KCOM Regulatory News (KCOM)

30 November 2015

KCOM GROUP PLC (KCOM.L) ANNOUNCES

UNAUDITED INTERIM RESULTS TO 30 SEPTEMBER 2015

KCOM Group PLC (KCOM.L) announces its unaudited interim results for the half year ended 30 September 2015.

Highlights

- Group revenue ahead of prior year, up 3% at £177.9 million

- EBITDA ahead of prior year, up 3% to £37.2 million

- Interim dividend up 10%

- Minimum dividend commitment for next two years

- Growth in focus areas demonstrates progress in strategy

o Kcom segment revenue up 4%

o KC brand revenue up 2%

- 3% decline in Group profit before tax and exceptional items reflects higher depreciation and amortisation consistent with increased investment

1 Adjusted basic EPS is basic EPS adjusted for exceptional items (including the tax impact of exceptional items).

Commenting on the results, Bill Halbert, Chief Executive said:

"The Group has delivered improved performance across all target segments. The results are clear evidence of the potential of our strategy and of the level of opportunity we have in our chosen markets. Our focus on generating targeted organic revenue growth, coupled with further steps to simplify the operating structure of the business, places us in a strong position to create a single, unified and simplified business by the end of this financial year.

"Consistent with our prior commitment of a minimum of 10% year on year growth, the Board confirms its intention to pay an interim dividend of 1.97 pence per share."

Outlook

The Group's performance shows good progress, reflecting its focus on growing those areas of strategic importance. The Board is committed to its stated strategy and, while certain legacy activities will continue to decline, is confident that it will produce profitable growth. The Group plans to accelerate further its investment in those areas that support this.

The Board reconfirms its commitment to increasing the dividend by 10% per annum until March 2016.

Reflecting its continued confidence in the outlook for the business, the Board is pleased to make a commitment to delivering a full year ordinary dividend of at least 6.0 pence per share for each of the financial years ending 31 March 2017 and 2018.

Assets classified as held for sale

As a result of the Board's decision to explore opportunities to maximise the return from our national network infrastructure (excluding Hull and East Yorkshire), and consistent with our wider transformation journey, these assets have been reclassified to current assets held for sale.

Enquiries:

Bill Halbert, Chief Executive Officer

Paul Simpson, Chief Financial Officer

Cathy Phillips, Investor RelationsKCOM Group PLC 

01482 602595

Matt Ridsdale/Lulu Bridges/Mike Bartlett

Tavistock Communications

020 7920 3150

Group performance

The Group's transformation plan continued at pace during the first half of the year. Nevertheless, our four brands (KC (excluding contact centres and publishing), Kcom, Eclipse and Smart421) have recorded revenue and EBITDA growth and have made further progress in working together. In that period, we continued to invest in those areas where we believe we can generate sustainable value.

The Group, as part of its transformation, has continued to simplify its operations, consolidating and centralising those activities, where efficiencies and cost savings may be obtained. This has been facilitated by investment in IT systems and we expect this investment to continue in the second half of the year and beyond.

Segmental performance

The following analysis relates to the Group's reported segments in the period ended 30 September 2015 and all results are stated before exceptional items.

KC

The KC segment covers communications services for consumers and Small and Medium Businesses (SMB) within Hull and East Yorkshire, and provides contact centre and publishing services. Key features of the half year include:

- continued growth in consumer revenue and profitability driven by increasing broadband penetration of existing customers with an accelerating demand for fibre services;

- increased consumer Average Revenue Per User (ARPU) of £32.34 (2014: £31.54) as a result of new broadband customers and fibre take-up;

- strong performance, with the support of the government's voucher scheme for small businesses, to fund Superfast Broadband take-up, strengthening the demand for fibre services in those businesses; and

- anticipated decline in Contact Centres and Publishing revenue.

The fibre deployment across Hull and East Yorkshire continues to achieve customer take-up well in excess of national trends. As at 30 September 2015, approximately 53,000 premises had access to fibre with take-up of 40%. A total of 786 businesses have benefitted from access to the government Superfast Broadband voucher scheme during the half year.

