Connecting people KCOM Group PLC Annual report and accounts 2014/15 KCOM GroupKCOM PLC Annual report and accounts 2014/15 We are a leading provider of communications services to organisations and consumers in the UK. Small and medium- sized businesses Supporting small and medium-sized businesses to exploit the benefits of cloud services Enterprises Enabling enterprises to achieve business outcomes through technology Consumers Helping consumers live more connected lives Highlights Operational highlights I Performance in line with expectations I Progress across all key focus areas I Success of and growth in demand for IP-based ‘Workplaces’ portfolio, including successful HM Revenue & Customs (HMRC) implementation and further significant opportunities in pipeline Strategic report page 2 I Acceleration of fibre deployment in Hull and East Yorkshire, following continued strong demand for fibre and broadband services, well ahead of national average I Business transformation continues to create a more agile operating model I Integration of brands to focus investment on growth in the enterprise, small and medium-sized business (SMB) Directors’ report and consumer markets page 28 I Continued move towards effective, efficient support services/ back-office operations and implementation of common Strategic report 02 Our business at a glance systems and processes supports consolidation of teams 04 Chairman’s statement 06 CEO’s statement 08 Performance review Financial highlights 10 Our business model 12 Market opportunities and trends 15 Case studies 1 Revenue £m EBITDA £m 16 Our strategy 18 Key performance indicators (KPIs) K K 20 Risk management £348.0m 6 .1% £74.3m 1.3% 22 Corporate responsibility 2015 348.0 2015 74.3 Directors’ report 2014 370.7 2014 75.3 28 Board of Directors 30 Corporate governance Operating profit1 £m Profit before tax1 £m 34 Nomination Committee report 36 Audit Committee report L L 39 Other disclosures £57.2m 4.0% £51.5m 3.2% 42 Remuneration report 43 Policy report 2015 2015 57.2 51.5 49 Annual report on remuneration 2014 55.0 2014 49.9 Financial statements 58 Independent auditors’ report £m p Net debt Proposed full year dividend per share 64 Consolidated income statement 64 Consolidated statement L L of comprehensive income £99.3m 32.4% 5.37p 10.0% 65 Balance sheets 2015 99.3 2015 5.37 66 Consolidated statement of changes in shareholders’ equity 2014 2014 75.0 4.88 67 Parent company statement of changes in shareholders’ equity 1. Before exceptionals. 68 Cash flow statements 69 Notes to the financial statements Performance review KPIs 95 Five year summary of consolidated figures page 8 page 18 96 Shareholder information KCOM Group PLC Annual report and accounts 2014/15 01 Strategic report Our business at a glance We are the partner of choice for organisations and consumers seeking to harness the power of communications Our goal is to become an acknowledged leader in the markets we serve and an automatic partner of choice for organisations and consumers in those markets. We aim to help our customers exploit the communications revolution and its associated technologies to improve the performance of their organisations and to enhance their personal communications experience. Further information: Our business model page 10 Market opportunities and trends page 12 Case studies page 15 Enterprises We help customers meet their business needs, growth and cost outcomes through the integration of collaboration and communications tools. Our customers in this market include Admiral, Association of Train Operating Companies (ATOC), Aviva, Domino’s, HMRC, Kuoni, Morrisons and NFUM. Served by Smart421 and Kcom KCOM Group PLC 02 Annual report and accounts 2014/15 Strategic report Strategic Small and Consumers Our broadband-based services help medium‑sized people communicate and live their lives businesses in a digital age. Our connectivity and IT services help Our customers in this market include more than businesses operate more efficiently, 130,000 households in Hull and East Yorkshire. provide better customer service and achieve growth. Our customers in this market include Foot Anstey, Furniture Village, Hull College Group, RNLI, RSPB and The Range. Served by Served by KC and Eclipse KC KCOM Group PLC Annual report and accounts 2014/15 03 Strategic report Chairman’s statement We have seen clear progress in terms of growing customer demand and increased operational effectiveness In summary I Business continues to progress its transformation I New Board appointments bring fresh perspectives and contributions I Focus and discussion on strategic milestones and succession planning I Continued dividend growth reflects strength of the business Dear shareholder The business continues to perform well, progressing its transformation The executive team journey to become more tightly focused on the markets in which it operates. While this journey will continue into the coming financial year, continues to lead the we have seen clear progress