Annual Report and Accounts 2015

Annual Report and Accounts 2015
Driving success in
a growing market
Gamma Communications plc
Annual Report and Accounts 2015
Gamma is an AIMlisted communications
£191.8m
company.
Financial highlights
Overall revenue grew from £173.2m
in 2014 to £191.8m (up 11%).
We are a leading
supplier of business
communications
services to the
UK market.
Welcome to our
2015 Annual Report.
£82.3m
Gross profit improved from £67.6m
to £82.3m (up 22%).
£29.9m
Unadjusted EBITDA grew by 67%
from £17.9m to £29.9m.
£28.3m
Adjusted EBITDA grew by 23%
from £23.1m to £28.3m.
£28.2m
Net cash inflow from operating activities
was £28.2m, up 72% from £16.4m in 2014.
£22.6m
PBT grew by 97% from £11.5m to £22.6m.
Read more at gamma.co.uk
Contents
Key stories in this
year’s report:
p5
Taylor
Wimpey:
our new
FTSE 100
client signs up
p9
p15
Increased
potential for
public sector
contracts
Development
of core
infrastructure
for mobile
network
Strategic report 2
Financial statements Our business at a glance
Market overview
Chairman’s statement
Business model
Chief Executive Officer’s review
Strategy for growth
Key performance indicators
Performance metrics
Principal risks and uncertainties
Business unit review
Indirect channel business unit
Direct channel business unit
Financial review
Corporate social responsibility
2
4
6
8
10
14
16
17
18
20
22
24
26
28
Independent auditor’s report Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of cash flows
Consolidated statement of changes in equity
Notes forming part of the financial statements
Company balance sheet
Company statement of changes in equity
Notes forming part of the Company financial statements
Corporate governance Chairman’s introduction to corporate governance
Board of Directors
Senior management
Corporate governance report
Audit Committee report
Remuneration Committee report
Directors’ report
Statement of Directors’ responsibilities
31
31
32
34
36
38
40
48
50
Supplementary information
Glossary of terms
Company information
51
51
52
53
54
55
56
82
83
84
86
86
IBC
Our business at a glance
Who we are and
what we do
Who and where we are
670 staff
As of December 2015, Gamma had
670 staff.
6 sites
We have five main sites in the UK
with one small development team
in Budapest.
Gamma is a rapidly growing,
technology-based provider
of advanced communications
services to the UK business
market. We create simplified
communications and software
services for business.
What makes us different
What we do for
our customers
The way people work, communicate and
collaborate is undergoing profound change.
It is all in the quest for increased business
productivity and efficiency while at the
same time reducing operational and
IT costs.
We supply a broad range of
communications to small, medium and
large-sized business customers, the public
sector and not-for-profit organisations,
both through our large network of channel
partners and direct. Our products include
fixed telephony, IP telephony, Cloud
PBX solutions, broadband and data
connections, mobile services, and
unified communications solutions.
• Outstanding customer
service
• Excellent network
availability and resilience
• Innovative services
• Commercial strength
and stability
• Strong balance sheet and
consistent market strategy
Creating simplified communications for business
Fixed connection
Local
connection
National
network
Mobile connection
Customer’s
site(s)
2
Portal
Gamma Core
Network
– Services
– Applications
– Interconnects
Strategic report
Corporate governance
Financial statements
9.7m
£819m
Mobile business connections in UK.
The anticipated UK SIP market size is
£819m per annum by 2018.
A history of Gamma
2001—2002
•Initially formed through selective
acquisition of UK national network assets
and relevant staff from the administrators
of Atlantic Telecom.
2003—2004
•Agreement with Telia to enable its
channel partners to transfer their UK
voice services to Gamma.
•Won major supply contracts with Tiscali,
AOL and Pipex.
•Acquired a direct sales channel through
the acquisition of Uniworld Communications
Limited for £10.4m.
We lead on network strength
Business model
page 8
2005—2006
•Invested £10m into the core network
to position the business for next
generation services.
•Acquired the IPR on billing and support
systems, and specialist software skills
in Budapest.
DATA
2007—2008
VOICE
•First phase SIP Trunking launched.
•Full carbon offset, becoming first carbonneutral carrier.
Manchester
Milton Keynes
Birmingham
2009—2010
Bristol
London
•Launched Inbound Call Control Services.
•Expanded to 350 channel partners.
Portsmouth
2011—2014
MOBILE
DATA
• Data access products are designed
to assure quality of service for
our voice services and provide
a single support structure
• Data service architecture is fully
integrated with our national
voice network, allowing a
fully-converged service offering
• Fully-resilient solution delivered
into more than one network node
• High capacity MPLS core network
(10Tb capable routers)
MOBILE
• 4G data service
• Gamma owns mobile core network
giving us the same control as we
have over fixed voice services
(routing of all calls, text and data
traffic onto the Gamma network)
• Gamma Mobile is independent
from mobile operator control
• Primary mobile network is with 3
• Premium MultiNet provides
access to multiple networks
in one single SIM
• Direct peering with key content
providers as well as geographically
diverse internet transit
• POP sites around UK
• Primary and secondary
interconnect points
Gamma Communications plc Annual Report and Accounts 2015
VOICE
• Our voice product platforms (SIP
Trunking, Hosted telephony and
Inbound) are an integral part of our
national voice and data network
• Our underlying voice switching
fabric is a carrier class,
highly resilient, distributed,
next generation, national
softswitch network
• We are part of the UK’s national
switching infrastructure
• Interconnects with all major
UK, international, fixed
and mobile carriers
• We process over 2 million calls
during the peak business hours
•Broadened the portfolio substantially
to include data services, Cloud PBX
(branded Horizon) and Mobile.
•Acquisition of Varidion Limited, a small
systems integrator and wide area data
specialist, thereby strengthening the
Company’s capability with large
Enterprise and public sector customers.
•Launch of “The Loop” in Manchester
to exploit the extensive fibre and ducting
assets the Group has in the city.
•Acquisition of a mobile infrastructure
enabling Gamma to develop and manage
a range of mobile services, effectively
becoming a full MVNO.
•Listed on the Alternative Investment
Market (“AIM”).
2015
•Launch of Converged Private
Networks, providing secure, multi-site
data connectivity.
•Gaining a strong position on the new
Government Crown Commercial Services
framework (RM1045) opens up new
markets in the public sector.
3
Market overview
Understanding
and responding
in a fast-moving
industry
Our services are designed to meet
the needs of the UK business market,
from small businesses to national
enterprises. We do not compete in
either the residential market or the
international market. Our focus is on
software-based services that we can
supply from the core of our network
(i.e. cloud-based) and we minimise our
involvement with equipment on the
customer’s premises.
SIP Trunking: Business Grade VoIP
SIP Trunking is increasingly being used by
business customers to replace traditional
ISDN lines. At the end of 2015, there
were estimated to be 1.95m SIP Trunking
channels deployed in the UK, of which
Gamma has a 19% share and is the market
leader. The broader directly relevant
market, however, is the 2.9m business
ISDN channels for which SIP Trunking
offers a modern, more cost-effective
alternative. Gamma’s growth rate in sales
of SIP Trunking services in 2015 was 54%.
Major trends impacting
growth in our market:
Cloud PBX: A phone system in the Cloud
The total UK business PBX market
(including on-premise and hosted) is
approximately 17.6m seats, of which
close to 2.2m are hosted PBX seats.
Cloud PBX services are increasingly
replacing traditional, on-premise PBX
infrastructure with seat volumes growing
at circa 32% per annum including private
Cloud PBXs. In 2015, Gamma’s growth
rate in Cloud PBX seats was 67%.
• Growing convergence of
communications and IT
Inbound
The market for Inbound Call Control
Services ranges from large enterprises to
small organisations for which professionally
managing inbound calls (such as for sales
and customer services) is important as it
enables them to queue, record and route
calls effectively. Gamma grew the base of
telephone numbers in 2015 by over 30%.
• The shift of hardware to
the Cloud
•A
vailability of optical fibre
access for businesses
• The growth in
smartphones
75%
of SMEs have adopted one or more
Cloud service.
£8.5bn
calls and lines total market size.
30%
of all broadband connections are
now superfast.
4
Ethernet
Ethernet is becoming the dominant Wide
Area Network transmission technology
because it can transport large amounts
of any type of data in a fast, assured and
economic manner. Ethernet connectivity
between Local Area Networks enables
multiple services and applications to
operate seamlessly across different
geographical locations. Gamma has
substantially increased Ethernet
connections in the past 12 months,
and views Ethernet as a key enabling
technology for its more strategic services
such as SIP Trunking and Cloud PBX.
Broadband
Gamma offers a quality business-grade
broadband service and does not compete
for the residential market. Connections
grew by 37% in 2015.
Mobile services
Gamma acts as a virtual operator, either
under its own brand or that of its channel
partner. In 2015, Gamma’s market share
of the UK business market stood at just
0.7%, leaving plenty of opportunity for
further growth. At the end of 2014, Gamma
acquired a mobile infrastructure enabling it
to develop and manage a range of mobile
services, effectively becoming a full MVNO.
The first of these services will be launched
in the first half of 2016.
Routes to market
Gamma sells all of its products through
both the indirect channels (via 834 channel
partners) which generates 79% of its
revenue, as well as selling to end users
through the direct channel.
Strategic report
Corporate governance
Continued growth
Our new FTSE 100
customer for 2015:
Taylor Wimpey
Financial statements
“We evaluated all the usual suspects to find
a partner capable of transforming our
communications estate to help us achieve
our operational, commercial and business goals
for the coming years. Gamma then delivered
leading capabilities throughout the whole
process whilst being sympathetic to the
sizeable change we knew this would bring to
our business. We are delighted with Gamma and
have a strong partnership with them as they
deliver significant benefits to our business.”
Andrew Feldon
IT Director of Taylor Wimpey plc
Gamma Communications plc Annual Report and Accounts 2015
5
Chairman’s statement
An exciting year
for Gamma
2015 has been an excellent year
for Gamma, with revenue and profit
continuing to increase.
Introduction
I am very pleased to present the
full year report on the results of
Gamma Communications plc for the
year ended 31 December 2015, my first
following its successful IPO and listing
on the AIM on 10 October 2014.
Gamma operates in the very dynamic
UK communications market; a market
that is increasingly hard to define as the
boundary between communications
and IT blurs. This presents many new
opportunities.
Richard Last
Chairman and Independent
Non-Executive Director
1st place
in the Comms Business Awards for ‘most
innovative cloud product’ which
recognises excellence in the channel.
100
Gamma was recognised as one of
‘The Sunday Times Best 100 Companies
to Work For – 2015’.
6
Overview of results
Group turnover for the year ended
31 December 2015 increased by £18.6m
to £191.8m (2014: £173.2m), an increase
of 10.7% on the prior year. Of this increase
£15.1m came from the indirect channels
business where turnover increased to
£152.0m (2014: £136.9m), while £3.5m
came from the direct business which
saw turnover increase to £39.8m
(2014: £36.3m). Gross profit for the year
to 31 December 2015 rose to £82.3m an
increase of 21.7% compared to the £67.6m
achieved in 2014, whilst the gross margin
increased to 42.9% (2014: 39.0%).
Adjusted EBITDA, (being before
exceptional items and share based
payments) for the Group increased
by 22.5% to £28.3m (2014: £23.1m).
Adjusted fully diluted earnings per share
for the year ended 31 December 2015
increased by 19.3% to 17.9p (2014: 15.0p)
(EPS is adjusted for share based
payments, exceptional items and
the tax effect thereon).
The net operating cash inflow (pre-tax
and non-recurring income from the ladder
pricing settlement) for the year was £25.3m
compared to £19.4m in 2014.
This represents a cash to adjusted EBITDA
conversion ratio in respect of 2015 of 89%,
compared to 84% for 2014. Net cash
as at 31 December 2015 amounted to
£24.8m, which is significantly up from
£13.4m as at 31 December 2014.
Dividend
As stated at the time of the IPO, Gamma is
committed to a progressive dividend policy.
The Board is therefore pleased to propose
a final dividend, in respect of the year
ended 31 December 2015, of 4.4p per
share (2014: 3.95p) which, subject to the
necessary shareholder approval at the
forthcoming AGM, will be payable on
23 June 2016 to shareholders on the
register on Friday 3 June 2016. When
added to the 2.2p interim dividend this
makes a total dividend of 6.6p for the
year as a whole.
Exceptional gain
Gamma had previously reported a
contingent asset which related to ladder
pricing. Ladder pricing was a mechanism
which was used by fixed line operators
to bill other operators for calls to certain 08
numbers. Gamma had been in commercial
negotiations for a settlement in regard to
its ladder pricing policy with the affected
operators and these have now concluded,
resulting in an exceptional gain to
Gamma of £5.7m for the year ending
31 December 2015.
Business development
I am pleased that the business has grown
across a range of fronts, the number of
channel partners has grown as has the
average volume of trading with each
partner. The shift to more strategic products
continues and the direct business has
grown successfully, winning larger
accounts, such as Taylor Wimpey in the
Enterprise market and Peabody Housing
in the charity sector.
Strategic report
Corporate governance
Financial statements
Chairman’s introduction
to corporate governance
page 31
Gaining a strong position on the new
Government Crown Commercial Services
framework (RM1045) opens up new
markets in the public sector, both directly
and through our channel partners, and
we have strengthened our sales team
in this area.
The senior executives, managers and
employees are the bedrock of Gamma
and they have significantly contributed
to the creation of the successful company
we have today. I should like to thank them
for their consistent hard work and
continued support.
In December 2014 Gamma purchased
the control equipment that provides the
core of a mobile network. The Board is very
pleased with the progress that was made
during 2015 in building this capability into
a “full MVNO” ready for a planned service
launch in June 2016.
Gamma is fully supportive of apprenticeship
schemes and employee volunteering
within the local community and has a
policy of matched funding for charitable
activities by staff. Employee motivation
and development are fundamental
principles of Gamma and lead to a
stronger and more successful business.
Given BT’s acquisition of EE, the
timing of that launch is very opportune.
Business customers are increasingly
looking to buy all their communications
services from a single supplier and this
new mobile capability positions Gamma
as one of only a small number of operators
that have full technical capability across
fixed telephony, mobile telephony and
data services.
Board and employees
On 1 December 2015 I was delighted
to welcome Richard Bligh onto the Board
as Chief Operating Officer reporting to
Bob Falconer, Chief Executive Officer.
Richard had previously been the
Company’s Group Marketing Director
and Managing Director of Gamma’s Direct
Mid-Market Channel. Richard has been
with Gamma since 2004 and has over
20 years’ experience in telecoms
in a variety of marketing and business
development roles.
Outlook
The Board looks forward enthusiastically
to 2016 and beyond. The emerging market
for converged fixed and mobile services
presents many opportunities, and Gamma
is well placed to exploit these with its clear
focus on the UK business market and its
commitment to new product development.
We believe that Gamma has the
experience, resources and capabilities
to continue to achieve its objectives.
Richard Last
Chairman and Independent
Non-Executive Director
Board of Directors
Richard Last
Chairman and Independent
Non-Executive Director
•Chairman of the Nomination Committee
•Member of the Audit Committee
•Member of the Remuneration Committee
Bob Falconer
Chief Executive Officer
Andrew Belshaw
Chief Financial Officer
Richard Bligh
Chief Operating Officer
Alan Gibbins
Independent Non-Executive Director
• Chairman of the Audit Committee
• Member of the Nomination Committee
•Member of the Remuneration Committee
Martin Lea
Independent Non-Executive Director
• Chairman of the
Remuneration Committee
• Member of the Nomination Committee
•Member of the Audit Committee
Andrew Stone
Non-Independent Non-Executive Director
• Member of Nomination Committee
Wu Long Peng
Non-Independent Non-Executive Director
• Member of Nomination Committee
Gamma Communications plc Annual Report and Accounts 2015
7
Business model
How Gamma
creates value
Highly cash generative with
a resilient business model,
a broad customer base and
low customer concentration,
Gamma has seen strong growth
driven by repeating revenues.
Robust and scalable business model
Gamma provides
these services:
The services are provided
for these business markets:
VOICE
DATA
MOBILE
Indirect channel
(79% of Gamma revenues)
Direct channel
(21% of Gamma revenues)
• Public sector
• Mid-market / SME sector
• Enterprise
Channel
partners
End users/
customers
Underpinned by our ‘Policy of One’ (building our services and support on a single set of largely proprietary internal systems)
Gamma is a rapidly growing, technologybased provider of communications services
to the UK business market. Gamma’s
services, such as Cloud PBX, Inbound Call
Control Services and SIP Trunking, are
designed to meet the increasingly complex
voice, data and mobility requirements of
businesses, through the exploitation of its
know-how and own intellectual property.
Gamma also provides services such as
business-grade broadband, Ethernet,
mobile and data services. Also, as a
consequence of its history, Gamma has
a substantial voice service capability,
completing its comprehensive range
of communication services.
Growing our business
The business has consistently grown its
margins over the last six years and this
growth has come from right across our
8
different channels. We do not have a
target mix for indirect and direct business
– we will let the business market decide.
This growth has come despite industry
reductions in regulated prices and difficult
economic conditions.
Strategic services
The single biggest factor in the success
of the business over the last six years
has been the transition from selling
traditional services, such as calls and lines,
to providing the more strategic services of
Cloud PBX, SIP Trunking and Inbound Call
Control Services. For the customer, these
services have three inherent advantages
over the services they replace: they cost
less, they are more flexible and featurerich, and they do not require significant
capital expenditure to implement.
For Gamma, the investment in product
development is returned with improved
margins, longer contracts and lower churn
as the products are more integral to a
business operation. The enabling services
of Ethernet, mobile and broadband (see
service portfolio diagram) are prerequisites
for providing the strategic services and
for ensuring that Gamma, and its channel
partners, maximise the revenue opportunity
from each customer.
Public sector
This is becoming an increasingly important
market for Gamma, both through a number
of key channel partners, who are active and
successful in the public sector, and our own
direct sales capability. Through framework
agreements we now have a significant
presence in education, health and local
government. Gamma is now on the new
Government Crown Commercial Services
Strategic report
Corporate governance
Financial statements
Business unit review
page 20
Our services
Our portfolio comprises voice, data and
mobile services that are sold indirectly
through channel partners and directly to
end users. These services are sold in a
standard, repeatable way to both partners
and customers. What creates value and
differentiation in our services is the way we
deliver them to our partners via the Gamma
portal. The business invests significantly in
software resources to automate, simplify
and speed up the provisioning and billing
of our services. This focus on “ease of use”
for all our services across one platform is
a key differentiator, and reduces the back
office costs of our partners.
Service portfolio
Strategic
services
Growth
framework (RM1045), positioning the
business well for opportunities in the
central government area of the public
sector, an area where Gamma is currently
under-represented.
Ethernet
Enabling
services
Cloud
PBX
SIP
Trunking
Inbound
Mobile
Broadband
Calls and
lines
Margin
Traditional
services
Emerging market
UK Government focus
on expanding the
supply chain for
telecoms services
Gaining a strong position on the new Government Crown
Commercial Services framework (RM1045) opens up new
markets in the public sector, both directly and through our
channel partners, and we have strengthened our team in
this area accordingly.
Gamma Communications plc Annual Report and Accounts 2015
9
Chief Executive Officer’s review
Strong momentum
in the business
The outlook for Gamma remains
positive, and we look forward to
continuing the strong momentum
in the business and delivering
sustainable long term value for
our stakeholders.
Following its first full financial year on
AIM, 2015 saw an excellent financial and
operational performance from Gamma with
strong growth in strategic products.
Overall, revenue grew from £173.2m in
2014 to £191.8m (+11%) whilst gross profit
improved from £67.6m to £82.3m (+22%).
Adjusted EBITDA grew by 23% from
£23.1m to £28.3m, while adjusted profit
before tax increased to £21.0m, up 26%
from £16.7m in 2014.
The outlook for Gamma continues to be
positive, the product pipeline is strong,
and we look forward to delivering
sustainable long term value for our
stakeholders. Our investment in
developing new services continues.
Bob Falconer
Chief Executive Officer
Gamma operates primarily through a
network of channel partners and this
represents 79% of the revenue and 69%
of profit from operations. Direct sales are
increasingly focused on areas that the
channel is less active in, such as large
enterprise and the public sector.
Channel partners
With our channel route to market showing
growth in revenues of £15.1m to £152.0 in
2015 (2014: £136.9m) and profit after tax
of £13.8m in 2015 (2014: £6.1m), we have
successfully met our three key objectives
in this market of a) successfully growing our
business with existing partners b) shifting
the balance of revenues in favour of more
strategic products, and c) expanding the
number of partners that actively trade
with us (from 725 to 834 during 2015).
The channel remains a fast-changing
and diverse market, with channel operators
seeking to broaden their range of offerings
to the UK business market. Unlike many of
our competitors, the channel is our primary
route to market and our focus is on helping
our partners grow their businesses with a
strong differentiated product set. During
10
2015, we added significantly to the
marketing expertise and services we
provide to our partners, directly working
with them to use the latest digital techniques
to successfully drive new business.
In the latter part of the year, we were
particularly pleased to work successfully
as a supplier to Fujitsu on the conversion
of HMRC’s traditional ISDN telephony
estate to SIP, as a part of a much wider
transformation programme. With some
97,000 numbers ported onto the Gamma
network and 13,000 SIP trunks deployed,
this was one of the largest and most
complex ISDN to SIP conversions in
the UK to date. We are pleased that it
all transferred smoothly and on time.
Direct sales
The direct arm of Gamma’s business
also showed strong growth with revenues
rising to £39.8m (2014: £36.3m) and profit
after tax of £4.5m (2014: £3.3m). This
included wins such as a £3.5m, three year
agreement with Taylor Wimpey plc for a
managed communications infrastructure
service. Gamma will take over the existing
traditional fixed and mobile voice services
to all Taylor Wimpey UK locations, and is
in the process of migrating these services
to Gamma’s Cloud-based unified
communications service.
Gamma was also selected by IT and
business process services provider
CGI Group Inc. to play a key part in the
roll-out of smart meters across the UK
by connecting energy firms to the core
datacentres.
