Performance review

The Group is well positioned to deliver value-added services in our target markets

Paul Simpson

In summary

  • Performance in line with expectations
  • Progress across all key focus areas
  • Pre-exceptional operating profit up 4% to £57.2m (2014: £55.0m), reported operating profit £22.4m (2014: £55.6m)
  • Adjusted basic EPS up 5% to 7.91p (2014: 7.55p)
  • Proposed final dividend of 3.58p (2014: 3.25p), representing sixth year of at least 10 per cent dividend growth

Business update

Businesses of all sizes are looking for a technology partner that can provide solutions that deliver against clear business outcomes.

In the enterprise market, we are becoming recognised as a partner of choice for the delivery of complex integration projects, as is evidenced by the successful implementation of a private cloud, contact solution for HMRC. This success reflects our decision to invest in higher value services and migrate the business away from the provision of declining voice and volume-based connectivity services.

Within the SMB market, we provide and support a range of subscription based IT and communications packages. We have seen growing demand particularly for cloud-based services, across both new and existing customers, resulting in continued revenue and EBITDA margin growth in this area.

In the consumer market, data usage continues to grow exponentially, driving demand for both fibre-based and traditional broadband services. Our fibre deployment in Hull and East Yorkshire has achieved take-up of 33 per cent of premises passed, significantly above the national average. Based on this strong demand, we have accelerated our deployment of fibre and, by 2017, over 50 per cent of customers will have access to these services. The majority of our fibre services are delivered direct to the premises, allowing us to offer speeds and capacity that can grow readily, to match future customer demand.

Set against this progress, the revenue and margins from some of our more traditional legacy activities have continued to decline. Recognising this, and their diminishing importance and contribution to future growth, an exceptional, non-cash impairment charge of £33.9 million has been recognised against the goodwill balance associated with the related acquisitions made in 2004.

Revenue £m

£348.0m 6.1%

EBITDA1 £m

£74.3m 1.3%

Operating profit1 £m

£57.2m 4.0%

1. Before exceptionals.

KC

The KC reporting segment covers communications services for consumers and SMBs within Hull and East Yorkshire, and provides contact centre and publishing services. Key features of the year include:

  • continued growth in consumer revenue and profitability driven by growing demand for broadband services and increasing penetration of bundled products with an accelerating demand for fibre services;
We are increasingly recognised as a partner of choice for the delivery of complex integration projects
  • consumer Average Revenue Per User (ARPU) continues to increase as a result of new broadband customers and fibre take-up;
  • slightly weaker business performance, pipeline strengthening particularly for fibre services; and
  • an expected lower publishing EBITDA, reflecting anticipated decline in the Hull Colour Pages directory.

The fibre deployment across Hull and East Yorkshire continues to achieve customer take-up well in excess of national trends. As at 31 April 2015, approximately 48,000 premises had access to fibre with take-up of 33 per cent. As a result, we have accelerated our rate of deployment and by March 2017, we expect to reach 100,000 customers, covering 50 per cent of our network area.

Hull is included in a government funding scheme aimed at supporting SMBs with improved digital connectivity. KC has registered as a provider under the scheme and since launching on 1 April has achieved 110 sales with pipeline building to 450 registered interests. Fibre take-up rates in the business sector are significantly ahead of initial expectations, at approximately 50 per cent of premises passed.

Kcom

The Kcom reporting segment covers the communication and collaboration services provided across the enterprise and SMB activities (excluding Hull and East Yorkshire). Key features in the year include:

  • investment in cloud-based contact services underpins successful implementation of HMRC contract within Kcom;
  • overall revenue and profit in Kcom brand impacted by continued decline in legacy activities;
  • cloud services contributing to a growing revenue and market share within Eclipse; and
  • strategic progress and stronger second half order intake in Smart421, particularly in cloud-based integration and consultancy services.

The substantial government contract to provide a cloud-based contact centre for HMRC was delivered successfully, ahead of the 31 January self-assessment deadline. This initial deployment was the start of our engagement with HMRC’s digital roadmap.

Refinancing, net debt and cash flow

During the year, the Group refinanced through the agreement of a £200 million revolving credit facility, secured on improved terms. This new arrangement, which expires on 30 June 2019, provides sufficient funding to support the Group’s growth.

Exceptional items

The Group’s net exceptional charge is £34.8 million (see Note 7 to the financial statements). Significant items include:

  • £33.9 million impairment charge against the goodwill balance of legacy activities associated with historical acquisitions made in 2004. This is a non-cash item and is treated as exceptional in line with our accounting policy;
  • £7.5 million restructuring costs relating to cost reduction, strategic IT investment and the move towards an integrated operating model; offset by
  • £5.3 million cash receipt in relation to a rebate of prior year network rates.

As anticipated year end net debt increased to £99.3 million (2014: £75.0 million), representing a net debt to pre-exceptional EBITDA ratio of 1.3 x (2014: 1.0 x). The year on year movement in net debt was anticipated following planned increases relating to our services to HMRC. The Group’s working capital outflow in the year principally arose as a result of a partial reversal of the strong cash collection in March 2014.

Dividend

The Board is proposing a final dividend of 3.58 pence per share (2014: 3.25 pence), representing a total dividend for the year of 5.37 pence per share (2014: 4.88 pence). This represents 10.0 per cent year on year growth in the total dividend, consistent with the Board’s previously stated commitment to grow full year dividends at 10 per cent per annum until the year ending 31 March 2016.

Subject to shareholder approval at the KCOM Group PLC Annual General Meeting on 31 July 2015, the final dividend will be paid on 4 August 2015 to shareholders registered on 26 June 2015. The ex-dividend date is 25 June 2015.

Pensions

The year end IAS 19 pension liability was £31.4 million (2014: £26.5 million). The year on year increase arose as a result of:

  • £22.6 million increase in liabilities, principally due to a 1.05 per cent decrease in the discount rate, mitigated in part by a reduction in the assumed rate of inflation; offset by
  • £17.7 million increase on assets, due to stronger investment returns (equity and bonds) over the year.

The agreed level of deficit repair payment (across both schemes) for the year ended 31 March 2016 is £2.0 million.

Capital investment

The Group’s investment profile is consistent with previous guidance and cash capital expenditure during the year was £32.0 million (2014: £27.9 million). Specific projects include:

  • the continued deployment of fibre;
  • strategic IT investment, including the implementation of SAP financials, driving the Group’s move towards common systems and processes; and
  • targeted customer specific investment.

The Group’s depreciation and amortisation charge for the year is £17.1 million (2014: £20.3 million). In line with its accounting policy and in light of market activity relating to network assets, the Group has assessed the appropriateness of the residual values of its network assets. This has resulted in higher residual values and a £4.9 million reduction in the depreciation charge for these assets in the year.

Tax

The Group’s tax charge is £4.1 million (2014: £11.8 million). The current year effective tax rate is 21.6 per cent, broadly in line with the prevailing rate of corporation tax. The overall effective tax rate is 24.9 per cent reflecting the impact of prior year items.

Paul Simpson

Chief Financial Officer
17 June 2015