22nd May 2007 07:03
Kingston Communications(Hull)PLC22 May 2007 KINGSTON COMMUNICATIONS (HULL) PLC (KCOM.L) - PRELIMINARY ANNOUNCEMENT OF UNAUDITED RESULTS FOR YEAR ENDED 31 MARCH 2007 "All our businesses have shown continued improvement, against a backdrop of continuing and rapid change in our markets. These strong results, and our clear strategy going forward, give us great encouragement for the future." Michael Abrahams, Chairman Kingston Communications (HULL) PLC (KCOM.L) ("Kingston" or the "Group") todayannounces its unaudited preliminary results for the year ended 31 March 2007. Summary Year ended Year ended Change 31 March 31 March over 2007 2006 prior (£ million) (£ million) year (%) Results from continuing operations before exceptional items(1) Revenue 483.1 453.9 6.4 Group profit from operations 31.4 21.6 45.4 Adjusted Group profit from 39.4 28.2 39.7 operations2 Profit before tax and amortisation(2) 28.4 17.5 62.3 EBITDA 71.0 73.2 (3.0) EBITDA less capital expenditure 37.9 26.4 43.6 Reported results Profit/(loss) before tax 10.6 (80.8) - Basic earnings/(loss) per share (pence) 4.66 (13.32) - Free cash flow(2) 28.9 23.8 21.4 Adjusted basic earnings per share 5.52 3.40 62.4 (pence)(2) Dividend per share (pence)(3) 1.95 1.17 66.7 1) Exceptional items are disclosed in Note 2 2) A reconciliation of reported to adjusted results is given in note 8. 3) Dividend pence per share is the sum of the interim dividend of 0.65 (2006: 0.39) pence per share and the proposed final dividend of 1.3 (2006: 0.78) pence per share Highlights • Revenue up 6.4 per cent to £483.1 million (2006: £453.9 million) • Adjusted Group profit from operations up 39.7 per cent to £39.4 million (2006: £28.2 million) leading to a 62.3 per cent rise in profit before tax and amortisation of £28.4 million (2006: £17.5 million) • Profit before taxation of £10.6 million (2006: £80.8 million loss) • Adjusted basic earnings per share of 5.52 pence per share (2006: 3.40 pence per share) an increase of 62.4 per cent • EBITDA before exceptional items of £71.0 million (2006: £73.2 million), decreased by 3.0 per cent, more than offset by the decline in capital expenditure to £33.1 million (2006: £46.8 million) as the Affiniti business model becomes less capital intensive • Free cash flow of £28.9 million (2006: £23.8 million) an increase of 21.4 per cent. • Proposed final dividend of 1.3 pence per share (2006: 0.78 pence per share) resulting in growth in the full year dividend of 66.7 per cent to 1.95 pence per share (2006: 1.17 pence per share) Chairman, Michael Abrahams said, "All our businesses have shown continuedimprovement, against a backdrop of continuing and rapid change in our markets.These strong results, and our clear strategy going forward, give us greatencouragement for the future. "On the back of this improvement the Board is proposing an increased finaldividend of 1.3 pence making a total of 1.95 pence for the year, an increase of66.7 per cent." Chief Executive, Malcolm Fallen said, "We remain confident in the continuingexecution of our strategy with this year's results demonstrating furtherprogress in the repositioning of our business. Affiniti is delivering consistentgrowth and now achieving sustainable profitability and positive cash flow.Combined with the continued strength of our regional and broadband business, theGroup is well positioned to deliver further growth and continued strong cashflows. "At the same time the transformation of the business has been successfullysupported by the three acquisitions made during the year which have extended ourcapabilities in the integration and managed services market and enhanced ourearnings. We enter the new financial year with confidence." For further information please contact: Kingston Communications (HULL) PLC: Corporate Communications & Investor Relations Kingston Communications:Anita Pace Tel: 01482 602666 Mobile: 07770 744322 Maitland:Colin Browne/Richard Farnsworth Tel: 020 7379 5151 Mobile: 07733 103800 Strategy, Business and Operating review Strategy The markets for IT and communications services continue to evolve at an everincreasing pace with Internet Protocol ("IP") now the standard for any modernnetwork. This in turn has accelerated the convergence of the IT servicesindustry with the telecommunications industry. Driven by this trend towardsconvergence, we have now successfully restructured and repositioned our businessto provide our customers with the skills and services they require. We set out a clear, consistent and evolving strategy focused on: - developing the skills to meet the needs of our customers through the delivery of integrated IT and communications solutions; - reducing our dependency on legacy voice services and increasing the level of direct recurring service revenues, and - achieving sustainable, profitable growth and delivering returns to our shareholders. The successful implementation of our strategy has involved a combination of bothorganic growth and acquisition. The most significant step as part of ourbusiness transformation was the purchase of Omnetica in December 2004. Ourresults to March 2007 demonstrate not only that, through the creation ofAffiniti, have we successfully integrated the Omnetica business, but also thatwe have established a growing, profitable communications network integrator. Atthe beginning of the second half of last year we acquired Smart421, a businessapplications integrator and managed service provider, which complements thenetwork integration skills within Affiniti. More recently, we have addedspecialist skills in the contact centre integration market with the purchase ofJAM IP, and hosting skills for small and medium enterprises following theacquisition of Mistral Internet in January 2007. Effective implementation of our strategy also requires clear alignment to targetmarkets and customer segments. Today, the Group targets three distinct markets: - integrated and managed IT and communications solutions for medium and large enterprises (Affiniti and Smart421) - internet and telecommunications services aimed primarily at small and medium enterprises ('SME') (Kingston Communications); and - the provision of information to end users through a range of channels including web-based, paper-based and person-to-person (Information Services). In each of these markets, we are committed to building and maintaining ourreputation for the quality of the end-to end customer experience we deliver. Itis through this that we create long