In the public sector, we were very pleased
to be awarded a Government framework
agreement on eight out of the ten possible
‘Lots’ on the new Crown Commercial
Service Network Services agreement
(RM1045). This framework will replace
a number of legacy agreements, and the
‘Lots’ cover all communications services
Strategic report
Corporate governance
Financial statements
78%
Gamma’s Cloud PBX product has
achieved growth of 78% over the
last year.
including data, voice, mobile and integrated
communications. This gives Gamma the
ability to compete in a sector where we
have been materially restricted in the past
– particularly in competing for national
government business. Our public sector
team was successful in winning a number
of new contracts including Peabody
Housing Trust, and NHS Trusts such as
North & East London, and Maidstone &
Tunbridge Wells.
Strategic products
Our strategic products of SIP Trunking
(business grade VoIP) and Horizon
(our Cloud PBX service) have continued
to grow strongly.
Our SIP product – which is a more flexible
and cost effective alternative to traditional
ISDN – grew by 54%; from 234,000 to
360,000 channels during 2015. We have
continued to invest in our SIP product,
maintaining our product leadership.
We also introduced a number of service
enhancements, including additional
resiliency options and new pricing initiatives
that bundle in calls to mobile destinations.
Gamma remains the current UK market
leader in SIP Trunking, and has exceeded
significantly the general 25% market
growth of SIP Channels in the UK
(Ilume Report June 2015).
The market for cloud-based telephony
services as an alternative to a traditional
PBX is now well established. In 2015 the
number of connected handsets on our
own Cloud telephony product, Horizon,
grew by 78% from 80,000 to 142,000,
helped by the number of partners
accredited to sell the product growing
from 258 to 345. The product is
subjected to a programme of continued
enhancements, the most significant
of which was the addition of call-centre
functionality allowing any business that
receives inbound calls to better manage,
monitor and control their inbound call
Read more about our strategy on page 14
Exploiting
existing
services
Infrastructure
investment
Introducing
new services
Developing
the market
Execution
activity; from businesses with sales
teams, help desks, accounts departments,
receptionists or customer service
representatives, right through to smaller
professional call-centre environments.
These services enable Gamma to
provide converged voice and data
services to businesses and extend its
practice of providing more functionally
bundled services.
For both SIP and Horizon, we are now
seeing a growth in competition, from
both UK based and overseas operators,
however the market remains very buoyant,
and in the past 12 months Gamma
has outgrown significantly the general
market growth.
Traditional products
Margins on the traditional business, which
we define as conventional wholesale calls
and lines, have shown only a small decline
(£0.3m of gross profit decline from 2014 to
2015), ahead of the general and continuing
reduction in the size of this market.
Enabling products
In June we were pleased to be able to
launch on time our multi-site data network
product (branded CPN – Converged
Private Network). By the end of 2015, we
have received eight orders for the product
from larger organisations and the pipeline
continues to grow. This product underpins
our ability to provide full communications
services for mid-market companies.
Gamma’s enabling services of Ethernet,
business-grade broadband, and mobile
also grew significantly during the year.
For example, the number of business-grade
broadband connections grew from 29,000
to 40,000 and Gamma’s Ethernet base
expanded to 2,400 live connections.
Gamma Communications plc Annual Report and Accounts 2015
11
Chief Executive Officer’s review continued
Operational performance
With Gamma now providing services to
a growing proportion of UK businesses,
the quality of Gamma’s operational
services remains absolutely paramount,
and an area where the business seeks
to differentiate itself from its competitors.
Overall, across all Gamma products, the
2015 operational performance was above
the defined and published service levels
and the service level trend has been one
of continuous improvement over several
years. Strong emphasis continues to be
placed on the quality of the operational
service, the elimination of risk and
improvements in security and, to this end
the business has maintained its certification
in both ISO 27001 and ISO 22301.
During the year we have developed a
number of online tools that allow partners
to self-diagnose and rectify over 50% of
faults; not only does this mean the partner
can provide a better service to their
customers, but it also means we can
improve our own operational efficiency.
Cyber security
Over the last few years, the risk profile
associated with cyber security has
changed significantly, with several high
profile cases hitting the press in 2015.
Whilst no company can declare they
are 100% immune from a cyber attack,
our stringent governance in this area is
independently audited and tested through
both our ISO certifications and regular
penetration testing. Alongside our ISO
27001 certification, we also gained
certification to the Cyber Essentials
standard and we participate in the UK’s
Cyber-security Information Sharing
Partnership (CiSP), which is a joint
industry-government initiative to share
cyber threat and vulnerability information.
The Board regularly reviews the health
of our security governance, to ensure
appropriate resource and priority is
placed on mitigating risk in this area.
12
Strategic report
Corporate governance
Financial statements
Regulatory
Gamma had been in commercial
negotiations for a settlement in regard
to its ladder pricing policy. I am pleased
to report that we have now concluded
a cash settlement and have recognised
an exceptional gain of £5.7m for the year
ending 31 December 2015.
Once again, Gamma was recognised
as one of “The Sunday Times 100 Best
Companies to Work For 2015” and retained
its 2-star accreditation by Best Companies
as an Outstanding Company. As well as
aiding recruitment and retention, the survey
process provides us with valuable and
detailed feedback from our employees.
Mobile services
We announced last year that we had made
an opportunistic, but strategic, acquisition
of equipment that comprises the ‘core’ of
a mobile network, i.e. the equipment which
controls the voice and data services used
by a mobile customer.
To cater for the growth in the business,
upon expiry of the lease for our Fareham
office in December we relocated to
improved premises in Port Solent (near
Portsmouth). An additional floor of meeting
space was also agreed opportunistically for
our London office in the City, and our small
Budapest office was relocated following the
expiry of the lease.
I am pleased to report that progress on
developing a full mobile service (including
4G) has gone well and we are currently
in full testing with plans for the service to
go live in June 2016. Roaming and radio
access agreements are in place and plans
are advanced for the transfer of our existing
base of some 66,000 customers on to the
new full MVNO service. Gamma will look
to position itself as the fourth mobile
operator in the UK business market.
Looking forward, we recognise the
importance of fixed-mobile integration,
and Gamma is one of a very small number
of operators with a strong capability in all
the core technologies of fixed voice, mobile
and data services. This is where we will
be placing much of our development effort
going forward.
People and property
The average number of people in the
Gamma Group increased over the year
from 519 to 626, primarily to support the
growth in product volume and future
product development.
Outlook
And so to 2016, where our core strategy
is to remain a leader in the high growth
sectors of the business communications
market (such as SIP Trunking and Cloud
PBX), underpinned by absolutely the
best-in-class quality of service and with the
best and most motivated staff we can hire.
We expect the volumes to continue to grow
in new products (SIP Trunking, Cloud PBX
etc) and to continue to decline in traditional
services (phone calls and lines), with
our margins continuing to migrate from
traditional to strategic.
The industry as a whole continues to
undergo major changes, such as the
acquisition of EE by BT, much of it driven
by larger players looking to take multiple
service offerings to the consumer market.
Gamma, by contrast, remains wholly
focused on the UK business market
and the indirect channel is an effective
route to that market.
Bob Falconer
Chief Executive Officer
Gamma Communications plc Annual Report and Accounts 2015
13
Strategy for growth
Growing our
profitability and
market share
This strategy will be principally
pursued organically, but Gamma
is also well placed to consider
strategically relevant acquisitions
as the opportunities arise.
Our objective
Gamma’s objective is to continue
to grow both its market share
and profitability by developing
new innovative communications
products for organisations.
This is delivered via five strategic pillars:
Exploiting
existing services
Infrastructure
investment
Introducing new
services
Developing the
market
Execution
•Maintaining focus on
the high-growth market
opportunities for services
such as SIP Trunking
and Cloud PBX.
•Continuing to minimise
the erosion of traditional
services in spite of
anticipated market size
reductions by offering
customers extra features
and a migration path
to strategic services
and enabling services.
•Increasing flexibility of
approach to increase
share of end-customer
wallet over time as
multiple services
procured from the
same supplier and
individual incumbent
contracts expire.
•We have an ongoing
infrastructure investment
programme in order
to better position the
business to supply more
converged services and
multi-site data services.
•Reducing cost by
expanding the data
network deeper into
the regulated BT
Openreach exchanges.
•Launched an MPLS
data service in 2015
to address the needs
of larger multi-site
organisations
supported by a single
set of IT systems and
Gamma’s portal.
•Developing more
converged services
and commercial bundles
of services to meet
the demand for such
services in the UK
business market.
•Seeking commercial
opportunities to expand
and deepen its technical
capability in mobile
services.
•Growing the number
of channel partners
that Gamma works
with and deepening
the relationship with
existing channel partners
by providing attractive
services and support.
•Growing business in
the public sector.
•Growing Gamma’s brand
awareness in the UK
business market in
support of the above.
•Maintaining our “Policy
of One” in terms of
underlying systems.
14
Strategic report
Corporate governance
Financial statements
Key performance
indicators
page 16
Executing our strategy
Development of core
infrastructure for
mobile network
During 2015 Gamma continued with the development of its
‘mobile core’ (the central switching and intelligence which
controls a mobile service). Ownership of this mobile core,
together with Gamma’s existing fixed line network infrastructure
and its software development capability, gives Gamma the
ability to create new products tailored to the business market.
The initial service will be ready for launch once all the relevant
processes (e.g. number porting and international roaming)
have been fully tested with the relevant operators, anticipated
in the first half of 2016.
£5.0m
initial capital investment spent.
Gamma Communications plc Annual Report and Accounts 2015
15
Key performance indicators
Measuring
our success
Revenue (£m)
£191.8m
2015
Definition
Revenue from sales made to all
customers (excluding intra-group sales
which eliminate on consolidation).
Outlook
Ongoing growth driven by increased sales
of strategic and enabling products.
2013
67.6
2013
148.7
53.9
Gross margin (%)
Definition
Gross margin as a percentage of revenue.
Adjusted EBITDA (£m)
42.9%
Outlook
Continued growth but slowing as the
product mix of strategic and enabling
versus traditional tends to an equilibrium.
£28.3m
2015
42.9
2014
2013
2013
Definition
Cash and cash equivalents held
at the end of the year.
£24.8m
2015
2014
Outlook
The Group intends to maintain a cash
balance at this level subject to any
acquisition opportunities that may arise.
24.8
17.2
Net operating cash flows (£m)
Definition
Net cash flows from operating activities.
£28.2m
Outlook
In 2015, unusually high due to laddering
income. In the future, growth in line
with EBITDA – cash conversion is
expected to remain strong.
2014
14.6
2013
28.2
16.4
14.0
PBT (£m)
Definition
Profit before tax.
Adjusted EPS (£p)
£22.6m
Outlook
Continued growth is expected.
17.9p
2015
22.6
Definition
Adjusted earnings after tax divided by the
fully diluted number of shares. Unadjusted
earnings per share were 19.6p (2014: 10.0p).
Outlook
Continued growth.
2015
2014
11.5
2014
2013
11.5
2013
16
Outlook
Continued growth.
23.1
2015
13.4
Definition
Adjusted earnings before interest,
taxation, depreciation and amortisation
stated before exceptional items and
share based payment charges.
28.3
2014
36.2
Net cash (£m)
2013
2015
39.0
Outlook
Ongoing growth driven by increased sales
of strategic and enabling products.
82.3
2014
173.2
Definition
Revenues less direct costs of sales
(excluding depreciation on specific assets
which is shown as depreciation).
£82.3m
2015
191.8
2014
Gross profit (£m)
17.9
15.0
10.8
Strategic report
Corporate governance
Financial statements
Performance
metrics
Number of Hosted seats (‘000s)
142
Definition
Number of billed seats at end of year
on all of the Cloud PBX products.
Outlook
Continued growth.
Relevant strategy pillars
2015
2014
Strategy for growth
page 14
142
Number of SIP channels (‘000s)
360
Relevant strategy pillars
360
2014
2013 43
2013
Strategic and enabling services as
percentage of gross margin (%)
72%
Outlook
Continued growth.
2015
80
Definition
Margin from strategic products (Inbound,
SIP Trunking and Cloud PBX) and enabling
products (Ethernet, Broadband and Mobile)
as a percentage of the total margin.
Outlook
Continued growth.
234
161
Cross sell ratios per channel
partner (%)
73%
Relevant strategy pillars
72
2014
2015
65
2013
Definition
The percentage of margin of our
wholesale business derived from
channel partners who are taking four or
more strategic or enabling products.
Outlook
Similar or improving.
Relevant strategy pillars
2015
Definition
Number of billed SIP Channels
at end of the year.
73
2014
56
72
2013
62
Network availability (%)
Definition
Availability of strategic platforms.
Direct customer profile
99.997%
Outlook
Similar or improving.
109
Relevant strategy pillars
Definition
Number of direct customers
generating monthly revenues of
above £5,000 at the end of the year.
Outlook
Continued growth.
Relevant strategy pillars
2015
99.997
2014
99.997
2013
40.0%
2015
Definition
The Net Promoter Score of a random
selection of direct customers measured
quarterly and averaged over the year.
Relevant strategy pillars
Strategic pillars:
69
Number of channel partners
834
Relevant strategy pillars
834
2014
43.1
725
2013
Exploiting
existing
services
Gamma Communications plc Annual Report and Accounts 2015
Infrastructure
investment
Definition
Number of wholesale channel
partners with monthly billing over
£500 at the end of the year.
Outlook
Continued growth.
2015
22.3
2013
90
2013
Outlook
We expect our NPS score to
remain above 20%.
40.0
109
2014
99.993
Customer satisfaction (%)
2014
2015
627
Introducing
new services
Developing
the market
Execution
17
Principal risks and uncertainties
Understanding
the risks that
affect our
Company
To this end, Gamma operates a robust
and well established structure for the
identification, evaluation, monitoring
and mitigation of the potential risks to its
performance. There is a comprehensive
operational governance structure,
with regular and documented meetings
to track risks through the four stages
on the opposite page. Each generic area
of risk (e.g. Security) has clearly assigned
accountability at Director level within the
management team, with reporting lines
to the CEO and ultimately the Board.
Gamma’s business is heavily reliant on the
performance of its network and associated
application platforms. It ensures that the
network architecture and operational
support processes are robust and can
cope with the vast majority of failures
without impacting customer service.
Gamma holds certification to ISO 27001,
22301 and ND 1643 which cover the
security and business continuity of its
primary products, as well as its core
operational functions. In 2015 Gamma
added the ‘Cyber Essentials’ standard to
its list of certifications. Gamma carries out
a full set of business continuity rehearsals,
covering both technical failure and loss
of access to physical locations.
The principal risks to the business are listed
with a short description of their potential
impact and what is being done to mitigate
them. This is not an exhaustive list and,
as described, the risk profile of the
business is constantly evolving:
18
As with any business, Gamma is
exposed to a number of different
risks. Whilst some are clear and
straightforward to manage, others
are less apparent and may be outside
Gamma’s direct control. Therefore,
in all aspects of risk management
we identify new risk areas as they
arise, as well as building contingency
options into our plans and processes.
Risk
Description
Security
By its very nature, our network infrastructure provides customers with open access
to the internet and global voice networks. As such there is a risk from cyber threat and
telephony fraud as well as to the physical infrastructure. Over the last few years the
profile around cyber security has changed significantly and the Company has adapted
its governance accordingly.
Maintaining
customer
service levels
Communications services are critical to businesses. The ability to order and deliver
them easily, and reach support quickly when something goes wrong, are key areas
that any service provider is assessed on when a customer is placing business.
Network
and systems
performance
Reliable, high quality voice and data services are critical to any business and are
the core components of Gamma’s products. Therefore, maintaining very high levels
of service availability is central to any service provider’s credibility in this market.
Increased
competition
New entrants or existing service providers extend their product set to compete directly
with our products and services.
Evolution
of technology
and markets
The communications market is constantly evolving both in terms of the available
technologies and also in how people look to purchase certain products.
Suppliers
The business relies on a number of key suppliers to provide elements of its products
and services.
Regulatory
environment
The UK’s telecommunications sector does not have a “licence” requirement; it operates
under a General Authorisation regime whereby, in combination with relevant UK and
European statute, the sector’s regulator outlines the required compliance, which is
presumed from telecommunications companies such as Gamma.
Key personnel
The business has grown rapidly over the last few years, with very low staff turnover.
Therefore, there are individuals who have been instrumental in its development and
are important to its ongoing success.
Corporate governance
Financial statements
ion
at
Identification
Risks recorded in controlled risk registers.
Ide
nt
n
tio
ca
ifi
Mi
tig
Strategic report
Risk
management
process
t
in
at
ni
io
n
Mo
or
g
Ev
al
u
Evaluation
Risk exposure reviewed and prioritised.
Monitoring
Risks analysed for impact and probability.
Mitigation
Risk owners identified and action plans
implemented. Robust mitigation strategy
subject to regular and rigorous review.
Potential impact
Mitigating actions
Impact Change
A breach of security could have a significant impact
on the Company’s reputation and, in the case of
telephony fraud, there could also be the chance
of commercial impact.
Gamma’s core infrastructure and operating capability is certified under ISO 27001 for
security. We have a proactive approach to identifying any threat or attack and well proven
procedures for neutralising such events.
High
We also employ external agencies to carry out penetration testing on our systems as well
as carrying out our own security incident rehearsals. We have also undergone
assessment and certification to meet the ‘Cyber Essentials’ standard.
In light of the increasing profile of cyber security we have enhanced our governance to
ensure that we follow best practice in the identification and management of associated
risk, including: increased frequency and broadened scope of both routine and bespoke
penetration testing, mandated cyber security training for all our employees, dedicated
security roles to track how cyber threats are evolving and are best detected, and Board
visibility of the ‘health’ of the governance structure.
Our fraud management applications aim to identify unusual traffic patterns within a short
space of time and we have a 24/7 operational capability to then assess and mitigate the risk.
Delivering poor customer service has two potential
impacts: firstly on our ability to sustain and grow
revenues and secondly, dealing with failure increases
the costs of the support operation.
We have a comprehensive service development plan that captures customer feedback
and seeks to best align the support interfaces (system and human) with the needs of our
customers. This programme delivers additional self-serve tools, online training material and
specific customer service training for our support teams. Our objective is to eliminate any
cause of frustration and ensure any interaction is as straightforward as possible.
High
In terms of governance, we hold a monthly quality forum chaired by the CEO that reviews
performance across all parts of the business. This forum has its own action register to
track through any improvements highlighted.
If our network and systems perform below the market
expectations then this will impact our ability to grow
and sustain revenues.
We operate a comprehensive operational governance framework to manage the
availability and performance of our services. This includes the design and architecture
of our platforms, capacity planning, change management, security, business continuity
planning and rehearsals, incident management and monitoring. This structure is subject
to external audit via our ISO 27001, ISO 22301 and ND 1643 certifications.
High
This may dilute the addressable market and slow
down growth.
Gamma aims to provide services which are more attractive to our customers than those
of competitors.
Moderate
If the business does not at least keep pace with
this evolving market then its plans for growth may
be impacted.
Gamma plans, develops and markets products which match the evolution of market
demand and of relevant technologies, and develops its core platforms to support
these products.
Moderate
Failure of one of these suppliers to perform may
have an impact on our ability to deliver products
and services.
Where possible, we avoid reliance upon a single supplier for a particular element of our
service, and ensure key supplier contracts have appropriate clauses in place to assure
their performance.
Moderate
Our activities within the UK can also be impacted by the
decisions of relevant legislative, regulatory and judicial
bodies both domestically and in the European Union,
with the primary potential impact of new decisions
being changes to buy and sale prices for products
and the way in which we are required to engage with
our customers. Should our activities be found to be
in breach of the requirements of our General
Authorisation, the primary impact would be the cost
of negative publicity and any financial penalty levied.
Gamma mitigates this risk by continuing to monitor likely regulatory changes; assessing
their risk and potential impact; and engaging with regulators as appropriate.
Low
Loss of key individuals could have an impact on the
continuing development of the business.
The business has a well-established team and a reputation for being a good employer.
In 2015, it came 47th in ‘The Sunday Times Best 100 Companies To Work For’ ranking.
This process involves a comprehensive staff survey, the feedback from which is actively
reviewed and addressed by the senior management team.
Low
Gamma Communications plc Annual Report and Accounts 2015
19
Business unit review
We divide our business into indirect
and direct business units serving
different markets with broadly
the same portfolio of services.
Indirect channel Direct channel
20
• System integrators
• Resellers
• Unified communications
• Value added resellers
• Cloud and infrastructure
• Public sector
• Mid-market/SME sector
• Enterprise
page 22
page 24
Strategic report
Corporate governance
Gamma Communications plc Annual Report and Accounts 2015
Financial statements
21
Business unit review
Indirect channel
business unit
The business unit has grown external
revenues by 11% in 2015 with gross profit
up 22% to £64m. The main drivers of profit
growth have been a steady increase in
number of partners and also the increased
market penetration with our higher margin
services SIP Trunking and Inbound. Our
Cloud PBX, Horizon, has continued to be in
demand, with 47% of our partners actively
selling the service to their customers.
The volume of these orders placed in
2015 has grown by over 50%.
We have successfully launched our CPN
data network offering – partners have
contracted with customers including
Weatherseal, Churchills and Toni & Guy.
Gamma grew the number of active
partners from 725 to 834 during 2015.
We have continued success in expanding
our range of channel partners, having
signed up more than 50% of the ‘Microsoft
Gold’ partners to work with us, giving us
more of a presence at the ‘Microsoft Gold’
forums. We also have 39% penetration of
the Systems Integrators Top 100 CRN Rich
List, and an ongoing campaign to target
IT specialists.
This diversity and breadth of the business
models of new channel partners confirms
the convergence of IT and telecoms, and
our industry’s appetite to broaden service
portfolios. To support the growth in
partners, our sales team grew by 27% over
the year. 24% of our sales team have been
with Gamma for more than five years, with
14% over ten years. There have been a few
developments within the team – separating
the systems integrator channel from value
added resellers to make five channel
teams. The ‘Carrier’ channel has expanded
to cover cloud and infrastructure and now
provides UK services to over 50 of the UK’s
hosted telephony/Unified Communications
as a Service (“UCaaS”) platforms.
