KeyTech Profits Increase To $7.2 Million

In a filing to the Bermuda Stock Exchange (BSX), KeyTech Limited (Ticker: KEY.BH) released a preliminary announcement of results for the financial year ended 31 March, 2012.

The KeyTech Group of Companies concluded fiscal year 2011/12 with a profit for the year of $7.2 million versus $6.6 million for the prior year.

“Despite continued weak economic conditions affecting group revenue, 2011/12 was a year in which we tangibly advanced our strategies as a group of companies with the facilities and breadth to meet and exceed the global and local communication needs of our customers. In the corporate segment BTC completed our rebuild of Bermuda’s Hamilton network, branded “PRISM”, to a full Ethernet network using CISCO technology. In the residential market BTC launched 8 and 10 megabyte per second DSL. In the Cayman Islands we completed our fiber network in George Town. Internationally Logic established a network point of presence in London, in addition to existing points of presence in New York, Miami, Bermuda and the Cayman Islands” said KeyTech CEO Sheila Lines.

Profit for the year includes a $10.5 million gain on the disposal of M3 Wireless and the acquisition of a 42% interest in CellOne in May 2011, $8.9 million of additional amortization expense due to revised estimates of future cash generation and useful life of a number of tangible and intangible assets, and $3 million in staff termination costs. Excluding these three items net profit for the year was $8.6 million.

Operating revenues in 2011/12 declined $5.1 million versus the prior year. However, of this decline $3.4 million arose on hardware and software revenues with a corresponding decline of $2.4 million in cost of goods sold expenses. This revenue decline reflects KeyTech’s previously announced strategic shift from the sale of software and hardware to increasing the focus on recurring communications revenues. Excluding hardware and software revenues, total operating revenues declined $1.8 million in 2011/12 due to a $2.3 million decline in residential wire-line revenues partially offset by growth in data and international capacity revenues.

“This year over year decline is substantially less than that experienced in the prior year when wire-line revenues declined $3.9 million and, excluding hardware and software revenue, total revenues declined $7.2 million. This indicates that economic activity contracted more significantly in 2010 than 2011, and as we anticipated last year, corporate revenues have stabilized after the significant declines from 2008 to 2010” said Sheila Lines.

Total operating expenses increased $1.3 million primarily due to one-off amortization expense charges in the year. Salaries and employee benefit expenses declined $3.6 million due to restructuring of the group’s business model. Staff termination costs were $3 million, $1.4 million lower than the prior year. Depreciation and amortization expenses increased $4.7 million. Included in total operating expenses is $5.5 million in additional tangible fixed asset and inventory amortization and impairment charges.

“Clearly global and local economic factors remain challenging, and we are impacted by our operating conditions. Our approach is to focus on our business models, customer retention, reduce structural recurring cost levels and continue to invest in the network assets that underpin our competitive advantage and sustain our recurring revenues. Despite the economic challenges in the last twelve months we have continued to implement tangible change and investment in the group and have kept our focus firmly on the future of our businesses” Sheila Lines continued.

In addition to completing PRISM, BTC upgraded its island wide core fiber network in 2011/12, allowing service of business customers outside Hamilton on the same Ethernet based network and creating greater capacity on our network core which will enable delivery of higher bandwidth services to individual residential customers without congestion on the network. “A simple analogy is that we have greatly widened the river that each stream and rivulet, representing residential customers, flows into before being delivered to the international Internet access carriers” said Sheila Lines.

The next phase of BTC’s network investments will be higher speeds to the home. In the United States some carriers have deployed high speed DSL (“VDSL”) such as AT&T’s U-Verse and an all fiber build such as Verizon’s FiOS. “We have been working with vendors to develop detailed plans for both VDSL and fiber to the home. In the coming fiscal year we expect to commence execution of specific deployment plans” said Sheila Lines

In January 2012 Logic Cayman was granted an Internet Protocol Television (“IPTV”) license. IPTV is used by telecommunications companies around the world, including BT, Verizon and AT&T, to deliver content services in competition to Cable TV companies – the triple play offers voice, data and content. “We intend to offer a triple play in Cayman over a fiber residential network and we have commenced construction of this residential network. We expect the first phase to be in service in our 2012/13 fiscal year” said Sheila Lines

The other major change in operations is that reported in 2011, the merger of CellularOne and M3 Wireless into CellOne in which KeyTech holds a 42% interest. “Twelve months on we remain as pleased with the merger as when it was announced. As expected, the tangible benefits of synergy realization and increased competitive scale are bearing fruit. CellOne completed the integration of the operations and networks of M3 Wireless and CellularOne in the year. The successful project planning and execution of this complex merge of operations is a credit to the CellOne team” said Sheila Lines.