term, sustainable relationships and buildtrust with our customers. In order to ensure we are able to deliver the desired customer experience, wehave over the course of the last six months been making important changes in theway we manage these different customer segments and how our people are rewarded. We have done this by: - ensuring that customers are managed through the most appropriate channel by realigning all of our medium and small customers under the Kingston Communications brand, rather than Affiniti. This includes customers served through both direct and indirect channels. - across the Group, aligning a proportion of people's rewards to the delivery of an improved customer experience. - investing in improving our IT environment and business processes to support our ability to deliver the right customer experience. During FY07, we invested £12.3 million in this area, representing around 40 per cent of our total capital expenditure for the year. Whilst the business results are the key indicator of the Group's success, thestrides we have made in improving quality are also demonstrated in a range ofindependent accreditations. The Group recently achieved ISO27001 certification, the highest internationalquality standard for Information Security, covering all of our operationalorganisation, networks and systems that are involved in the design, planning,implementation and support of communications solutions and services delivered toour customers. Smart421 became one of the first companies worldwide to achieve ISO/IEC 20000-1:2005 certification covering its provision of bespoke customer IT servicemanagement solutions and the management of internal IT systems. Together with Affiniti's recognition as a key strategic partner for CiscoSystems, including in particular its recent award as Cisco's European MarketsGold Partner of the Year, these accreditations demonstrate the quality of ouroverall capabilities. Financial overview We have seen continuing organic growth across Affiniti and KingstonCommunications (KC), supplemented by contributions from our acquisitions,resulting in Group revenue increasing 6.4 per cent to £483.1 million. Excludingthe impact of acquisitions, organic revenue growth was 3.2 per cent. Group EBITDA, before exceptional items, declined 3.0 per cent from £73.2 millionto £71.0 million. This reduction reflects the change within the Affiniti revenuemix, and has been accompanied by a more than compensating fall in capitalexpenditure. The level of EBITDA less capital expenditure has as a result risenby 43.6 per cent from £26.4 million to £37.9 million. Adjusted profit from operations of £39.4 million (2006: £28.2 million),increased 39.7 per cent, which underpinned a 62.4 per cent rise in the Group'sAdjusted basic earnings per share to 5.52 pence (2006: 3.40 pence). Year on yearsecond half earnings per share increased 45.5 per cent from 1.91 pence to 2.76pence. This improvement in adjusted earnings reflects the increased contributionfrom Affiniti, resilience in our KC business and the earnings accretive natureof acquisitions undertaken in the period. The acquired businesses, Smart421, JamIP and Mistral Internet, have all performed well and made positive contributionsto revenue and earnings over the last six, four and two months respectively. Group profitability has been impacted in the year by a charge of £2.1 million(2006: £Nil) reflecting an increase in the provision for long term incentiveplans. The impact of this is partially offset by a one-off credit of £1.8million arising as a result of changes in pension scheme legislation ("A day"changes) and the consequent impact this has on the underlying IAS19 pensionsvaluation. This credit is recognised primarily within the KC and Affinitiresults. The Group incurred exceptional items of £7.8 million (2006: £2.2 million) withthe majority of this cost relating to onerous lease provisions in respect ofvacant properties. Profit after exceptional items and before taxation was £10.6 million (2006:£80.8 million loss). This reflects a combination of improved financialperformance, partially offset by increases in exceptional property provision andthe impact of the £89.5 million impairment of our national networkinfrastructure during 2006. Overall free cash flow improved 21.4 per cent to £28.9 million (2006: £23.8million) with, as expected, stronger cash flows in the second half. Business review Affiniti Results before 2007 2006 Change overexceptional items prior year (£ million) (£ million) (%) Revenue 345.4 332.0 4.0 EBITDA 28.7 34.4 (16.6) Capital 16.7 28.2 (40.8) expenditure EBITDA less capital 12.0 6.2 93.5 expenditure Adjusted Profit 10.7 4.8 229.2 from operations Revenues in Affiniti have increased 4.0 per cent to £345.4 million (2006: £332.0million). The growth in revenues from direct sales to the enterprise and public sector was5.6 per cent to £287.9 million (2006: £272.6 million) with overall growthimpacted by the decline in indirect revenues from £59.4 million in 2006 to £57.5million in 2007, a reduction of 3.2 per cent. EBITDA reduced 16.6 per cent to £28.7 million (2006: £34.4 million) with adecline in the EBITDA margin from 10.4 per cent to 8.3 per cent. This reflectsthe change in mix of business within Affiniti and is entirely consistent with areduction in the capital intensity of the overall revenue mix. This change inthe business model has seen a 93.5 per cent rise in the level of EBITDA lesscapital expenditure to £12.0 million (2006: £6.2 million). Whilst the overall capital intensity of the Affiniti business has declined, itsEBITDA margins will continue to be influenced by the level of Group financednetwork-based contracts within the overall business mix. In the direct market, we continue to see strong demand for converged networksolutions as more businesses recognise the benefit of migration to IP basedunified communications solutions. During the year, Affiniti has continued tomaintain a robust sales pipeline with new customers including GE, Derby CityCouncil and Lloyds TSB and renewed or extended contracts with Littlewoods ShopDirect Group, North Wales Police and Scarborough NHS Trust The strategic, as well as financial, benefits of our recent acquisitions havestarted to be realised and we are currently working on a number of collaborativeprojects between Affiniti, Smart421 and JAM IP. We believe their combinedcapability will become a clear differentiator in the market place. The growth that has been achieved within the direct part of