Stunning Final results that took the City by surprise

22 May 2008
Telecom plus PLC
Final Results for the year ended 31 March 2008
Telecom plus PLC, the UK's leading low-cost multi-utility supplier (gas, electricity, telephony,
broadband), announces final results for the year ended 31 March 2008.
Financial Highlights:
• Profit before tax up 45% to £16.8m (2007: £11.6m)
• EPS up 42% to 17.7p (2007: 12.5p)
• Cash generation of £17.0m before share buy-backs of £5.7m and dividend
payments of £6.8m
• Year-end net cash balance increased by £4.5m to £30.3m (2007: £25.8m)
• Final dividend of 10p per share (2007: 6p) making a total for the year of 14p
(2007: 8p) per share; this represents an increase in the total payment of 75%
compared with last year
Operating Highlights:
• Annualised growth in services provided of 15% during Q4
• 49% increase in Business Club membership
• Average services per member of 3.11 (2007: 2.95)
• Significant growth in the number of distributors promoting our services
• Successful launch of new “Community Fundraiser” position
Commenting on the results, Charles Wigoder, CEO said:
“We are still the UK’s only fully integrated multi-service utility provider, able to offer our
customers consistent value across a wide range of services with the added convenience of
receiving just a single clear and concise bill each month. Our distribution channel has
demonstrated its continuing ability to gather high quality new customers, cost-effectively and in
increasing volumes; this gives us a considerable competitive advantage in the domestic market.
“In the context of the strong growth and cash generation currently being achieved, and subject to
unforeseen circumstances, we intend to pay a total dividend of not less than 17.5p for the current
financial year and not less than 22p for the year to 31 March 2010.
“Since the year end we have seen a further increase in activity, with encouraging growth in both
new services and new distributor numbers. We are more confident than we have ever previously
been in the ability of our business to deliver continuing satisfactory results.”
There will be a meeting for analysts at Smithfield’s offices at 12.30 pm today. To view the full text
of this press release in PDF format, click on the link below: http://www.telecomplus.co.uk/_prelim
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For more information please contact:
Telecom plus PLC
Charles Wigoder, Chief Executive 020 8955 5000
Richard Hateley, Finance Director
KBC Peel Hunt
Richard Kauffer / Nicholas Marren 020 7418 8900
Smithfield
Tania Wild / Reg Hoare 020 7360 4900
3
Chairman’s Statement
I am delighted to report a further year of significant achievement for the Company, which has
seen turnover, profitability, earnings per share and dividends all reach record levels.
Pre-tax profits increased by 45% to £16.8m (2007: £11.6m) on group turnover of £186m (2007:
£176m). This strong increase in profitability clearly demonstrates the resilience of our
infrastructure-light business model, and the benefits which the business can be expected to
deliver as we achieve increasing economies of scale in the future. The relatively modest rise in
turnover during the period reflects the impact of lower retail energy prices last spring (which have
recently been reversed following a sharp increase in the wholesale markets), as well as our
decision to restructure our multi-service discount scheme to provide Club members with free
telephone calls instead of the previous “Cashback” scheme.
Earnings per share increased by 42% during the year to 17.7p (2007: 12.5p). Our share buy-back
programme, in which we purchased 3.1m shares at an average cost of 182p per share, improved
earnings per share by 2.3% this year, however this was offset by a higher effective tax rate of
28.7% (2007: 25.7%).
Customer numbers have been moving ahead steadily since the changes we announced at our
sales conference in October, with the rate of growth increasing as we moved through the first
quarter of 2008. Residential Club membership increased by over 9% during the year to 158,972
(2007: 145,317) and our Business Club membership grew by almost 50% during the year to
9,537 (2007: 6,388); together, these clubs (trading under the Utility Warehouse brand) now
account for over 77% (2007: 72%) of our total customer base We are particularly encouraged by
the recent strong growth in the number of services we are providing, which reached 591,981
(2007: 542,039) by the year end; of this total, over 22,000 were added during the last quarter of
the year (more than twice as many as were added during the whole of the first six months),
representing an annualised growth rate of more than 15%.
During the year we continued to focus on the quality of our customer base. This has shown a
steady improvement as measured by the proportion of our customers who are taking more than
one service which has risen from 67% to 71%, the average number of services taken by each
member which has increased to 3.11 (2007: 2.95) and the average spend per customer which has
grown to £824 (2007: £801). We have also invested significant additional resources in improving
our UK-based customer service team. As a result, we have seen a significant reduction in
customer churn over the last six months to an annualised rate of around 20%.