22
The largest part of our business, and
very much at the heart of what we
do; providing services to over 834
channel partners across the UK.
These partners work closely with
us, are loyal, and growing in number.
The channel business is close to
80% of Group revenues.
Key facts and figures
Current channel partner
examples
Indirect channel
revenue income
percentage
79%
What we did in 2015
•Successfully launched our MPLS
data product through the channel.
•Continued to grow the number of
channel partners in emerging segments.
•Increased the level of business from
Microsoft partners and systems
integrators as a proportion of the whole.
•Increased cross sell ratios into the
partner base.
New customers
through channel partners
Looking ahead in 2016,
we plan to:
•Successfully launch our new
mobile offering.
•Increase the level of business from
mobile partners in the second half
of the year.
•Continue to maintain cross sell
ratios into the partner base.
•Encourage our partners with
commercial deals which drive growth
and commitment.
•Continue to grow the number of channel
partners in emerging segments.
109
Gamma added 109 new actively trading
channel partners in 2015.
22%
Gross profit grew 22% over the year.
Strategic report
Corporate governance
Financial statements
We have successfully sold our UK Carrier
infrastructure as a service offering to
Telstra, the Australian carrier, and have
several other large international carriers
interested in the service.
As ever, we have worked hard on deepening
the relationship with our partners to ensure
we are well connected right across their
business and are supporting all relevant
aspects of their operations. Over the year
we ran sales training sessions, operational
workshops to support our partners’ back
office staff, and regular webinars on product
market issues and important regulatory
information. All of these activities combined
to help generate a depth of relationship that
hopefully puts Gamma at the core of our
partners’ business; creating long term
partnerships as opposed to short term
transactional relationships.
Major partners during the year included
companies such as Fujitsu, Freedom
Communications, Olive, Capita IT, Daisy,
Alternative, Azzurri, Focus, HighNet and
Sabio. We continue to benefit from a broad
spread of customers and low customer
concentration. Our top ten partners
accounted for 23% of total revenues
at the end of 2015.
We have continued to develop our
commercial frameworks with partners to
build stronger, longer term and mutually
beneficial relationships, increasing our
visibility of forward revenues. The new
Platinum Partner scheme has been
introduced – select partners have been
offered a ‘platinum’ contract, trading
increased support for a longer term
commitment to grow the volume of their
SIP and/or Horizon products. In exchange
they receive marketing assistance, a
marketing fund and a dedicated line
for any escalations.
Gamma Communications plc Annual Report and Accounts 2015
Channel case study: “I can highly recommend
Vonage
Gamma as a very good,
trustworthy, reliable partner
in a quite turbulent market.
Gamma do what they say,
when they say and provide
a service that works well.
I would seriously recommend
Gamma as a potential partner.”
Simon Burckhardt
UK Managing Director, Vonage
London based Gamma partner selling
Cloud PBX and Inbound services.
23
Business unit review
Direct channel
business unit
Public sector
Our public sector business unit continues to
evolve at speed with an enlarged customer
base and a considerably enhanced position
on key framework procurement processes.
During 2015, we brought greater focus
to this market, breaking public sector out
as a distinct business unit to drive our
capabilities and revenues forward.
Gamma had particular success with the
key government procurement framework
“Network Services RM1045”, gaining
access to eight lots out of ten. We expect
this to be a cornerstone of the public
sector landscape for the next decade.
The business also earned positions on the
latest G-Cloud and JANET frameworks,
while we continue to supply services
through both Procurement for Housing
and Scottish Government organisations.
Wins in 2015 included a £3.4m contract for
Peabody Housing Trust to provide the Wide
Area Network and Horizon hosted
telephony to over 1,000 users. We also had
several prominent SIP awards including
NHS North and East London, Maidstone
and Tunbridge Wells NHS Trust, with
several more County Councils taking our
services. Of the top 20 new business wins,
19 included SIP Trunking services,
cementing our position as market leader.
Our churn was once again negligible with
no losses from the major accounts team.
Customers retained in the year include
Northumberland County Council covering
SIP, Inbound, ADSL, Ethernet and the
conversion of the Cheshire Police ISDN
estate to SIP.
We are rapidly expanding some of our
product lines in order to meet customers’
requirements, recently adding a major PBX
vendor to our capability with two more to
complete in early 2016. The addition to
these of Gamma’s own 4G Mobile services
will significantly increase the ratio of
tenders where we are able to meet
requirements and bid competitively.
24
We find that some customers,
particularly larger enterprises, prefer
or even insist on working directly
with the network bearing operator.
Some, such as the public sector,
have very specific requirements
that require a more tailored
response. This is where our direct
capability is mostly focused.
Key facts and figures
Current customer examples
Direct channel
revenue income
percentage
21%
What we did in 2015
•Increased the average size of direct
customers and new contracts.
•Built market share in the public sector
by maximising opportunities from our
framework contracts.
•Continued to have a CSAT Net
Promoter Score above 20%.
•Pushed Cloud PBX and SIP Trunking
harder into the mid-market.
New direct customers
Looking ahead in 2016,
we plan to:
•Continue to increase our average size
of direct customers.
•Widen our service portfolio in the public
sector to bid and win more tenders.
•Continue to have a CSAT Net Promoter
Score above 20%.
•Successfully launch our new mobile
offering into our direct businesses.
•Win more FTSE listed companies for
managed service contracts.
20%
Gross profit grew 20% over the year.
Strategic report
Mid-market/SME sector
In the Mid-market and SME sector it was
apparent that 2015 saw a significant flip
of sales from traditional telephony to Cloud
PBX and SIP Trunking services.
There have been very few new customers
that have been won which have taken
solely traditional voice services. Where this
has been the case, the strategy has been
to sign them up on the basis that they will
employ next generation services once
their estates have been placed under
the Gamma umbrella and the project of
migrating them onto a new service design
(with IP telephony at its core) can begin.
Along with this notable shift, it has also now
almost become the norm for customers
to opt to bundle in their calls to their fixed
rental/recurring charges. New customers
such as Just Eat, Metro Bank and Money
Supermarket.com have all opted for this
model, which brings comfort over call
spend and an easy to understand invoice.
A dramatic increase in Cloud PBX sales
has been in the main part driven by the
SME channel, selling to the 10-100 seat
business market. Clearly, this market is still
being served in the main by BT. However,
having the ability to sell Cloud PBX to this
market, which means that the SME can
enjoy the features and benefits plus the
limited or even zero capital expenditure
which only much larger organisations
have traditionally enjoyed, is starting to
grab the attention of this market segment.
The major accounts team are now
starting to really cement relationships with
our ~300 key accounts. Marsh & Parsons,
Estée Lauder, Mills & Reeve, Haymarket
Media, Keatons Estate Agents and
Softcat, to name a few, all re-signed
contracts in 2015.
Corporate governance
Enterprise
It was another strong year for the Enterprise
side of our business. This growth can be
attributed to a combination of our Cloud
unified voice, data and mobility solutions that
are highly sought by Enterprise customers,
combined with the fact that Gamma’s brand
is rapidly becoming recognised as a trusted
provider of communication services to
medium and large enterprise organisations.
It is to this end Gamma was awarded a three
year managed communications services
contract to provide the FTSE listed house
builder Taylor Wimpey plc with a Cloud
unified voice, data and mobility solution.
We had additional big wins with NBC
Universal, Americana International and
Sinclair International Limited.
Our existing customers are very important
and delivering them world class service is
our aspiration. To ensure our contract growth
does not impact our current customers we
bolstered our Enterprise support function,
moving it to our centre of excellence in
Manchester, where we were rewarded
with an increase in organic growth from
our existing managed service customers.
All direct contract awards are for next
Financial statements
generation cloud services, where we help
large organisations navigate the blurred line
between fixed and mobile communications.
This appeals to large organisations
because they reduce the cost and
complexity of owning and operating large
communications estates with our flexible
model, but still retain the confidence they
are dealing with a network operator directly.
This is why our direct Enterprise customers
commit to multi-year service agreements,
typically three or five years.
Customer service
Customer service continues to be at the
heart of our proposition and we track our
performance quarterly with CSAT surveys.
We use the Net Promoter Score
methodology as a method of quantifying
and tracking our customers’ perceptions
on service. Our average score for the year
across four quarters of measurement was
40.0% (up from 22.3% in 2014).
New customers
City of Glasgow College turns to SIP
for resilience and cost savings
“Gamma’s proposal met all the requirements, didn’t cost us a fortune
which it would have done with other vendors, and we could lose ISDN
completely and use JANET which we already had. It’s also good that
Gamma has a major support centre here in Glasgow. We’re never
going to get such a personal service from anyone else.”
Liam Mulgrew
New Campus Telecommunications Officer, City of Glasgow College
Gamma Communications plc Annual Report and Accounts 2015
25
Financial review
Excellent financial
performance
in 2015
Andrew Belshaw describes a
positive set of results for 2015
as Gamma reports for the first
full year as a listed group.
Revenue
Indirect Business
Revenue from the indirect business grew
from £136.9m to £152.0m and gross profit
grew from £52.4m to £64.1m – an increase
of £11.7m of gross profit year on year.
Andrew Belshaw
Chief Financial Officer
17.9p
+2.9p
Adjusted EPS grew from 15.0p to 17.9p.
Unlike many of Gamma’s peers, the
performance of the traditional business
(which includes calls and lines and trade
with other carriers) showed only a small
decline in gross profit, down to £18.5m
(2014: £18.8m). Revenues declined
from £64.5m in 2014 to £58.2m as a
consequence of reductions in the cost
base, which were reflected in lower pricing
(i.e. regulated cost base reductions can
result in reduced prices to channel
partners). Gamma continues to attract
traditional business as a by-product from
channel partners who chose to buy our
new products such as Cloud PBX and SIP
Trunking. The number of channel partners
actively trading with Gamma increased
from 725 at the start of the year to 834
by the end of the year.
The percentage of gross profit coming
from channel partners who buy four or
more products (excluding traditional calls
and lines) from Gamma remains high at
73% (2014: 72%). Both the increase in
channel partners and the fact that they
are selling more products meant that the
revenue from new product sales increased
from £72.4m to £93.8m and gross profit
grew from £33.6m to £45.6m. Gross
margin grew from 46.4% to 48.6%, which
reflects the fact that the main contributor
to this growth was SIP Trunking, which is
our highest margin product.
Direct Business
The direct business has also had a solid
year although growth in the second half
was lower than hoped for due to the length
of the order to cash cycle. Revenue
increased from £36.3m in 2014 to £39.8m
and gross profit from £15.2m to £18.2m.
26
Gross margin increased from 41.9% to
45.7%. The growth was attributable to
sales of new product and profit on these
products grew from £10.6m to £14.0m.
This includes multi-product solution sales
to larger enterprises. This is particularly
pleasing because much of the new
business is won on multi-year contracts.
Operating expenses
Operating expenses before exceptional
items and share based payments grew
from £50.9m to £61.4m. This was due
to a number of factors:
•The growth in the number of customers
switching to new products for the first
time continues to be a driver of overhead.
•The new mobile platform cost £1.8m
to maintain in the year, which was cost
incurred without any corresponding
improvement in margins, which will
come in the second half of 2016.
•We also continue to increase our
investment in product development and,
whilst internal spend of £0.9m was
capitalised in the year, we spent more
on the research and initial development
of new product offerings and variants on
our existing product set as we continue
to build for the future.
•The Group continues to invest in its
systems to ensure that, as sales
increase, the number of customer service
personnel required does not increase
at the same rate.
Adjusted EBITDA
The combination of increasing sales of new
products and operational improvements
means that adjusted EBITDA grew from
£23.1m to £28.3m or 23% – an impressive
performance (adjusted EBITDA is stated
before share based payments and
exceptional Items).
Strategic report
Highlights
£191.8m
+11%
Overall revenue grew from
£173.2m in 2014 to £191.8m.
£29.9m
+67%
Unadjusted EBITDA grew by 67%
from £17.9m to £29.9m.
£28.3m
+23%
Overall EBITDA before exceptional
items and share based payments grew
from £23.1m in 2014 to £28.3m.
£23.1m
+£6.7m
Adjusted cashflow from operating
activities grew from £16.4m to
£23.1m (cashflow has been adjusted
downwards by £5.1m to reflect
the non-recurring inflow from the
“ladder pricing” settlement).
Corporate governance
Exceptional items and share
based payments
In the current year there was an exceptional
gain of £5.7m relating to “ladder pricing”.
Share based payment charges for the year
were £4.1m in 2015 (2014: £3.2m) as a result
of additional options being issued to senior
management, a SIP scheme offered to all
staff where Gamma matched shares bought
by staff with one free matching share for
each share purchased, and the increasing
costs of Employers National Insurance on
Share Option Gains. We anticipate share
based payments decreasing in future years.
Cash flows
The cash balance at the end of the year
was £24.8m, which is up from £13.4m at
the end of the previous year.
The trading cash flows were bolstered by
an exceptional inflow of £5.1m in respect
of the ladder pricing settlement (some cash
had been received previously but no income
had been recognised in respect of this in
the income statement due to an ongoing
dispute). Therefore, whilst the cash flow
from operations is shown as £28.2m, the
underlying cash inflow is actually £23.1m.
This adjustment gives a cash inflow before
taxation of £25.3m which represents 89%
of adjusted EBITDA for the year; in line with
our historical rates of cash conversion.
Capital expenditure for the year was £11.5m,
which is a decrease from £12.1m in the
previous year. This is discussed in detail below.
The Group continues to be debt free and
a number of lenders have indicated that
they would be willing to support the Group
with debt were it to be required for capital
expenditure or an acquisition.
Capital expenditure
The Group spent £11.5m on capital,
which was split as follows:
•£3.4m was on increasing capacity
and development of the core network
(2014: £4.8m).
Gamma Communications plc Annual Report and Accounts 2015
Financial statements
•An additional £1.0m was spent on
augmenting the mobile platform
purchased in 2014 in preparation for
a live service in 2016 (2014: £4.0m).
•£0.4m was spent on building out our
data network into a number of London
Exchanges which will reduce our cost
base for our Ethernet product from
mid-2016 (2014: £Nil).
•£0.9m was the capitalisation of
development costs incurred during
the year; this is in line with previous
years (2014: £0.9m).
•£4.4m was on customer premises
equipment (“CPE”); this is “success
based” expenditure and is expected
to increase in line with sales growth
in our data and Cloud PBX products
(2014: £1.0m).
•£1.4m of other assets which are
predominantly related to IT and
Fixtures and Fittings (2014: £1.4m).
Taxation
The effective tax rate for the year was
19.0% (2014: 18.3%). The tax rate is lower
than the statutory rate for the year (20.25%)
because the Group benefits from research
and development tax credits. These credits
are however lower in 2015 than previously
because the Group has moved into the
large company regime where the credits
are lower.
Dividends
The Board has proposed a final dividend
of 4.4p representing a full year dividend
of 6.6p per share. This is an increase of
11% against our pro-forma dividend for
2014 of 5.93p and is in line with our
progressive dividend policy.
Subject to shareholder approval, the final
dividend will be paid on 23 June 2016
to shareholders on the register as at
3 June 2016.
Andrew Belshaw
Chief Financial Officer
27
Corporate social responsibility
An engaging
culture, central
to our business
growth and ideals
Our culture has been instrumental
in the growth and success of the
business to date. This is aided by
trusting our staff, delegating as far
as possible, and creating an informal,
constructive environment.
Communicating with staff is obviously
paramount in maintaining an involved and
informed group of employees. We have
quarterly conference calls where the
management team individually brief the whole
staff, supported by regular staff newsletters,
CEO briefings (by location) and an annual
survey (see Best Companies to Work For).
Chosen charity: Woodland Trust
Our staff churn across the business is low
relative to industry norms, and particularly
so in our customer service teams where
knowledgeable, experienced staff are so
vital to offering good customer service.
Wherever we can, our preference is to grow
our own staff from graduates or apprentices.
In sales, for example, our strategy is to recruit
graduates as desk-based support staff,
developing them into field-based sales and
ultimately sales management. The average
tenure of our sales staff is well over five years,
with many of our sales management having
been with us for over ten years.
Gamma operates a policy of “matched
funding” for all qualifying staff charity activities
in addition to supporting the Woodland Trust.
In 2015, we also ran two charity events with
our customers – car rallying and cycling.
The Charity Mountain Bike event raised
£3,700 for the Samaritans and Rays of
Sunshine whilst the Gammaball Rally raised
a staggering £140,000 for Special Effects and
ATE (Action Through Enterprise).
The business also offers staff a choice in
terms of flexible benefits. We believe this
flexibility gives our employees freedom and
choice in selecting a customised basket of
benefits to suit their specific needs and
individual lifestyle. We also aim to provide
a degree of peace of mind for our people
through the provision of income protection and
life assurance policies. For those employees
juggling work, family or carer commitments,
or trying to enhance their work/life balance,
we provide the option for them to purchase
additional holidays.
Staff learning and development remains
a key priority for Gamma. It helps us to
maximise the potential of our people,
retain skills and grow the business. As a
technically-based business in a fast-changing
market we need to keep our people’s skills up
to date and give them the opportunity to grow
and develop as best they can. A wide range of
learning and development opportunities are
available, including funding by Gamma to
undertake Masters level courses and other
professional development courses.
28
We are proud to support the Woodland Trust,
an organisation dedicated to the protection
and promotion of natural woodlands
across the UK.
Policy on staff support for good causes
Apprenticeships
Gamma continues to welcome and assist
apprentices to gain invaluable work
experience, continue their education and
gain nationally recognised qualifications. With
apprentices currently employed in IT,
Infrastructure Support, Software Development
and Customer Service, we have a good track
record of offering permanent employment at
the end of the apprenticeships.
Volunteering policy
Gamma actively encourages and supports
employees who wish to volunteer within
the community or for charities. Supporting
volunteers helps the Company to build
relationships with the local community and
improves its perception within it. Employees
who do volunteering work can use the skills
that they have developed at work to help
in the community, or learn new skills, such
as leadership, helping to improve their
morale, physical health and overall
work/life balance.
The environment and CarbonNeutral®
We made a commitment to reducing our
carbon footprint across our network back in
2006, through investment in the efficiency
of our IP based network and other assets
as well as an active offset management
programme. This means Gamma is a fully
certified CarbonNeutral® company, making us
one of the few communications providers in
the UK to have a net zero carbon footprint.
Share scheme
Flexible benefits
Gamma offers all UK based staff access
to a pension scheme, life assurance cover
and income protection. In response to staff
feedback, Gamma offers a flexible benefits
package which allows staff to trade salary
for benefits such as a bike to work, gym
membership, childcare vouchers and
additional holiday. Gamma has also
partnered with Reward Gateway to offer
staff a variety of discounts from various
retail outlets.
In addition to the long term incentive schemes
which offer options to key employees, the
Company is keen to ensure that all employees
who would like to be shareholders can do
so in the most efficient way. Therefore, the
Company has historically offered a Share
Incentive Plan (“SIP”) and, for 2016, will
be offering a Save as you Earn (“SAYE”)
scheme, both of which allow all eligible
employees to acquire shares. At 31 December
2015, 176 employees were shareholders
via the SIP scheme.
Strategic report
Corporate governance
Financial statements
GammaFest is an excellent example
of how we put a lot of time and
effort into trying to be different
from the larger companies that we
compete against, and how we
protect our culture as we expand.
The first GammaFest was held during September 2015
at Keele University with some great bands and singers,
DJ sets, fun activities and plenty of food. The event
was a big hit with employees who travelled from all our
offices to spend the weekend together – some of them
even formed bands that performed on the main stage.
Gamma Communications plc Annual Report and Accounts 2015
29
Corporate social responsibility continued
The Sunday
Times Best
Companies
To Work For
Top factor ranks
Wellbeing23rd
My manager
41st
Leadership45th
Male/female ratio
72:28
Average age
36
Voluntary Leavers
8%
Earning £35,000+
39%
The Sunday Times Best Companies To
Work For 2015 recognises the opinion
of Britain’s motivated workforces and it
is widely acknowledged as the most
searching and extensive research into
employee engagement carried out in this
country. All the scores and ratings that are
assessed to compile the lists are based
on employee opinions. In 2015 Gamma
was recognised as the ‘47th Best Company
To Work For’.
The strategic report was approved by the
Board of Directors on 21 March 2016.
Andrew Belshaw
Chief Financial Officer
30
Three times recognised in the Top
100 Best Companies To Work For.
Strategic report
Corporate governance
Chairman’s
introduction
to corporate
governance
Financial statements
The Board recognises that sound
corporate governance is an essential
underpinning for a growing, publicly
quoted business, and is committed
to ensuring the integrity of both
its processes and of those of the
Company as a whole.
The Board is responsible for establishing
and maintaining the system of internal
controls which has been in place
throughout 2015. The effectiveness of
the Group’s system of internal control is
reviewed annually by the Audit Committee
on behalf of the Board, as referred to in
the Audit Committee report.
Richard Last
Chairman and
Independent
Non-Executive
Director
The Directors support high standards of
corporate governance. Although as an
AIM-quoted company, the Company is
not required to comply with the UK
Corporate Governance Code, we have
reported on our corporate governance
arrangements by drawing upon best practice
available, including those aspects of the
Code we consider to be relevant to the
Company and best practice.
The Board comprises eight Directors,
three of whom are Executive Directors and
five of whom are Non-Executive Directors,
reflecting a blend of different experience
and backgrounds. Of the Non-Executive
Directors, the Group regards Richard
Last, Alan Gibbins and Martin Lea as
Independent Non-Executive Directors
within the meaning of the UK Corporate
Governance Code 2014.
Richard Last
Richard Bligh
Andrew Stone
Chairman and Independent
Non-Executive Director
Chief Operating Officer
Non-Independent
Non-Executive Director
Bob Falconer
Alan Gibbins
Wu Long Peng
Chief Executive Officer
Independent NonExecutive Director
Non-Independent
Non-Executive Director
Chief Financial Officer
The Company has established
Audit, Nomination and Remuneration
Committees of the Board with formally
delegated duties and responsibilities.