Affinitidemonstrates that we have been able to establish a strong proposition forcustomers. Our commitment to a less capital intensive business model in thisarea is also starting to bring rewards. We anticipate that, whilst there may bevolatility in the overall EBITDA margins of the business, we will see improvinglevels of contribution measured in terms of EBITDA less capital expenditure aswell as growth in net earnings, from the direct part of the Affiniti business. The indirect segment of Affiniti continues to be impacted by the adverse pricingand volume trends associated with the provision of some network based services.The ongoing reduction in the provision of wholesale ISP dial-up and a decline inthe market for some premium rate services have impacted the overall revenues andearnings we deliver through indirect channels. Whilst there continues to be adverse publicity surrounding the Media TelephonyServices market place in general, we continue to see healthy revenue growth inthis area. Our Myriad platform, which we believe already meets the standardsrecently introduced by ICSTIS, has provided a differentiated proposition to anumber of media partners. Smart421 2007 (£ million) Revenue 8.7 EBITDA 1.5 Adjusted profit from operations 1.4 The results for Smart421 represent performance for the six months ended 31 March2007, following the acquisition on 29 September 2006. During this period, the business has performed in line with our expectations andhas been accretive to overall Group earnings. The business remains focused on the provision of applications integrationservices. Whilst the majority of revenues are derived from consultancy andproject services, there has been continuing growth in managed service activity,which now make up 23.9 per cent of revenues. Since acquisition, the company has renewed or extended contracts with O2 andNorwich Union and been awarded new business with organisations includingAlliance & Leicester. Kingston Communications Results before 2007 2006 Change overexceptional items prior year (£ million) (£ million) (%) Revenue 117.1 109.3 7.1 EBITDA 47.4 42.8 10.7 Capital 16.0 17.4 (8.0) expenditure EBITDA less capital 31.4 25.4 23.6 expenditure Adjusted profit 34.9 28.2 23.8 from operations Kingston Communications ("KC") continues to perform strongly across all areas ofthe business, delivering improved margins and strong cash flows. Revenue increased 7.1 per cent to £117.1 million (2006: £109.3 million) withEBITDA up 10.7 per cent to £47.4 million (2006: £42.8 million). This increasereflects the underlying growth of the business and a two month contribution fromMistral Internet which was acquired on 31 January 2007. EBITDA margins increased to 40.5 per cent from 39.2 per cent in the prior yearas we continue to benefit from volume growth, the scalability of the businessand ongoing operating efficiencies. Within the business sector, we have seen strong customer demand for broadband,ethernet and mobile data based services. Our network expansion into Lincolnshirehas delivered year on year growth which, although modest in the context of theoverall business, provides an established customer base from which to develop,with any resulting capital investment driven by customer demand. The rebalancing of our consumer revenues in East Yorkshire towards a greaterlevel of subscription income continues following the successful launch of ourinclusive calling packages in 2005. At 31 March, our broadband customer base exceeded 180,000 representing growth of49.4 per cent on the prior year. In East Yorkshire, we now have a broadbandcustomer base of approximately 75,000. Competition within the broadband market across the UK remains intense and islikely to remain so. Our decision to invest in our customer and technicalservice capabilities, rather than investing capital in speculative Local LoopUnbundling, has been rewarded with strong growth in customer numbers and hasbeen recognised by the broadband industry with Eclipse, our national brand,winning the best consumer ISP at the UK ISPA awards in February 2007. The recent acquisition of Mistral Internet increases KC's capabilities in themanaged and hosting services sector of the fast growing broadband internetservices market for small and medium enterprises. The business has beenintegrated within the existing management structure, providing it with thefoundations for growth and development both in its own right and by exploitingthe reach of KC's channels to market. Information Services Results before exceptional 2007 2006 Change overitems prior year (£ million) (£ million) (%) Revenue 13.6 13.2 3.0 EBITDA 3.7 3.5 5.7 Adjusted profit from 3.3 3.0 10.0 operations Our Information Services business continues to deliver robust results throughits provision of directory publishing, outsourced contact centres and directoryenquiry services. Revenues grew 3.0 per cent to £13.6 million (2006: £13.2million) and EBITDA grew 5.7 per cent to £3.7 million (2006: £3.5 million). A successful campaign for the Hull Colour Pages was completed in the first halfof the year, achieving revenue growth of 6.7 per cent year on year, a strongperformance in comparison with its peers. Within our contact centre operations,the outsourced directory enquiries market continues to provide a strongopportunity for growth. The call centre now handles over one million calls permonth. Group Earnings EBITDA Group EBITDA before exceptional items has decreased by 3.0 per cent to £71.0million (2006: £73.2 million). EBITDA includes a loss on other activities of£10.3 million (2006: £7.5 million) representing primarily the unallocatedoperational costs and expenses associated with PLC activities. In addition, itincludes provisions in respect of long term incentive plans covering ExecutiveDirectors and senior managers across the Group. These amounts representliabilities that may crystallise annually based on three year growth targets forthe Group's Adjusted Earnings. Therefore at any point in time, these costs caninclude estimates as to liabilities that may arise over the course of the nextthree years. In line with the progress that the Group is making in improving itsoverall profitability, a charge of £2.1 million (2006: £Nil) was made in respectof such scheme. In April 2006, legislative changes to pension schemes, known as A day changes,increased the amount of the cash lump sum pensioners are entitled to take uponretirement. Actuarial assumptions underlying the IAS19 pension valuation havebeen changed