in terms of growing customer demand and transformation of increased operational effectiveness. the business Dividend As a result of this progress and our confidence in the strength of the business, the Board is proposing a final dividend of 3.58 pence per share (2014: 3.25 pence). Subject to shareholder approval at this year’s AGM, 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. The proposed total dividend of 5.37 pence per share (2014: 4.88 pence) would result in a sixth year of 10 per cent growth in the total dividend. This is consistent with the Board’s previously stated commitment to grow full-year dividends by at least 10 per cent per annum and this commitment remains in place until 31 March 2016. KCOM Group PLC 04 Annual report and accounts 2014/15 Employees have consistently demonstrated commitment report Strategic to delivering inspiring customer experiences Strategic focus As the transformation of the business continues, I anticipate that a great As the executive team continues to lead the transformation of the deal of the Board’s time and focus will be on reviewing progress against business, a great deal of the Board’s time has been focused on evaluating the key strategic milestones set out by the senior management team. progress against key strategic milestones. We continue to have an effective Board in place, with debate and constructive challenge on all Given the growing dependency on the strength of our people, the Board of the key areas of the business. Given the strong focus on the strategy will increasingly dedicate time to further discussions around succession of the Group, there has been a standing agenda item at each Board planning and to making sure that plans are in place to retain and meeting to discuss strategy, with contributions from across the Board. develop talent. Board appointments Good governance and responsible business We reported last year that we were seeking an additional Non-Executive We believe that good governance is essential to the Group and we seek Director to join the Board and we were delighted to appoint Peter Smith to adopt best practice in all areas of governance where it is possible to to the Board in January 2015. Peter brings with him a wealth of do so. We also believe it is vital that the Board lives the values according experience in assisting businesses across different industries in to which the Group conducts itself; those of being open and considerate, developing and delivering their strategies. team-minded, flexible, inspiring and innovative. I believe that our current Board achieves this and we will seek to continue to demonstrate these Earlier this year, Martin Towers notified us of his intention to retire from values in all that we do. the Board at the AGM in July 2015. In seeking a successor for Martin’s role, we welcomed Liz Barber to the Board in April 2015. She has Those values have been embraced by employees and we continue significant financial experience and expertise and will become to have a high level of engagement in community programmes right Audit Committee Chairman following Martin’s departure. across the business, and particularly in Hull and East Yorkshire. We believe that both Peter and Liz will bring new perspectives to At the end of this year, we came to the end of our three-year Charity our Board discussions and will contribute significantly to the ongoing Partnership with Sparks, during which, through a wide variety of effectiveness of the Board. We used external recruitment consultants fundraising activities, we were able to raise over £235,000 for the who are completely independent of the business for both appointments. charity. This money will support Sparks’ ongoing work to fund pioneering research into conditions that affect babies, children and mothers-to-be. Board effectiveness We continually consider the effectiveness of the Board and have a formal At the start of this financial year, we began our new partnership with evaluation annually, which in 2014 was performed by an independent the Teenage Cancer Trust and I am sure that we will see equally external firm. The conclusion from the evaluation was that we are enthusiastic support. operating effectively but there were some minor areas for improvement, which are detailed further on page 32. We have taken action in all the Finally, I would like to acknowledge once more the significant areas identified as we strive to be as effective as we can be. contribution made by our employees. An environment of transition and change inevitably results in a level of uncertainty. Since we began this We always seek to ensure that we have appropriate succession plans journey in 2008, our employees have consistently demonstrated their in place both for the Board and for the senior management team commitment to delivering inspiring experiences to our customers and of the business and this has been another regular topic of discussion I have every confidence in their ability to rise to the challenges ahead.