Oxford Power Holdings (“Opus”), in which we maintain a 20% interest, has continued to produce
extremely satisfactory results. Our share of their profits increased to £939,000 (2007: £473,000)
and Opus declared its first dividend on 31 March 2008. On 31 December 2007, strong cash
generation enabled Opus to repay its £2m loan to the Company which we had made to them at
the time of our original investment in February 2003.
Year-end net cash balances increased by £4.5m to £30.3m (2007: £25.8m), notwithstanding
spending £5.7m on repurchasing shares. We still have considerable scope to repurchase further
shares over the coming year, as well as continuing to increase the proportion of our earnings paid
out as dividends.
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Our distributors have become increasingly confident in the overall strength of our customer
proposition, which combines convenience, value and a consistently high quality of customer
service; this has resulted in a substantial increase in activity. We saw a net increase of over 3,000
distributors over the year (2007: net increase of 600), taking the total to around 19,600 (2007:
16,600); this represents an increase of over 18% during the year, all of which took place during
the second half. The current total includes approximately 500 Community Fundraisers, a new
business opportunity we introduced in October 2007 to enable local organisations (e.g. schools,
sports clubs, religious bodies and charities) to raise funds by promoting the benefits of using our
services within their communities.
Our infrastructure and systems were originally developed to enable us to manage a significantly
larger number of customers than those currently using our services, which means we have the
potential to benefit from further economies of scale by growing our customer numbers and the
number of services we provide. This remains a key priority for the coming year.
Recently published customer satisfaction surveys compare us favourably against our competitors.
We intend to capitalise on these positive opinions by enhancing the benefits available under our
recently introduced customer referral programme through offering existing members, who
successfully recommend a new customer to us, a discount on their own monthly utility bill – a
discount which increases with the number of new customers they introduce. This initiative will be
supported by the inbound tele-sales fulfilment team we established late last year, which enables
potential new customers to sign up for our services with the minimum of effort or inconvenience.
We have also recently introduced new systems designed to encourage “New Occupiers” (potential
customers who have moved into a property where we are the incumbent utility supplier) to
become Club members, rather than reverting back to their previous supplier(s). Notwithstanding
the slowdown in the housing market recently, this initiative is expected to have a positive impact
on our net growth, as around 4% of our residential customers move home each year.
Once again I would like to thank our staff and distributors for the loyalty they have shown, and
the continuing contribution they are making to the success of the Company.
Dividend
We are proposing a final dividend of 10p for the year (2007: 6p) making a total for the year of
14p (2006: 8p). This represents an increase of 75% in our total payment compared with last year.
The final dividend will be paid on 8 August 2008 to shareholders on the register at the close of
business on 11 July 2008 and is subject to approval by shareholders at the Company’s Annual
General Meeting which is being held on 9 July 2008.
In the context of the strong growth and cash generation currently being achieved, and subject to
unforeseen circumstances, we intend to pay a total dividend of not less than 17.5p for the current
financial year and not less than 22p for the year to 31 March 2010.
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Summary and Outlook
The nature of our business model gives us considerable visibility over our future revenues, and it
is extremely encouraging that we have been able to maintain our margins in all of the business
areas in which we operate.
The forward price curves for gas and electricity suggest there are likely to be further industry wide
increases in retail energy prices this autumn. However we remain insulated from any volatility in
the wholesale energy markets under our long-term supply arrangements with npower, where they
are responsible for meeting the energy requirements of our customers in accordance with a price
formula designed to ensure we earn a positive margin whilst maintaining competitive retail prices.
We are still the UK’s only fully integrated multi-service utility provider, able to offer our customers
consistent value across a wide range of services with the added convenience of receiving just a
single clear and concise bill each month. Our distribution channel has demonstrated its continuing
ability to gather high quality new customers, cost-effectively and in increasing volumes; this gives
us a considerable competitive advantage in the domestic market.
The combination of higher growth in the number of services we provide and the lower churn which
we have seen in recent months will, if these trends continue, feed through into significantly higher
turnover and profits over the coming years. We would logically expect to benefit from the difficult
general economic environment as consumers search for better value suppliers in order to reduce
their outgoings, and the tendency amongst those whose standard of living is being squeezed to
seek additional sources of income such as that provided by becoming one of our distributors.
Indeed, March 2008 saw us recruit more new distributors than in any other single month during
the last three years.
Since the year end we have seen a further increase in activity, with encouraging growth in the
number of new services and new distributors. We are more confident than we have ever
previously been in the ability of our business to deliver continuing satisfactory results.
