M2 Telecommunications Group Ltd – Annual Report 2011 Group Ltd – Telecommunications M2 M2 Telecommunications Group Ltd Annual Report 2011 www.m2.com.au Creative Design: ADMAD, www.admad.com.au Photographers: John Warren, Warren Photography, www.warrenphotography.com.au Rohan Smith, People Telecom Marketing Executive Andrew Barnard, M2 Telecom Credit Management Officer Contents Timeline 2 Chairman’s Letter 4 Managing Director / CEO’s Review 6 Case Studies 12 Directors’ Report 20 Remuneration Report (audited) 24 Corporate Governance Statement 29 Corporate Social Responsibility Statement 34 Consolidated Statement Of Comprehensive Income 36 Consolidated Statement Of Financial Position 37 Consolidated Statement Of Changes In Equity 38 Consolidated Statement Of Cash Flow 39 Notes To The Consolidated Financial Statements 40 Directors’ Declaration 71 Independent auditor’s report 72 ASX additional information 73 Corporate Directory 75 T 2011 T 2011 R L REPO A M2 ANNU M2 1 2 M2 ANNUAL REPORT 2011 - TIMELINE Delivering recordincreasesintopandbottomlinessince2003. T imeline 3 M2 ANNUAL REPORT 2011 - TIMELINE Chairman’s Letter Dear Shareholder, following is a summary of the key highlights of FY11, > Declaration of interim and final (fully franked) not only in the year ahead but also for the medium a number of which are further elaborated upon in dividends of 7c and 9c respectively, a 60% to longer term. On behalf of the Board of M2 Telecommunications the Managing Director / CEO’s report which follows: increase on FY10. These were the Company’s 13th One of the Board’s core functions is succession Group Ltd (“M2”), I am pleased to present to you our and 14th consecutive dividends since listing on the Annual Report, for the period 1 July 2010 to 30 June > Consolidated revenues increased to $426.8 million planning of the CEO role. To this end, the Board ASX in October 2004; 2011 (“FY11”). from $406.1 million last year, an increase of 5%; was advised by Vaughan Bowen of his intention to > Expansion of the Company’s internal and external step aside from his current role as CEO / Managing I am genuinely thrilled to be delivering our > Earnings Before Interest, Tax, Depreciation sales channels, both in Australia and New Director and it was announced on 29 August 2011 shareholders the details of a year in which we have and Amortisation (EBITDA) of $48.3 million, as Zealand; that Vaughan will assume an Executive Director role improved M2’s EBITDA and NPAT by 54% and 72% compared with $31.4 million in the previous year, whilst Geoff Horth, M2’s present Chief Operating respectively. Given we operate in an industry in representing an EBITDA increase of 54%; > Selection and customisation of a new Company- Officer, will be appointed as CEO. Both changes will which on average low single digit growth is being wide Business Support System (“BSS”) scheduled > Net Profit After Tax (NPAT) increased by 71% from become effective at the conclusion of M2’s 2011 generated, this result is a stunning testament to the for phased implementation, commencing early the previous year to a new record high of $27.6 Annual General Meeting, on 28 October 2011. diligence and ingenuity of our team and the many FY12. million; hundreds of representatives across our national Over the past 12 years, Vaughan Bowen has proven dealer network. > Earnings Per Share (EPS) increased by 56% “This heightened focus on himself to be an outstanding CEO. Commencing in compared with the previous year, to 22.6c per the role at the time of the Company’s incorporation “This result is a stunning share; growth coupled with our in December 1999, Vaughan has grown M2 from a fledgling start-up to a large, profitable, respected testament to the diligence and > A number of sizable customer base acquisitions strengthened operating systems, member of the Australian telecommunications made late in the second half of the period, most ingenuity of our team.” provides cause for considerable industry, employing nearly 500 people across notably; Clear Telecoms (February 2011), Austar Australia and in New Zealand. Since its listing Mobile (February 2011) and Edirect (April 2011). optimism about M2’s prospects R This time last year I reported on the focus the on the ASX almost seven years ago, Vaughan has business had devoted to integration of its major The assets of New Zealand-based Black+White ETTE L for future success...” steered the Company from a market capitalisation Limited were also acquired in November 2010; acquisitions from the previous year (People Telecom of $14 million to approximately $357 million at the n’s and Commander). This year I’m pleased to report on > Implementation of business-wide process Together with the announcement of FY11 results time of writing, an increase of over 2400%. a period which has been considerably less impacted AIRMA improvements and operating efficiencies, including on 29 August 2011, the Directors released financial by the need to integrate major acquisitions. Rather, Australian “on-shoring” of all recently