The Company’s commitment to
strong corporate governance and risk
management will remain central to the
business during 2016 and beyond.
Corporate governance
framework
Board of Directors
Andrew Belshaw
The Board meets regularly to consider
strategy, performance and the framework
of internal controls. To enable the Board
to discharge its duties, all Directors receive
appropriate and timely information. Briefing
papers are distributed to all Directors in
advance of Board meetings.
Martin Lea
The Board has a coherent corporate
governance framework, as illustrated
opposite, with clearly defined responsibilities
and accountabilities designed to safeguard
and enhance long term shareholder value
and provide a robust platform to realise the
Company’s strategy.
Independent NonExecutive Director
Audit Committee
Chaired by Alan Gibbins.
Members: Richard Last
and Martin Lea.
Nomination
Committee
Chaired by Richard Last.
Members: Martin Lea,
Alan Gibbins, Wu Long
Peng and Andrew
Stone.
Gamma Communications plc Annual Report and Accounts 2015
Remuneration
Committee
Chaired by Martin Lea.
Members: Richard Last
and Alan Gibbins.
31
Board of Directors
An experienced
Board
We have an experienced Board
which blends industry expertise
with public company experience
and the knowledge and skills of
our long standing shareholders.
Richard Last
Chairman and Independent
Non-Executive Director
Bob Falconer
Chief Executive Officer
Andrew Belshaw
Chief Financial Officer
Richard Bligh
Chief Operating Officer
Richard is currently Chairman
and Non-Executive Director of
Servelec Group plc, a UK-based
technology group, Tribal Group
plc, an education software,
systems and services group,
and of British Smaller Companies
VCT 2 plc, a venture capital trust,
all listed on the London Stock
Exchange. Richard is also
Chairman and Non-Executive
Director of AIM-listed Arcontech
Group plc, a financial services
software company, and of
Lighthouse Group plc, an
AIM-quoted financial services
group. He is also a NonExecutive Director of Corero
Network Security plc, an
AIM-quoted IT security solutions
provider, and a number of
private companies.
Bob began his career at BT’s
Research Laboratories before
joining ICI in 1987, rising to
become the global telecoms
manager for the Group. In 1994
Bob took a directorship at Racal
Network Services (later Racal
Telecom and Global Crossing
UK) where he stayed until 2002,
during which time he was
responsible for group operations.
Bob joined Gamma in 2003 as
COO before being appointed
CEO in 2004.
Andrew has been with Gamma
since 2007, having previously
been Finance Director, and was
appointed to the Board in October
2014. A Chartered Accountant by
background, he has worked in
both audit and corporate finance
at Deloitte and Ernst & Young,
specialising in providing advice
to a wide range of clients in the
technology sector. After leaving
private practice, Andrew worked
alongside the Commercial
Director in a new business
development role at Xansa plc
before joining Gamma.
Richard joined Gamma in
2004 and has nearly 20 years’
telecoms experience in a
variety of marketing and
business development
Vice President roles.
These include UK and
international experience in
ECI Conferencing, Intertek
plc, Global Crossing and
Racal Telecom. Richard
has extensive experience
of business markets from
serving multinational
corporates to selling via
the channel. Richard
was appointed COO
in December 2015.
Bob has a BSc in Electrical
and Electronic Engineering from
Heriot-Watt University, Edinburgh
and is a Fellow of the Institution
of Engineering and Technology.
Richard is a Fellow of the Institute
of Chartered Accountants in
England and Wales.
Andrew has a degree in
Maths from St John’s College,
Cambridge and gained an MBA
from Warwick University Business
School. He is a Fellow of the
Institute of Chartered Accountants
in England and Wales.
Richard is a graduate of
Cardiff University and a
member of the Chartered
Institute of Marketing.
Year joined
2014
Year joined
2003
Year joined
2007
Year joined
2004
Committee membership
•C
hairman of the
Nomination Committee
• Member of the Audit Committee
• Member of the
Remuneration Committee
Committee membership
—
Committee membership
—
Committee membership
—
32
Strategic report
Corporate governance
Financial statements
Alan Gibbins
Independent
Non-Executive Director
Martin Lea
Independent
Non-Executive Director
Andrew Stone
Non-Independent
Non-Executive Director
Wu Long Peng
Non-Independent
Non-Executive Director
Alan has extensive experience
of public company reporting and
financial services spanning 30
years with Price Waterhouse and
PricewaterhouseCoopers LLP,
having been a Partner from 1985
until 2006.
Martin has over 20 years’
experience leading businesses
within the support services,
telecommunications and network,
integration and service sectors.
Most recently, he served as
interim CEO at Multicom Security
Group and was President and
CEO of Invitel from 2004 to 2011.
Prior to Invitel, Martin was
Executive Vice President of
Intertek Group plc and Managing
Director of Racal Telecom, a
national UK alternative telecom
operator and managed service
provider. Martin joined Gamma
in June 2014 and is Chairman
of the Remuneration Committee.
Martin is also an Independent
Non-Executive Director of Epsilon
Global Communications PTE Ltd,
a privately owned provider of
global communications and
infrastructure services.
Andrew is a founding Director
of Greenstone+ Ltd (formerly
Greenstone Carbon Management
Ltd) and was previously a
Non-Executive Director of
Armajaro Trading Ltd, a global
soft commodity trading house,
from 2011 until 2012 when he
was appointed Global Head
of Commodities and one of the
CEOs from January 2013 to
July 2013. Andrew has also
acted as Non-Executive Director
at Openfield plc, one of the
UK’s largest grain marketing
organisations. From 1993 to
2006, Andrew was employed
at ED&F Man in a variety of
senior positions including
Managing Director of ED&F
Man Asia, and a director of both
SIS 88 Pte Ltd and Asian
Blending Pte Ltd. He is also
a Director of Epsilon Global
Communications Pte Ltd.
Long Peng has more than
30 years’ experience in
finance and corporate affairs.
He is an Executive Director
of Kuok (Singapore) Limited,
Pacific Carriers Limited and
Malaysian Bulk Carriers
Berhad (a company listed
on Bursa Malaysia). He is
also a Non-Executive Director
of Pacc Offshore Services
Holdings Limited (a company
listed on the Singapore
Exchange) and a Director
of Epsilon Global
Communications Pte Ltd.
Long Peng joined the Board
of Gamma in 2011.
His responsibilities included
one of the main London audit
groups and he was an Audit and
Business Assurance Partner.
Alan has been a Non-Executive
Director and Audit Committee
Chairman for BlueBay Asset
Management plc as well as being
a Non-Executive Director for a
number of private companies.
Alan joined Gamma in June 2014
and is Chairman of the Audit
Committee.
Alan has an MA in Modern History
from Lincoln College, Oxford
and is a member of the Institute
of Chartered Accountants in
England and Wales.
Martin has a BA 1st class (hons)
degree in Business Studies,
and is a Fellow of the Institute
of Directors.
Long Peng is a Fellow
Member of the Association
of Chartered Certified
Accountants in the United
Kingdom and a member
of the Institute of Singapore
Chartered Accountants.
Year joined
2014
Year joined
2014
Year joined
2011
Year joined
2011
Committee membership
•C
hairman of the
Audit Committee
•M
ember of the
Nomination Committee
• Member of the
Remuneration Committee
Committee membership
•C
hairman of the
Remuneration Committee
• Member of the
Nomination Committee
• Member of the Audit Committee
Committee membership
• Member of the
Nomination Committee
Committee membership
• Member of the
Nomination Committee
Gamma Communications plc Annual Report and Accounts 2015
33
Senior management
Robust
leadership
The Gamma management team
has many years’ experience in both
Gamma and the communications
industry. The average tenure
at Gamma is over nine years.
Commitment, knowledge and
a passion for Gamma are what
drives this team.
Andy Morris
Group Operations Director
Daryl Pile
Director – Public Sector
Paul Peel
Development Programme Director
Andy joined Gamma in 2006 with a
proven track record of establishing and
running high quality, customer orientated
operations. Previously at Cable & Wireless
he successfully ran a business unit
responsible for 12 of Cable and Wireless’
largest corporate customers including
Marks and Spencer and Alliance &
Leicester. Prior to that he was involved
with a number of telecoms start-ups both
in the UK and across a number of
European countries.
Daryl joined Gamma in 2003 and has a proven
track record in overseeing revenue and margin
growth in the telecoms industry. With over
17 years of experience, he has taken a number
of business development roles including Head
of Channel and Sales Director at companies
such as Telia, Uniworld and Gamma. Prior
to his current position, Daryl was Head of
Sales for the PBX/UC channel overseeing
the development of around half of our
channel partners.
Paul joined the leadership team as its
Programme Director having spent over 20
years managing programmes and projects in
technology intensive industries. A graduate of
the RMA Sandhurst, he spent his early years
in telecoms with the Royal Signals, completing
a degree in Electronic Systems Engineering
en route. He joined Gamma from General
Dynamics in 2003 since when he has been
involved in delivering many of Gamma’s
significant business transformation projects.
Daryl is a graduate of the University of Surrey
with a degree in economics.
He has an MBA and Masters degrees
from King’s College London and Cranfield
University. He is also a Member of the
British Computer Society, reflecting his
wider role at the head of Gamma’s software
development teams.
He spent the early part of his career
with GEC Marconi Aerospace and is
an engineering graduate of Nottingham
Trent University.
34
Strategic report
Corporate governance
Financial statements
Malcolm Goddard
Group Commercial Director
and Company Secretary
David Macfarlane
Managing Director –
Gamma Network Solutions
Alan Mackie
Product Director
Malcolm joined Gamma in 2005 bringing
over 15 years’ experience in mergers and
acquisitions, multinational procurement,
business management and IT outsourcing.
David joined Gamma in 2012 following
Gamma’s acquisition of his managed services
business Varidion Limited and now heads up
the Enterprise solutions division.
Malcolm’s early career was with ICI and
AstraZeneca, and he has a degree in
Engineering from Cambridge University.
Prior to this, David was the CTO at Sirocom
and latterly the Group CTO at Azzurri
Communications and has over 25 years’
experience in creating and delivering
managed services.
Alan has over 20 years’ experience in the
telecoms and data managed services industry,
in senior product management, marketing and
project management roles. Immediately prior
to his current role, Alan was Head of Voice
Services at Gamma, having undertaken
product/project management roles at
application hosting companies Aspective
and Global Crossing earlier in his career.
Gamma Communications plc Annual Report and Accounts 2015
Alan is a graduate of Napier University, with
a degree in Communications Engineering.
35
Corporate governance
Corporate
governance report
The workings of the Board and its Committees
At 31 December 2015, the Board was comprised of five NonExecutive Directors, one of whom is the Chairman, and three
Executive Directors. Of the Non-Executive Directors, three
are considered to be independent. The Board is responsible to
the Shareholders for the proper management of the Group. It
meets regularly, as set down in the table opposite, to review trading
performance, set and monitor strategy, examine acquisition and
divestment possibilities, approve major capital expenditure projects
and other significant financing matters and report to shareholders.
The Board delegates authority to the management for the
day-to-day business under a set of delegated authorities which
cover: routine operational matters, purchasing procedures,
financial authority limits, contract approval procedures and
the hiring of full time and temporary staff and consultants.
Matters for review by the Board are communicated in advance
of formal meetings. All of the Directors are subject to election by
shareholders at the first AGM after their appointment to the Board
and to re-election by shareholders at least once every three years.
In addition, any Non-Executive Director who has served on the
Board for more than nine years will be subject to annual re-election.
The Chairman and Non-Executive Directors have other third
party commitments including directorships of other companies.
The Company is satisfied that these associated commitments
have no measurable impact on their ability to discharge their
responsibilities effectively. The Executive Directors have no third
party commitments.
New Directors receive induction on their appointment to the Board
which covers the activities of the Group and its key business
and financial risks, the terms of reference of the Board, and its
committees, and the latest financial information about the Group.
36
All Directors have access to the advice and services of the
Company Secretary, who is responsible to the Board for ensuring
that Board procedures are followed and that applicable rules and
regulations are complied with. In addition, the Company Secretary
will ensure that the Directors receive appropriate training as
necessary. The appointment and removal of the Company
Secretary is a matter for the Board as a whole. All Directors are
supplied with information in a timely manner in a form, and of
a quality, appropriate to enable them to discharge their duties.
The following is a table of attendance:
Board
meeting
Executive Directors
Bob Falconer
Andrew Belshaw
Richard Bligh
Non-Executive Directors
Richard Last
(Independent)
Alan Gibbins
(Independent)
Martin Lea
(Independent)
Wu Long Peng
Andrew Stone
Audit
Committee
Remuneration
Committee
Nomination
Committee
8/8
8/8
1/1
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8/8
4/4
4/4
1/1
8/8
4/4
3/4
1/1
8/8
4/4
4/4
1/1
8/8
8/8
N/A
N/A
N/A
N/A
1/1
1/1
Richard Bligh was appointed as a Director of the Company on
1 December 2015.
During 2015, certain Directors who were not committee members
attended meetings of the Audit Committee and Remuneration
Committee by invitation. These details have not been included
in the table. Where a Director is unable to attend meetings of the
Board or of Board committees, such Director is invited to review
the relevant papers for the meetings and provide his comments to
the Board or the Board committees in advance of such meetings.
Strategic report
Corporate governance
Board performance
The Company has a formal process of annual performance
evaluation for the Board, its committees and individual Directors.
The Board and its committees are satisfied that they are
operating effectively.
A performance evaluation of the Board, the Board committees and
individual Directors will continue to be conducted annually and the
method for such review will continue to be reviewed by the Board
in order to optimise the process.
The Company has Directors’ and officers’ liability insurance
in place.
Committees
The following committees deal with specified aspects of the
Group’s affairs.
Audit Committee
The make-up and workings of the Audit Committee are set out
in the Audit Committee report on page 38.
Remuneration Committee
The make-up and workings of the Remuneration Committee,
together with details of the Directors’ remuneration, interest in
options, together with information on service contracts, are set out
in the Report on Directors’ Remuneration. No Director is involved
in the decision about their own remuneration.
Nomination Committee
The Nomination Committee assists the Board in discharging
its responsibilities relating to the composition and make-up of
the Board and any committees of the Board. It is also responsible
for periodically reviewing the Board’s structure and identifying
potential candidates to be appointed as Directors or committee
members as the need may arise. The Nomination Committee is
responsible for evaluating the balance of skills, knowledge and
experience and the size, structure and composition of the Board
and committees of the Board, retirements and appointments of
additional and replacement Directors and committee members
and will make appropriate recommendations to the Board on
such matters.
Financial statements
The Company’s policy is to attract and develop a highly qualified
and diverse workforce, to ensure that all selection decisions are
based on merit and that all recruitment activities are fair and
non-discriminatory. We continue to focus on encouraging diversity
of business skills and experience, recognising that Directors and
managers with diverse skills sets, capabilities and experience
gained from different backgrounds enhance the Group.
Relations with shareholders
Communication with shareholders is given high priority by
the Board and is undertaken through press releases, general
presentations at the time of the release of the annual and interim
results and face-to-face meetings. The Group issues its results
promptly to individual shareholders and also publishes the same
on the Company’s website. Regular updates to record news
in relation to the Company are also included on the website.
In order to ensure that the members of the Board develop an
understanding of the views and concerns of major shareholders
there is regular dialogue with institutional shareholders, including
meetings after the announcement of the Company’s annual and
interim results. The Board uses the AGM to communicate with
private and institutional investors and welcomes their participation.
Signed on behalf of the Board by:
Richard Last
Chairman and Independent
Non-Executive Director
21 March 2016
The Nomination Committee is chaired by Richard Last and its
other members are Martin Lea, Alan Gibbins, Wu Long Peng
and Andrew Stone.
Gamma Communications plc Annual Report and Accounts 2015
37
Corporate governance
Audit Committee
report
→→considers whether these statements and announcements
provide a balanced and understandable view of Gamma’s
strategy and performance, and of the associated risks;
→→considers the appropriateness of accounting policies and
significant accounting judgements and the disclosure of these
in the financial statements;
→→reviews the effectiveness of financial controls and systems.
In this context the Committee continues to keep under review
the need for an internal audit function; and
→→oversees the relationship with and performance of the
external auditors.
Activities of the Committee during the year
In fulfilment of the responsibilities set out above, the Committee’s
activities have focused on financial reporting and the related
statutory audit, and the assessment of internal controls. In addition,
the Committee conducted a tender for the external audit, which is
also explained below.
Alan Gibbins
Audit Committee Chairman
Membership
The members of the Audit Committee and meetings
attended are:
Name
Alan Gibbins, Chairman
Richard Last
Martin Lea
Meetings attended
4/4
4/4
4/4
The Committee consists of the three Independent Non-Executive
Directors, including the Chairman of the Board, who between them
have a balance of recent and relevant financial experience and
accounting training, and general business knowledge. There were
no changes to the membership of the Committee during the year.
The Committee meets at least three times a year generally just
prior to Board meetings to facilitate immediate and efficient
reporting to the Board, with additional meetings where necessary.
The external auditors are invited to each meeting. The Chief
Executive Officer, Chief Financial Officer and the other NonExecutive Directors also attend by invitation.
The Committee also meets separately with the external auditors
without others being present, and the Chairman of the Committee
maintains a regular dialogue with the Chief Financial Officer and
his team.
Objectives and responsibilities
The Committee’s key objectives are to provide effective
governance over Gamma’s financial reporting and the
performance of the external auditors; to provide oversight of
the Group’s systems of internal financial control; and to report
to the Board on these matters.
In fulfilment of these objectives the Committee:
→→reviews Gamma’s financial statements and announcements,
including compliance with statutory and listing requirements.
As an AIM-listed company, Gamma is not required fully to
comply with the UK Corporate Governance Code, but seeks
nevertheless to comply in all material respects;
38
Financial reporting and statutory audit
The Committee has reviewed with both management and the
external auditors the half year and annual financial statements,
focusing on:
→→the overall truth and fairness of the results and financial
position, including the clarity of disclosures shown in the
statements and their compliance with statutory, listing and
best practice requirements;
→→the appropriateness of the accounting policies and practices
used in arriving at those results;
→→the resolution of significant accounting judgements or of
matters raised by the external auditors during the course
of their half year review or annual statutory audit; and
→→the quality of the Annual Report taken as a whole, including
disclosures on governance, strategy, risks and remuneration,
and whether it gives a fair and balanced picture of the Group.
External audit
The Committee discussed, challenged and agreed with Deloitte LLP
their detailed audit plans prepared in advance of the audit, which set
out their assessment of key audit risks and materiality. There were
particular discussions on the complexity of auditing revenues and
associated costs and the use of specialist audit techniques for
Gamma’s billing and related IT systems. To help with these
discussions, the Billing and Revenue Assurance Manager
presented to the Committee on what Gamma itself does on a daily
basis to ensure the accuracy of billings to clients and that Gamma
only pays for the proper amount of any corresponding external cost.
The Committee satisfied itself that the appropriate degree of audit
rigour and scepticism would be applied in this crucial area.
Accounting policies, practices and judgements
The selection of appropriate accounting policies and practices is
the responsibility of management, and the Committee discussed
these with both management and the external auditors.
Strategic report
Corporate governance
Significant areas considered by the Committee in relation to the
2015 financial statements are set out below.
→→Revenue recognition. Gamma has a number of revenue
streams arising from its various products and services which
should be recognised in line with relevant contractual terms.
As discussed earlier in this report, the Committee’s
consideration of this area took into account the extensive work
carried out by Gamma’s Revenue Assurance function on the
integrity of amounts billed and charges received and the audit
work on the relevant systems carried out by Deloitte.
→→Exceptional items. These should be disclosed, fully described
in the notes to the accounts and taken into consideration for
year on year comparisons, including the calculation of EPS.
The Committee considered the quantum and disclosure of
relevant amounts.
→→Capitalisation of internal development costs. Gamma carries
out a significant level of in-house development which is
capitalised and amortised where appropriate – that is, where
projects are technically feasible, can be completed and
the asset can or will be capable of use or sale.
The Committee considers management’s capitalisation
process and the assumptions used when assessing whether
expenditure should be capitalised or otherwise.
→→Impairment of goodwill. In accordance with accounting
standards, Gamma is required to test annually whether
goodwill has suffered any impairment.
The Committee reviews the impairment testing carried out,
including estimates of future cash flows (the achievability of
the long term business plan) and the choice of discount rate.
→→Share based payments. The charge in the financial statements
for share based payments can be complex, often involving
estimates around market volatility and yield.
The Committee reviewed the calculations prepared by
Gamma’s external advisers in this area, calculations by
management, the assumptions relating to performance
conditions and the findings of the external auditors.
→→Leasehold dilapidations. Provisions for leasehold dilapidations
are estimates of the cost of returning leasehold properties to
a defined condition at the end of the lease.
The Committee has satisfied itself as to the basis of the
estimates made, particularly the costs to be incurred at the
end of each lease.
→→Taxation. The Group recognises tax liabilities based on its
assessment of the supportability of its tax return positions.
The Committee considered the estimates involved in arriving
at the provision for taxation, in particular where there is any
possibility of challenge upon review by the tax authorities.
Assessment of internal financial control
Management is responsible for putting in place internal financial
controls over financial reporting and to protect the business from
identified material risks.
Gamma Communications plc Annual Report and Accounts 2015
Financial statements
As reported last year, extensive due diligence was carried out in
2014 on the Group’s financial controls as part of the IPO process.
Those controls were also reviewed by the external auditors as part
of the statutory audit. With the change in auditors for 2015 the
financial controls have had another fresh review and the external
auditors have reported their findings to the Audit Committee. The
Committee has also, as described above, received a presentation
from Gamma’s Revenue Assurance team on the systems and
procedures surrounding revenue and associated costs.
Given the level of controls in place, the Committee is satisfied
at present that no internal audit establishment is required.
The Committee will, however, continue to keep this under review.
Audit tender process
Following the conclusion of the statutory audit of the 2014 financial
statements, the Board, on the Committee’s recommendation,
considered that it was appropriate to put the audit for the 2015
financial year out to tender. The previous auditors, Grant Thornton
LLP, were not invited to take part in this process, having already
served as Gamma’s auditors for over ten years.
