Arqiva announces excellent results for the half year to 31 December 2016

Strong performances across all businesses. Arqiva partnering with Samsung to deliver the first UK 5G Fixed Wireless Access in-field trial

Arqiva, the UK’s largest independent towers company and communications infrastructure group, announces record revenues and EBITDA for the half year to 31 December 2016 :

• Revenue up 10% at £466 million, a 13% increase from continuing operations
• EBITDA up 11% at £231 million
• EBITDA margin stable at 49%
• Operating cash flow after investing activities up 84.3% at £163.3 million, with lower capital expenditure and working capital
• Order book of £5.6 billion

Arqiva is confident that it will achieve further significant improvements in EBITDA over the next 12 months to December 2017 as a result of continued revenue growth and cost savings programmes.

Arqiva provides the communications infrastructure used by mobile telecoms network operators; TV & radio broadcasters and satellite TV broadcasters. It has taken a leading role in deploying devices requiring machine-to-machine connectivity such as smart meters for energy and water.

On Friday 24 February, as a further development in its role as a leader in UK communications connectivity, Arqiva announced a partnership deal with Samsung to run the first UK 5G Fixed Wireless Access (FWA) field trial. The trial will operate in London for six months starting in the summer and will use cutting edge products with the aim of showcasing what superfast connectivity will mean for UK business and residents.

“Arqiva is continuing to deliver strong growth in revenue up by 10% in the half year, operating profit and, importantly, cash-flow from our operations as our capital expenditure and working capital needs start to reduce, after a number of years of historically high levels to support our investment in smart metering and DAB radio rollout.

“We own a leading portfolio of broadcast and telecoms towers infrastructure and we are making progress with optimising utilisation of our assets.

“Our investment and capital expenditure is focused on clearly defined opportunities and projects to ensure that the UK is at the forefront of the digital economy. We have a very strong order book with long term inflation-linked contracts and investment grade credit ratings to support these investments.

“We are currently developing our small cells proposition to improve 4G coverage and capacity and in the summer we will be working in partnership with Samsung to deliver an in-field trial of 5G FWA connectivity. We see considerable opportunities to increase the UK’s connectivity and ensure that the UK economy benefits.

“Alongside our growth strategy, our transformation programme ‘FutureFit‘ is lowering our cost base, aligning the way we work to reflect market developments better, identifying the needs of our customers better and strengthening our ability to deliver complex projects.”

Looking at each business in turn:

Revenue in Terrestrial Broadcast was up 8.2%. This was largely driven by growth in TV channel sales (Digital Platforms), rollout of radio networks and the 700 MHz clearance programme.

During the six months to 31 December 2016, Arqiva increased the capacity of its two main DVB-T Multiplexes to 31 streams, all of which are utilised. This has driven revenue growth and EBITDA margin expansion. Ongoing full utilisation of these Multiplexes and a strong period of sales with high quality customers demonstrate the on-going attractiveness to broadcasters of the Freeview DTT platform.

Arqiva is delivering the DAB rollout programme and upgrades to the analogue radio network as part of the BBC New Radio Agreement. As at 31 December 2016, Arqiva had 159 new transmitters on air helping broadcasters in reaching the targeted UK DAB network coverage of more than 97% of the population. The final stages for the current phase of the rollout programme are expected to complete by the end of March 2017.

The Group has successfully achieved the local DAB coverage threshold of 90% set by the UK Government in 2010, and is progressing with the delivery of Commercial local DAB to increase coverage to 91%. Arqiva is delivering new transmitters and upgrades at 220 sites and as at 31 December 2016 work had been completed on 201 sites. The remainder of the work is due to be completed by June 2017. The first national DAB multiplex achieved 93% capacity utilisation in September following the launch of Capital Radio.

Sound Digital network (a consortium in which Arqiva has a 40% holding) was successfully launched in March 2016 and by September had achieved 100% capacity utilisation. At the first ever Audio and Radio Industry Awards in October Sound Digital was awarded the Radio Academy Award for the biggest contributor to the industry in 2016.

Additionally, Arqiva is contracted with the major broadcasters and Ofcom to deliver the 700 MHz clearance programme to enable spectrum to be auctioned to the mobile network operators (MNOs). The programme is expected to generate cash flows from 2016 to 2021. In October 2016, Ofcom announced that it is aiming to make the 700 MHz band nationally available for mobile data by the second quarter of 2020.