Kcom

1 Prior year restated for hosting customers who passed from Kcom to Eclipse in period ending 30 September 2015.

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

- continued growth of HMRC contract within Kcom, consulting on and delivering the HMRC digital roadmap;

- strong growth in other key strategic focus areas, alongside an expected decline in certain legacy activities.

Kcom and Smart421 has worked as one team in the Enterprise market, to deliver consultancy and integration services, which are increasingly cloud-based. There has been particular interest in cloud-based multi-channel contact centres and focus remains on building pipeline opportunities.

PLC Segment

The Group's PLC segment comprises shared service functions, share scheme expenses, and administration costs associated with the Group's defined benefit pension schemes. These costs (before exceptional items) were £3.6 million (2014: £3.5 million).

Exceptional items

The Group's net exceptional charge is £0.4 million (2014: £1.8 million) (see Note 2). Significant items include:

· £2.2 million restructuring costs relating to cost reduction and the move towards an integrated operating model, which we expect to continue throughout the year;

· £0.9 million increase in the onerous lease provision; offset by

· £2.7 million cash receipt relating to various regulatory settlements.

Net debt and cash flow

Net debt at 30 September 2015 remained stable and within a very comfortable range at £103.0 million (2014: £103.0 million), representing a net debt to pre-exceptional EBITDA ratio of 1.36 x (2014: 1.36 x).

Dividend

The Group's interim dividend is 1.97 pence per share (2014: 1.79 pence), which is consistent with the Board's previously stated commitment to grow the full year dividend at 10% per annum until the year ending 31 March 2016. The dividend will be paid on 1 February 2016 to shareholders registered on 29 December 2015. The ex-dividend date is 24 December 2015.

Pensions

The IAS 19 pension liability at 30 September 2015 is £16.1 million (30 September 2014: £34.0 million and 31 March 2015: £31.4 million). The decrease from the 31 March 2015 year end arises as a result of a higher discount rate used to calculate the schemes' liabilities.

The Group makes pre-agreed deficit repair payments into its pensions schemes, based on the outcomes of its triennial valuation. This payment will be a total of £2.0 million in the current year, rising to £6.7 million in the year ending 31 March 2017.

In addition to the deficit repair payments, the Group makes pre-agreed payments to its pension schemes through the asset backed partnership. The payment is £2.7million in the current year and is forecast to be £2.7million in the year ending 31 March 2017.

As a result, the total payment in respect of pensions will be approximately £4.7 million in 2016 and £9.4 million in 2017. The next actuarial valuation for both schemes is 31 March 2016.

Tax

The Group's tax charge is £5.1 million (2014: £4.7 million). The current year effective tax rate is 21.0%, broadly in line with the prevailing rate of corporation tax.

Forward looking statements

Certain statements in this interim statement are forward looking. Although the Group believes that the expectations reflected in these forward looking statements are reasonable, we can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.

We undertake no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

Principal risk and uncertainties

The Group has a number of risks and uncertainties which have been identified through the risk management framework. The risks set out below could have a material adverse impact on the Group:

· customer service and delivery - delivering exceptional service to our customers is one of our key strategic aims and therefore the risk of failing to do this is a key risk for us to mitigate;

· recruitment and retention of the right people - we need to be able to recruit and retain people who embody our values as well as those who have specific technical skills where needed;

· reliance on key partners and suppliers - our business model means that we work with several key partners to deliver service to our customers; they include BT, ForgeRock, Cisco, Amazon Web Services and Microsoft;

· security and resilience of our networks and IT systems - our networks and IT systems are key to all that we do and are crucial in delivering service to our customers; and

· accuracy, security and confidentiality of customer data - security of customer data is of paramount importance to our customers and therefore to us.

The risks outlined above are disclosed in more detail on pages 20 and 21 of the Annual report and accounts to 31 March 2015 and it is the view of the directors that these risks and uncertainties remain appropriate for this interim statement.