to reflect this increased cash lump sum entitlement, and this hasresulted in a one off credit of £1.8 million recognised in the Income Statementduring the year. This credit reverses charges made to the profit and lossaccount in prior years. The Group has incurred exceptional items of £7.8 million in 2007 (2006: £2.2million) due primarily to a combination of onerous lease provisions in respectof vacant properties and redundancy costs relating to restructuring. The Groupis committed to the ongoing rationalisation of its property portfolio with aview to minimising the liabilities associated with its vacant premises. After exceptional items, Group EBITDA decreased 11.3 per cent to £63.1 millionin 2007 (2006: £71.1 million). Depreciation and amortisation Depreciation and amortisation amounted to £39.6 million in the current year(2006: £51.6 million). This includes £8.0 million in respect of the amortisationof intangibles assets arising on acquisitions (2006: £6.6 million). Group financing costs of £13.0 million (2006: £10.8 million) reflect a higherlevel of borrowings consistent with the financing in respect of the acquisitionscompleted in the year. In addition the cost includes the accelerated write offof unamortised loan fees of £1.9 million associated with the previous bankfacility taken out in December 2004 which was refinanced in February 2007. Group profit from operations Group Adjusted profit from operations has increased 39.7 per cent to £39.4million (2006: £28.2 million), resulting from a reduced depreciation andamortisation expense charged in the year. Group profit from operations before exceptional items is £31.4 million (2006:£21.6 million), an increase of 45.4 per cent. Profit and loss before tax Group profit before taxation is £10.6 million against a prior year loss of £80.8million. Prior to charging exceptional items of £9.7 million (2006: £91.7million), profit before tax is £20.3 million (2006: £10.9 million), an increaseof 86.2 per cent. Taxation During the year we have recorded a net taxation credit of £13.3 million (2006:£12.4 million). This credit arises as a consequence of the recognition of anadditional deferred tax asset during the year and reflects our current view ofthe anticipated utilisation of unclaimed capital allowances in the Group. The total deferred tax asset recognised in respect of capital allowances andshort term timing differences is £32.8 million (2006: £22.0 million). The Grouphas a further unrecognised deferred tax asset of £22.1 million (2006: £42.7million) Discontinued operations During the year, we disposed of the remaining European trading operations ofAffiniti, Kingston Communications Data SA, which was previously reported withinAffiniti. This disposal resulted in a loss on disposal of £0.6 million. Earnings per share Basic earnings per share amounted to a profit of 4.66 pence (2006: loss of 13.32pence). Adjusted basic earnings per share amounted to 5.52 pence per share(2006: 3.40 pence). Adjusted basic 2007 2006 Change overearnings per share (pence) (pence) prior year (%) H1 2.76 1.49 85.2 H2 2.76 1.91 44.5 Total 5.52 3.40 62.4 Group Financing and Investment Group net debt at 31 March 2007 was £164.2 million (2006: £127.7 million),reflecting the acquisitions made for cash during the year. As at 31 March 2007pro-forma net debt to EBITDA is 2.3 times (2006:1.7 times). Net cash inflow from operations of £59.1 million has decreased 14.0 per cent onan inflow of £68.7 million in 2006. This decrease is due to an increase inworking capital of £4.1 million reflecting the organic growth and the cashimpact of exceptional items in the year. The purchase of tangible and intangible assets amounted to £30.2 million (2006:£46.1 million). This reduction is primarily due to the change of business mixwithin Affiniti. We anticipate this trend will continue as we move the businessmix away from capital intensive network based contracts. Within the overall mixof capital expenditure, network-related capital (excluding directlycustomer-driven) amounted to less than 10 per cent of our total capitalexpenditure. IT-related investment totalled £12.3 million reflecting an ongoingdrive to improve the quality of the experience we deliver to our customers. During the year, the Group spent a total of £43.1 million on the acquisitions ofSmart421, JAM IP and Mistral. This compares to net cash proceeds of £26.2million from the purchase and sale of businesses in 2006. Free cash flow before financing has increased 21.4 per cent to £28.9 million(2006: £23.8 million). The cash cost of financing Group debt amounted to £12.9 million (2006: £8.7million). The increase on the 2006 cost is consistent with higher Group debtlevels arising on the acquisitions undertaken in the year. The refinancing ofour bank facilities, announced at the end of March 2007, has resulted in acompetitively priced debt facility, reflecting the Group's improved capacity togenerate cash. This refinancing has resulted in one-off arrangement fee of £1.4million in the year. The cash cost of dividends in 2007 was £7.4 million (2006: £4.8 million)reflecting the increased interim dividend. In accordance with IAS 19, the Group now recognises the liabilities associatedwith its defined benefit pension scheme in the financial statements. As at 31March 2007, the Group had a net liability in respect of its pension schemeobligations of £8.9 million (2006: £11.7 million). The gross deficit within thisnet balance has fallen to £12.7 million as at 31 March 2007 from £16.7 millionat 31 March 2006. The 24.0 per cent reduction in this gross liability reflectsthe improved equity returns experienced within the main Kingston Group definedbenefit pension scheme. Dividend In light of the financial performance of the Group and the improvement in theGroup free cash flow before financing costs, the Board is proposing a finaldividend of 1.3 pence per share, resulting in a full year dividend payment of1.95 pence per share, an increase of 66.7 per cent on the prior year. Subject toshareholder approval at the Company's Annual General Meeting on 1 August 2007,the final dividend will be payable on 10 August 2007 to shareholders registeredat the close of business on 29 June 2007. Notification of intention of shareholding disposal by Kingston upon Hull CityCouncil Kingston Communications (Hull) PLC ("Kingston") has received notification fromKingston upon Hull City Council ("the Council"), pursuant to the RelationshipAgreement dated 22 June 1999, of the Council's