KCOM Regulatory News (KCOM)

22 November 2011

KCOM GROUP PLC (KCOM.L) ANNOUNCES

UNAUDITED INTERIM RESULTS TO 30 SEPTEMBER 2011

KCOM Group PLC (KCOM.L) ("KCOM Group" or the "Group") announces its unaudited interim results for the half year ended 30 September 2011.

"Building a platform for sustainable growth"

Summary

·; Revenue at £198.0 million (2010: £194.8 million) reflects good performance across the Group.

·; EBITDA before exceptional items improves to £40.7 million (2010: £38.9 million) continuing recent trends.

·; Profit before tax and exceptional items increases 22.7% to £27.0 million (2010: £22.0 million).

·; Strong cash generation reduces net debt further to £75.1 million (2010: £111.8 million), a reduction of £6.9 million from £82.0 million at 31 March 2011.

·; Increased interim dividend in line with previously stated commitment.

Operational highlights

·; Further contract wins across both public and private sector including WorldPay and appointment as preferred bidder for both Calderdale Council and emPSN.

·; Next generation fibre deployment continues successfully across Hull & East Yorkshire network.

Bill Halbert, Executive Chairman, said "We are pleased to report half year results showing continued progress across the Group. Strong growth in earnings and resultant conversion into cash emphasises the robust foundation on which the Group is building its growth strategy.

"Additional multi-year contract wins, including being the preferred bidder on a further PSN contract, have strengthened further the contract backlog for future years, underpinning our ability to achieve our objective of sustainable growth."

"As previously stated, we are committed to delivering a minimum ten per cent per annum dividend growth in this and the subsequent financial year, reflecting our confidence in maintaining current performance. Accordingly, we have increased the interim dividend per share to 1.33 pence (2010: 1.10 pence)"

Outlook

The Group continues to deliver growth in profits and excellent cash conversion, strengthening its balance sheet whilst investing in growth.

Our focus for the Kcom brand continues to be on securing recurring revenue and driving long term sustainable growth. The contracts won in the period will strengthen further the contracted order backlog within Kcom and underpin multi-year revenue.

The Board remains committed to a minimum 10 per cent growth per annum in the dividend for this, and the next financial year.

Enquiries:

KCOM Group PLC:

Business and Operating Review

Group overview

Overall Group revenue has grown by 1.6% to £198.0 million (2010: £194.8 million). This reflects a positive contribution from all our brands.

Group EBITDA before exceptional items has increased 4.6% to £40.7 million (2010: £38.9 million) benefitting from our continued focus on higher margin activities and reduced operating costs.

Group profit before tax has increased by 16.4% to £27.0 million (2010: £23.2 million), with the increase in EBITDA and reduced depreciation and amortisation offsetting higher borrowing costs.

Net debt has continued to reduce, reaching £75.1 million at the half year (2010: £111.8 million). It has also fallen by £6.9 million since 31 March 2011, reflecting the cash generative nature of the business. This reduction has been achieved alongside increased levels of capital investment, pension scheme payments and dividends paid.

KC & Eclipse overview

KC, which provides consumer and business services in East Yorkshire, and Eclipse, which delivers internet based services to businesses nationally, have shown a 1.0% growth in revenue to £63.1 million (2010: £62.5 million). This has been achieved despite the anticipated decline in KC Colour Pages, our directory publication in East Yorkshire.

Consistent with previous years, the first half reported results include the recognition of revenue and profitability associated with the publication of the KC Colour Pages directory for 2011. Revenue for the directory has fallen by £0.6 million to £4.1 million (2010: £4.7 million) due to a reduction in advertising spend, consistent with market trends across the UK.

The reduction in KC Colour Pages revenue resulted in EBITDA falling by 1.3% to £30.3 million (2010: £30.7 million). Growth in EBITDA in both KC and Eclipse is anticipated to offset this during the second half of the year, with overall full year EBITDA in KC & Eclipse for 2012 anticipated to be broadly in line with the 2011 result.

Growth within KC reflects increasing demand for higher bandwidth services from business customers, offsetting continued decline in legacy voice services in this customer segment. Consumer revenue has continued to grow due to further success in the migration to bundled services, which launched a year ago, alongside upgrades to KC Talk packages.

During the first half we announced our initial deployment of fibre technology delivering up to 100Mbps broadband services, which is anticipated to pass 15,000 homes across Hull and East Yorkshire over the next two financial years. We have recently announced the next phase of this initial deployment in the centre of Hull.

Growth within Eclipse reflects the continued success of the focus on the SME market, which has offset the expected churn of lower end consumer contracts. The first half of the year has seen a consistent trend of monthly growth in the number of broadband connections in the SME market.

