Secure Reliable Connectivity VOCUSGROUP.COM.AU | ANNUAL REPORT 2017 Contents Key Highlights 01 Chairman and CEO’s Letter 02 Directors 06 Directors’ Report 07 Remuneration Report 12 Operating and Financial review 27 Auditor Independence Declaration 49 $ Financial Statements 51 Directors Declaration 98 1,8 2 0 Independent Auditor’s Report 99 revenue (million) Corporate Directory 105 UP 119% On the cover: Rhodora Bautista, Corporate Applications Manager, Technology | Carol Thompson, BSS Support Manager, Technology | Aman Sharma, Product Data Analyst Jenny Hyland, HR Operations & Group Payroll Manager | Nick Jensen, Retail Development Manager, Technology | Paran Thangarajah, Finance Business Partner Vocus Group Annual Report 2017 Remuneration Report 01 Key Highlights $ $ underlying3 6EBITDA 6.4(million) underlying15 NPAT 2.3(million) UP 70% UP 50% on PCP on PCP Company name change Acquired 26 pop up Dodo to Vocus Group Limited, as approved Nextgen Networks in Oct ‘16, completing Connect Kiosks by shareholders, to reflect the broader the Australian infrastructure puzzle around opened in regional areas March to June, nature and scope of the business Australia and contributing international to provide information and sales points in infrastructure projects that will enhance new rollout areas to help us achieve our the Vocus network experience goal of 10% market share 2 4.7¢ FULLY DILUTED A great place to work Organic NBN growth UNDERLYING EPS AFTER We improved our year-on-year Great Place Organic growth in Consumer NBN to Work Survey results engagement subscribers to 178k, taking our NBN MINORITY INTERESTS score and our score rating Vocus as a market share, including wholesale, to 8.02% great place to work 30,000km 5,5 0 0 23 fibre network spanning Australia and More than 5,500 buildings on-net data centres on-net New Zealand 66 days 45,000 Acquired number of team member volunteering (total) services connected to NZ’s UFB, early stage NZ energy retailer Switch Utilities days taken taking our market share to 13% Ltd in Dec ‘16 5000+ team members in sites around Australia, New Zealand and the Philippines 02 Chairman and CEO’s Letter “We are very confident that the business platform we have established, combining the strongest elements of challenger % telcos across Australia and New 70Growth in Zealand, is in a strong position underlying to genuinely rival the majors and EBITDA grow market share in future years delivering on our growth commitment to shareholders.” Financial Performance As detailed in the Operating and Financial Review and Financial Statements contained in this report, the Company reported 50% growth in underlying NPAT for the 12 months ended 30 June 2017 Dear Fellow Shareholder, compared to the prior corresponding period on a 119% increase in revenue. The record result reflects a full 12 month contribution from Following a very busy period of merger the M2 business following the merger in February 2016 (an additional and acquisition activity, the FY17 year and $111.8m EBITDA compared to the pcp) and an 8 month contribution in particular 2HFY17 has been a period from the Nextgen Networks acquisition, completed on 26 October of transition for Vocus as the business 2016 ($62.5m EBITDA post synergies). focused on the completion (in October 2016) and integration of the Nextgen Networks The result reflects another strong year of growth for Vocus however acquisition; and the implementation of it was not at the level we anticipated at the beginning of the financial business plans that will maximise the year. There are a number of factors, both internal and external, that returns and leverage the infrastructure impacted the Company’s financial performance this year and the platform and scale that has been created senior leadership team has moved quickly over the last six months to through recent acquisitions. address these issues, improve the performance of the business and restore returns to shareholders. We are very confident that the business platform we have established, combining Dividends the strongest elements of challenger telcos The Vocus Board made the decision not to declare a final dividend across Australia and New Zealand, is in a for the FY17 year in light of the current opportunities for investment strong position to genuinely rival the majors across the business, including the ASC project and the focus of the and grow market share in future years Board on reducing the overall leverage in the business. We understand delivering on our growth commitment that this will disappoint some shareholders; however, we believe this to to shareholders. be the prudent approach to our capital management while we continue We acknowledge this period of transition has to work to restructure the business. created an unacceptable level of share price An interim dividend of 6¢ per share fully franked was paid in April 2017. volatility for shareholders. Contributing to this share price volatility, as you may also be The Board of Vocus expects to review future dividend payments in aware, is that the