The tender process and the Committee’s involvement are set out below.
→→visits by the Chairman of the Audit Committee and the Chief
Financial Officer to the local offices of major audit practices
to assess their interest in tendering for the audit;
→→provision of ‘data room’ materials to those tendering;
→→presentation of the Group by management to all firms tendering;
→→meetings of those firms with members of the finance team and
the Chairman of the Audit Committee;
→→submission of written proposals outlining the audit team,
audit approach, proposed transition arrangements and issues,
independence considerations and proposed fees;
→→oral presentation by key members of proposed audit teams
to a panel comprised of the Audit Committee and the Chief
Financial Officer;
→→evaluation of the firms taking into account feedback from each
stage of the tender process; and
→→recommendation to the Board.
As a result of this process, the Audit Committee proposed and it
was unanimously resolved by the Board to appoint Deloitte LLP
as Gamma’s auditors for the 2015 audit, including the review of
the half year results.
External audit effectiveness
Following the publishing of the 2015 financial statements, the
Audit Committee will be carrying out an assessment of the external
auditors and the external audit process. The outcome will be
reported in the 2016 Annual Report.
Alan Gibbins
Audit Committee Chairman
21 March 2016
39
Corporate governance
Remuneration
Committee report
Dear Shareholders
I am pleased to introduce the Director’s Remuneration Report for
the 2015 financial year. The Chairman’s statement (on pages 6 to
7) provides a summary of the progress the Group has made over
the year. The Remuneration Committee is committed to structuring
senior executive remuneration that is competitive, incentivises
and rewards good performance, and that will help the Company
to continue building on this strong performance, thereby creating
value for shareholders. The Remuneration Committee is
appointed by the Board, and comprises the three Independent
Non-Executive Directors.
Martin Lea
Remuneration Committee Chairman
This report is on the activities of the
Remuneration Committee for the
period to 31 December 2015. It sets
out the remuneration policy and the
remuneration details for the Executive
and Non-Executive Directors of
the Company.
The report is split into three main areas:
Page
The statement by the Chairman of the
Remuneration Committee
The Directors’ remuneration policy
The Annual Report on Remuneration
40
41
44
Membership
The members of the Remuneration Committee and
meetings attended are:
Name
Martin Lea, Chairman
Richard Last
Alan Gibbins
Meetings attended
4/4
4/4
3/4
The Committee is primarily responsible for determining and
agreeing with the Board the broad policy for the remuneration
and employment terms of the Executive Directors, Chairman and
other senior executives and, in consultation with the CEO, for
determining the total individual remuneration packages of senior
executive managers. The Committee is also responsible for the
review of, and making recommendations to the Board in
connection with share incentive plans, and performance related
pay schemes and their associated targets, and for the oversight
of employee benefit structures across the Group. The Committee’s
full terms of reference are reviewed regularly and approved by the
Board. No Director or manager is involved in any decisions as to
their own remuneration.
Short term performance for senior executives is incentivised using
an annual bonus scheme based on the achievement of profitability.
Long term performance is incentivised by way of a long term
incentive plan (LTIP) based on the achievement of Total
Shareholder Return (TSR) and Earnings Per Share (EPS)
growth goals, over a three year measurement period.
In order to further facilitate the alignment of employee and
shareholder interests, prior to its admission to AIM, the Group also
adopted a Group-wide general Share Incentive Plan (SIP) and a
Company Share Option Plan (CSOP).
Under the SIP, awards of 256,320 free shares were made to all
employees in October 2014. In March 2015, employees purchased
98,501 partnership shares under the SIP, which were matched 1:1
by the Company. In May 2015, employees indicated their intention
to purchase 121,353 partnership shares under the SIP, which will
be matched 1:1 by the Company.
The CSOP is designed to enable the Group to selectively incentivise
key high performing employees. In May 2015, 370,349 awards of
options were made to high performing employees under the CSOP.
In 2016, it is planned to introduce a new Company wide SAYE share
save scheme. These various schemes provide the Board with the
tools to help the alignment of employee and shareholder interests.
Employees in the Group generally participate in a bonus scheme
that enables them to earn up to 10% of basic salary based half
on personal performance and half on Company performance.
Furthermore, based on the Company’s performance in 2015,
and the contribution and hard work of all the employees, the
Board was pleased to approve a 2% general salary increase
at the 2015 year end.
40
Strategic report
Corporate governance
Financial statements
This Remuneration Committee report includes a summary of the remuneration policy, details of Directors’ Service Agreements as well
as the Annual Report on Remuneration.
As an AIM-listed company, this report is not mandatory, but is included as a matter of best practice. Gamma’s Remuneration Committee
report was approved unanimously on an advisory basis at the 2015 AGM and we are not proposing any material policy changes for the
current financial year. This Remuneration Committee report will again be put to an advisory vote at the forthcoming 2016 AGM.
Martin Lea
Remuneration Committee Chairman
21 March 2016
Directors’ remuneration policy
This part of the Directors’ Remuneration Report sets out the remuneration policy of the Company with regard to its Directors.
Policy on Executive Director remuneration
The Company’s remuneration policy is designed to ensure that the Company is able to attract, retain and motivate executives and senior
management of the right quality to enable the Company to fulfil its objectives and longer term potential. The retention of key management
and the alignment of management incentives with the creation of shareholder value are a key objective of this policy.
Setting base salary levels for Executive Directors at an appropriate level is key to management retention. Therefore, the Remuneration
Committee seeks to ensure that salaries are market competitive for comparable companies. The aim is to set total compensation within
a range around the median level for the Company’s peer group.
The Remuneration Committee is directly responsible for setting the remuneration of Executive Directors and for giving guidance on and
approving recommendations for the remuneration of other members of the senior management team.
The main components of the remuneration policy for the year ending 31 December 2016 and how they are linked to and support the
Company’s business strategy are summarised below:
Purpose and link to strategy
Operation
Potential remuneration
Performance metrics
Salaries are typically reviewed
annually, with any changes
effective from 1 January. The
review takes into account:
The CEO’s base salary was
reviewed on 1 January 2016
(the prior review being in October
2014) and was increased by 2%
to £299,880.
Not applicable.
Base salary
To be set at a level which is
sufficiently competitive to recruit
and retain individuals of the
appropriate calibre to deliver the
Company’s strategy, and which
takes into account the Director’s
experience and personal
contribution to the Company’s
strategy.
•Company performance;
•the role, experience and
performance of the individual
Director; and
•average workforce salary
adjustments within the Company.
The CFO’s salary was reviewed on
1 January 2016 and increased by
2% to £183,600. The prior review
was in June 2015 at the time of his
promotion to CFO.
Salaries are benchmarked from
time to time against comparable
roles at companies of a similar size
and complexity in the Telecoms
and IT services sectors.
The COO was appointed to this
position on 1 December 2015.
His salary is £200,000 with effect
from 1 January 2016.
Reviewed from time to time to ensure
that benefits when taken together
with other elements of remuneration
remain market competitive.
The cost of providing these benefits
vary year on year depending on
the schemes’ premiums. The
Remuneration Committee monitors
the overall cost of the benefits
package.
Benefits
To complement basic salary by
providing market competitive
benefits to attract and retain
executives.
Benefits for the Executive Directors
currently comprise participation in
the Company’s life assurance and
income protection schemes.
Gamma Communications plc Annual Report and Accounts 2015
Not applicable.
41
Corporate governance
Remuneration Committee report
continued
Purpose and link to strategy
Operation
Potential remuneration
Performance metrics
The Executive Directors (together
with all other eligible staff) are able
to participate in the Company’s
defined contribution (money
purchase) pension scheme.
The Company contributes a
maximum of 5.1% of salary.
A contribution of up to 5.1% per
annum of salary is paid into the
scheme, by the Company, on
behalf of the COO and CFO. The
COO and CFO are able to request
that the Company, at the discretion
of the Remuneration Committee,
makes additional contributions
where salary or bonus has been
waived. The CEO does not
participate in the scheme.
Not applicable.
The Executive Directors (as well
as the other senior executive
managers) participate in a
discretionary, annual, performance
related bonus scheme. Targets are
set at the beginning of each year
based on the recommendations
of the Remuneration Committee.
Bonuses are paid in cash based
on audited financial results.
For the Executive Directors, the
maximum capped bonus potential
is 100% of salary.
For the year ending 2015, the
targets were based on growth in
Adjusted Profit Before Tax (PBT).
For 2016, targets are again based
on growth in Adjusted Profit Before
Tax (PBT).
The Executive Directors (as well as
other senior executive managers)
participate in a discretionary LTIP.
The Remuneration Committee
would in normal circumstances
expect to make annual LTIP awards
to the Executive Directors (and
other senior executive managers)
at a value of 100% of base salary.
Pension
To provide retirement benefits,
which when taken together
with other elements of the
remuneration package, will
enable the Company to attract
and retain executives.
Annual bonus
To incentivise the achievement
of the Company’s annual
financial targets.
For 2015, the Executive Directors
achieved the maximum capped
bonus of 100% of salary.
Long Term Incentive Plan
(LTIP)
To motivate executives and
incentivise the achievement
of longer term financial
performance.
To align the interests of
executives and shareholders.
The plan entitles participants to an
allocation of, or options over, free
(or nominal value) shares after a
performance period of three years,
subject to certain performance and
service conditions being met.
Participation is at the discretion
of the Remuneration Committee.
Awards will typically be made
annually based on a multiple
of annual salary. Performance
conditions are set by the
Remuneration Committee at the
time of the award. The plan rules
amongst other things include
claw-back provisions and a
limitation to ensure that new
shares issued, when aggregated
with all other employee share
awards, must not exceed 10%
of issued share capital over any
ten year period.
42
Following the announcement of the
Group’s results for 2014, awards
were granted under this scheme
at a value of 100% of base salary.
These awards will vest in April
2018, subject to service and
performance conditions.
It is anticipated that further awards
will be made in April 2016 following
announcement of the Group’s
annual results.
Vesting of the LTIP awards is
conditional upon the following
performance conditions:
15% of the shares if annual
compound total shareholder return
(TSR) over the performance period
equals 8%, and 50% of the shares
if annual compound TSR over the
performance period equals 15%
or higher, with straight line vesting
in between.
15% of the shares if annual
compound growth of adjusted
earnings per share (adjusted
for exceptional costs and share
based payment costs) over the
performance period equals 8%,
and 50% of the shares if annual
compound growth of adjusted
EPS over the performance
period equals 20% or higher, with
straight line vesting in between.
In both cases (TSR and EPS) the
Committee determined that at this
stage of Gamma’s development
and its market position, absolute
performance measures would be
more appropriate than relative
measures.
Strategic report
Corporate governance
Financial statements
Alignment of executive remuneration and the market
In 2014, ahead of the IPO, the Company engaged h2glenfern, a remuneration advisory practice, to undertake a benchmarking exercise
for use in considering the remuneration levels of the Executive Directors as well providing advice on longer term incentive plan structures.
In undertaking this work h2glenfern took into account Gamma’s size, position, profile and outlook, and reviewed the remuneration data
for a number of comparable UK quoted telecoms/technology companies. It is planned that a similar benchmarking exercise will be
undertaken every three years.
In addition to such formal benchmarking exercises, the Committee takes advantage of various annual AIM Directors’ Remuneration
reports as well as available data about similar and competing companies. The Company aims to position Gamma Directors’ salary and
annual bonus at the median level, but to also ensure there is significant incentive and reward for better than average longer term results
through the performance based Long Term Incentive Plan.
Consideration of employment conditions elsewhere in the Group
The Committee considers the pay and conditions of employees throughout the Company when determining the remuneration
arrangements for Executive Directors although no direct comparison metrics are applied. In particular, the Committee considers the
relationship between general changes to UK employees’ remuneration and Executive Director reward. Whilst the Committee does
not directly consult with our employees as part of the process of determining executive pay, the Board does receive feedback from
employee surveys that takes into account remuneration in general. The Committee also receives updates from the Head of Group HR.
Policy on Non-Executive Director remuneration
The Chairman and the other Non-Executive Directors’ remuneration comprises only fees. The Chairman’s fee is approved by the
Board on the recommendation of the Remuneration Committee. The other Non-Executives’ fees are approved by the Board on the
recommendation of the Chairman and CEO. The Non-Executive Directors are not involved in any decisions about their own remuneration.
Additional fees over and above the base fee are payable to the chairmen of the Audit and Remuneration Committees. They are reviewed
annually with changes effective from 1 January each year. The Chairman and the other Independent Non-Executive Directors are
entitled to be reimbursed for reasonable expenses.
Details of the fees paid for 2015 are set out in the Annual Report on Remuneration. There were no changes to the general Non-Executive
Director fees at the start of 2016, however the Committee Chair fees for the chairs of the Remuneration and Audit Committees were
increased by £1,000 each with effect from 1 January 2016.
The current fees are as follows:
Director
Directors’ Fee
Committee Chair Fee
2016
Richard Last
£75,000
–
£75,000
Alan Gibbins
£35,000
£6,000
£41,000
Martin Lea
£35,000
£6,000
£41,000
Wu Long Peng
£35,000
–
£35,000
Andrew Stone
£35,000
–
£35,000
Gamma Communications plc Annual Report and Accounts 2015
43
Corporate governance
Remuneration Committee report
continued
Directors’ Service Agreements
Executive Directors’ Service Agreements
The key elements of the Executive Directors’ Service Agreements are summarised in the table below:
Key element
CEO Bob Falconer
CFO Andrew Belshaw
COO Richard Bligh
Effective date of
Service Agreement
Notice period
10 October 2014
10 October 2014
1 January 2016
6 months’ notice given by either party
6 months’ notice given by either party
6 months’ notice given by either party
Basic salary
£299,880 per annum
£183,600 per annum
£200,000 per annum
Annual bonus
Discretionary performance related
Discretionary performance related
Discretionary performance related
Pension
None
Benefits
Participation in Company life
assurance and income protection
schemes
Eligible to participate in Company
share schemes
The Company has the discretion
to make a payment of basic salary
in lieu of notice to terminate the
employment forthwith in the event
of notice being given
Company contributes up to 5.1% of
basic salary into defined contribution
money purchase scheme
Participation in Company life
assurance and income protection
schemes
Eligible to participate in Company
share schemes
The Company has the discretion
to make a payment of basic salary
in lieu of notice to terminate the
employment forthwith in the event
of notice being given
Company contributes up to 5.1% of
basic salary into defined contribution
money purchase scheme
Participation in Company life
assurance and income protection
schemes
Eligible to participate in Company
share schemes
The Company has the discretion
to make a payment of basic salary
in lieu of notice to terminate the
employment forthwith in the event
of notice being given
Share schemes
Termination payments
Non-Executive Director Letters of Appointment
The Non-Executive Directors have Letters of Appointment stating that their appointment is for an initial term of three years from the date
of the appointment letter. The Letters of Appointment provide for termination of the appointment with three months’ notice by either party.
The current Non-Executive Directors’ appointments commenced on the following dates:
Director
Date of appointment
Alan Gibbins
17 June 2014
Richard Last
17 June 2014
Martin Lea
17 June 2014
Wu Long Peng
6 June 2014
Andrew Stone
6 June 2014
Annual Report on Remuneration
Introduction
This Annual Report on Remuneration sets out information about the remuneration of the Directors of the Company, for the period ended
31 December 2015.
Remuneration Committee
Membership
The Remuneration Committee consisted of the following Directors during the year to 31 December 2015.
Martin Lea (Chairman), Independent Non-Executive Director.
Alan Gibbins, Independent Non-Executive Director.
Richard Last, Independent Non-Executive Director and Chairman of the Board.
Role of the Remuneration Committee
The role of the Remuneration Committee is to determine and recommend to the Board the remuneration policy for the Executive
Directors. This includes base salary, annual and long term incentive awards and pension arrangements. In determining the remuneration
policy, the Remuneration Committee takes into account many factors including the need for a significant proportion of the Executive
Directors’ remuneration to be structured so as to link rewards to business performance.
44
Strategic report
Corporate governance
Financial statements
Activities of the Remuneration Committee in 2015
The Committee met four times in 2015 in order to conduct the following main items of business: agree the annual Remuneration
Committee report; review the terms of the new Company SIP and CSOP schemes; approve the 2015 LTIP and CSOP awards and LTIP
targets; review the projected dilution impact of various share schemes; consider the Company annual salary review; consider the terms
of a new SAYE Company-wide share save scheme and discuss revisions to Executive Directors’ remuneration and Service Agreements
and the executive annual bonus scheme structure and targets.
Advisers
There were no material external adviser fees incurred in connection with remuneration matters during the course of 2015.
Remuneration of the Executive Directors
Bonuses are shown on an accrued basis.
The share option remuneration has been calculated as the excess of the share price on the vesting date over the exercise price for share
options that vested during the year.
Director
Salary and fees
Benefits
Annual bonus
Pension
Share options
Total for
2015
£2,320,287
Bob Falconer
£294,000
–
£294,000
–
£1,732,287
Andrew Belshaw
£131,305
–
£140,000
£36,706
£195,363
£503,374
Richard Bligh
£150,765
£10,000
£120,612
£7,689
£366,933
£655,999
Andrew Belshaw waived £28,695 of his salary for 2015 and received a pension contribution of the same amount.
Richard Bligh became a Director of the Company on 1 December 2015 and his salary from then until the end of 2015 was £12,564.
In addition to the above, the Company provides life assurance and group income protection for the Executive Directors.
Director
Salary and fees
Benefits
Annual bonus
Bob Falconer
£250,793
–
£294,000
Andrew Belshaw
£113,797
–
£40,000
Share options
Total for
2014
–
–
£544,793
£114,189
–
£267,986
Pension
Bob Falconer became a Director on 27 June 2014 but was also a director of the former group holding company (Gamma Telecom
Holdings Limited). His remuneration is shown assuming that Gamma Communications plc had been the holding company.
Andrew Belshaw became a Director of the Company on 1 October 2014 and his salary from then until the end of the period was £38,505.
He waived £100,000 of his bonus relating to 2014 and received a pension contribution of the same amount.
On 2 October 2014, the Company made an interest free loan of £2.6m to Bob Falconer to enable him to maintain his holding of 5%
of the issued Ordinary Share capital of the Company. At the year end, the outstanding loan was £2.6m (2014: £2.6m).
On 6 May 2014, a subsidiary (Gamma Telecom Holdings Limited) made an interest free loan of £50,000 to Andrew Belshaw to enable
him to repay a loan of £50,000 from the Employee Benefit Trust. This loan was repaid on 2 December 2015.
On 6 May 2014, a subsidiary (Gamma Telecom Holdings Limited) made an interest free loan of £75,000 to Richard Bligh to enable him
to repay a loan of £75,000 from the Employee Benefit Trust. This loan was repaid on 31 March 2015. On 2 July 2014, a subsidiary
(Gamma Telecom Limited) made an interest free loan of £250,000 to Richard Bligh. This loan was fully repaid by 3 June 2015.
Remuneration of the Non-Executive Directors
Director
Directors’ Fee
Committee
Chair Fee
Total for
2015
Richard Last
£75,000
–
£75,000
Alan Gibbins
£35,000
£5,000
£40,000
Martin Lea
£35,000
£5,000
£40,000
Wu Long Peng
£35,000
–
£35,000
Andrew Stone
£35,000
–
£35,000
Gamma Communications plc Annual Report and Accounts 2015
45
Corporate governance
Remuneration Committee report
continued
Director
Committee
Chair Fee
Directors’ Fee
Total for the
7 months to
December
2014
Richard Last
£43,750
–
£43,750
Alan Gibbins
£20,416
£2,917
£23,333
Martin Lea
£20,416
£2,917
£23,333
Wu Long Peng
£20,417
–
£20,417
Andrew Stone
£20,417
–
£20,417
Share scheme interests awarded during the year ended 31 December 2015
Deferred Share Scheme (DSS)
The following awards were made under the DSS in respect of the financial performance for the 18 months ended 30 June 2014. There
are no performance conditions attached.
Director
Bob Falconer
Andrew Belshaw
Richard Bligh
Type of
scheme interest
Basis of award
Number of
awards
Vesting date
Exercise price
Exercise date
Nil-Cost Option
Discretionary
219,496
1 Feb 2015
£0.0025
–
Nil-Cost Option
Discretionary
329,244
10 Oct 2015
£0.0025
–
Nil-Cost Option
Discretionary
71,765
1 Feb 2015
£0.0025
2 Dec 2015
Nil-Cost Option
Discretionary
71,765
1 Feb 2016
£0.0025
–
Nil-Cost Option
Discretionary
35,882
1 Feb 2017
£0.0025
–
Nil-Cost Option
Discretionary
134,778
1 Feb 2015
£0.0025
23 Mar 2015
Nil-Cost Option
Discretionary
134,778
1 Feb 2016
£0.0025
–
Nil-Cost Option
Discretionary
67,389
1 Feb 2017
£0.0025
–
Unapproved share option plan
There were no awards made under the unapproved share option plan during the year ended 31 December 2015.
The following award was made under an unapproved share option plan during the year ended 31 December 2014. There are no vesting
conditions.
Director
Andrew Belshaw
Type of
scheme interest
Basis of award
Number of
awards
Vesting date
Exercise price
Exercise date
Option
Discretionary
31,204
Immediate
£1.87
2 Dec 2015
This award was made pre-IPO to compensate Andrew Belshaw for the fact that he was unable to exercise existing options on IPO.
Long Term Incentive Plan (LTIP)
The following awards were made under the LTIP. The performance conditions are set out below the table.
2015
Director
Type of
scheme interest
Basis of award
Number of
awards
Vesting date
Exercise price
Exercise date
Bob Falconer
Nil-Cost Option
100% of Salary
108,888
1 April 2018
£0.0025
–
Andrew Belshaw
Nil-Cost Option
100% of Salary
51,851
1 April 2018
£0.0025
–
Richard Bligh
Nil-Cost Option
100% of Salary
55,838
1 April 2018
£0.0025
–
Type of
scheme interest
Basis of award
Number of
awards
Vesting date
Exercise price
Exercise date
Bob Falconer
Nil-Cost Option
200% of Salary
288,220
1 April 2017
£0.0025
–
Andrew Belshaw
Nil-Cost Option
200% of Salary
170,732
1 April 2017
£0.0025
–
Richard Bligh
Nil-Cost Option
200% of Salary
179,376
1 April 2017
£0.0025
–
2014
Director
At the time of making an award the Remuneration Committee sets challenging long term performance targets in order to align the
interests of the Directors with shareholders and which, together with continuous employment conditions, must be satisfied before
an award vests.