Peter Nutting
Chairman
22 May 2008
6
Business Review
Performance
Overall performance for the year has been extremely encouraging in a number of key respects:
• record Group pre-tax profits and turnover of £16.8m and £186m respectively
• cash generation of £17.0m before share buy-backs of £5.7m and dividend
payments of £6.8m
• significant growth in the number of distributors promoting our services
• substantial reduction in churn
• 9% increase in the number of services we provide over the full year
• successful launch of new Community Fundraiser position
• 49% increase in membership of our Business Club
The year was distinctly one of two halves. During the first six months customer numbers showed a
small decline as we focussed our resources on developing the infrastructure needed to support the
various sales initiatives we were planning to introduce at our annual sales conference in October.
During the second half, we saw the impact of those initiatives on our business with higher
distributor activity, higher customer growth and lower churn. Indeed, the annualised rate of
growth in the number of new services we provide increased to over 15% during the final quarter
of the year.
Margins
Margins improved during the year in our fixed telephony business, reflecting the continuing
competitive pressures on the owners of network infrastructure to attract and retain call traffic
from the dwindling number of substantial independent resellers like ourselves. Energy margins
improved slightly over the full year, reflecting increasing economies of scale in our energy
business combined with the impact of higher industry energy prices which we passed on to our
customers in the final quarter of the year. Broadband margins also improved slightly, as we were
able to negotiate reductions in our cost base ahead of those required to maintain competitive
retail prices. Overall however the gross margin reduced slightly reflecting the increasing shift in
the balance of our turnover from telephony (which has relatively high margins) towards energy
(where the margins are lower), exacerbated by the recent trend towards higher retail energy
prices and our introduction of “Free UK Calls” as a replacement for “Cashback”.
The Market
Our focus is on supplying a wide range of essential utility services (gas, electricity, fixed
telephony, mobile telephony and internet) to both domestic and small business customers. These
are substantial markets and represent a considerable opportunity for further organic growth.
We remain a small operator in a market dominated by the former monopoly suppliers, however
our unique position as the only integrated multi-utility supplier gives us a considerable competitive
advantage. We combine a highly efficient cost base, good customer service and competitive
pricing with the convenience of a single monthly bill for each customer.
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We estimate that the approximate size of the UK domestic market for the principal services we
provide is around £40.6bn as follows:
Number of Households Retail Market Value
Gas 21.5m £11.7bn
Electricity 26.7m £14.2bn
Home Phone - Calls 23.4m £3.0bn
Home Phone - Line Rental (Lines) 23.4m £2.8bn
Mobile (excluding Pre-Pay) 24.0m £6.1bn
Broadband 15.6m £2.8bn
Retail market values based on average prices charged by us to customers for each service during the year ended 31 March
2008. Sources for No. of households: Ofgem domestic retail market report 2007; Ofcom Telecoms market report Q4:2007
Our Customers
The majority of our customers choose to take advantage of our multi-service proposition, with
over 77% having joined our Discount Club since its launch in October 2003.
On average each member takes 3.11 services (2007: 2.95) with 83% taking two or more
services, and 55% taking three or more services. These figures are illustrated by the analysis
below, which demonstrates the effectiveness of our Club concept in encouraging customers to
subscribe for additional services:
Members Non-Members
1 Service 17% 61%
2 Services 28% 29%
3 Services 17% 7%
4 Services 16% 2%
5 Services 18% 1%
6 Services 3% -
7 Services 1% -
At the year end we had 168,509 members and 49,348 non-members. Non-members relate to customers gathered prior to
the launch of our Discount Club in October 2003 or who have moved into a property where we were the incumbent utility
supplier, and have not yet applied to join the Discount Club.
This growth in services has led to a further increase in average revenue per customer,
notwithstanding considerable price deflation in the fixed telephony markets over the last ten years
and the reduction in retail energy prices in spring 2007.
Year Average Revenue per
Customer
1999 £190
2000 £286
2001 £316
2002 £329
2003 £459
2004 £482
2005 £505
2006 £634
2007 £801
2008 £824
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We enjoy high levels of overall customer satisfaction, as evidenced by the relatively low churn we
experience. Our overall monthly churn has fallen to around 1.8% during recent months, which
compares with an average within the energy industry (amongst customers who have switched
away from their original supplier) of around 5% per month.
We substantially increased the range of benefits available to our members during the year, with
the introduction of an exclusive discount booklet providing savings on a wide range of everyday
purchases. We also introduced new premium membership categories with enhanced benefits for
those members choosing to participate, including free Accidental Death Cover and freephone
technical support. We are encouraged that over 10% of all new customers who have joined since
our October sales conference have chosen one of the premium membership categories.
Services
Our range of essential utility services includes fixed telephony (calls and line rental), mobile
telephony, gas, electricity and broadband. At the year end we supplied a total of 591,981 services
(2007: 542,039), representing an increase of over 9% during the course of the year.
