Managed infrastructure provider, Redstone, has improved profitability in H1 in the face of a 22% revenue decline to £28m. For the six months to the end of September, the firm increased gross margin while reducing operating expenses by £2.1m (to £14.1m) to achieve an adjusted EBITDA margin of 8.8% (up from 5.3% in H1 last year). Redstone has set a target of 10%, which is certainly looking achievable. Taking into account all of the ‘nasty bits’, the company moved from an operating loss of £458k to a profit of £628k.
The management team is working to rebalance the revenue mix of the business towards stronger-growing managed services in order to address the top line challenge. You can see precisely why it needs to reduce its reliance on the projects business: in H1 revenue here decreased by 28% to £13m.
A key strategic priority for Redstone is to achieve profitable growth in the managed services business. To this end, there has been some progress with an increase in adjusted EBITDA from the annuity business of £800k to £2.6m. This is despite an overall decline in revenues due to the loss of two contracts (for which notice was served almost two years ago). Stripping those out, underlying growth was 4.6%.
Towards the end of the first half, the company completed the acquisition of Maxima (see - Smith brings Maxima to the Redstone party) and raised £3m to fund the restructuring of the Group. With £24m in managed services revenue (for the year ending May 2012), Maxima gives Redstone a real boost as it looks to reduce its reliance on discretionary projects. Now about two thirds of combined revenues will come from network-based managed services, and one third from infrastructure solution projects. The underlying business is starting to shape-up, and we’d be surprised if there weren’t more improvements to report at the end of the year.