acquired guidance for FY12, which forecasts another strong we took advantage of the opportunity to refine “Since its listing on the overseas-based customer support operations; year of earnings growth. Inherent within M2’s our operating processes and made a key strategic FY12 guidance is a sizable incremental investment ASX almost seven years T 2011 - CH R decision regarding the central operating system > Delivery of substantial increase in our “Net in its sales channels, expansion of our inside sales which will support our business into the future. We Promoter Score”, a recognised measure of ago, Vaughan has steered team and certain one-off costs associated with the L REPO A also drove cost efficiencies into the business, across customer satisfaction, across all M2 brands; implementation of our new BSS. This heightened the Company from a market both our cost of goods and operating expense base. > Cash flows remained strong and gearing levels focus on growth coupled with our strengthened capitalisation of $14 million to M2 ANNU M2 Summarising the many achievements of such a busy remained very low in relation to borrowing operating systems provides cause for considerable 4 and productive year is indeed difficult. However, covenants; optimism about M2’s prospects for future success, approximately $357 million” The M2 Board would like to sincerely thank Vaughan for The Board is extremely pleased to be retaining his dedication and exceptional performance. Vaughan’s Vaughan in his new Executive Director role and as determination, in consultation with the Board, was that a continuing member of the M2 Board of Directors, M2’s prospects of continued future success were best demonstrating his continued commitment to M2 and served by a well managed transition of the day-to-day its future success. management of the Company. The Board conducted a Finally, on behalf of the Board, I would like to sincerely structured and thorough evaluation process and formed thank you for choosing to be a shareholder of our the strong and united view that Geoff possesses the Company and for your support during what has been a appropriate skills and experience to lead the next stage very successful and developmental year for M2. of M2’s evolution. Yours faithfully, In addition to a distinguished senior managerial career Geoff has proven himself to be an outstanding member of the M2 executive team for more than two years. After more than 20 years in the telecoms industry, Geoff assumed the role of COO at M2, where he presently has executive management Craig L Farrow responsibility for all operating divisions of the M2 Chairman Group. Geoff possesses exceptional capability to implement the systems, processes and organisational structure necessary to equip M2 to move to the next level in terms of scale whilst maintaining its lean, R hungry, “challenger” culture. ETTE L “Geoff possesses the appropriate n’s skills and experience to lead the AIRMA next stage of M2’s evolution.” T 2011 - CH In his new role as Executive Director, Vaughan’s R principal responsibilities will be identifying and negotiating merger and acquisition opportunities, L REPO A continued active involvement with management of key supplier and capital markets relationships, whilst continuing to serve as a member of the M2 Board of ANNU M2 Directors and ongoing advisor to the new CEO. Craig Farrow, Chairman 5 Managing Director/CEO’s Review largely due to organic / underlying improvements “Infrastructure Light”: M2 ranks as by far the in the business as a whole, rather than relying largest of the light infrastructure operators. That heavily on contributions from businesses or assets is, the M2 core business model is one which acquired during the period. This illustrates that our leverages strategic wholesale supply relationships commitment to becoming a more efficient and more with the major telecommunications carriers (most profitable business, not just a bigger one, has been notably Telstra and Optus). These long-standing and realised during the year. sizable supply relationships enable M2 to deliver its customers a wide suite of telecoms services, remain In addition to the financial performance achievements technology agnostic and operate with particularly of FY11, some exceptional business improvements low capital expenditure. M2’s light infrastructure and foundations for future improvement were business model puts us in a strategically enviable delivered during the year. Amongst these were a position in advance of the deployment of the National stunning increase in our Net Promoter Score (“NPS”) Broadband Network (NBN), which is elaborated upon customer satisfaction rating (across all M2-owned in “M2 and the NBN” section which follows. brands), the “on-shoring” of all acquired customer service functions to our existing Australian-based “We are confident that we have contact centres, the expansion of our national sales dealer network and selection of a business-wide the team, sales channels and billing and customer management system.