Avanti (AVN) ... Eh? 2.5 x run rate required?

Thursday 3rd October 2013

This posting may be worth persevering with as you may come round to my view that Avanti’s sales team only managed to achieve sales of c. £10.6m worth of Bandwidth during the 2013 financial year. This compares to total reported revenue of £20.6m for 2013; the fruits of a valiant effort to sell capacity over four years.

Avanti reported £20.6m of revenue for the financial year to 30 June 2013. This compared to £12.5m of sales achieved during FY 2012. Deconstructing this, I reckon we have the following: 

FY 2013 – Year end results

£20.6m of reported revenue

(£4.5m) revenue from the European Space Agency (ESA) contract relating to the financing of HYLAS 1. This £4.5m can be estimated from note 2. (c) of the year end results, that “If the fair value of the capacity sale was altered by 10%, the impact on the revenue figure would be £450,000.” This also ties up with note 2. within the 2012 annual report, which declared that “... revenues from ESA representing the sale of capacity on HYAS 1 comprise 36.1% (2011: 20.6% of total revenue.” 30.6% x £12.46m (2012 revenue) = £4.5m. It is also worth bearing in mind that this is a non-cash receipt.

(£1.7m) of provision for doubtful debts. In other words, the group reckons 8.2% (2012: 1.8%) of its sales will not materialise. How this increasing bad debt provision sits with "Market adoption is maturing and the Company has an increasingly 'blue chip' customer base" I don't know. 

(£1.8m) of kit/terminals. During 2012, the group reported within note 2. of its 2012 annual report: “Of this, £1,780,000 (2011: £576,000) relates to the sale of terminals”. I have assumed that this figure was the same for 2013, although it will need to be confirmed upon publication of the 2013 annual report.

(£2.0m) consultancy. Broker research on the group used to include a breakdown of this figure attributable to consultancy. Indeed the group still reflects its consultancy activities within its accounts. Well it did in note 1. of its 2012 annual report: “Revenue from space consultancy and other consultancy contracts connected with the exploration of space assets are recognised by reference to the stage of completion of the contract activity at the reporting date.” I presume this is still ongoing?

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£10.6m left over for bandwidth sales generated since selling commenced over 4 years ago. A valiant effort.

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In summary:

£20.6m of reported revenue

(£4.5m) ESA revenue

(£1.7m) Bad debt

(£1.8m) Kit sales

(£2.0m) Consultancy

£10.6m of bandwidth sales

Should bandwidth sales have been £10.6m as by the above deconstruction of revenue, then it becomes possible to attempt a further deconstruction so that I reckon that HYLAS 2 satellite sales contributed just £2.0m to total revenue during its 3 months of operation. That equates to just £666,000 per month.

I reckon we have the following:

There were virtually no bad debts in the first half of the year; provisions for doubtful debts were reported to be £11,000. This suggests that of the £1,679,000 of doubtful debts that were reported for the full year, that £1,668,000 was attributable to bad debts in the second half. Therefore, assuming that the split of the remaining adjustments above was evenly divided between the two halves, suggests that the split of adjustments between the two halves is £4.2m in H1 and £5.8m in H2, to arrive at the total of £10m of adjustments for the full year. This suggests that bandwidth sold in each half year may be estimated as:

H1:

£8.6m of reported revenues in H1

(£4.2m) share of adjustments above

£4.4m of bandwidth sales in H1 (all HYLAS 1 as it was not until “By January, service was fully operational (HYLAS 2) with end user deployments rolling out and all customers invoiced. We will therefore report the first material revenues from HYLAS 2 in the second half of the current financial year”, as was reported in the group’s interims to 31^st December 2012.

H2:

£12.0m of total revenue for H2 (FY less H1)

(£5.8m) share of adjustments as above

£6.2m of bandwidth sales during H2. Assuming that sales for HYLAS 1 were flat half on half (but experienced £0.2m of bad debts, as last year), at £4.2m, suggests that £2m of sales were attributable to bandwidth sold on HYLAS 2 during H2 over the 3 months average invoicing period (as reported in the 10^th July 2013 trading update: “Some customers started service later in the second half than expected and the average HYLAS 2 customer was invoiced for three months during the financial period”. That would equate to £666,000 of HYLAS 2 sales per month.

All this suggests that the estimated revenue run-rate for HYLAS 1 & 2 comes to just £16.4m per annum. i.e. ((£4.2m of HYLAS 1 sales during H2 / 6 months) + (£2.0m of HYLAS 2 sales during H2 / 3 months)) x 12 months = £16.4m. Including the £10m of adjustments above points towards an estimated run rate of £25.4m for 2014 (the total adjustments will be £1m less as the ESA stop in April 2014). This is a far cry from the £50m of sales which is forecast by Avanti’s broker; although I would add that Avanti’s broker has form on being overly optimistic (Bizarre reaction to further downgrades).

Essentially it means that Avanti’s bandwidth sales run rate has to increase by 2.5 times to achieve the £41m of estimated bandwidth sales during 2014. I reckon the group has a limited chance of achieving that and by limited I mean zero.

I’ve increased my short position.

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