Total capital asset expenditure in the current year was $11.7 million compared to $14 million in the prior year. Significant individual capital items in the year were the BTC Hamilton metro-Ethernet network “PRISM”, investment in network and premises in BTC to improve service and maintain existing assets, and completion of construction of fiber plant in the business district of George Town in the Cayman Islands. The prior year included $3.8 million in additional cellular sites for M3 Wireless.

In December 2011 telecommunications reform legislation was passed into law. Under the reform legislation the responsible Government Minister determines the activation date for the legislation.

“It has been suggested that the fact that regulatory reform has not been completed has deprived Bermuda of investment in telecommunications facilities. This simply is not borne out by the facts” said Sheila Lines. “Regulatory reform was first tabled in 2005. Since that time, far from stultifying investment, investment has continued at the same, if not increased rate than prior to the announcement of reform. KeyTech has invested in excess of $150 million in infrastructure since the announcement of reform. Nor have we been alone in making multi-million dollar investments since regulatory reform was tabled. Cable & Wireless completed two submarine cable systems, Gemini Bermuda and C-Bus, and all three wireless carriers made multi-million dollar investments in upgrading to 3G+ and 4G speeds. Clearly future regulatory uncertainty, which affects all carriers and which will continue after the start of reform as the industry regulation evolves, has not deterred entrepreneurial efforts and investment from a number of industry players” Mrs. Lines continued.

“The Hon. Marc A. Bean JP, MP, Minister for Environment, Planning, & Infrastructure Planning has stated that a number of work streams need to be completed to ensure all players “have a fair start”. This is essential for fair competition under the new licensing regime and we are encouraged by his statement and also by his comments on the issue of keeping additional taxation costs due to regulatory reform to the minimum required” said Sheila Lines.

“When telecommunications reform was first tabled, Bermuda was in a period of strong and continuous economic growth. That is in stark contrast to the situation today and it is essential that additional ongoing structural recurring costs resulting from the establishment of a new regulatory authority be closely managed by the Government”.

Share of income of associates for the year were $3.2 million as compared to $1.9 million for the prior year. The increase is due to the addition of CellOne as an associate from May 2011 and improved results from QuoVadis following growth in European certificate revenues.

Total cash dividends paid to common shareholders for the current and prior year was $0.48 per common share. KeyTech’s basic and fully diluted earnings per common share from continuing and discontinued operations for the year were $0.493 compared to $0.454 in the prior year. The operations of M3 Wireless are reported as discontinued operations in the current year to the date of amalgamation in May 2011, and for the prior year. KeyTech’s basic and fully diluted earnings per common share from continuing operations for the year were $0.495 compared to $0.339 in the prior year.

Due to the combined impact of a reduction in both the actuarial discount rate for the defined pension liability and the value of assets held by the defined benefit pension plan, for the current year other comprehensive income changes in the in the defined benefit plan was a decrease of $2.9 million versus $0.9 million decrease for the prior year.

Profit attributable to shareholders was $7,175,966 as compared to $6,529,237 for the prior year.

Profit for the year from continuing operations was $7,203,377 compared to $4,935,522 for the prior year. Loss from discontinued operations for the current year was $27,411 compared to a profit for the prior year of $1,681,263. Discontinued operations are the operations of M3 Wireless to the date of disposal in May 2011. Subsequent to May 2011 share of income from KeyTech’s 42% interest in CellOne is accounted for in continuing operations.

Operating revenues for the year were $80,606,465 as compared to $85,800,069 for the prior year.

Investment income was $6,849 as compared to $17,309 for the prior year.

Non-controlling minority interests were nil in the current year and $87,548 for the prior year.

Share of income of associates for the year were $3,241,356 as compared to $1,892,748 for the prior year.

Total comprehensive income for the year was $3,706,604 compared to $5,585,259 for the prior year. Changes in the defined benefit pension plan included in other comprehensive income were an expense of $2,907,378 in the current year and $916,646 in the prior year.

During the financial year KeyTech invested $11,656,198 in capital assets. During the prior year KeyTech invested $14,099,981 in capital assets.

The record date for attendance at the 2012 Annual General Meeting is 2nd July 2012. The 2012 Annual General Meeting will be held at 4pm on Friday 27th July 2012.

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