Our Telecoms and Machine to Machine (M2M) business saw revenue growth of 14.7%.

Within this, Telecoms revenue was up 5% as a result of the four MNOs continuing to increase their 4G network coverage; Arqiva is carrying out large volumes of antenna and feeder upgrade projects, resulting in a significant increase in installation services revenues. At December 2016 the Group had completed 4,871 4G upgrades. A further c. 3,400 upgrades are in progress or have been requested by the MNOs over the next 18 months.

The disposal of the WiFi business was completed successfully in November 2016 for net proceeds of £23.6m. The prior year period includes revenues totalling £16.9m (2016: £7.2m) from non-core businesses which have subsequently been sold. Excluding these, organic revenue growth was 24.1% for Telecoms & M2M.

Smart metering is an exciting business that is beginning to show its potential, with revenues almost tripling in the period, to £23m.

Arqiva is a leading provider of smart metering communications infrastructure. It has long term contracts with customers including the Data Communications Company (the ‘DCC’, a body licensed by statute and backed by the utility companies) and Thames Water, plus a trial with Anglian Water to provide fixed network infrastructure to support smart metering roll-out.

In November 2016, the communications network provided by Arqiva as part of a 15-year contract with DCC, covering the North of England and Scotland, went live. Consequently, revenue streams from this contract increased in the period. Following ‘go-live’ further service roll-out will continue and accelerate.

In March 2015, the Thames Water contract was signed for an initial six-year term, extendable up to a total of 16 years. The service will cover three million homes when fully deployed. The Group has completed two major programme implementation phases and the service is live with more than 125,000 meters installed, an increase of c. 30,000 meters since the previous period.

In July 2016, the Anglian Water contract was signed for an initial four year trial term. The contract involves implementation of a smart water metering fixed network trial for 7,500 meters. The first trial went live in December 2016.

In Satellite and Media, revenues were up 5% as a result of new HD channel sales, a new agreement with Al Jazeera Media Network for global teleport and distribution services and foreign exchange gains, partially offset by the continuing process of exiting lower margin businesses.

‘FutureFit’ During the six months to December 2016 the Group launched a company-wide transformation programme called ‘FutureFit’. This programme has a number of aims, including lowering our cost base, aligning the way we work to better reflect market developments, improving the way we serve our customers, and strengthening our ability to deliver complex projects. The EBITDA margin expansion in the six months to 31 December 2016 has been supported by the early stages of this programme.

Longer-term developments - Small Cells opportunities and 5G. Arqiva is developing its outdoor small cells proposition using low power base stations to provide street level network capacity to MNOs, particularly in dense urban areas. Trials are underway with two MNOs in the London borough of Hammersmith & Fulham. In parallel, Arqiva is completing commercial design orders from an MNO with deployment expected during 2017. Further orders are envisaged from the MNOs as part of a rolling deployment of small cells as they look to increase network performance.

Arqiva and Samsung are undertaking field trials of 5G Fixed Wireless Access (FWA) technology in London starting in the summer and lasting for six months. The aim of these trials is to showcase how the UK can be at the forefront of high speed connectivity, for example, in virtual reality, connected buildings and connected homes. 5G has the potential to be a key pillar of the fast growing digital economy in the UK, and Arqiva is keen to work with the Government to ensure that the necessary investment is in place so that 5G is readily accessible in 2020.

Refinancing In November 2016, Arqiva completed the refinancing of the bank facilities that were due to mature in 2018 with a combination of private placement notes and bank facilities with expected maturity dates ranging from 2020 to 2029. The associated interest rates swaps were restructured to match the maturity of the new facilities and the break clauses were removed.

Following the completion of this financing, the Group’s funding arrangements have been simplified with all £2.5bn of senior debt and related long dated derivative instruments being consolidated on the Group’s Whole Business Securitisation programme, which has a common set of financial and operational covenants with security granted to all senior creditors.

Fitch and S&P affirmed the Group’s senior ratings at BBB following the completion of the November 2016 refinancing. In addition, the Group has a £0.6bn junior bond which is rated B-/B3 (Fitch/Moodys).