telecommunications sector line with the growth of the business, taking into account the capital as a whole has been significantly de-rated requirements and accretive infrastructure opportunities available at by equity markets over the last 12 months any point in time. and our share price has not been immune to this change in sentiment. Your Board and Business Review management team remain focused on the During FY17 both the Australian and New Zealand Consumer things that are within our control and we have businesses have focused on the significant opportunity created by moved as quickly as possible to address the the Government sponsored fibre rollouts, to secure additional market range of issues that have arisen as a result of share in the provision of broadband services to the home. Despite the rapid period of M&A. We are committed intense competition in both markets, Dodo and iPrimus ended the to delivering on the projects outlined at the year with 7.3% market share in NBN (ex-satellite) compared to 6.4% Company’s investor day in June this year and at the beginning of the period; and our New Zealand business ended restoring value for shareholders. We would the year with ~13% market share of UFB with strong momentum in encourage all shareholders, if you haven’t the business which has seen it take ~18% share of UFB connections already, to visit our website and read through in Q4 FY17. While the intense competition has created a challenging the presentation and listen to the recording business environment, churn levels remain materially lower than on the website or read the transcript of the copper broadband levels at ~1.5% and AMPUs have remained similar management presentations. or in New Zealand slightly higher than copper margins. 1. AMPU – average margin per user Vocus Group Annual Report 2017 RemunerationChairman and CEO’sReport Letter 03 Geoff Horth & David Spence Our Consumer businesses in both Australia The New Zealand Enterprise & Wholesale and New Zealand are also both focused on business is also focused on leveraging lowering costs and improving the customer its infrastructure platform to grow; and experience through automating the customer rationalising its brand portfolio to leverage interface and backend platforms in turn the equity in the Vocus Communications driving lower churn rates. Both businesses brand in New Zealand. The Division believes are also focused on brand positioning in the there are significant growth opportunities in face of intense competition to ensure we this market, in particular in the Government 7. 3 % have clearly defined target markets and that market and the Wholesale sector as the Consumer market the return from the Group’s marketing spend number of new entrants in the reseller is maximised. This focus will result in the market grows. share in NBN relaunch of iPrimus in Australia in 1QFY18 The New Zealand Division has continued compared to 6.4% and a consolidation of the Consumer brands to restructure its business portfolio with in the pcp in New Zealand with a reinvigoration of the the sale of its 50% share in the Connect 8 Orcon brand and business model. joint venture; and the acquisition of a small The Enterprise & Wholesale business has energy retailer, Switch, which has already with Vocus on 3 July 2017. Both Simon and been restructured over 2HFY17 to create created significant momentum in bundling Justin have moved quickly to implement the one unified business platform reflecting the opportunities in the Consumer business in restructure of business activities and drive strongest attributes of the Vocus, Amcom, the first few months of ownership, albeit from the programs that have been established. M2 and Nextgen businesses. The focus of the a low base. During FY17 the Company made the decision Division is to leverage the momentum created During 2HFY17 we announced the restructure to move to contract in force on the Australia by the increased scale of the business to of our Technology business and the Singapore Cable (ASC) project. grow market share with particular focus on: establishment of a Transformation Office The project is a 4,600km submarine cable opportunities in the Government sector as to identify and implement a clear set of system linking Australia, Indonesia and a trusted provider of secure connectivity enterprise wide priority projects, ensuring that Singapore. The project was acquired as part and redundancy; the Wholesale sector, in the projects are well resourced and funded of the Nextgen acquisition. The Company particular with other carriers and carriage and that progress is monitored and measured believes that the project has a number of service providers; and the Corporate market in a consistent way. We were pleased to strategic advantages over its competitors on the East coast of Australia where the announce the appointment of a new CTO, and will deliver Vocus the ability to tap into business is under indexing compared to the Simon Smith and a Head of Transformation, the rapid growth in demand for data capacity west coast.