As can be seen from the above table, we experienced a small reduction in the number of mobile
and home phone telephony services, partly due to the increasing tendency of our main
competitors to tie customers into onerous long-tem contracts whenever possible, offset by strong
growth in the number of customers to whom we supply gas, electricity, broadband and fixed line
rental.
Included within the above figures are 9,537 members of our Business Club, who are taking in
aggregate over 26,000 services and contributing £11.1m (2007: £5.8m) to Group turnover. We
are extremely encouraged by this strong performance, and the continuing enthusiastic response of
our distribution channel to this opportunity. In order to support their activities in this segment of
the market, we launched a new sales tool in March 2008 which enables them to provide potential
business customers with a comprehensive personalised proposal covering our full range of
services, clearly setting out the benefits and savings the customer will receive from us. This
should assist our distributors to increase their penetration into this profitable sector of the
UK market, where there are over one million home-based, small and medium-sized businesses.
The introduction of this new sales tool gives us considerable confidence that this sector of the
market will make an increasingly significant contribution to the Group in due course.
2008 2007
Services:
Gas 113,761 98,095
Electricity 133,873 115,643
Home phone 155,035 158,896
Fixed line rental 87,108 71,557
Freephone 10,282 10,670
Mobile 36,358 40,418
Broadband 55,564 46,760
Total 591,981 542,039
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Customer Service
We pride ourselves on delivering first-class customer service through a single call centre, based in
the UK. Our policy is to ensure that the first person a customer speaks to is able to resolve any
issues with their account, irrespective of how many different services we are providing to them.
We continue to invest in improving our customer service resources, and have developed specialist
teams capable of dealing with some of the more complicated problems which arise due to
continuing inefficiencies in the standard industry processes for switching customers between
suppliers. We are also developing our range of qualitative and quantitative performance
measurement tools for our Call Centre, so that we can further improve the overall quality of our
members’ customer service experience.
Our People
We rely on the combined efforts of over 300 employees to manage relationships with both our
customers and distributors, and deliver a consistently high quality of service at all times. We pay
considerable attention to recruiting and retaining appropriate people.
The combination of valuing and developing our staff, our service oriented culture and the day-today
reinforcement of our core values are key competitive advantages in enabling us to attract and
retain a motivated, talented and diverse workforce. Opportunities for employment, training,
career progression and promotion are determined on the basis of each individual’s ability, attitude
and track record, irrespective of their gender, ethnic origin, nationality, age, religion, sexual
orientation or disability.
Employees are kept informed on a regular basis of the financial performance of the business and
other matters of potential concern to them through internal communication channels including
email and the Company’s intranet service. We also have an established staff forum, which
includes a representative from each department in the Company, to enable employees to give
their views on any major changes being considered by management which might have a material
impact on their roles within the organisation.
We continue to invest in our premises to ensure the working environment is as attractive as
possible, consistent with the practical needs of running the business. We are currently mid-way
through a rolling programme that will see most of our current office accommodation
comprehensively refurbished.
The Company operates an HM Revenue and Customs approved employee share option plan, under
which employees are granted an option to purchase shares in the Company between three and
ten years from the date of grant. The exercise price is the market price at the time of granting the
option. Our policy is to issue options to all employees after the satisfactory completion of their
probationary period, without any performance conditions being attached to the exercise thereof.
As at 31 March 2008, there were outstanding options over 1,424,000 shares which had been
granted to staff, representing approximately 2% of the issued share capital of the Company.
Due to low utilisation of the subsidised crèche introduced last year, the Company has decided to
replace this with a new scheme. Employees returning from maternity leave with children less than
12 months old will in future be able to benefit from a company contribution towards the cost of an
external childcare service provider of their choice. We also provide facilities for staff to purchase
childcare vouchers in a tax-efficient manner using a salary sacrifice scheme, in accordance with
HM Revenue and Customs guidelines.
We also encourage all employees to participate in a stakeholder pension scheme operated by
Legal & General. Participants can choose their own contribution level which is matched by the
Company within certain limits, depending on length of service.
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Our Distributors
Our distributors remain one of our key strengths. In contrast to other utility suppliers, the
alignment of financial interests provided by our revenue-sharing model ensures that our
distributors focus their activities on finding credit-worthy and high-spending customers who will
reap the maximum savings from using our services, and will thus be least likely to churn. By doing
so, they maximise their own long-term income. This ensures that cases of mis-selling are
generally inadvertent and extremely rare.
During the autumn, we introduced a new incentive enabling our most active distributors to earn a
place on a luxury holiday or to receive Gift Vouchers from a choice of leading retailers.