Consolidated interim income statement

Consolidated interim statement of comprehensive income

Consolidated interim balance sheet

Consolidated interim statement of changes in shareholders' equity

Consolidated interim cash flow statement

Notes to the unaudited interim financial information

1. Segmental analysis

The chief operating decision-maker of the Group is the KCOM Group PLC Board. The Board considers the performance of the four brands and the PLC function in assessing the performance of the Group and making decisions about the allocation of resources. These are the Group's operating segments.

The KC brand addresses the needs of our East Yorkshire customers and the Kcom, Smart421 and Eclipse brands serve enterprise, public sector organisations and small business markets across the UK.

The Board assessed that the Kcom, Smart421 and Eclipse brands have similar profiles offering similar products and services, similar production and distribution processes and are operating in a consistent regulatory environment. In line with IFRS 8, the Kcom, Smart421 and Eclipse brands are aggregated together and reported as the 'Kcom' segment. The remaining brands of KC and the PLC function are reported respectively in the 'KC' segment and 'PLC' segment. This reporting is also consistent with the reporting to the KCOM Group PLC Board.

The split of total revenue between external customers and inter-segment revenue is as follows:

[1] PLC comprises shared service functions, share scheme expenses, and administration costs associated with the Group's defined benefit pension scheme.

Neither revenue nor operating profit arising outside the United Kingdom is material to the Group.

2. Exceptional items

Exceptional items are separately disclosed by virtue of their size or incidence to improve the understanding of the Group's financial performance.

During the period, the Group received a settlement of a claim relating to an industry-wide regulatory ruling. The cash was received in June 2015 and the settlement is treated as exceptional in line with our accounting policy.

Restructuring costs arise as a result of organisational changes to support the Group's transformation.

Onerous lease costs arise as a result of continued rationalisation of the Group's property portfolio.

In accordance with accounting standards, the Group's goodwill balance is tested annually for impairment. As part of this review for the year ending 31 March 2015, the goodwill in the Group's Kcom CGU was deemed to be impaired and a charge was recognised in the consolidated income statement.

Network rates rebate related to a settlement agreed during the year ending 31 March 2015.

Recovery of previously provided debt related to a settlement of the Group's written off debt due from Lehman Brothers, which was previously charged as an exceptional item.

The profit on sale of investments related to the sale of the Group's previously impaired shareholding in Spectrum Venture Management Fund, which was previously charged as an exceptional item.

3. Finance costs

In July 2015, the sterling interest rate swaps held by the Group matured and the Group decided against entering into further swap arrangements. The result was the cumulative gain on the interest rate swaps, which had been previously recognised directly into equity, was recycled from equity into the income statement as per IAS 39.

4. Taxation

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to the expected total annual earnings. The Group's effective rate is 21.0% (2014: 20.1%).

5. Earnings per share

Earnings per share

6. Dividends

The proposed interim dividend for the six months ended 30 September 2015 is 1.97 pence per share. In accordance with IAS 10, "Events after the reporting period", dividends declared after the balance sheet date are not recognised as a liability in this set of interim financial information.

7. Assets classified as held for sale

Assets classified for held for sale are the Group's national network infrastructure, outside of Hull and East Yorkshire.

The assets had an original build cost of £238.1 million, of which £89.5 million was written off in previous years.

The above assets are disclosed in note 1 in the Kcom reporting segment.

8. Movement in net debt

Net debt comprises:

These Group's facilities comprise a multi-currency revolving credit facility of £200.0 million, provided by a group of five core relationship banks. The facility matures in June 2019. The Group considers that this facility will provide sufficient funding to support the Group's growth. In addition, short-term flexibility of funding is available under the £10.0 million overdraft facility provided by the Group's clearing bankers.

9. Basis of preparation and publication of unaudited interim results

General information

KCOM Group PLC is a company domiciled in the United Kingdom.

The Group has its primary listing on the London Stock Exchange. Details of the principal activities of the Group are disclosed on pages 2 to 3 and in the Strategic report in the Group's 2015 annual report and accounts.