46
Strategic report
Corporate governance
Financial statements
The LTIP awards have a performance period of three years starting from the vesting commencement date. The awards will vest
as follows:
→→15% of the shares if annual compound total shareholder return (“TSR”) over the performance period equals 8%, and 50% of the
shares if annual compound TSR over the performance period equals 15% or higher with pro rata straight line vesting in between;
and
→→15% of the shares if the annual compound growth of the Company’s adjusted earnings per share between the financial years
at the beginning and the end of the performance period is equal to 8%, and 50% of the shares if the annual compound growth
of the Company’s adjusted earnings per share over the same period is equal to or in excess of 20% with pro rata straight line
vesting in between.
Statement of Directors’ shareholding and share interests
Directors’ share interests at 31 December 2015 are set out below:
2015
Number
of beneficially
owned shares
With
performance
measures
Options
Without
performance
measures
Vested but
unexercised
Exercised
during
the year
Executive Director
Bob Falconer
4,567,193
397,168
–
548,740
Nil
Andrew Belshaw
277,002
222,587
107,647
–
179,306
Richard Bligh
422,222
235,214
202,167
–
134,778
53,475
–
–
–
Nil
Non-Executive Director
Richard Last
Alan Gibbins
13,368
–
–
–
Nil
Martin Lea
13,368
–
–
–
Nil
Wu Long Peng
–
–
–
–
Nil
Andrew Stone
3,650,000
–
–
–
Nil
Number
of beneficially
owned shares
With
performance
measures
Vested but
unexercised
Exercised
during
the year
2014
Options
Without
performance
measures
Executive Director
4,567,193
288,280
329,234
219,496
Nil
Andrew Belshaw
Bob Falconer
277,002
170,732
179,412
107,541
Nil
Richard Bligh
422,222
179,376
336,904
–
130,508
Non-Executive Director
Richard Last
53,475
–
–
–
Nil
Alan Gibbins
13,368
–
–
–
Nil
Martin Lea
13,368
–
–
–
Nil
Wu Long Peng
–
–
–
–
Nil
Andrew Stone
3,700,000
–
–
–
Nil
Richard Bligh was appointed as a Director of the Company on 1 December 2015.
This Remuneration Committee report will be put to an advisory vote at the forthcoming 2016 AGM. This report was approved by the
Board of Directors on 21 March 2016 and signed on its behalf by
Martin Lea
Remuneration Committee Chairman
Gamma Communications plc Annual Report and Accounts 2015
47
Corporate governance
Directors’ report
The Directors present their Annual Report
on the affairs of the Group, together with
the financial statements for the year ended
31 December 2015.
An indication of likely future developments in the business of the
Company and details of research and development activities are
included in the strategic report.
Information about the use of financial instruments by the Company
and its subsidiaries is given in note 18 to the financial statements.
Dividends
The Directors recommend a final dividend of 4.4p (2014: 3.95p)
per Ordinary Share to be paid on 23 June 2016 to ordinary
Shareholders on the register on 2 June 2016. An interim dividend
of 2.2p (2015: £Nil) per Ordinary Share was paid on 23 October
2015 to all shareholders on the register at 25 September 2015.
Directors
The names and biographies of the Directors during the year are
disclosed on pages 32 to 33.
Share capital and share options
Details of the share capital of the Company and options over
shares of the Company are set out in notes 21 and 25 to the Group
financial statements. Over the period, the Company had three
share incentive schemes by which Directors and employees may:
(i) be granted options under a long term incentive scheme to
subscribe for nil cost shares in the Company, (ii) be issued shares
under the Company Share Option Plan, and (iii) be issued shares
under a Share Incentive Plan.
The maximum aggregate number of shares which may be
issued in respect of these schemes is limited to 10% of the
issued share capital.
Composition of the Group
Details concerning subsidiary undertakings are given in note 13
to the Group financial statements.
Directors’ interest in share capital
The Directors’ interest in share capital is shown within the
Remuneration Report.
Directors’ indemnities
The Company has made qualifying third party indemnity provisions
for the benefits of its Directors which were made during the course
of the year and remain in force at the date of this report.
Going concern
The Group’s business activities, together with the factors likely
to affect the future development, performance and position,
are set out in the strategic report. The financial position of the
Group, its cash flows, liquidity position and borrowing facilities are
described in the Finance Review section in the strategic report and
in note 18. Further information on the Group’s exposure to financial
risks and the management thereof is provided in note 18.
The Board’s review of the accounts, budgets and financial plan
leads the Directors to believe that the Group has sufficient
resources to continue in operation for the foreseeable future.
The financial accounts are therefore prepared on a going
concern basis.
48
Strategic report
Corporate governance
Treasury policy
The objective of the Group’s treasury policy is to manage the
Group’s financial risk and to minimise the adverse effects of
fluctuations in the financial markets on the value of the Group’s
financial assets and liabilities, on reported profitability and on the
cash flows of the Group. Note 18 sets out the particular risks to
which the Group is exposed, and how these are managed.
Interests in contracts
There have been no contracts or arrangements during the financial
year in which a Director of the Company was materially interested
and which were significant in relation to the Group’s business.
Health, safety, the environment and the community
The Group has a formal Health, Safety and Environmental
Policy which requires all operations within the Group to pursue
economic development whilst protecting the environment.
The Directors aim not to damage the environment of the areas
in which the Group operates, to meet all relevant regulatory and
legislative requirements and to apply responsible standards of
its own where relevant laws and regulations do not exist.
Financial statements
Auditors and their independence
A resolution to appoint auditors for the year to 31 December 2016
will be proposed at the AGM. The Company has a policy for
approval by the Audit Committee of non-audit services by the
Auditor, to preserve independence.
Disclosure of information to auditors
The Directors who held office at the date of approval of this
Directors’ report confirm that, so far as they are each aware, there
is no relevant audit information of which the Company’s auditor is
unaware; and each Director has taken all the steps that he ought
to have taken as a Director to make himself aware of any relevant
audit information and to establish that the Company’s auditor is
aware of that information. This confirmation is given and should
be interpreted in accordance with the provisions of s418 of the
Companies Act 2006.
By order of the Board:
Andrew Belshaw
Chief Financial Officer
21 March 2016
It is the policy of the Group to consider the health and welfare
of employees by maintaining a safe place and system of work
as required by legislation in each of the countries where the
Group operates.
Political donations
No political donations were made in the year.
Employee consultation
Gamma recognises the essential importance of employees to the
success of the business and ensures that they are fully informed
of events that directly affect them and their working conditions.
Information on matters of concern to employees is given in
briefings that seek to provide a common awareness on the part
of all employees of the financial and economic factors affecting
the Group’s performance.
During both the year and the prior year Gamma undertook
the Best Companies Limited employee engagement survey
and achieved a 2-star accreditation. The results from this survey
attracted a listing in the Sunday Times Best 100 Companies
to Work For and Gamma was placed in the top 50 companies
in the UK.
Disabled employees
Applications for employment by disabled persons are given full
and fair consideration for all vacancies in accordance with their
particular aptitudes and abilities. It is the policy of the Company
that training and promotion opportunities should be available
to all employees.
Gamma Communications plc Annual Report and Accounts 2015
49
Corporate governance
Statement of Directors’
responsibilities
The Directors are responsible for preparing
the Annual Report and the financial
statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare such financial
statements for each financial year. Under that law the Directors are
required to prepare the Group financial statements in accordance
with International Financial Reporting Standards (IFRSs) as
adopted by the European Union and Article 4 of the IAS
Regulation and have also chosen to prepare the parent company
financial statements in accordance with Financial Reporting
Standard 101 ‘Reduced Disclosure Framework’.
Under company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs and profit or loss of the Company for
that period. In preparing these financial statements, the Directors
are required to:
→→select suitable accounting policies and then apply
them consistently;
→→make judgements and estimates that are reasonable
and prudent;
→→state whether applicable UK Accounting Standards have
been followed, subject to any material departures disclosed
and explained in the financial statements; and
→→prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
50
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
In so far as each of the Directors is aware:
→→there is no relevant audit information of which the Company’s
auditors are unaware; and
→→the Directors have taken all steps that they ought to have taken
to make themselves aware of any relevant audit information
and to establish that the Auditors are aware of that information.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may
differ from legislation in other jurisdictions.
Auditor
During the year, Grant Thornton UK LLP resigned as auditors of
the Company. Deloitte LLP were appointed by the Directors to fill
the casual vacancy arising and will be proposed for reappointment
in accordance with section 485 of the Companies Act 2006.
Andrew Belshaw
Chief Financial Officer
21 March 2016
Strategic report
Corporate governance
Financial statements
Independent auditor’s report to the
members of Gamma Communications plc
We have audited the financial statements
of Gamma Communications plc for the
year ended 31 December 2015 which
comprise the Consolidated Statement of
Comprehensive Income, the Consolidated
Statement of Financial Position, the
Consolidated Statement of Cashflows,
the Consolidated Statement of Changes
in Equity, the Company Balance Sheet, the
Company Statement of Changes in Equity,
and the Group and Company related notes 1
to 29 and 1 to 9 respectively. The financial
reporting framework that has been applied
in the preparation of the Group financial
statements is applicable law and
International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable
law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice), including FRS 101
“Reduced Disclosure Framework”.
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s members
as a body, for our audit work, for this report, or for the opinions
we have formed.
Respective responsibilities of Directors and auditor
As explained more fully in the Directors’ Responsibilities Statement,
the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s Ethical Standards
for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate
to the Group’s and the parent company’s circumstances and have
Gamma Communications plc Annual Report and Accounts 2015
been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
Directors; and the overall presentation of the financial statements.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the
audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
→→the financial statements give a true and fair view of the state
of the Group’s and of the parent company’s affairs as at
31 December 2015 and of the Group’s and the parent
company’s profit for the year then ended;
→→the Group financial statements have been properly prepared
in accordance with IFRSs as adopted by the European Union;
→→the parent company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
→→the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the
Companies Act 2006
In our opinion the information given in the strategic report and
the Directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where
the Companies Act 2006 requires us to report to you if, in our opinion:
→→adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
→→the parent company financial statements are not in agreement
with the accounting records and returns; or
→→certain disclosures of Directors’ remuneration specified by law
are not made; or
→→we have not received all the information and explanations we
require for our audit.
Andrew Bond FCA
(Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Reading, United Kingdom
21 March 2016
51
Financial statements
Consolidated statement of comprehensive income
For the year ended 31 December 2015
3
2015
£m
191.8
(109.5)
82.3
5.7
–
5
(65.5)
(56.1)
5
28.3
(4.1)
5.7
29.9
(7.4)
23.1
(3.2)
(2.0)
17.9
(6.4)
22.5
0.1
22.6
(4.3)
11.5
–
11.5
(2.1)
Profit after tax
18.3
9.4
Total comprehensive income attributable to the owner of the parent
18.3
9.4
20.4
19.6
10.6
10.0
Notes
Revenue
Cost of sales
Gross profit
Other operating income
Operating expenses
Operating profit before share based payment,
exceptional items, depreciation and amortisation
Share based payment expense
Exceptional items
Operating profit before depreciation and amortisation
Depreciation and amortisation
Profit from operations
Finance income
Profit before tax
Tax expense
Earnings per share
Basic per Ordinary Share (pence)
Diluted per Ordinary Share (pence)
Adjusted earnings per share is shown in note 10.
Other comprehensive income is not shown as it is less than £0.1m.
The notes on pages 56 to 81 form part of these financial statements.
52
25
6
5
5
8
9
2014
£m
173.2
(105.6)
67.6
10
Strategic report
Corporate governance
Financial statements
Consolidated statement of financial position
As at 31 December 2015
2015
£m
2014
£m
23.4
10.4
2.0
35.8
18.9
10.8
2.3
32.0
2.3
35.2
24.8
62.3
1.1
32.5
13.4
47.0
98.1
79.0
1.4
0.4
1.8
0.9
0.2
1.1
27.3
2.3
29.6
25.9
0.8
26.7
31.4
27.8
0.2
3.7
2.3
3.8
(0.8)
57.5
0.2
3.2
2.3
2.4
–
43.1
Total equity
66.7
51.2
Total equity and liabilities
98.1
79.0
Notes
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Deferred tax asset
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
11
12
20
14
15
16
Total assets
Liabilities
Non-current liabilities
Provisions
Deferred tax liability
Current liabilities
Trade and other payables
Current tax liability
19
20
17
Total liabilities
Issued capital and reserves attributable to owners of the parent
Share capital
Share premium reserve
Merger reserve
Share option reserve
Investment in own shares
Retained earnings
21
22
22
22
22
22
The financial statements on pages 52 to 81 were approved and authorised for issue by the Board of Directors on 21 March 2016 and
were signed on its behalf by:
Andrew Belshaw
Chief Financial Officer
The notes on pages 56 to 81 form part of these financial statements.
Gamma Communications plc Annual Report and Accounts 2015
53
Financial statements
Consolidated statement of cash flows
For the year ended 31 December 2015
2015
£m
2014
£m
22.6
11.5
Increase in trade and other receivables
Increase in inventories
Increase in trade and other payables
Increase/(decrease) in provisions and employee benefits
6.1
1.3
–
4.1
(0.1)
34.0
(3.3)
(1.2)
0.4
0.5
5.1
1.3
0.6
3.0
–
21.5
(3.3)
(0.6)
1.9
(0.1)
Taxes paid
(2.2)
(3.0)
Net cash flows from operating activities
28.2
16.4
(10.6)
(0.9)
(0.1)
0.5
0.1
(11.2)
(0.9)
(2.6)
(2.8)
–
(11.0)
(17.5)
–
0.5
(0.8)
(5.5)
(3.1)
3.0
–
–
Net cash used in financing activities
(5.8)
(0.1)
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
11.4
13.4
(1.2)
14.6
24.8
13.4
Notes
Cash flows from operating activities
Profit for the year before tax
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Change in fair value of contingent consideration
Share based payment expense
Net interest income
Investing activities
Purchases of property, plant and equipment
Expenditure on development costs
Payment of deferred consideration
Loans made to individuals to subscribe for shares
Interest received
11
12
6, 26
25
8
11
12
26
28
8
Net cash used in investing activities
Financing activities
Share buybacks and cancellations
Share issues
Investment in own shares
Dividends
Cash and cash equivalents at end of year
10
16
Included within operating cashflow is £5.1m (2014: £Nil) of cash received relating to the laddering settlement which management
considers to be non-recurring in nature.
The notes on pages 56 to 81 form part of these financial statements.
54
Strategic report
Corporate governance
Financial statements
Consolidated statement of changes in equity
For the year ended 31 December 2015
Retained
earnings
£m
33.3
(2.4)
0.9
1.9
–
0.4
Total
equity
£m
36.9
(3.0)
3.0
1.9
3.0
4.9
–
–
9.4
9.4
9.4
9.4
2.4
–
43.1
51.2
2.3
–
–
–
–
–
–
–
2.4
(1.6)
–
3.0
–
–
1.4
–
–
–
–
–
–
(0.8)
(0.8)
43.1
1.6
0.7
(0.7)
–
(5.5)
–
(3.9)
51.2
0.5
0.7
(0.7)
3.0
(5.5)
(0.8)
(2.8)
–
–
–
–
–
–
–
–
18.3
18.3
18.3
18.3
3.7
2.3
3.8
(0.8)
57.5
66.7
Merger Share option Investment in
own shares
reserve
reserve
£m
£m
£m
2.3
1.1
–
–
(0.6)
–
–
(1.1)
–
–
–
–
–
3.0
–
–
1.3
–
Share
capital
£m
0.2
–
–
–
–
–
Share
premium
£m
–
–
3.2
–
–
3.2
–
–
–
–
–
–
–
–
31 December 2014
0.2
3.2
2.3
1 January 2015
Issue of shares
Current tax on share based payments
Deferred tax on share based payments (note 20)
Recognition of share based payments
Dividend paid (note 10)
Investment in own shares
Transaction with owners
0.2
–
–
–
–
–
–
–
3.2
0.5
–
–
–
–
–
0.5
–
–
0.2
1 January 2014
Share option cancellations
Issue of shares
Deferred tax on share based payments
Recognition of share based payments
Transaction with owners
Profit for the year
Total comprehensive income
Profit for the year
Total comprehensive income
31 December 2015
Gamma Communications plc Annual Report and Accounts 2015
55
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015
1. Accounting policies
Basis of preparation
Gamma Communications plc (the “Company”) is a company
domiciled in England. The Company was incorporated on 17
March 2014 as Gamma Communications Limited. The Company
changed its name to Gamma Communications plc on 3 October
2014 when it became a public company.
The Group was formed on 12 May 2014 when Gamma
Communications Limited acquired the entire share capital of Gamma
Telecom Holdings Limited and its wholly owned subsidiaries through
the issue of 20,590,196 Ordinary Shares and 1,699,983 B1 Shares
(further detail on the share capital is set out in note 21).
The acquisitions of the subsidiaries are deemed to be
‘combinations under common control’ as ultimate control before
and after the acquisition was the same. As a result, the transaction
is outside the scope of IFRS 3 “Business combinations” and has
been included under the principles of merger accounting by
reference to UK GAAP.
Accordingly, although the units which comprise the Group did
not form a legal group for the entirety of the prior period, the
comparative results comprise the results of the subsidiary
companies as if the Group had been in existence throughout
the entire prior period.
These financial statements have been prepared in accordance
with International Financial Reporting Standards, International
Accounting Standards and Interpretations (collectively IFRS)
issued by the International Accounting Standards Board (IASB)
as adopted by the European Union (“adopted IFRSs”), and are in
accordance with IFRS as issued by the IASB, and are presented
in Sterling and, unless otherwise stated, have been rounded to
the nearest 0.1 million (£m).
The principal accounting policies adopted in the preparation of the
financial statements are set out below. The policies have been
consistently applied to all the years presented.
Standards, amendments and interpretations to existing standards that
are not yet effective and have not been adopted early by the Group
At the date of authorisation of these financial statements, certain
new standards and amendments to existing standards have been
published by the IASB that are not yet effective, and have not been
adopted early by the Group. New accounting standards expected
to be relevant to the Group are listed below.
→→IFRS 15 Revenue and Contracts with Customers (effective
1 January 2018).
→→IFRS 16 Leases (effective 1 January 2019).
→→Amendments to IAS 16 and IAS 38 clarifying Acceptable
Methods of Depreciation and Amortisation (effective date
1 January 2016).
→→Annual improvements to IFRSs 2012-2014 Cycle (effective
1 January 2016).
56
Management anticipates that all relevant pronouncements will
be adopted in the Group’s accounting policies for the first period
beginning after the effective date of the pronouncement.
IFRS 15 was published in May 2014 and the effective date
has been delayed to reporting periods beginning on or after
1 January 2018. Therefore, following the finalisation of the
standard and IFRS 16, the Group is in the process of assessing
the impact of this.
Going concern
The Directors prepare a detailed annual budget and constantly
reforecast for the next 12 month period. The Group has a significant
cash balance of £24.8m (2014: £13.4m) and is not reliant on any
debt facilities. Therefore, at the time of approving the financial
statements, the Directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in
operational existence for the foreseeable future. Thus they continue
to adopt the going concern basis of accounting in preparing the
financial statements.
Basis of consolidation
The Group financial statements consolidate those of the parent
company and all of its subsidiaries. The parent controls a
subsidiary if it has power over the investee to significantly direct the
activities, exposure or rights to variable returns from its involvement
with the investee, and the ability to use its power over the investee
to affect the amount of the investor’s returns. All subsidiaries have
a reporting date of 31 December.
All transactions and balances between Group companies are
eliminated on consolidation, including unrealised gains and losses
on transactions between Group companies. Where unrealised
losses on intra-Group asset sales are reversed on consolidation,
the underlying asset is also tested for impairment from a Group
perspective. Amounts reported in the financial statements of
subsidiaries have been adjusted where necessary to ensure
consistency with the accounting policies adopted by the Group.
Profit or loss and other comprehensive income of subsidiaries
acquired or disposed of during the year are recognised from the
effective date of acquisition, or up to the effective date of disposal,
as applicable.
The consolidated financial statements consist of the results of the
entities shown in note 13.
As set out in the basis of preparation note, the units which
comprise the Group have all been under common management
and control throughout the period presented in the consolidated
financial information but they did not form a legal group throughout
the prior period, the Group coming into existence on 12 May 2014.
As a result, the Group Reconstruction is outside the scope of
IFRS 3 “Business combinations”. In accordance with IAS 8, the
Directors have determined that the most appropriate method of
accounting for the Group Reconstruction is to follow the principles
of merger accounting by reference to UK GAAP.
Strategic report
Corporate governance
Financial statements
The aim of merger accounting is to show the results and financial
position of the Group as if the Group had always been in existence,
as follows:
Subscription fees, consisting primarily of monthly charges for access
to broadband, hosted IP services and other internet access or voice
services, are recognised as revenue as the service is provided.
→→the results of the subsidiaries have been included in the
consolidated results for the entire comparative period during
which the Group Reconstruction took place; and
Equipment sales
Revenue from the sale of peripheral and other equipment is
recognised when all the significant risks and rewards of ownership are
transferred to the buyer, which is normally the date the equipment is
delivered and accepted by the customer. Where the buyer has a right
of return, the Group defers recognition of revenue until the right to
return has lapsed. However, where the Group retains only insignificant
risks of ownership due to the right of return, revenue is not deferred,
but the Group recognises a provision based on previous experience
and other relevant factors. The same policy applies to warranties.
→→the consolidated results include the assets and liabilities
of the subsidiaries at the book values at which they were
recorded prior to the Group Reconstruction: there is no
requirement to fair value, and no goodwill arises as a result.