Our Car Plan, which provides eligible distributors with a subsidised fully-branded Mini remains
extremely popular, and we have now supplied over 100 cars following the extension of the
programme last autumn to bring it within reach of a substantially larger number of distributors.
Owners find these helpful in raising their local profile, resulting in enquiries from both potential
new customers and distributors.
Distributors have generally seen a considerable increase in their average earnings from each
customer during the last two years as a result of the growth in the number of services taken
combined with rising energy prices. The largest increases in earnings have however been achieved
by those who have been working consistently at building their personal and group customer
numbers. Our unique market position continues to make this predominantly part-time career
extremely attractive to potential new recruits.
We have continued to improve our national training programme (the “College of Excellence”)
during the year with the introduction of new Goal Setting Courses, Accelerator Courses and an
enhanced Leadership training module. These are designed to help our distributors maximise their
potential and provide our next generation of leaders with the additional skills they will need. We
have also increased the frequency of our “Career Opportunity Presentations” and “Getting Started”
training sessions, as well as growing the number of venues at which they are offered, in line with
the demands of the strong growth we have seen in the number of new distributors joining the
business.
The Environment
The environment is becoming an increasingly important concern and we participate in
programmes to help reduce the environmental impact of our activities.
We operate an energy efficiency helpline to provide advice on how customers can reduce their
energy usage, and we also participate actively in the “Shred-it” recycling programme, with a
certificated saving of 88 trees during 2007. We also participate in a mobile phone recycling
scheme which sends old handsets to less developed parts of the world for re-use, rather than
disposing of them in landfill sites.
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Principal Risks
The Group faces various risk factors, both internal and external, which could have a material
impact on long-term performance.
Reputation risk
Telecom plus’s reputation amongst our business partners, suppliers, shareholders and customers
is fundamental to the future success of the Group. Failure to meet expectations in terms of the
services we provide, the way that we do business or in our financial performance could have a
material effect on the Group. These risks are mitigated through our focus on quality customer
service, the training of our staff and our systems of internal control and risk management.
Wholesale prices
The Company does not currently own or operate any network infrastructure itself, choosing
instead to purchase the capacity needed from third parties. The advantage of this approach is that
the Company is not exposed to either technological risk, capacity risk or the risk of obsolescence,
as it can purchase each month the exact amount of each service required to meet its customers’
needs.
Whilst there is a theoretical risk that in some of the areas in which the Company operates it may
be unable to secure access to the necessary infrastructure on commercially attractive terms, in
practice the pricing of access to such infrastructure is either regulated (as in the energy market)
or subject to significant competitive pressures (as in telephony). The profile of our customers, the
significant quantities of each service they consume in aggregate, and our clearly differentiated
route to market has historically proven attractive to potential partners, who compete aggressively
in order to secure a share of our business.
The supply of energy, which has been accounting for an increasing proportion of our sales each
year, has different risks associated with it. The wholesale price can be extremely volatile, and
customer demand can be subject to considerable short term fluctuations depending on the
weather. To avoid these, the Company decided in November 2005 to seek a relationship with a
larger energy supplier which would preserve our integrated multi-utility business model whilst
passing the substantive risks and rewards of hedging and buying energy to them. The transaction
with npower which was completed on 31 March 2006 achieved these objectives, and has enabled
the Company to earn a positive contribution from providing energy since that date.
Bad debt risk on energy customers
The Company has a universal supply obligation in relation to the provision of energy to domestic
customers. This means that although the Company is entitled to request a reasonable deposit
from a potential new customer who is not considered credit worthy, the Company is obliged to
supply domestic energy to anyone who submits a properly completed application form. Where
such customers subsequently fail to pay for the energy they have used (“delinquent customers”),
there is likely to be a considerable delay before the Company is able to eliminate its exposure to
future bad debt from them by either installing a pre-payment meter or disconnecting their supply,
and the costs associated with preventing such delinquent customers from increasing their
indebtedness are not always recoverable.
Bad debt risk on telephony customers
There is regular fraud within the telephony industry which arises from customers using the
services without intending to pay their supplier. Although the amounts involved are generally
small, larger-scale fraud is sometimes attempted involving calls to premium rate and/or
international destinations. The Company has sophisticated systems to prevent material losses
arising as a result of such fraud by processing all call traffic on an hourly or daily basis, and
promptly disconnecting any number whose usage profile appears to be suspicious, although short
delays are sometimes experienced in receiving information from our network partners.
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Information technology risk
The Company is dependent on its proprietary billing and customer management software for the
successful implementation of its business strategy. This software is developed and maintained in
accordance with the changing needs of the business by a small team of highly skilled, motivated
and experienced individuals. Back-ups of both the software and data are made on a regular basis
and securely stored off-site.