Kcom & Smart421 overview

Kcom, our communication services brand for multi-site enterprise and public sector organisations across the UK and Smart421, our applications integration specialists, reported revenue growth of 2.5% to £137.7 million (2010: £134.3 million). EBITDA before exceptional items increased also by 6.3% to £13.4 million (2010: £12.6 million), reflecting further improvements in profit margin.

Smart421 has continued to achieve strong growth, with an 26% increase in revenue to £13.6 million (2010: £10.8 million). Smart421's strong performance reflects their ability to provide large corporate customers with specialist consultancy services focused on cloud technologies and the integration of complex business processes. Half year growth has been driven by successfully delivering against a sustained demand from existing customers and from new contract wins, including Haven Power, BT and Broadgate Estates.

Kcom has seen further success in growing its multi-year contract backlog, focusing on the provision of connect and managed services to multi-site national organisations. By their nature, these contracts have a longer book to bill cycle, therefore increasing the time before they start contributing to revenue.

In the public sector, Kcom has established a market leading position in the provision of Public Service Networks, having recently been appointed as preferred bidder for the East Midlands PSN contract, adding to the previous wins with Staffordshire and Dorset PSNs. These are long term contracts and enable Kcom to offer additional services to a range of public sector bodies.

Kcom has been notified also that it is the preferred bidder status for a contract with Calderdale Metropolitan Council for the provision of telecommunications services including voice, data and mobile telephony.

Within the corporate market, Kcom has won a number of new and extended contracts including WorldPay, Dominos, Morrisons and BA. These reflect our focus on developing long term customer relationships.

First half revenue includes build elements of a one-off contract relating to the build and management of a broadband network on behalf of a third party provider, amounting to £7.2 million (2010: £0.7 million). Build activity will cease in the second half of the current financial year, with a continuation of the current managed service.

 The growth in revenue has been achieved despite an accelerated decline in Premium Rate Services (PRS) traffic of £2.6 million year on year to £6.8 million (2010: £9.4 million). This trend is expected to continue during the remainder of this and the subsequent financial year.

PLC and associated costs ("PLC")

This segment includes Public Company, central and share scheme expenses and the costs, excluding current and past service costs, associated with the Group's defined benefit pension schemes. The net pre-exceptional costs incurred in the PLC segment have reduced to £3.1 million (2010: £4.4 million) as a result of a credit associated with the Group's defined benefit schemes of £0.8 million (2010: £0.8 million cost). This credit has arisen due to a recovery in assets values of the scheme at 31 March 2011. Volatility in both equity and bond markets is likely to impact on costs within PLC in future financial years.

Group Operating Profit

Group operating profit increased to £30.8 million (2010: £26.4 million). The overall improvement in operating profit of £4.4 million is a result of:

·; £1.8 million improvement in Group EBITDA before exceptional items

·; £1.2 million increase in costs due to prior year credit for exceptional items and

·; £3.8 million reduction in depreciation and amortisation, the majority of which reflects the anticipated reduction in amortisation of intangibles relating to acquisitions.

Finance costs

Finance costs for the period have increased to £3.7 million (2010: £3.2 million) with increased borrowing costs associated with the new finance facility established in November 2010, offsetting reduced costs associated with lower debt levels.

The Group anticipates a reduction in interest costs in the second half of the current financial year due to a change in fixed rate swap arrangements and lower debt.

In order to provide certainty over future interest costs, the Group has entered into new forward start fixed rate arrangements for £60.0 million of debt which commence on maturity of the existing swaps in January 2012. The new swaps have a weighted average rate of 2.7% and mature in July 2015. The Group had entered previously into fixed rate swap arrangements for £80.0 million of debt at a weighted average rate of 5.5%. Therefore the second half of the current financial year will reflect this movement.

Taxation

The taxation charge of £7.4 million (2010: £6.9 million) reflects the ongoing unwind of the deferred tax asset as the Group moves towards a tax payment position. The effective rate of 27.3% (2010: 29.7%) reflects in part a re-measurement of the deferred tax asset balance as a result of the reduction in corporation tax rates from 26% to 25%.

Dividend

The interim dividend is 1.33 pence per share (2010: 1.10 pence). The dividend will be paid on 1 February 2012 to shareholders registered on 16 December 2011.

The level of interim dividend is consistent with the Board's previously stated commitment to dividend growth of a minimum of 10% per annum for this and the subsequent financial year.

Pension scheme

Net liabilities associated with the Group's retirement benefit obligations have reduced to £20.9 million (2010: £45.0 million), but have increased by £14.0 million from £6.9 million at 31 March 2011. The increase from the year end arises as a result of a reduction in the valuation of scheme assets of £8.8 million and an increase in retirement benefit liabilities of £5.2 million.

The increase in liabilities since the year end predominately arises due to a fall in corporate bond yields and the associated discount rate to 5.1% from 5.5% at March 2011.

