UK Businesses’ operating expenses grew by 5% (compared to gross profit growth of 9%). These expenses (the majority of which relate to staff) have been tightly controlled. These and other inflationary pressures have been actively managed and partially offset by pricing actions towards the end of the year.
• The underlying increase in European costs was 3% after taking into account the immaterial reallocation of £1.6m between cost of sales and operating costs, as a result of tightly managed cost control.
• Central costs have increased from the prior period which is due to continued growth in the Group function required to support the businesses we have acquired around Europe as well as an increase in governance costs.

Depreciation and amortisation on tangible and intangible assets (excluding business combinations) has increased slightly to £17.7m (2021: £17.6m). The annual depreciation and amortisation charge is below the annual capital expenditure spend but is expected to increase in future as more of our own developed software products come into service.

Exceptional items

There were two exceptional items in the year (2021: none)

Impairment of goodwill on the Spain cash generating unit (CGU).

A non-cash impairment of the Spanish cash generating unit (“CGU”) has been recognised (£12.2m). This CGU has been impacted by challenging local market economic conditions. It is anticipated that the achievement of future business performance targets may take longer than originally forecast. This, combined with the increase in discount rates applied, has resulted in an impairment.

Disposal of a subsidiary.

On 5 August 2022 Gamma completed the sale of ComyMedia, previously part of the Spanish CGU, for €1. ComyMedia specialised in IT solutions and had little fit with the rest of our European business. An exceptional loss of £0.3m was recognised relating to proceeds on disposal less the book value of the net assets of the business. ComyMedia generated a negligible EBITDA contribution in 2022 prior to disposal.

Alternative performance measures

Our policy for alternative performance measures is set out in note 2.

The tables below reconcile the alternative performance measures used in this document:

2022

2021

• We believe that these measures provide a user of the accounts with important additional information by providing the following alternative performance metrics.
• Profit before tax is adjusted for exceptional items and also adjusted for the depreciation and amortisation on business combinations which were created on acquisition and the change in the fair value of acquisitions. This enables a user of the accounts to compare the core operational performance of the Group.
• Profit after tax is adjusted in the same way as Profit before tax but also considers the tax impact of these items. To exclude the items without excluding the tax impact would not give a complete picture.
• Adjusted earnings per share takes into account all of the factors above and gives users of the accounts information on the performance of the business that management is more directly able to influence and on a comparable basis from year to year.

In addition to the above adjustments to statutory measures, we add back the depreciation and amortisation charged in the year to Profit from Operations (2022: £65.4m; 2021: £68.3m) to calculate a figure for EBITDA (2022: £92.6m; 2021: £95.4m) which is commonly quoted by our peer group internationally and allows users of the accounts to compare our performance with those of our peers. We further adjust EBITDA for exceptional items as this gives a reader of the accounts a view of the trading picture which is comparable from year to year (adjusted EBITDA: 2022: £105.1m; adjusted EBITDA: 2021: £95.4m).

An adjustment to the cash has been presented because the Group believes that adjusted performance measures (APMs) provide valuable additional information for users of the financial statements in assessing the Group’s performance as Net Cash is a better measure of liquidity. We do not consider contingent consideration or IFRS 16 lease liabilities as debt for the purpose of quoting a net cash figure.

Adjusted EBITDA

Adjusted EBITDA grew from £95.4m to £105.1m (10%) driven by the revenue growth in the UK and Group-wide cost control.

Taxation

The effective tax rate for 2022 was 24% (2021: 20%). The effective tax rate in 2022 applied to trading profits was above the 19% statutory UK rate due to expenses that are not deductible in determining taxable profit relating to the exceptional items. Excluding the exceptional items would result in an effective tax rate of 19%. The prior year rate was above the UK effective rate as a result of a change in the rate on deferred tax. The UK corporation tax rate increases to 25% on 6 April 2023 which will affect EPS growth from 2022 to 2023.

Net Cash and cash flows

The Group has Net Cash of £92.5m (2021: £49.5m). Cash generated by operations was £99.1m (2021: £89.8m). The ratio of cash generated from operations as a percentage of adjusted EBITDA was 94% (2021: 94%).

Items which are not directly related to trading were:

• Capital spend was £20.7m, which is an increase from £16.8m in the comparative period. This is discussed below.
• £9.8m was the total payment for acquisitions net of cash acquired (2021: £49.3m) of which £4.3m was paid for the acquisition of NeoTel (net of cash acquired), £1.6m was paid in deferred consideration for the acquisition of Mission Labs, £0.1m was paid in deferred consideration for the acquisition of Voz Telecom Andalucia and £3.8m for the exercise of options relating to acquiring some of the residual minority interests in HFO.
• £3.1m was received from the issue of shares (2021: £5.9m). This significant decrease on the prior year was as a result of the reinvestment in Gamma by former shareholders of Mission Labs in 2021 (£2.8m).
• £13.3m was paid as dividends (2021: £11.7m).
• Gamma’s Group treasury policy is governed by the Audit Committee. Gamma manages cash centrally and seeks to maximise value and return whilst balancing associated risks. The policy manages concentration risk by setting an appropriate limit on the amount that can be placed with any one institution, and manages credit risk by setting a minimum requirement around the credit rating of the financial Institution. Given 85% of Group revenue is generated from our UK business, all deposit balances are held with large established UK financial institutions. Cash in Europe is held for working capital purposes and follows the credit rating requirements as set out above.

Capital spend

Capital spend in 2022 was £20.7m (2021: £16.8m) as follows:

• £6.8m was the spend on the core network, including increasing capacity as well as other minor items such as IT and fixtures and fittings (2021: £9.1m).
• £13.1m was the capitalisation of development costs incurred during the period (2021: £4.8m). The increase is due to development of our own voice applications products (in part using the capabilities acquired with Mission Labs) and is partially offset by the amounts paid to third parties as seen below.
• £0.8m was spent with third-party software vendors for the software which underpins our Cloud PBX products (2021: £2.9m).

Adjusted EPS (FD) and Statutory EPS (FD)

Adjusted EPS (fully diluted) increased from 64.0p to 71.8p (12%). Adjusted EPS is EPS adjusted for exceptional and other items as defined in note 2 and a reconciliation to the statutory measure is shown in the table above.

EPS (fully diluted) decreased from 55.2p to 50.6p (-8%). This is lower than the adjusted metric as a result of the exceptional charge relating to the impairment of the Spanish CGU and the disposal of ComyMedia.

Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report. In assessing going concern management and the Board has considered:

• The principal risks faced by the Group.
• The financial position of the Group.
• The strong cash position – at 31 December 2022 the Group had cash and cash equivalents of £94.6m (2021: £52.8m). Net Cash (being cash and cash equivalents less borrowings) was £92.5m (2021: £49.5m). All borrowings were acquired with acquisitions made in previous years.
• Budgets, financial plans and associated future cash flows including liquidity and borrowings.
• Sensitivity analysis, which has shown that EBITDA would need to decrease by 100% for the Group to need additional borrowing (assuming no mitigating actions had been taken). We consider this to be highly unlikely.

The Directors are satisfied that the Group and Company has adequate financial resources to continue in operational existence for the foreseeable future, being a period of at least twelve months from the date of this report. Accordingly, the going concern basis of accounting continues to be used in the preparation of the Annual Report for the year ended 31 December 2022.

Dividends

As described above by the Chair, the Board is proposing a final dividend of 10.0p (2021: 8.8p). This is an increase of 14% and is in line with our progressive dividend policy.

Subject to shareholder approval, the final dividend is payable on Thursday 22 June 2023 to shareholders on the register on Friday 2 June 2023.