Competitive risk
The Group operates in highly competitive markets and significant product innovations or increased
price competition could affect our margins. In order to maintain our competitive position, we
constantly focus on ways of improving our operating efficiency and keeping our cost base as low
as possible.
Legislation and regulatory risk
The Group is subject to varying laws and regulations, including possible adverse effects from
European regulatory intervention.
Risk management
The business continues to develop and operate a consistent and systematic risk management
process, which involves risk ranking, prioritisation and subsequent evaluation, with a view to
ensuring all significant risks have been identified and prioritised, and systems of control are in
place to manage such risks.
Charles Wigoder
Chief Executive
22 May 2008
13
Financial Review
Overview
Revenues of £186m (2007: £176m) were 6% higher in the financial year to 31 March 2008. The
pre-tax profit was £16.8m compared with £11.6m in the last financial year. This increase in
profitability, together with a £2m loan repayment received from Oxford Power Holdings, resulted
in a net cash inflow from operating activities of £15.3m. Overall, our year-end net cash position
increased by £4.5m from £25.8m to £30.3m.
The increase in turnover to £186m was due to the 9% increase in the number of services we
provide, partially offset by the impact of lower energy prices for most of the year.
The gross profit margin fell slightly during the year to 19.3% (2007: 19.8%), reflecting the
increasing proportion of our turnover which now derives from supplying energy, partially offset by
increasing gross margins from the various services we provide. The increase at the operating
profit level was due to increasing economies of scale; these resulted from the rise in the number
of services we are providing, combined with the initial positive benefits from the improved
systems we introduced during the year for managing our exposure to delinquent energy
customers, in respect of which we had made a substantial provision in our 2007 accounts.
Earnings per share increased by 42% to 17.7p (2007: 12.5p). The Company is therefore
proposing a final dividend of 10p (2007: 6p) making a total dividend of 14p for the year (2007:
8p).
Customer Management Business
Revenues from providing both gas and electricity increased by almost 10% during the year, due to
an increase of around 15% in the number of energy services supplied to customers, partially
offset by the impact of the retail energy price reductions which took effect in May and July last
year. We also saw an increase in revenues of over 30% from supplying broadband services and
around 15% from providing fixed telephony line rental. Call revenues in our fixed telephony
businesses fell slightly, primarily reflecting our decision in autumn 2006 to restructure our multiservice
discount scheme to provide Club members with free telephone calls instead of the
previous “Cashback” scheme. Our mobile business however saw a reduction in both revenues and
customer numbers due to the increasingly competitive environment for supplying these services,
combined with the absence of a pre-pay solution within our current mobile product range.
Overall margins in our Customer Management business improved from 7.5% to 9.5% due to
higher telephony margins during the second half of the year, administrative costs (excluding staff
costs) remaining constant despite significant growth in services, and the positive impact of the
improved systems we introduced during the year for managing our exposure to delinquent energy
customers.
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Revenue by Service (£m)
57.7
54.2
31.9
9.2
12.9
7.8
65.8
57.0
29.7
10.6 10.8 10.2
Electricity Gas Fixed Telephony
Calls
Fixed Telephony
Line Rental
Mobile Broadband
2007 2008
Customer Acquisition Business
The net cost in respect of our Customer Acquisition business increased during the year to £3.6m
(2007: £3.1m). This was mainly due to an increase in the number of broadband customers during
the year (where we generally incur significant upfront costs in providing a new router or modem,
as well as third-party connection charges). We introduced a new broadband tariff in October 2007
offering customers a free laptop in return for entering into a two-year service agreement on a
premium tariff. The cost of supplying these laptops has been capitalised and is being amortised
against the profits we earn from supplying their broadband service over the minimum contract
term. The amount included on the balance sheet at 31 March 2008 in respect of these laptops was
£0.6m; all other customer acquisition costs are expensed as incurred.
Operating Expenses
Operating expenses reduced during the year from £24.9m to £22.0m. Higher commission
payments to our distributors, an increase in our bad debt charge in line with the growth in
turnover, and extra payroll costs resulting from our decision to increase the number of staff we
employ (which has enabled us to improve the quality of our customer service and further
strengthen the senior management team) have been more than offset by the decrease in the
provision required for delinquent energy customers representing an improvement of around
£3.2m compared with last year.
We have put considerable resources into reducing our exposure to delinquent energy customers,
through intensive account management combined with an active programme to install prepayment
meters where necessary. We have also created a new team whose key objective is to
establish a customer relationship more quickly with New Occupiers, namely potential customers,
who have moved into a property where we are the incumbent energy supplier. As a result, we
have been able to reduce slightly our delinquent energy provision compared with the previous
year end balance.