intention to sell the 157,499,999ordinary shares it holds in Kingston subject, inter alia, to market conditions.The sale, if completed, would represent the entire stake the Council holds inKingston. Outlook We believe that with the skills we have built both from within and throughtargeted acquisitions, we are well placed to service the market for integratedIT and communications solutions. The Board believes that our strategy, strengthof management and improving business performance offer a strong basis forcontinuing growth. Current trading is in line with our expectations. Consolidated Income Statement Unaudited Audited Year ended Year ended 31 March 2007 31 March 2006 Before Before Exceptional Exceptional Exceptional Exceptional Items Items Total Items Items Total Note £'000 £'000 £'000 £'000 £'000 £'000 Continuing Operations Revenue 1 483,120 - 483,120 453,891 - 453,891 Operating costs (412,148) (7,826) (419,974) (380,651) (2,180) (382,831) --------------------------------------------------------------------------------------Group EBITDA 1 70,972 (7,826) 63,146 73,240 (2,180) 71,060 Depreciation, amortisation (39,569) - (39,569) (51,591) (89,521) (141,112)and impairment -------------------------------------------------------------------------------------- Group profit/loss 1 31,403 (7,826) 23,577 21,649 (91,701) (70,052) from operations Finance costs (11,302) (1,918) (13,220) (10,986) - (10,986) Finance income 261 - 261 220 - 220 Share of profit of 12 - 12 - - - associates -------------------------------------------------------------------------------------- Profit/(loss) 2 20,374 (9,744) 10,630 10,883 (91,701) (80,818) before taxation Taxation 3 13,339 - 13,339 12,394 - 12,394 -------------------------------------------------------------------------------------- Profit/(loss) for theperiod from continuing 33,713 (9,744) 23,969 23,277 (91,701) (68,424) operations Discontinued Operations Loss for the period from discontinued operations 6 (578) - (578) (2,808) - (2,808) --------------------------------------------------------------------------------------Profit/(loss) for the period attributable to equity holders 33,135 (9,744) 23,391 20,469 (91,701) (71,232) of the Company -------------------------------------------------------------------------------------- Earnings/(loss) per sharefrom continuing operations Basic 4 4.66p (13.32)pDiluted 4 4.66p (13.32)p Adjusted basic 4 5.52p 3.40p Adjusted diluted 4 5.52p 3.40p Earnings/(loss) per sharefrom total operations Basic 4 4.55p (13.87)pDiluted 4 4.55p (13.87)p Consolidated Statement of Recognised Income and Expense Unaudited Audited Year Year ended ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Exchange differences on translation 12 1 of foreign operations Cash flow hedges 895 (241) Actuarial (losses)/gains on (3,166) 11,782 retirement benefit obligation Tax on actuarial losses on retirement (1,201) (3,999) benefit obligations --------- -------- Net (expense)/income recognised (3,460) 7,543 directly in equity Profit/(loss) for the period 23,391 (71,232) --------- ---------Total recognised income and 19,931 (63,689) expense for the period --------- --------- Consolidated Balance Sheet Unaudited Audited Year Year ended ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Non-current assets Goodwill 192,754 159,551 Intangible assets 48,511 39,450 Property, plant and equipment 132,385 127,857 Investments 854 840 Deferred tax assets 25,378 18,952 --------- --------- 399,882 346,650 --------- ---------Current assets Inventories 9,866 13,228 Trade and other receivables 88,087 99,636 Cash and cash equivalents 30,110 12,084 --------- --------- 128,063 124,948 --------- ---------Total assets 527,945 471,598 --------- --------- Current liabilities Trade and other payables (138,234) (149,322) --------- ---------Net current liabilities (10,171) (24,374) --------- --------- Non-current liabilities Borrowings (193,383) (139,535) Retirement benefit obligation (12,665) (16,670) Long term provisions and other payables (6,062) (1,541) --------- ---------Total liabilities (350,344) (307,068) --------- --------- Net assets 177,601 164,530 --------- --------- Capital and reserves, attributable to equity holders of the Company Share capital 51,493 51,480 Share premium account 352,450 352,360 Hedging and translation reserve 877 (30) Retained earnings (227,219) (239,280) --------- ---------Total equity 177,601 164,530 --------- --------- Consolidated Cash Flow Statement Unaudited Audited Year Year ended ended 31-Mar 31-Mar 2007 2006 Note £'000 £'000 Net cash flow from operating activities Profit/(loss) from operations 7 23,564 (71,691) Adjustments for: - Depreciation and amortisation 39,569 51,992 - Impairment - 89,521 - Increase in working capital (4,114) (1,489) - Employee share schemes 393 754 Income taxes paid (284) (399) ------- ----------- -------- Net cash inflow from operations 59,128 68,688 ------- ----------- -------- Cash flows from investing activities Acquisition of businesses (43,064) (4,024) Disposal of businesses - 30,201 Purchase of property, plant and equipment (23,721) (38,202) Proceeds from sale of property, plant & 11 1,108 equipment Purchase of intangible assets (6,495) (7,896) Purchase of investments (12) (14) ------- ----------- --------Net cash used in investing activities (73,281) (18,827) ------- ----------- -------- Cash flows from financing activities Dividends paid (7,356) (4,784) Issue costs of long term loans (1,416) (18) Interest paid (11,496) (8,673) Interest received 261 219 Capital element of finance lease repayments (301) (279) Repayment of bank loans (13) (52,431) New loans 52,500 - ------- ----------- --------Net cash from/(used in) financing activities 32,179 (65,966) ------- ----------- -------- Increase/(decrease) in cash and cash 18,026 (16,105) equivalents Cash and cash equivalents at the beginning of 12,084 28,189 the period ------- ----------- --------Cash and cash equivalents at the end of the 30,110 12,084 period ------- ----------- -------- 1. Segmental Analysis Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Revenue Affiniti 345,400 331,983 Kingston Communications 117,099 109,280 Information Services 13,630 13,240 Smart421 8,714 - Head office and eliminations (1,723) (612) ----------- ---------Total - continuing activities 483,120 453,891 Discontinued activities 75 9,944 ----------- ---------Group total 483,195 463,835 ----------- --------- Group EBITDA Affiniti 28,698 34,435 Kingston Communications 47,413 42,838 Information