It is fair to say that the market was not over the moon about the full year results from satellites operator Avanti Communications, but the directors believe the share price reaction has been overdone, and have been backing up this view with share purchases.
David Williams, Chief Executive of Avanti, purchased 8,100 shares
at 305p a pop, while another director, David Bestwick, bought 16,200 shares at the same price.
"We've been filling our boots, you might say," Williams told Sharecast, adding that he would not be surprised were there to be more director purchases before the day is out.
The shares dipped as low as 290p in the first two hours of trading on Wednesday before recovering a little; the shares closed at 348.75p on Tuesday.
The dramatic share price fall was not caused so much by the full year results, which showed revenue in the year ended June 30th 2012 surged to £12.46m from £5.46m the year before, while the loss before interest, tax, depreciation and amortisation narrowed to £5.3m from £9.7m the previous year. Rather, it was the more conservative revenue guidance which spooked the market.
Revene forecasts set to be cut
House broker Cenkos Securities went into bat for its client, as you might expect.
"Annual results are broadly in line with expectations and the win-rate of new business has been maintained. In addition, the company believes it's on track to fill current satellite capacity in 2016. However, the board has taken a more prudent view of the rate at which capacity is filled in the next two years and consequently our forecasts have reduced as growth is pushed out a year," said Cenkos analyst Jason Holden.
Jefferies Hoare Govett, which also acts as a corporate broker for Avanti, noted revenues and other operating income of £15.0m, while up 246% year-on-year, were below company guidance of £17.8m. "Management attributes this to more conservative accounting treatment although underlying growth run-rate for recurring revenue forecasts is also below our forecasts," the broker conceded.
The discrepancy between expectations and actuality can be explained by Avanti changing its mind over how it will record cash received upfront for preparation work on new contract.
"Previously Avanti envisaged recording such revenues as they were invoiced. The company has now elected to spread them over the lifetime of the respective contracts," Jefferies Hoare Govett explans.
According to Digital Look, the consensus forecast for revenue in the year to June 30th 2013 was £54.0m before Wednesday's trading update. Jefferies Hoare Govett expects the consensus number to come down by around £15m following the trading update.
"However, investors thinking back to the £17m FY12 [fiscal 2012] revenue target (excluding other operating income) which was in Avanti's guidance statements at Feb 1H [first half] results and the 14 May IMS [interim management statement] may elect to trim utilisation growth assumptions as well, in our view," the broker speculated.
"Another area of careful scrutiny at this morning's analyst meeting ... will be cost forecasts, given the above-expectation increase in 2H FY12 and the sensitivities associated with Avanti's high operating leverage," Jefferies Hoare Govett said.
Cenkos, meanwhile, has slashed its revenue forecasts by around 40%. It is now forecasting revenue of £34.5m for the current financial year, earnings before interest, tax, depreciation and amortisation (EBITDA) of £11.4m and an adjusted loss per share of £20.6m.
CEO puts his mouth where his money is
Not surprisingly, in his interview with Sharecast, David Williams focused on the many positive aspects of the group's performance.
The group's second satellite, HYLAS-2, was successfully launched in August but has only just officially opened for business - "we started invoicing today," Williams revealed - after a period of testing which apparently went better than expected.
"At 11GHz [gigahertz], HYLAS-2 has a bigger capacity than the 9GHz previously indicated, which has a big impact on revenues for the future. The 9GHz capacity we previously quoted was because of built in contingencies, just in case there were a few technical issues, but I am happy to say it was the perfect launch," Williams said.
Williams highlighted two key performance indicators that the company focuses on: backlog (the total value of customer contracts) and the average rate of new business acquisition. He declared himself happy with both of them.
"I am particularly pleased with the backlog number [up 57% year-on-year]. We're using new technology to service new markets, breaking new ground," Williams said.
As for the average rate of new business acquisition, Williams said the company had set their sales people a target of £11m of new business every month and they have been hitting or exceeding that target every month since January 2012.
Already having one satellite (HYLAS-1) up and running has been very helpful in attracting new business for HYLAS-2, apparently.
"Our customers are very techie, and they love playing with the kit. We have been able to let them play on our HYLAS-1 data centres before signing up for HYLAS-2," Williams revealed.
With 83% of Avanti's capacity earmarked for emerging markets, Europe, with its extensive copper-wired network, has not been a major concern for the company, although that may be about to change a little.
"African countries never talk to me about sovereign debt crises," Williams quipped, as he explained how communication via satellite is a logical choice for a vast continent with little in the way of established telecommunication infrastructure.
"In Europe, satellite communication has not been used in a meaningful way because it already has the infrastructure, but demand is growing exponentially, and clients are struggling as a result to get good quality back-haul, whether because of traffic, or location - stuck up on top of a building in a built-up area or whatever," Williams said.
Back-haul is a term used in the telecommunications world to describe the relay between the central, or backbone, network to peripheral networks.
"We're the first in the world, I think, to use the Ka band [covering frequencies from 26.5GHz to 40GHz] to provide back-haul," Williams declared.
With the battering the shares took on the morning of the results, it is unlikely that a few Europeans signing up for back-haul services will transform the reputation of the company, although Williams did note that it only takes a few corporate customers to start filling up capacity ("It's not like broadband in the home where providers need to sign up hundreds of thousands of customers").
It does underline, however, that demand for Avanti's services is on an upward curve; the problem for the company is that, while the end-point of that curve over a five-year timespan may be the same, the curve is more shallow in the early part of the period than previously expected.
Essentially, customers have signed up for five year contracts but have opted for the flexibility to start with low usage and then ramp-up towards the end of the contract after they have, hopefully, created demand from their own customers.