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Share Option Costs
The operating profit is stated after share option expenses of £54,000 (2007: £425,000). These
expenses relate to an accounting charge under IFRS 2 'Share based payments'.
Taxation
The amount of corporation tax payable in respect of the year is £5.1m (2007: £3.6m).
The effective tax rate for the year is 28.7% (2007: 25.7%) which is principally due to credit
adjustments in respect of prior years included in the 2007 tax charge and a decrease in the
deferred tax credit following the reduction in Corporation tax from 30% to 28% on 1 April 2008.
Share Purchase Programme
Following authorisation received at last year’s AGM, the Company spent £5.7m on purchasing a
total of 3,084,000 shares between 20 July 2007 and 7 January 2008, at prices between 175p and
192.5p per share. The purchased shares are held in treasury.
By 31 March 2008, 204,132 of the shares held in treasury had been used to satisfy exercises
under the Company’s two share option plans.
Cash Flow and Balance Sheet
The operating profit of £14.0m (2007: £10.0m) together with repayment of a £2m long-term loan
received from Oxford Power Holdings, resulted in a net cash inflow from operating activities of
£15.3m (2007: £20.8m). The comparative net cash inflow figure for 2007 benefited from the
unwinding of our historic energy purchasing commitments following the transfer of buying
responsibility to npower.
Our net cash position increased at the year end by £4.5m from £25.8m to £30.3m, despite
investing £5.7m to purchase our own shares.
The March cash position was also adversely affected by energy customers who pay by Budget
Plan, where the high proportion of annual energy consumption used during the winter period
means that our energy debtors reach a peak at the end of each winter before falling as we move
through the spring and summer months. Winter this year was broadly in line with seasonal normal
temperatures (following a particularly mild winter the previous year), which has had a negative
impact of around £4m on the Company’s cash position at the year end compared with the position
at the end of March 2007.
The Group does not have a policy with respect to interest rate management as it currently has no
debt funding requirements. Cash surpluses are placed on deposit with Barclays Bank plc at money
market rates to maximise returns, after allowing for the Company’s working capital requirements.
Richard Hateley
Finance Director
22 May 2008
16
Consolidated income statement
For the year ended 31 March 2008
Note
2008
2007
£’000 £’000
Revenue 1 186,458 176,065
Cost of sales 150,478 141,136
Gross profit 35,980 34,929
Distribution expenses 8,566 8,327
Administrative expenses 13,454 16,584
Operating profit 1 13,960 10,018
Financial income 1,865 1,105
Financial expenses 2 6
Net financial income 1,863 1,099
Share of profit of associate 939 473
Profit before taxation 16,762 11,590
Taxation (4,808) (2,982)
Profit for the year 11,954 8,608
Basic earnings per share 2 17.7p 12.5p
Diluted earnings per share 2 17.6p 12.5p
Statement of recognised income and expense
For the year ended 31 March 2008
Group Company
Note 2008 2007 2008 2007
£’000 £’000 £’000 £’000
Profit for the year 11,954 8,608 10,805 7,551
Deferred tax on share options recognised directly in
equity 211 18 211 18
Total recognised income and expense for the
year 12,165 8,626 11,016 7,569
17
Balance sheet
As at 31 March 2008
Group Company
Note 2008 2007 2008 2007
£’000 £’000 £’000 £’000
Assets
Non-current assets
Property, plant and equipment 866 884 866 884
Goodwill and intangible assets 3,749 3,761 7 19
Investment in associate 1,815 1,422 1,047 1,047
Deferred tax 1,361 904 1,350 890
Other receivables 1,036 858 1,035 858
Total non-current assets 8,827 7,829 4,305 3,698
Current assets
Inventories 175 202 175 202
Trade and other receivables 5,126 3,258 5,659 4,621
Prepayments and accrued income 25,478 28,649 24,411 27,567
Cash 30,331 25,801 30,329 25,796
Total current assets 61,110 57,910 60,574 58,186
Total assets 69,937 65,739 64,879 61,884
Current liabilities
Trade and other payables 6,075 3,727 5,439 2,792
Current tax payable 3,019 1,969 2,723 1,842
Accrued expenses and deferred income 28,409 27,695 27,373 26,843
Total current liabilities 37,503 33,391 35,535 31,477
Total assets less total liabilities 32,434 32,348 29,344 30,407
Equity
Share capital 3,452 3,446 3,452 3,446
Share premium 2 19,444 2 19,444
Treasury shares (5,286) - (5,286) -
Retained earnings 34,266 9,458 31,176 7,517