Services 3,684 3,494 Smart421 1,464 - Head office and eliminations (10,287) (7,527) ----------- ---------Total - continuing activities before 70,972 73,240 exceptional items Exceptional items: Affiniti (6,418) (1,200) Kingston Communications (1,287) (577) Information Services (91) - Head office and eliminations (30) (403) ----------- --------- (7,826) (2,180) ----------- ---------Total - continuing activities 63,146 71,060 Discontinued activities (36) (1,499) ----------- ---------Group total 63,110 69,561 ----------- --------- Depreciation Affiniti 12,013 25,646 Kingston Communications 11,087 13,673 Information Services 358 446 Smart421 68 - Head office 666 341 ----------- ---------Total - continuing activities before 24,192 40,106 exceptional items Exceptional items: Affiniti - 79,134 Kingston Communications - 9,403 ----------- --------- - 88,537 ----------- ---------Total - continuing activities 24,192 128,643 Discontinued activities - 401 ----------- ---------Group total 24,192 129,044 ----------- --------- 1. Segmental Analysis (continued) Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Amortisation Affiniti 11,290 9,722 Kingston Communications 2,749 1,763 Information Services 69 - Smart421 1,269 - ----------- ---------Group total before exceptional 15,377 11,485 items Exceptional items: Affiniti - 984 ----------- --------- - 984 ----------- ---------Group total 15,377 12,469 ----------- --------- Profit/(loss) from operations Affiniti 5,395 (933) Kingston Communications 33,577 27,402 Information Services 3,257 3,048 Smart421 127 - ----------- ---------Segment result - continuing activities before 42,356 29,517 exceptional items Exceptional items: Affiniti (6,418) (81,318) Kingston Communications (1,287) (9,980) Information Services (91) - Head office (30) (403) ----------- --------- (7,826) (91,701) ----------- ---------Segment result - continuing activities 34,530 (62,184) Head office and other unallocated costs (10,953) (7,868) ----------- ---------Group profit/(loss) from operations 23,577 (70.052) Share of profit of associate 12 - ----------- ---------Profit/(loss) from continuing operations 23,589 (70,052) Segment result - discontinued activities (578) (3,042) ----------- ---------Group total 23,011 (73,094) ----------- --------- Assets Affiniti 277,732 296,075 Kingston Communications 155,442 128,195 Information 6,129 6,114 Services Smart421 27,307 - Other 4,176 9,339 Unallocated assets 57,159 31,875 ----------- ---------Total assets 527,945 471,598 ----------- --------- 1. Segmental Analysis (continued) Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Liabilities Affiniti 53,741 98,660 Kingston Communications 3,308 37,037 Information 3,851 4,733 Services Smart421 2,339 - Other 40,671 26,723 Unallocated liabilities 246,434 139,915 ----------- ---------Total liabilities 350,344 307,068 ----------- --------- Capital expenditure on property, plant and equipment, development costs andsoftware Affiniti 16,654 28,200 Kingston Communications 16,004 17,439 Information Services 91 845 Smart421 122 - Head office 191 329 ----------- ---------Total - continuing activities 33,062 46,813 Discontinued operations - 277 ----------- ---------Group total 33,062 47,090 ----------- --------- The split of total revenue between revenue from external customers andinter-segment revenue is as follows: Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Revenue from external customers Affiniti 344,184 331,619 Kingston Communications 114,457 106,254 Information Services 11,472 11,545 Smart421 8,714 - Head office 4,293 4,473 Discontinued operations 75 9,944 ----------- ----------Total 483,195 463,835 Inter-segment revenue Affiniti 1,216 364 Kingston Communications 2,642 3,026 Information Services 2,158 1,695 Head office and eliminations (6,016) (5,085) ----------- ---------Total - - ----------- ---------Group total 483,195 463,835 ----------- --------- 1. Segmental Analysis (continued) None of the revenue, operating profit or net operating assets arising outsidethe United Kingdom are material to the Group. The geographical analysis ofrevenue by destination is given below. Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Geographical analysis of revenue United Kingdom 468,288 448,846 Europe 12,946 12,384 Other 1,961 2,605 ----------- ---------Group total 483,195 463,835 ----------- --------- The analysis of the Group's revenue between sale of goods and services is asfollows: Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Continuing operations Sale of goods 83,718 87,132 Provision of services 399,402 366,759 ----------- ---------Total - continuing operations 483,120 453,891 ----------- ---------Discontinued operations Sale of goods and services 75 9,944 ----------- ---------Group total 483,195 463,835 ----------- --------- 2. Profit/(loss) from continuing operations The profit/(loss) before taxation from continuing operations is stated after charging/(crediting): Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Exceptional items: Restructuring costs 2,033 1,090 Onerous leases 5,770 720 Loss on disposal of business - 108 Amounts written off investments 23 262 ----------- ---------- 7,826 2,180 Impairment of property, plant and equipment - 88,537 Impairment of intangible assets - 984 ----------- ---------- 7,826 91,701 ----------- ---------- Depreciation 24,192 40,105 ----------- ---------- 2. Profit/(loss) from continuing operations (continued) Amortisation of intangible assets - Intangible assets arising on acquisitions 8,016 6,599 - Software and development costs 7,361 4,886 ----------- ---------- 15,377 11,485 ----------- ---------- Release of prior year network operating accruals - (3,201) Pension past service credit for cash commutations (1,806) - at retirement Employee share schemes 393 754 Long term incentive plans 2,122 - ----------- ---------- 3. Taxation The taxation (credit)/charge on continuing activities is set out below: Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 ----------- ----------Corporation tax (122) 633 Deferred tax (13,217) (13,027) ----------- ----------Group total (13,339) (12,394) ----------- ---------- The combined tax effect of the exceptional items is £Nil (2006: credit of£542,000) in respect of current tax and a debit of £2,341,000 (2006: credit of£26,561,000) in respect of deferred tax. 4. Earnings per share For the year ended 31 March 2006, the impact of share options on unadjustedearnings per share was anti-dilutive and these have therefore been excluded fromthe