The share capital issued to effect the merger has been shown
as if it had always been issued.
These financial statements incorporate the results of business
combinations using the acquisition method with the exception
of the common control transaction on the forming of the Group.
In the statement of financial position, the acquiree’s identifiable
assets, liabilities and contingent liabilities are initially recognised
at their fair values at the acquisition date. The results of acquired
operations are included in the consolidated statement of
comprehensive income from the date on which control is obtained.
They are deconsolidated from the date control ceases.
Revenue
Revenue represents the fair value of the consideration received
or receivable for communication services and equipment sales,
net of discounts and sales taxes.
Revenue is recognised when it is probable that the economic
benefits associated with a transaction will flow to the Group and the
amount of revenue and associated costs can be measured reliably.
The Group sells a number of communications products (both
traditional and new) each of which typically consists of all or some of
four main types of revenue – voice and data traffic, a subscription or
rental, equipment and installation fees. Revenue for each element of
the sale of the product is recognised as described below.
To the extent that invoices are raised to a different pattern than the
revenue recognition described below, appropriate adjustments are
made through deferred and accrued income to account for
revenue when the underlying service has been performed or
goods have transferred to the customer.
Voice and data traffic
Revenue from traffic is recognised at the time the call is made.
Revenue arising from the interconnection of voice and data traffic
between other telecommunications’ operators is recognised at the
time of transit across the Group’s network.
Subscriptions and rentals
Revenue from the rental of analogue and digital lines is recognised
evenly over the period to which the charges relate.
Gamma Communications plc Annual Report and Accounts 2015
Installations
Revenue arising from installation and connection services is
recognised when it is earned, upon activation.
Arrangements with multiple deliverables
Where goods and/or services are sold in one bundled transaction,
the Group allocates the total arrangement’s consideration to the
different individual elements based on their relative fair values.
Management determines the fair values of individual components
based on actual amounts charged by the Group on a stand-alone
basis, or alternatively based on comparable pricing arrangements
observable in the market.
Advances made to channel partners
Where the Group can demonstrate recovery of the asset (being
the advances made) through contractual claw back provisions
and past evidence of recovery they are deferred and are
recognised over the period of the contract. Where this is not
possible they are charged directly to the consolidated statement
of comprehensive income.
Business Combinations
Goodwill represents the excess of the cost of a business combination
over, in the case of business combinations completed prior to
1 January 2011, the Group’s interest in the fair value of identifiable
assets, liabilities and contingent liabilities acquired and, in the case
of business combinations completed on or after 1 January 2011,
the total acquisition date fair value of the identifiable assets,
liabilities and contingent liabilities acquired.
For business combinations completed prior to 1 January 2011,
cost comprised the fair value of assets acquired, liabilities
assumed and equity instruments issued, plus any direct costs
of acquisition. Changes in the estimated value of contingent
consideration arising on business combinations completed by this
date were treated as an adjustment to cost and, in consequence,
resulted in a change in the carrying value of goodwill.
For business combinations completed on or after 1 January 2011,
cost comprises the fair value of assets acquired, liabilities assumed
and equity instruments issued, plus the amount of any non-controlling
interests in the acquiree plus, if the business combination is achieved
in stages, the fair value of the existing equity interest in the acquiree.
57
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
1. Accounting policies continued
Contingent consideration
Contingent consideration is included in cost at its acquisition date
fair value and is classified as a financial liability, re-measured at fair
value subsequently through profit or loss. Contingent consideration
classified as equity is not re-measured.
Development costs
Expenditure on the research phase of an internal project is
recognised as an expense in the period in which it is incurred.
Development costs incurred on specific projects (whether in
respect of new products or enhancement of existing products)
are capitalised when all the following conditions are satisfied:
Direct costs
For business combinations completed on or after 1 January 2011,
direct costs of acquisition are recognised immediately as an expense.
→→completion of the asset is technically feasible so that it will
be available for use or sale;
Goodwill
Goodwill is capitalised as an intangible asset with any impairment
in carrying value being charged to the consolidated statement
of comprehensive income. Where the fair value of identifiable
assets, liabilities and contingent liabilities exceeds the fair value of
consideration paid, the excess is credited in full to the consolidated
statement of comprehensive income on the acquisition date.
→→the Group has the ability to use or sell the asset and the asset
will generate probable future economic benefits (over and
above cost);
Intangible assets
An intangible asset, which is an identifiable non-monetary asset
without physical substance, is recognised to the extent that it is
probable that the expected future economic benefits attributable
to the asset will flow to the Group and that its cost can be
measured reliably. The asset is deemed to be identifiable when it
is separable or when it arises from contractual or other legal rights.
Intangible assets acquired as part of a business combination are
shown at fair value at the date of the acquisition less accumulated
amortisation. Amortisation is charged on a straight line basis
through the profit or loss. The rates applicable, which represent
the Directors’ best estimate of the useful economic life, are:
→→customer contracts – five years.
Impairment of non-financial assets (excluding inventories
and deferred tax assets)
Impairment tests on goodwill and other intangible assets with
indefinite useful economic lives are undertaken annually at the
financial year end. Other non-financial assets are subject to
impairment tests whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable.
Where the carrying value of an asset exceeds its recoverable
amount (i.e. the higher of value in use and fair value less costs
to sell), the asset is written down accordingly.
Where it is not possible to estimate the recoverable amount of an
individual asset, the impairment test is carried out on the smallest
group of assets to which it belongs for which there are separately
identifiable cash flows: its cash generating units (‘CGUs’). Goodwill
is allocated on initial recognition to each of the Group’s CGUs that
are expected to benefit from the synergies of the combination
giving rise to the goodwill.
Impairment charges are included in profit or loss, except to
the extent they reverse gains previously recognised in other
comprehensive income. An impairment loss recognised for
goodwill is not reversed.
58
→→the Group intends to complete the asset and use or sell it;
→→there are adequate technical, financial and other resources
to complete the development and to use or sell the asset; and
→→the expenditure attributable to the asset during its development
can be measured reliably.
Development costs not meeting the criteria for capitalisation are
expensed as incurred. The cost of an internally generated asset
comprises all directly attributable costs necessary to create,
produce and prepare the asset to be capable of operating in
the manner intended by management. Directly attributable costs
include employee (other than Directors’) costs incurred along with
third party costs.
Judgement by the Directors is applied when deciding whether the
recognition requirements for development costs have been met.
Judgements are based on the information available at each
statement of financial position date. In addition, all internal activities
related to the research and development of new projects are
continuously monitored by the Directors. Amortisation is charged
to the income statement on a straight line basis over the estimated
useful life from the date the asset is available for use.
Foreign currency
Transactions entered into by Group entities in a currency other than
the currency of the primary economic environment in which they
operate are recorded at the rates ruling when the transactions occur.
Foreign currency monetary assets and liabilities are translated at
the rates ruling at the reporting date. Exchange differences arising
on the retranslation of unsettled monetary assets and liabilities are
recognised immediately in profit or loss, except for foreign currency
borrowings qualifying as a hedge of a net investment in a foreign
operation, in which case exchange differences are recognised
in other comprehensive income and accumulated in the foreign
exchange reserve along with the exchange differences arising
on the retranslation of the foreign operation.
On consolidation, the results of overseas operations are
translated into sterling at rates approximating to those ruling
when the transactions took place. All assets and liabilities of
overseas operations, including goodwill arising on the acquisition
of those operations, are translated at the rate ruling at the reporting
date. Exchange differences arising on translating the opening net
assets at opening rate and the results of overseas operations at
actual rate are recognised in other comprehensive income and
accumulated in the foreign exchange reserve.
Strategic report
Corporate governance
Financial statements
Exchange differences recognised in the profit or loss of Group
entities on the translation of long term monetary items forming part
of the Group’s net investment in the overseas operation concerned
are reclassified to other comprehensive income and accumulated
in the foreign exchange reserve on consolidation.
Financial liabilities
Apart from contingent consideration in the prior year the Group
does not have any financial liabilities that would be classified as fair
value through profit or loss. Therefore, these financial liabilities are
classified as financial liabilities at amortised cost, as defined below.
On disposal of a foreign operation, the cumulative exchange
differences recognised in the foreign exchange reserve relating
to that operation up to the date of disposal are transferred to the
consolidated statement of comprehensive income as part of the
profit or loss on disposal.
Other financial liabilities include the following items:
Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker.
The chief operating decision-makers have been identified as the
Chief Executive Officer, Chief Financial Officer, Chief Operating
Officer and the Management Committee. For further details
please see note 4.
Share capital
The Group’s Ordinary Shares and Deferred Shares are classified
as equity instruments.
Financial assets
The Group does not have any financial assets which it would
classify as fair value through profit or loss, available for sale or
held to maturity. Therefore, all financial assets are classed as
loans and receivables as defined below.
Loans and receivables
These assets are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
They arise principally through the provision of goods and services
to customers (e.g. trade receivables), but also incorporate other
types of contractual monetary asset.
They are initially recognised at fair value plus transaction costs
that are directly attributable to their acquisition or issue, and are
subsequently carried at amortised cost using the effective interest
rate method, less provision for impairment.
Impairment provisions are recognised when there is objective
evidence (such as significant financial difficulties on the part of
the counterparty or default or significant delay in payment) that the
Group will be unable to collect all of the amounts due, the amount
of such a provision being the difference between the net carrying
amount and the present value of the future expected cash flows
associated with the impaired receivable. For trade receivables,
which are reported net, such provisions are recorded in a
separate allowance account with the loss being recognised
within administrative expenses in the consolidated statement of
comprehensive income. On confirmation that the trade receivable
will not be collectable, the gross carrying value of the asset is
written off against the associated provision.
The Group’s loans and receivables comprise trade and other
receivables and cash and cash equivalents in the consolidated
statement of financial position.
Cash and cash equivalents includes cash in hand, deposits held
at call with banks, other short term highly liquid investments with
original maturities of three months or less, and – for the purpose
of the statement of cash flows – bank overdrafts. Bank overdrafts
are shown within loans and borrowings in current liabilities on
the consolidated statement of financial position.
Gamma Communications plc Annual Report and Accounts 2015
→→trade payables and other short term monetary liabilities, which
are initially recognised at fair value and subsequently carried
at amortised cost using the effective interest method.
Retirement benefits: defined contribution schemes
Contributions to defined contribution pension schemes are
charged to the consolidated statement of comprehensive income
in the year to which they relate.
Share based payments
Where equity settled shares or share options are awarded to
employees, the fair value of the options at the date of grant is
charged to the consolidated statement of comprehensive income
over the vesting period. Non-market vesting conditions are taken
into account by adjusting the number of equity instruments
expected to vest at each reporting date so that, ultimately, the
cumulative amount recognised over the vesting period is based on
the number of options that eventually vest. Non-vesting conditions
and market vesting conditions are factored into the fair value of the
options granted. As long as all other vesting conditions are
satisfied, a charge is made irrespective of whether the market
vesting conditions are satisfied. The cumulative expense is not
adjusted for failure to achieve a market vesting condition or where
a non-vesting condition is not satisfied.
Where the terms and conditions of options are modified before
they vest, the increase in the fair value of the options, measured
immediately before and after the modification, is also charged to
the consolidated statement of comprehensive income over the
remaining vesting period.
The fair value of the options is measured by use of either the
Black-Scholes method or the Monte Carlo method; the latter
methodology being used where there are market conditions
attached to the share awards.
Prior to flotation, the Group also operated a shadow share option
scheme (a cash settled share based payment). An option pricing
model was used to measure the Group’s liability at each reporting
date, taking into account the terms and conditions on which the
bonus is awarded and the extent to which employees have
rendered service. Movements in the liability were recognised in the
consolidated statement of comprehensive income. All such awards
crystallised on flotation and were settled in 2014. No new awards
have been made.
59
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
1. Accounting policies continued
Exceptional items
The Group treats certain items which are considered to be one-off
and not representative of the underlying trading of the Group as
exceptional in nature.
The Directors apply judgement in assessing the particular items,
which by virtue of their scale and nature should be classified as
exceptional items. The Directors consider that separate disclosure
of these items is relevant to an understanding of the Group’s
financial performance.
Leased assets
Where substantially all of the risks and rewards incidental to
ownership are not transferred to the Group (an “operating lease”),
the total rentals payable under the lease are charged to the
consolidated statement of comprehensive income on a straight
line basis over the lease term. The aggregate benefit of lease
incentives is recognised as a reduction of the rental expense
over the lease term on a straight line basis.
Dividends
Dividends are recognised when they become legally payable.
In the case of interim dividends to equity shareholders, this is
when declared by the Directors. In the case of final dividends,
this is when approved by the Shareholders at the AGM. Dividend
distributions payable to equity shareholders are included in other
liabilities when the dividends have been approved in a general
meeting prior to the reporting date.
Taxation
The tax expense represents the sum of the tax currently payable
and deferred tax.
Current tax
The tax currently payable is based on taxable profit for the year.
Taxable profit differs from net profit as reported in the statement
of comprehensive income because it excludes items of income
or expense that are taxable or deductible in other years, it includes
items that are tax deductible but which do not affect net profit and
it further excludes items that are never taxable or deductible.
Deferred tax
Deferred tax assets and liabilities are recognised where the
carrying amount of an asset or liability in the consolidated
statement of financial position differs from its tax base, except
for differences arising on:
→→the initial recognition of goodwill;
→→the initial recognition of an asset or liability in a transaction
which is not a business combination and at the time of the
transaction affects neither accounting or taxable profit; and
→→investments in subsidiaries and jointly controlled entities
where the Group is able to control the timing of the reversal
of the difference and it is probable that the difference will not
reverse in the foreseeable future.
60
Recognition of deferred tax assets is restricted to those instances
where it is probable that taxable profit will be available against
which the deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected
to apply in the period when the liability is settled or the asset is
realised based on tax laws and rates that have been enacted or
substantively enacted at the statement of financial position date.
Deferred tax is charged or credited in the income statement,
except when it relates to items charged or credited in other
comprehensive income, in which case the deferred tax is
also dealt with in other comprehensive income.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same
taxation authority and the Group intends to settle its current tax
assets and liabilities on a net basis.
Current tax and deferred tax for the year
Current and deferred tax are recognised in profit or loss, except when
they relate to items that are recognised in other comprehensive
income or directly in equity, in which case, the current and deferred
tax are also recognised in other comprehensive income or directly in
equity respectively. Where current tax or deferred tax arises from the
initial accounting for a business combination, the tax effect is included
in the accounting for the business combination.
Property, plant and equipment
Items of property, plant and equipment are initially recognised at
cost. As well as the purchase price, cost includes directly attributable
costs and the estimated present value of any future unavoidable
costs of dismantling and removing items. The corresponding liability
is recognised within provisions.
Assets in the course of construction for use in the supply of
communication products, or for administration purposes not yet
determined, are carried at cost, less any recognised impairment
loss. Cost includes professional fees. Depreciation of these assets,
on the same basis as other assets, commences when the assets
are ready for their intended use.
Assets which are supplied to customers as part of a service (for
example, a broadband router or a telephone handset), known as
Customer Premises Equipment, are capitalised and depreciated
over the expected period of the provision of that service.
Depreciation is provided on all other items of property, plant and
equipment so as to write off their carrying value over their expected
useful economic lives. It is provided at the following rates:
Network assets
Customer Premises Equipment
Computer equipment
Fixtures and fittings
10%–33% per annum straight line
20%–50% per annum straight line
25%–50% per annum straight line
20%–25% per annum straight line
Strategic report
Corporate governance
Inventories
Inventories are initially recognised at cost, and subsequently at the
lower of cost and net realisable value. Cost comprises all costs of
purchase, costs of conversion and other costs incurred in bringing
the inventories to their present location and condition.
Weighted average cost is used to determine the cost of ordinarily
interchangeable items.
Work in progress is stated at the lower of cost, comprising direct
materials and labour plus attributable overheads less provision for
foreseeable losses and progress payments, and net realisable value.
Employee Benefit Trust (EBT)
As the Company is deemed to have control of its EBTs, they are
treated as subsidiaries and consolidated for the purposes of the
consolidated financial statements. The EBTs’ assets (other than
investments in the Company’s shares), liabilities, income and
expenses are included on a line-by-line basis in the consolidated
financial statements.
Provisions
The Group recognises provisions where there is a present
obligation as a result of a prior event. The Group has recognised
provisions for liabilities of uncertain timing or amount relating to
leasehold dilapidations or onerous lease provision. The provision is
measured at the best estimate of the expenditure required to settle
the obligation at the reporting date, discounted at a pre-tax rate
reflecting current market assessments of the time value of money
and risks specific to the liability.
Adjusted measures
Throughout this report, adjusted EBITDA is defined as earnings
before interest, taxation, depreciation and amortisation stated before
exceptional items and share based payment charges. Also, adjusted
EPS is defined as earnings after tax adjusted for share based
payment charges, exceptional items and the associated tax effect.
These are non-GAAP measures. Exceptional items are those which
are considered significant by virtue of their nature, size or incidence,
and are presented separately in the income statement to enable a full
understanding of the Group’s financial performance. The Group
believes that adjusted EBITDA provides valuable additional
information for users of the financial statements in assessing
the Group’s performance since it provides information on the
performance of the business that local managers are more directly
able to influence and on a basis consistent across the Group.
2. Critical accounting estimates and judgements
The Group makes certain estimates and assumptions regarding
the future. Estimates and judgements are continually evaluated
based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances. In the future, actual experience may
differ from these estimates and assumptions. The estimates
and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within
the next financial year are discussed below.
Gamma Communications plc Annual Report and Accounts 2015
Financial statements
(a) Valuation of intangibles
Acquisitions may result in customer contracts being recognised.
These are valued using discounted cash flow methods which
require the application of certain key judgements and estimates.
In particular, management has had to estimate the likely future rate
of contract renewals, which involves a level of judgement due to
the short trading history of the acquisition. If the contract renewals
are lower than estimated, this may result in an impairment to the
asset valuation. The level of renewal experienced to date supports
management’s estimates.
(b) Impairment of goodwill
The Group is required to test, on an annual basis, whether
goodwill has suffered any impairment. The recoverable amount
is determined based on value in use calculations. The use of this
method requires the estimation of future cash flows and the choice
of a discount rate in order to calculate the present value of the cash
flows. Actual outcomes may vary. Impairment testing has not
indicated any impairment in goodwill over the period end dates.
(c) Taxation
Significant judgement is required in determining the provision
for income taxes. During the ordinary course of business, there
are transactions and calculations for which the ultimate tax
determination is uncertain. As a result, the Company recognises
tax liabilities based on estimates of whether additional taxes and
interest will be due. These tax liabilities are recognised when,
despite the Group’s belief that its tax return positions are
supportable, the Group believes that certain positions could be
challenged upon review by tax authorities. The Group believes that
its accruals for tax liabilities are adequate for all open years based
on its assessment of many factors, including past experience and
interpretations of tax law. This assessment relies on estimates and
assumptions and may involve a series of complex judgements
about future events. To the extent that the final tax outcome of
these matters is different from the amounts recorded, such
differences will impact income tax expense in the period in which
such determination is made.
(d) Leasehold dilapidations
Leasehold dilapidations relate to the estimated cost of returning
a leasehold property to a defined condition at the end of the lease
in accordance with the lease terms. Once the stage of the lease
has been reached at which a reliable estimate of the costs can be
made, a provision is recognised in the profit and loss. The main
uncertainty relates to estimating the cost that will be incurred at
the end of the lease.
(e) Capitalisation of internal development costs
The Group carries out a number of research and development
projects. Some of these projects consist of speculative research
whilst others are considered to be closer to the maintenance
of existing systems. However, where a piece of development is
producing an asset which will be used within the business or sold
directly (and it is probable that it will generate future economic
benefits) then the development cost is capitalised and amortised
over the useful economic life. Each year the Directors consider the
work which has been performed by the development team and,
where it is assessed that the appropriate criteria are met, the costs
are capitalised; this involves inherent judgement as to the likely
future economic benefit to be derived from the asset.
61
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
(f) Share based payment charges
The Company runs a number of share option schemes which give
rise to share based payment charges. The calculation of the charges
involves a significant level of estimate particularly around market
volatility and yield. In instances where there are performance
conditions (i.e. the LTIP scheme) the Directors must also consider
the likelihood of the performance conditions being met. The Directors
use the services of a firm of Chartered Accountants (who are not the
Auditor) to assist with these valuations.
3. Revenue
Revenue in all periods principally arises from the provision of
services. There is an immaterial level of sales of goods (which are
not part of a service).
4. Segment information
The Group has two main operating segments:
→→indirect – this division sells Gamma’s traditional and new
products and services to channel partners and contributed
79% (2014: 79%) of the Group’s external revenue; and
→→direct – this division sells Gamma’s traditional and new
products and services to end users in the SME, Enterprise and
public sectors together with an associated service wrap. They
contributed 21% (2014: 21%) of the Group’s external revenues.
There are no material non UK segments and no material noncurrent assets outside the UK.
Both operating segments sell a combination of traditional products
and services (which is mainly voice traffic from which revenues are
derived from channel partners and other carriers as well as rentals
for wholesale lines) and new products and services (which consist
of IP voice traffic, rental income derived from SIP Trunking, hosted
IP voice systems and Gamma’s hosted inbound product and
data products).
62
Factors that management used to identify the Group’s
reportable segments
The Group’s reportable segments are strategic business units
that offer products and services into different markets. They are
managed separately because each business requires different
marketing strategies and are reported separately to the Board
and management team.
Measurement of operating segment profit or loss, assets and liabilities
The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies.
The Group evaluates performance on the basis of profit or loss
from operations but excluding non-recurring losses, such as
goodwill impairment, the effects of share based payments and
exceptional income.
Inter-segment sales are priced along the same lines as sales to
external customers, with an appropriate discount being applied
to encourage use of Group resources at a rate acceptable to local
tax authorities. This policy was applied consistently throughout the
current and prior period.
Loans and borrowings are allocated to the segments based on
relevant factors (e.g. funding requirements). Details are provided in the
reconciliation from segment assets and liabilities to the Group position.