Total equity 32,434 32,348 29,344 30,407
These accounts were approved and authorised for issue by the Board on 22 May 2008
Charles Wigoder Director
Richard Hateley Director
18
Statement of cash flows
For the year ended 31 March 2008
Group Company
2008 2007 2008 2007
£’000 £’000 £’000 £’000
Operating activities
Operating profit 13,960 10,018 12,918 9,597
Depreciation of property, plant and equipment 480 447 480 447
Amortisation of intangible assets 12 133 12 133
Distribution from associated company 546 - 546 -
Profit on disposal of property, plant and equipment (1) (44) (1) (44)
Decrease in inventories 27 310 27 310
Decrease in trade and other receivables 1,127 218 1,272 36
Increase in trade and other payables 3,065 10,647 3,179 10,661
Repayment of inter-company receivable - - 670 871
Costs attributed to the issue of share options 54 425 54 425
Corporation tax paid (4,009) (1,402) (3,893) (1,680)
Net cash flow from operating activities 15,261 20,752 15,264 20,756
Investing activities
Investment in associates - (9) - (9)
Purchase of property, plant and equipment (464) (341) (464) (341)
Sale of property, plant and equipment 3 70 3 70
Cash flow from investing activities (461) (280) (461) (280)
Financing activities
Dividends paid (6,815) (2,062) (6,815) (2,062)
Interest received 1,865 1,105 1,865 1,105
Interest paid (2) (6) (2) (6)
Issue of ordinary shares 122 404 122 404
Purchase of own shares (5,659) - (5,659) -
Issue of treasury shares 219 - 219 -
Cash flow from financing activities (10,270) (559) (10,270) (559)
Increase in cash and cash equivalents 4,530 19,913 4,533 19,917
Cash and cash equivalents at the beginning of the
year
25,801 5,888 25,796 5,879
Cash and cash equivalents at the end of the year 30,331 25,801 30,329 25,796
19
Notes to the consolidated financial statements
1. Segment reporting
For management reporting purposes, the Group is currently organised into two operating
divisions:
• Customer Management
• Customer Acquisition
These divisions are the basis on which the Group reports its primary segmental information.
Business segments
Year ended 31 March 2008 Year ended 31 March 2007
Customer
Management
Customer
Acquisition Total
Customer
Management
Customer
Acquisition Total
£’000 £’000 £’000 £’000 £’000 £’000
Revenue:
External sales 184,145 2,313 186,458 173,735 2,330 176,065
Segment result 17,566 (3,606) 13,960 13,107 (3,089) 10,018
Operating profit 13,960 10,018
Net financing income 1,863 1,099
Share of profit of associates 939 473
Taxation (4,808) (2,982)
Profit for the year 11,954 8,608
Segment assets 66,595 1,527 68,122 63,008 1,309 64,317
Investment in equity
method associates 1,815 - 1,815 1,422 - 1,422
Total assets 68,410 1,527 69,937 64,430 1,309 65,739
Segment liabilities (37,217) (286) (37,503) (33,079) (312) (33,391)
Capital expenditure 458 6 464 336 5 341
Depreciation and
amortisation 486 6 492 572 8 580
The share of profit of associates relates to the Customer Management business segment.
All turnover is derived in the United Kingdom and substantially arises from the provision of
services.
20
Notes to the consolidated financial statements
2. Earnings per share
Basic earnings per share
The calculation of basic earnings per share at 31 March 2008 was based on the profit
attributable to ordinary shareholders of £11,954,000 (2007: £8,608,000) and a weighted
average number of ordinary shares outstanding during the year ended 31 March 2008 of
67,407,883 (2007: 68,606,607).
2008 2007
Basic earnings per share 17.7p 12.5p
Diluted earnings per share 17.6p 12.5p
Diluted earnings per share
Diluted earnings per share assumes dilutive options have been converted into ordinary shares.
The calculations are as follows:
2008 2007
Profit
£’000
Number
of shares
(‘000)
Profit
£’000
Number
of shares
(‘000)
Basic earnings 11,954 67,408 8,608 68,607
Dilutive effects – Options 353 - 171
Diluted earnings 11,954 67,761 8,608 68,778
The share options may be dilutive in future periods.
3. Basis of preparation
The financial information set out above does not constitute the Group’s statutory information for
the years ended 31 March 2008 or 2007, but is derived from these accounts. Statutory accounts
for 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered
following the Company's annual general meeting. The auditors have reported on these accounts,
their reports were unqualified and did not contain statements under the Companies Act 1985,
s237(2) or (3).

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Date: 24/05/2008
Category: BUSINESS ADVERTORIAL