calculation of dilutive weighted average share capital for all unadjustedearnings per share calculations for that year. Unaudited Audited Year ended Year ended 31 March 31 March 2007 2006 Weighted average number of shares No. No. For basic earnings per share 513,941,128 513,659,129 Exercise of share options 171,636 838,079 ----------- -----------For diluted earnings per share 514,112,764 514,497,208 ----------- ----------- Earnings £'000 £'000 Profit/(loss) for the year attributable to equity 23,391 (71,232) holders of the Company Adjustment to exclude loss for the year from discontinued operations 578 2,808 --------- --------Profit/(loss) for the year from continuing 23,969 (68,424) operations Adjustments: Exceptional items 7,826 91,701 Accelerated loan fee amortisation 1,918 - Amortisation of intangibles arising on acquisition 8,016 6,599 Tax and deferred taxation (13,339) (12,394) Adjusted profit for the year --------- --------from continuing operations 28,390 17,482 --------- -------- Earnings/(loss) per share from contiuing operations pence pence Basic 4.66 (13.32) Diluted 4.66 (13.32) Adjusted basic 5.52 3.40 Adjusted diluted 5.52 3.40 Loss per share from discontinued operations Basic (0.11) (0.55) Diluted (0.11) (0.55) Total earnings/(loss) per share from continuing and discontinued operations Basic 4.55 (13.87) Diluted 4.55 (13.87) 5. Dividends Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 March - 2,778 2005 of 0.54 pence per share Interim dividend for the year ended 31 March - 2,006 2006 of 0.39 pence per share Final dividend for the year ended 31 March 4,012 - 2006 of 0.78 pence per share Interim dividend for the year ended 31 March 3,344 - 2007 of 0.65 pence per share ----------- ----------- Total 7,356 4,784 ----------- ----------- The proposed final dividend for the year ended 31 March 2007 is 1.30 pence pershare amounting to a total dividend of £6,681,000. In accordance with IAS 10"Events after the balance sheet date", dividends declared after the balancesheet date are not recognised as a liability in these financial statements. 6. Acquisitions and disposals Acquisitions Smart421 Technology Group Limited On 29 September 2006, the Group acquired 100% of the share capital of Smart421Technology Group Limited. The acquired business contributed revenues of£8,714,000 and profit from operations of £127,000. The fair value to the Group of net assets acquired is shown below: Book value Fair value Fair value of assets adjustments to the Group acquired of assets acquired £'000 £'000 £'000 Intangible fixed assets - 12,179 12,179 Property, plant and equipment 239 - 239 Investments in associates 17 - 17 Trade and other receivables 2,963 - 2,963 Cash and cash equivalents 3,692 - 3,692 Trade and other payables (1,711) - (1,711) Deferred tax liability - (3,654) (3,654) --------- -------- --------Net assets acquired 5,200 8,525 13,725 Goodwill 12,133 --------- -------- --------Total consideration 25,859 Satisfied by: - cash paid 25,578 - direct costs relating to the 281 acquisition --------- -------- --------Total purchase consideration 25,859 --------- -------- -------- Goodwill is attributable to the future cash flows arising from the operations ofthe company, excluding those cash flows associated with identified intangibleassets. The realisation of the anticipated future synergies arising from thebusiness combination and the amount of avoided cost associated with havingestablished the business operations and workforce in place at the date ofacquisition. £'000 Purchase consideration settled in cash 25,859 Cash and cash equivalents acquired (3,692) --------Cash outflow on acquisition 22,167 -------- 6. Acquisitions and disposals (continued) JAM IP Limited On 15 December 2006, the Group acquired 100% of the share capital of JAM IPLimited. The acquired business contributed revenues of £1,574,000 and loss fromoperations of £120,000. The fair value to the Group of net assets acquired is shown below: Book value Fair value Fair value of assets adjustments to the Group acquired of assets acquired £'000 £'000 £'000 Intangible fixed assets - 1,338 1,338 Property, plant and equipment 28 - 28 Trade and other receivables 584 - 584 Inventories 47 - 47 Cash and cash equivalents 522 - 522 Trade and other payables (979) - (979) Deferred tax liability - (402) (402) --------- -------- --------Net assets acquired 202 936 1,138 Goodwill 1,536 --------- -------- --------Total consideration 2,674 Satisfied by: - cash paid 2,562 - direct costs relating to the 112 acquisition --------- -------- --------Total purchase consideration 2,674 --------- -------- -------- A further amount of contingent consideration capped at £1,195,000 may be payablein each of the three years ending 31 August 2007, 2008 and 2009 based on certainfinancial performance criteria. In view of the uncertainty over futureperformance, no amounts have been provided as at 31 March 2007. Goodwill is attributable to future cash flows arising from the operations of thecompany, excluding those cash flows associated with identified intangibleassets, the anticipated future synergies arising from the integration of thebusiness within Affiniti and the amount of avoided cost associated with havingestablished the business operations and workforce in place at the date ofacquisition. £'000 Purchase consideration settled in cash 2,674 Cash and cash equivalents acquired (522) --------Cash outflow on acquisition 2,152 -------- 6. Acquisitions and disposals (continued) Mistral Internet Group Limited On 31 January 2007, the Group acquired 100% of the share capital of MistralInternet Group Limited. The acquired business contributed revenues of £3,545,000and loss from operations of £45,000. The fair value to the Group of net assets acquired is shown below: Book value Fair value Fair value of assets adjustments to the Group acquired of assets acquired £'000 £'000 £'000 Goodwill 9,335 (9,335) - Intangible fixed assets - 4,426 4,426 Property, plant and equipment 1,912 (15) 1,897 Trade and other receivables 2,792 (76) 2,716 Cash and cash equivalents (214) - (214) Trade and other payables (5,453) (1,241) (6,694) Deferred tax liability - (1,328) (1,328) --------- -------- -------Net assets/(liabilities) acquired 8,372 (7,569) 803 Goodwill 19,421 --------- -------- -------Total consideration 20,224 Satisfied by: - cash paid 15,894 - loans and other liabilities settled on acquisition 4,122 - direct costs relating to the 208 acquisition --------- -------- -------Total purchase consideration 