This condensed consolidated interim financial information was approved for issue on 25 November 2015.

This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2015 were approved by the Board of directors on 17 June 2015 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The condensed consolidated interim financial information has been reviewed, not audited. The review opinion is disclosed on pages 19 and 20.

This condensed consolidated interim financial information will be published on the Company's website. The maintenance and integrity of the website is the responsibility of the directors. The work carried out by the auditors does not involve consideration of these matters. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Basis of preparation

This condensed consolidated interim financial information for the six months ended 30 September 2015 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously Financial Services Authority) and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 March 2015, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going-concern basis

The Group meets its day-to-day working capital requirements through its bank facilities. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities. After making enquires, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated interim financial statements.

10. Accounting policies

The accounting policies adopted are consistent with those published in the Group's 2015 annual report and accounts, except as described below.

Tax policy

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to the expected total annual earnings.

IFRS 13 - Fair value measurement

IFRS 13 measurement and disclosure requirements are applicable for the March 2016 year end in respect of the six months ended 30 September 2015. The Group has included the disclosures required by IAS 34 para 16A(j). See Note 12. Application of this revised standard has not had a material impact on the financial statements.

Assets classified as held for sale

Assets are classified as assets held for sale when their carrying amount is to be recovered through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell. Once classified as held for sale, intangibles assets and property, plant and equipment are no longer amortised or depreciated.

11. Significant judgements and estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Group's 2015 annual report and accounts, with the exception of changes in estimates that are required in determining the provision for income taxes (see Note 10).

12. Financial risk management and financial instruments

Financial risk factors

The Group's activities expose it to a variety of financial risks; currency risk, interest-rate risk, liquidity risk, and credit risk. The Group's overall risk management strategy is approved by the Board and implemented and reviewed by senior management. Detailed financial risk management is then delegated to the Finance departments which have a specific policy manual that sets out guidelines to manage financial risk. The condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 31 March 2015. There have been no changes in the Group's risk management processes or policies since the year end.

Financial instruments

The Group accounts for financial instruments in accordance with IFRS 13. This standard requires disclosure of fair value measurements by level of the following hierarchy;

- Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)

- Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2)

- Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs)

(level 3).

Consistent with the March 2015 year end, all of the Group's financial instruments fall into hierarchy level 2. The fair value of financial assets and liabilities is obtained from third party sources.

The following table analyses the fair value of derivative financial instruments held by the Group by category:

Fair values

The fair value of bank borrowings is £97.5 million (March 2015: £91.6 million) compared to a book value of £110.0 million (March 2015: £105.0 million). The fair value of cash flows has been estimated using a rate based on the weighted average borrowing rate of 3.20% (March 2015: 3.20%).

13. Related party transactions

There are no material related party transactions.

14. Statement of directors' responsibilities

The directors confirm that these condensed interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union, and that the interim management report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

· an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related party transactions in the first six months and any material changes in the related party transactions described in the Group's 2015 annual report and accounts.

The directors of KCOM Group PLC are listed in the KCOM Group Annual Report for 31 March 2015.

Signed by Order of the Board on 30 November 2015 by:

Independent review report to KCOM Group PLC

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed KCOM Group PLC's condensed consolidated interim financial statements (the "interim financial statements") in the unaudited interim results of KCOM Group PLC for the 6 month period ended 30 September 2015. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements, comprise:

· the consolidated interim balance sheet as at 30 September 2015;

· the consolidated interim income statement and statement of comprehensive income for the period then ended;

· the consolidated interim cash flow statement for the period then ended;

· the consolidated interim statement of changes in shareholders' equity for the period then ended; and

· the explanatory notes to the condensed consolidated interim financial statements.

The interim financial statements included in the unaudited interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in Note 9 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The unaudited interim results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the unaudited interim results in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the unaudited interim results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the unaudited interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

Leeds

30 November 2015

Notes:

a) The maintenance and integrity of the KCOM Group PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.