The reduction in scheme assets since the year end is a result of a general decline in equity market values (approximately 60% of scheme assets are invested in "return-seeking" assets). The Group will continue to explore opportunities with the Trustees of both defined benefit schemes to minimise the impact of volatility in the equity market on scheme assets.

Effective from 1 April 2010, the Group increased its ongoing deficit contributions into both schemes to the next three years to £6.9 million per annum (previously £3.5 million per annum). The Group made also a one-off contribution of £3.3m in the six months to September 2010 into the Kingston Communications Pension Scheme, the Group's main defined benefit scheme.

Cash flow and net debt

Net debt has reduced by £6.9 million to £75.1 million from £82.0 million as at 31 March 2011 (2010: £111.8 million).

Net cash inflow from operating activities has increased to £35.3 million (2010: £21.2 million) reflecting the continued strength of the business in the management of receivables and working capital and conversion of earnings into cash. Reduced pension deficit payments of £3.4 million (2010: £6.3 million) mainly reflect the impact of the one-off payment of £3.3 million in the prior period.

Cash outflows associated with the purchase of tangible and intangible assets have increased to £10.9 million (2010: £6.4 million) in line with previous expectations, with the Group continuing to anticipate full year capital investment in the region of £25.0 million.

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 & uncertainties

The list below sets out the principal risks and uncertainties which could have a material adverse effect on the Group and have been identified through the management risk framework:

·; Security and resilience of IT, networks and data - we continue to operate networks across the UK and host data for many customers alongside billings platforms and other IT systems internally. This means that we are dependent on the secure operation and resilience of our information systems, networks and data.

·; Reliance on key third-party suppliers - our strategic agreements with BT and Phoenix means we are dependent on the performance of these third parties.

·; Business continuity - business continuity in the event of a crisis or disaster is a risk we continue to monitor and mitigate against. It is essential to many of our customers that we can continue to provide services even when a significant incident occurs.

The risks outlined above are disclosed in more detail on page 20 of the Annual Report and Accounts to 31 March 2011 and it is the view of the director's that these risks and uncertainties are valid 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

KCOM Group PLC operates four brands and a PLC function -

The brands are reported as KC & Eclipse, which address the needs of our East Yorkshire customers and UK small business market respectively, and Kcom & Smart421 which serve enterprise and public sector organisations across the UK. These brands have separate management teams and each offers tailored propositions to their target market, based on the Group's range of products and services.

The chief operating decision-maker of the Group is the KCOM Group PLC Board. The Board considers the performance of KC & Eclipse and Kcom & Smart421 in assessing the performance of the Group and making decisions about the allocation of resources. Segment disclosures have been presented on this basis.

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

None of the revenue or operating profit arising outside the United Kingdom are material to the Group.

[1] PLC includes Public Company central and share scheme expenses, inter-segment eliminations and the costs, excluding current and past service costs, associated with the Group's defined benefit pension schemes and the related assets and liabilities.

2. Exceptional items

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

The taxation charge on activities is set out below:

There are deferred tax assets of £1.3 million (2010: £1.3 million) which have not been recognised, as there is insufficient evidence as to the generation of suitable profits against which these assets can be offset.

4. Earnings per share

5. Dividends

The proposed interim dividend for the six months ended 30 September 2011 is 1.33 pence per share. In accordance with IAS 10, "Events after the balance sheet date", dividends declared after the balance sheet date are not recognised as a liability in this set of interim financial information.

6. Movement in net debt

Net debt comprises:

7. 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 5 and in the Business review in the Group's 2011 Annual Report and Accounts.

This condensed consolidated interim financial information was approved for issue on 22 November 2011.

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 2011 were approved by the Board of directors on 8 June 2011 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 page 17.

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 2011 has been prepared in accordance with the Disclosure and Transparency Rules of the 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 2011, 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.

8. Accounting policies

The accounting policies adopted are consistent with those published in the Group's 2011 Annual Report and Accounts, except as described below.

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

9. 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 2011 Annual Report and Accounts, with the exception of changes in estimates that are required in determining the provision for income taxes (see Note 8).

10. Related party transactions

There are no material related party transactions.

11. Statement of directors' responsibilities

The directors confirm that this consolidated interim financial information has 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 2011 Annual Report and Accounts.

The directors of KCOM Group PLC are listed in the KCOM Group Annual Report for 31 March 2011

Signed by Order of the Board on 22 November 2011 by:

Independent review report to KCOM Group plc

Introduction

We have been engaged by the company to review the condensed set of financial statements in the interim financial report for the six months ended 30 September 2011, which comprises the consolidated interim income statement, the consolidated interim statement of comprehensive income, the consolidated interim balance sheet, the consolidated interim statement of changes in shareholders' equity, the consolidated interim cash flow statement and related notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

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

As disclosed in note 7, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the interim financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, 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.

Scope of review

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.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 30 September 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

PricewaterhouseCoopers LLPChartered AccountantsLeeds22 November 2011