20,224 --------- -------- ------- Goodwill is attributable to future cash flows arising from the operations of thecompany, excluding those cash flows associated with identified intangibleassets, the anticipated future synergies arising from the integration of thebusiness within Eclipse and Kingston Communications and the amount of avoidedcost associated with having established the business operations and workforce inplace at the date of acquisition. £'000 Purchase consideration settled in cash 20,224 Cash and cash equivalents acquired 214 --------Cash outflow on acquisition 20,438 -------- If all three acquisitions had occurred on 1 April 2006, group revenue would havebeen £508,668,000 and profit before taxation would have been £6,640,000. Theseamounts have been calculated using the group's accounting policies and byadjusting the results of the subsidiaries to reflect amortisation that wouldhave been charged assuming the fair value adjustments to intangible assets hadapplied from 1 April 2006, together with the consequential tax effects. Disposals On 29 September 2006, the Group disposed of its remaining French business,Kingston Communications Data SA ("KC Data") for a nominal sum. KC Data made aloss in the period of £36,000 and the loss on disposal was £542,000. Thisdisposal qualifies for treatment as a discontinued operation since it is thetermination of operations in a geographical area. Accordingly the combined lossfor the period and loss on disposal of £578,000 has been disclosed in the line'discontinued items' on the face of the income statement. The prior year figures also include results of Arche, the French operationsacquired with Omnetica, which the Group disposed of for cash consideration of£30,336,000 on 31 May 2005. The results of discontinued operations, which have been included in consolidatedincome statement, were as follows: Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Revenue 75 9,944 Expenses excluding depreciation and finance (111) (11,443) costs ----------- -----------EBITDA (36) (1,499) Depreciation - (401) Loss on sale of discontinued operations (542) (1,141) ----------- -----------Loss from operations (578) (3,041) Finance costs - (43) ----------- -----------Loss before tax (578) (3,084) Attributable tax - 276 ----------- -----------Net loss attributable to discontinued (578) (2,808) operations ----------- ----------- The effect of discontinued operations on segment result is shown in note 1. 7. Reconciliation of profit from operations Unaudited Audited Year ended Year ended 31-Mar 31-Mar 2007 2006 £'000 £'000 Group profit/(loss) from continuing 23,577 (70,052) operations Loss from discontinued operations (36) (1,900) Loss on write down of fixed asset 23 261 investments ----------- -----------Group profit/(loss) from operations 23,564 (71,691) ----------- ----------- 8. Reconciliation of reported results to adjusted results Unaudited Unaudited Unaudited Year ended Year ended Year ended 31-Mar-2007 31-Mar-2007 31-Mar-2007 Group Profit Basic profit before earnings from taxation per share operations £'000 £'000 £'000 As reported 23,577 10,630 4.66 Exceptional items 7,826 9,744 1.90 Amortisation of intangibles arising on acquisition 8,016 8,016 1.56 Taxation - - (2.60) --------- --------- ---------As adjusted 39,419 28,390 5.52 --------- --------- --------- Audited Audited Audited Year ended Year ended Year ended 31-Mar-2006 31-Mar-2006 31-Mar-2006 Group Profit Basic profit before earnings from taxation per share operations £'000 £'000 £'000 As reported (70,052) (80,818) (13.32) Exceptional items 91,701 91,701 17.85 Amortisation of intangibles arising on acquisition 6,599 6,599 1.28 Taxation - - (2.41) --------- --------- ---------As adjusted 28,248 17,482 3.40 --------- --------- --------- Unaudited Audited Year ended Year ended 31-Mar-2007 31-Mar-2006 Free cash Free cash flow flow £'000 £'000 As reported 18,026 (16,105) Net investment in/(proceeds from) acqusitions and 43,064 (26,177) disposals Dividends 7,356 4,784 Interest 12,651 8,472 Movement in bank loans (52,487) 52,431 Taxation 284 399 --------- ---------As adjusted 28,894 23,804 --------- --------- 9. Basis of preparation The consolidated financial statements have been prepared in accordance with EUEndorsed International Financial Reporting Standards (IFRS), IFRICinterpretations and the Companies Act 1985 applicable to companies reportingunder IFRS. The consolidated financial statements have been prepared under thehistorical cost convention, as modified by the revaluation of financial asstsand financial liabilities (including derivative instruments) at fair valuethrough profit or loss. The preparation of financial statements in conformity with IFRS requires the useof certain critical accounting estimates. It also requires management toexercise its judgement in the process of applying the group's accountingpolicies. At the date of authorisation of these financial statements, the followingstandards and interpretations which have not been applied in these financialstatements were in issue but not yet effective: - IFRS 7 'Financial Instruments: Disclosures' (and the relevant amendment to IAS 1 on capital disclosures) - IFRIC 8 'Scope of IFRS 2' - IFRIC 9 'Re-assessment of Embedded Derivatives' - IFRIC 10 'Interim Financial Reporting and impairment' - IFRIC 11 'Group and Treasury Share Transactions' - IFRIC 12 'Service Concession Arrangements' All of the standards and interpretations listed above are not expected to have amaterial impact on the financial statements of the group or company. 10. Note to the preliminary announcement The financial information set out in the announcement does not constitute thecompany's statutory accounts for the year ended 31 March 2007 or 2006. Thefinancial information for the year ended 31 March 2006 is derived from thestatutory accounts for that year, which have been delivered to the Registrar ofCompanies. The previous auditors reported on those accounts; their report wasunqualified and did not contain a statement under s237 (2) or (3) of theCompanies Act 1985. The statutory accounts for the year ended 31 March 2007 willbe finalised on the basis of the financial information presented by theDirectors in this preliminary announcement and will be delivered to theRegistrar of Companies following the Annual General Meeting. The financial information contained within this Preliminary Announcement wasapproved by the Board on 21 May 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
KCOM