Strategic report
Corporate governance
Financial statements
Indirect
£m
Direct
£m
Total
£m
2015
Traditional products and services
New (being strategic and enabling) products and services
Total revenue from external customers
Inter-segment revenue
58.2
93.8
152.0
29.2
11.5
28.3
39.8
–
69.7
122.1
191.8
29.2
Traditional products and services
New (being strategic and enabling) products and services
Total gross profit
18.5
45.6
64.1
4.2
14.0
18.2
22.7
59.6
82.3
Segment operating profit before share based payment,
depreciation, amortisation and exceptional items
Share based payment expense
Exceptional Items
Segment EBITDA
Depreciation and amortisation
20.6
(4.1)
5.7
22.2
(6.6)
7.7
–
–
7.7
(0.8)
28.3
(4.1)
5.7
29.9
(7.4)
Profit from operations
Finance income
Tax
Group profit after tax
15.6
0.1
(1.9)
13.8
6.9
–
(2.4)
4.5
22.5
0.1
(4.3)
18.3
External revenue of customers has been derived principally from the United Kingdom and no single customer contributes more than
10% of revenue.
Indirect
£m
11.0
67.6
9.0
Direct
£m
0.5
30.5
22.4
Total
£m
11.5
98.1
31.4
Indirect
£m
Direct
£m
Total
£m
2014
Traditional products and services
New (being strategic and enabling) products and services
Total revenue from external customers
Inter-segment revenue
64.5
72.4
136.9
8.2
13.7
22.6
36.3
–
78.2
95.0
173.2
8.2
Traditional products and services
New (being strategic and enabling) products and services
Total gross profit
18.8
33.6
52.4
4.6
10.6
15.2
23.4
44.2
67.6
Segment operating profit before share based payment,
depreciation, amortisation and exceptional items
Share based payment expense
Exceptional Items
Segment EBITDA
Depreciation and amortisation
17.4
(3.2)
(1.4)
12.8
(5.8)
5.7
–
(0.6)
5.1
(0.6)
23.1
(3.2)
(2.0)
17.9
(6.4)
Profit from operations
Tax
Group profit after tax
7.0
(0.9)
6.1
4.5
(1.2)
3.3
11.5
(2.1)
9.4
Additions to non-current assets
Reportable segment assets
Reportable segment liabilities
External revenue of customers has been derived principally from the United Kingdom and no single customer contributes more than
10% of revenue.
Gamma Communications plc Annual Report and Accounts 2015
63
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
4. Segment information continued
Additions to non-current assets
Reportable segment assets
Reportable segment liabilities
Indirect
£m
11.6
54.2
12.2
Direct
£m
0.5
24.8
15.6
Total
£m
12.1
79.0
27.8
2015
£m
0.1
6.1
37.1
6.1
1.3
3.5
2014
£m
0.1
5.1
30.1
5.1
1.3
4.6
0.1
–
0.1
0.3
1.2
1.2
5. Profit on ordinary activities
Profit on ordinary activities is stated after charging the following amounts:
Net foreign exchange
Research and development costs
Staff costs (see note 7)
Depreciation of property, plant and equipment (incl. impairment)
Amortisation of intangible assets
Cost of inventories recognised as an expense
Fees payable to the Company’s auditors for other services:
– Audit of the Company’s subsidiaries pursuant to legislation
– Other services – including IPO
Operating lease expense:
– Property
Fees payable to the Company’s auditor for the audit of the parent company and consolidated financial statements totalled £55k
(2014: £16k) for the year.
6. Exceptional items
IPO costs
Change in the fair value of contingent consideration relating to the purchase of Varidion Limited (note 26)
Restructuring
Income from ladder pricing
2015
£m
–
–
–
5.7
5.7
2014
£m
(1.2)
(0.6)
(0.2)
–
(2.0)
IPO costs relate to the professional fees incurred on the admission of the Group to AIM.
The change in the fair value of contingent consideration is because during the course of the year ended 31 December 2014 the Directors
took an opportunity to settle the consideration relating to the purchase of Varidion Limited.
Ladder pricing was a mechanism which was used by fixed line operators to bill other operators for calls to certain 08 numbers.
Gamma has now reached a commercial settlement in regard to its ladder pricing policy with the affected operators and these have
now concluded, resulting in an exceptional gain of £5.7m. There was a non-recurring cash inflow of £5.1m, £0.6m was received
previously but not recognised as income as the invoices had been disputed.
7. Staff costs
Staff costs (including Directors) comprise:
Wages and salaries
Defined contribution pension cost (note 24)
Social security contributions and similar taxes
Share based payment expense (note 25)
64
2015
£m
2014
£m
28.5
1.6
2.9
33.0
4.1
37.1
23.2
1.2
2.5
26.9
3.2
30.1
Strategic report
Corporate governance
Financial statements
Employee numbers
The average number of staff employed by the Group during the financial year amounted to:
2015
Number
364
262
626
Operational
Selling, administration and distribution
2014
Number
272
247
519
Key management personnel compensation
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities
of the Group, including the Directors of the Company listed on pages 32 to 33, and the Management Committee listed on pages 34 to 35.
Salary
Defined contribution pension costs
Social security contributions and similar taxes
Share based payment expense (note 25)
2015
£m
2.9
0.2
0.5
3.6
3.6
7.2
2014
£m
2.3
0.2
0.3
2.8
2.9
5.7
2015
£m
1.1
–
–
0.1
1.2
1.2
2.4
2014
£m
0.9
0.2
0.1
0.1
1.3
1.0
2.3
2015
£m
0.6
0.8
1.4
2014
£m
0.6
0.6
1.2
Emoluments in respect of Directors are summarised below:
Salary
Compensation for loss of office
Defined contribution pension costs
Social security contributions and similar taxes
Share based payment expense
Emoluments disclosed above include the following amounts in respect of the highest paid Director.
Salary
Share based payment expense
During the year, two Directors (2014: one Director) participated in a private money purchase defined contribution pension scheme.
For the prior year, the remuneration for the Directors who served since flotation is shown within the Remuneration Report. Between
incorporation and flotation, there were two additional Directors who received remuneration from the Group. Malcolm Goddard served
as Director from incorporation on 17 March 2014 to 30 August 2014 and Gerard Sreeves from 23 May 2014 to 1 October 2014.
During those periods their remuneration was as follows:
Director
Gerard Sreeves
Malcolm Goddard
Salary and
fees
56,968
49,639
Bonus
–
39,994
Compensation for
loss of office
181,424
–
Pension
9,055
–
Total for
period
served as
Director
247,447
89,633
Bonuses are shown on an accrued basis.
Gerard Sreeves also exercised 118,381 options over £0.0025 Ordinary Shares shortly after he ceased to be a Director. A payment of
£1,104,000 was also paid for cancellation options over 400,000 A1 Ordinary Shares.
Gamma Communications plc Annual Report and Accounts 2015
65
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
8. Finance income
Recognised in profit or loss:
Finance income
Interest received on bank deposits
Total finance income
2015
£m
2014
£m
0.1
0.1
–
–
2015
£m
2014
£m
9. Tax expense
Current tax expense
Current tax on profits for the year
Adjustment in respect of prior year
Total current tax
Deferred tax expense
Origination and reversal of temporary differences (note 20)
Adjustment in respect of prior year
Total deferred tax
Total tax expense
4.9
(0.4)
4.5
2.9
(0.2)
2.7
(0.4)
0.2
(0.2)
4.3
(0.6)
–
(0.6)
2.1
The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom
applied to profits for the year are as follows:
Profit before income taxes
Expected tax charge based on the standard rate of United Kingdom corporation tax at the domestic rate of 20.25%
(2014: 21.5%)
Expenses not deductible for tax purposes
Change in tax rates
Additional deduction for R&D expenditure
Adjustment in respect of prior year
Total tax expense
2015
£m
22.6
2014
£m
11.5
4.6
–
0.1
(0.2)
(0.2)
4.3
2.5
0.5
–
(0.7)
(0.2)
2.1
The inclusion of legislation to reduce the main rate of corporation tax from 20% to 19% from 1 April 2017 and then a further reduction to
18% from 1 April 2020 was substantively enacted on 26 October 2015. For the purposes of deferred tax, the rate change from 20%
to 18% was substantively enacted before the balance sheet date.
10. Earnings per share and dividends
Earnings per share
The calculation of basic earnings per Ordinary Share is based on a profit after tax of £18.3m (2014: profit of £9.4m) and 89,488,163
(2014: 88,349,480) Ordinary Shares, being the weighted average number of Ordinary Shares in issue during the period (in the prior
period, this was adjusted for the fact that there was a share split). Also, in the prior period, because the Group was formed by a share
for share exchange, it has been assumed that the number of shares at incorporation was the number of shares between 1 January 2013
and incorporation for the purposes of calculating a weighted average for the earnings per share calculation.
The unadjusted diluted earnings per Ordinary Share is calculated by including in the weighted average number of shares the dilutive
effect of potential Ordinary Shares related to committed share options as described in note 25. For 2015, the unadjusted diluted
Ordinary Shares were based on 93,226,438 Ordinary Shares (2014: 93,601,600) that included 3,738,275 potential Ordinary Shares
(2014: 5,252,120).
The following reflects the income and share data used in the calculation of adjusted earnings per share computations before share based
payments, one-off items and their associated tax effect.
Profit for the year
Exceptional (income)/costs
Share based payment costs
Add/(less) tax effect associated with share based payment costs and one-off costs
Adjusted profit after tax for the year
66
Total
2015
£m
18.3
(5.7)
4.1
0.1
16.8
Total
2014
£m
9.4
2.0
3.2
(0.6)
14.0
Strategic report
Corporate governance
Financial statements
Weighted average number of Ordinary Shares for basic earnings per share
Effect of dilution resulting from share options
Weighted average number of Ordinary Shares adjusted for the effect of dilution
Adjusted earnings per Ordinary Share – basic (pence)
Adjusted earnings per Ordinary Share – diluted (pence)
Total
2015
No.
89,488,163
4,591,931
94,080,094
Total
2014
No.
88,349,480
5,252,120
93,601,600
2015
18.8
17.9
2014
15.9
15.0
There have been no material transactions involving Ordinary Shares or potential shares between the reporting date and the date of
completion of the financial statements.
Dividends
An interim dividend of 2.2p was paid on 23 October 2015 (2014: £Nil).
A final dividend of 4.4p will be proposed at the AGM but has not been recognised as it requires approval (2014: 3.95p).
11. Property, plant and equipment
Cost
At 1 January 2014
Additions
At 31 December 2014
Depreciation
At 1 January 2014
Charge for the year
At 31 December 2014
Net book value
At 1 January 2014
At 31 December 2014
Cost
At 1 January 2015
Additions
Disposals
Reclassification
At 31 December 2015
Depreciation
At 1 January 2015
Charge for the year
Disposals
Reclassification
At 31 December 2015
Net book value
At 1 January 2015
At 31 December 2015
Network
assets
£m
Customer/
Premises
equipment
£m
Computer
equipment
£m
Fixtures
and fittings
£m
Total
£m
33.0
8.8
41.8
0.9
1.0
1.9
11.5
1.0
12.5
1.1
0.4
1.5
46.5
11.2
57.7
23.8
0.2
8.7
1.0
33.7
3.2
27.0
0.6
0.8
1.3
10.0
–
1.0
5.1
38.8
9.2
14.8
0.7
1.1
2.8
2.5
0.1
0.5
12.8
18.9
41.8
4.8
(1.6)
0.9
45.9
1.9
4.4
(0.5)
–
5.8
12.5
1.4
(8.4)
(0.9)
4.6
1.5
–
(1.0)
–
0.5
57.7
10.6
(11.5)
–
56.8
27.0
3.7
(1.6)
0.3
29.4
0.8
1.4
(0.5)
–
1.7
10.0
0.9
(8.4)
(0.3)
2.2
1.0
0.1
(1.0)
–
0.1
38.8
6.1
(11.5)
–
33.4
14.8
16.5
1.1
4.1
2.5
2.4
0.5
0.4
18.9
23.4
Included within network assets in the prior year were assets in the course of construction with a value of £4.0m for which no depreciation
had been charged. Depreciation commenced when the asset entered use.
There was no property, plant or equipment held under finance leases at the end of either year.
There was no property, plant or equipment held as security at the end of either year.
Gamma Communications plc Annual Report and Accounts 2015
67
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
12. Intangible assets
Goodwill on
consolidation
£m
Development
costs
£m
Customer
contracts
£m
Total
£m
Cost
At 1 January 2014
12.5
3.4
2.1
18.0
Additions
At 31 December 2014
Amortisation
At 1 January 2014
–
12.5
0.9
4.3
–
2.1
0.9
18.9
4.5
1.5
0.8
6.8
Charge for the year
At 31 December 2014
Carrying value
At 1 January 2014
At 31 December 2014
–
4.5
0.9
2.4
0.4
1.2
1.3
8.1
8.0
8.0
1.9
1.9
1.3
0.9
11.2
10.8
12.5
–
12.5
4.3
0.9
5.2
2.1
–
2.1
18.9
0.9
19.8
4.5
–
4.5
2.4
0.9
3.3
1.2
0.4
1.6
8.1
1.3
9.4
8.0
8.0
1.9
1.9
0.9
0.5
10.8
10.4
2015
£m
6.8
1.2
8.0
2014
£m
6.8
1.2
8.0
Cost
At 1 January 2015
Additions
At 31 December 2015
Amortisation
At 1 January 2015
Charge for the year
At 31 December 2015
Carrying value
At 1 January 2015
At 31 December 2015
The estimates of the useful economic lives of the intangible assets are as follows:
→→customer contracts – five years;
→→development costs – over anticipated UEL of asset developed but no more than four years; and
→→goodwill on consolidation – indefinite (subject to impairment).
The carrying amount of goodwill is allocated to the cash generating units (CGUs) as follows:
Gamma Business Communications Limited
Gamma Network Solutions Limited
The carrying value of the Group’s goodwill is not subject to annual amortisation and was tested for impairment at 31 December 2015 and
2014. The recoverable amount has been determined on a value-in-use basis on each CGU using the Board approved 12-month budget for
each CGU. The base 24-month projection is amended for years two to five as follows: (a) by increasing revenue by 5% for Gamma Business
Communications Limited and by 20% for Gamma Network Solutions Limited (being based on historical growth rates); (b) gross margin
percentage is assumed to be held constant (based on historical data); and (c) overheads are assumed to grow in line with inflation for
Gamma Business Communications Limited and by 15% for Gamma Network Solutions Limited. These cash flows are then discounted
at 12% – both CGUs form the direct part of the Group and therefore it is appropriate to use a single discount rate across both CGUs.
Based on the results of the impairment reviews carried out for each period (giving a recoverable amount of £23.9m in respect of
Gamma Business Communications Limited and £12.2m in respect of Gamma Network Solutions Limited), no impairment charges have
been recognised by the Group in either of the years. Management has considered various sensitivity analyses in order to appropriately
evaluate the carrying value of goodwill. Having assessed the anticipated future cash flows, the Directors do not consider there to be any
reasonably possible changes in assumptions that would lead to such an impairment charge in any of the years.
68
Strategic report
Corporate governance
Financial statements
13. Subsidiaries
The principal subsidiaries of Gamma Communications plc, all of which are 100% owned and have been included in these financial
statements in accordance with the merger accounting as set out in the basis of preparation and basis of consolidation note 1, are as
follows:
Name
Gamma Telecom Holdings Limited
Gamma Telecom Limited
Gamma Metronet Limited
Gamma Business Communications Limited
Gamma Network Solutions Limited
Peach Amber Kft
Country of
incorporation
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Hungary
Nature of
business
Intermediate holding company
Telephony services
Dormant
Retail telephony services
Data and communications networks
Software services
Notes
(a)
Notes:
(a) Gamma Network Solutions Limited is owned by Gamma Business Communications Limited.
Gamma Business Communications Limited held 100% of the share capital of the following dormant subsidiaries, all incorporated in the
United Kingdom, at 31 December 2014 and 31 December 2015:
→→Blue Spot Technologies Limited;
→→Go Worldwide Communications Limited; and
→→Uniworld Bureau Services Limited.
Gamma Telecom Limited is also a member of NP4UK Limited which is a dormant company (limited by guarantee) incorporated in the
United Kingdom.
The Group also consolidates the Gamma Telecom Employee Benefit Trust and the Gamma Communications plc SIP Trust.
The Group held no interests in unconsolidated structured entities.
14. Inventories
Raw materials and consumables
Provision
Total inventories
2015
£m
2.4
(0.1)
2.3
2014
£m
1.2
(0.1)
1.1
2015
£m
19.4
(1.2)
18.2
8.1
5.0
3.9
35.2
2014
£m
17.9
(1.2)
16.7
7.6
4.6
3.6
32.5
15. Trade and other receivables
Trade receivables
Less: provision for impairment of trade receivables
Trade receivables – net
Accrued income
Prepayments
Other receivables
Total trade and other receivables
Due to the short term nature of trade and other receivables and as the credit risk has been adjusted for, the book value approximates to
fair value.
As at 31 December 2015 and 2014, trade receivables as shown below were past due but not impaired. They relate to customers with no
default history or where we have an offset arrangement. The ageing analysis of these receivables is as follows:
Up to 3 months
3 to 6 months
6 to 12 months
Older than 1 year
Gamma Communications plc Annual Report and Accounts 2015
2015
£m
1.1
0.1
–
0.1
1.3
2014
£m
1.7
0.3
0.2
0.2
2.4
69
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
15. Trade and other receivables continued
As at 31 December 2015, trade receivables of £0.9m (2014: £0.9m) were past due and impaired. The amount of the provision as at
31 December was £1.2m (2014: £1.2m). The main factors considered by the Credit Committee in determining that the amounts due
are impaired are that the customers are unlikely to be trading or the debts are three months and more past due. The ageing of these
receivables is as follows:
Not due
Up to 3 months
3 to 6 months
6 to 12 months
Older than 1 year
2015
£m
0.3
0.6
0.1
0.1
0.1
1.2
2014
£m
0.3
0.1
0.3
0.2
0.3
1.2
The Group does not have any concentration of credit risk. None of the customers represents more than 10% of trade receivables.
Movements on the Group provision for impairment of trade receivables are as follows:
At beginning of the year
Provided during the year
Receivable written off during the year as uncollectible
2015
£m
1.2
0.5
(0.5)
1.2
2014
£m
0.9
0.3
–
1.2
The movement on the provision for impaired receivables has been included in the selling and administrative expenses line in the
consolidated statement of comprehensive income.
16. Cash and cash equivalent
Cash at bank available on demand
2015
£m
24.8
2014
£m
13.4
2015
£m
2014
£m
4.4
0.8
18.7
–
23.9
1.9
1.5
27.3
3.3
0.9
17.3
0.1
21.6
2.6
1.7
25.9
17. Trade and other payables
Current
Trade payables
Other payables
Accruals
Contingent consideration (note 26)
Tax and social security
Deferred income
Total trade and other payables
Book values approximate to fair value at 31 December 2015 and 31 December 2014.
All current trade and other payables are payable within three months of the period end date shown above, with the exception of the
contingent consideration in the prior year which was payable between three and 12 months, and as such they are all considered current.
70
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Financial statements
18. Financial instruments – risk management
The Group is exposed through its operations to the following financial risks:
→→credit risk;
→→fair value or cash flow interest rate risk;
→→market risk; and
→→liquidity risk.
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes
the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative
information in respect of these risks is presented throughout these financial statements.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
→→trade receivables;
→→cash and cash equivalents; and
→→trade and other payables.
A summary of the financial instruments held by category is provided below:
Financial assets – loans and receivables – amortised cost
Cash and cash equivalents
Trade receivables – net
Accrued income
Other receivables
Total financial assets
2015
£m
24.8
18.2
8.1
3.9
55.0
2014
£m
13.4
16.7
7.6
3.6
41.3
2015
£m
23.9
23.9
2014
£m
21.5
21.5
2015
£m
–
–
2014
£m
0.1
0.1
Financial liabilities – amortised cost
Trade and other payables
Total financial liabilities – amortised cost
Financial liabilities – fair value through profit or loss (FVTPL)
Contingent consideration
Total financial liabilities – FVTPL
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining
ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective
implementation of the objectives and policies to the Group’s Management Committee. The Board receives quarterly reports from the
Management Committee through which it reviews the effectiveness of the processes put in place and the appropriateness of the
objectives and policies it sets.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s
competitiveness and flexibility. Further details regarding these policies are set out on the next page:
Gamma Communications plc Annual Report and Accounts 2015
71
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
18. Financial instruments – risk management continued
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or a counterparty to a financial instrument fails to meet its contractual
obligations. The Group is mainly exposed to credit risk from credit sales. It is Group policy, implemented locally, to assess the credit risk
of new customers before entering contracts. Such credit ratings are taken into account by local business practices.
The Credit Committee has established a credit policy under which each new customer is analysed individually for creditworthiness
before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings when
available. Purchase limits are established for each customer, which represent the maximum open amount without requiring approval from
the Credit Committee.
The Credit Committee determines concentrations of credit risk by quarterly monitoring the creditworthiness rating of existing customers
and through a monthly review of the trade receivables’ ageing analysis.
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial
institutions, only independently rated parties with high credit status are accepted.
The Group does not enter into derivatives to manage credit risk.
Quantitative disclosures of the credit risk exposure in relation to financial assets are set out below. Further disclosures regarding trade
and other receivables, which are neither past due nor impaired, are provided in note 15.
Financial assets – maximum exposure
Cash and cash equivalents
Trade receivables – net
Accrued income
Other receivables
Total financial assets
2015
£m
24.8
18.2
8.1
3.9
55.0
2014
£m
13.4
16.7
7.6
3.6
41.3
The Credit Committee monitors the utilisation of the credit limits regularly and at the reporting date does not expect any losses from
non-performance by the counterparties.
Cash in bank
The Group is continually reviewing the credit risk associated with holding money on deposit in banks and seeks to mitigate this risk
by holding deposits with banks with high credit status.
Fair value and cash flow interest rate risk
As of 31 December 2014 and 31 December 2015, the Group’s exposure to fair value and cash flow interest rate risk was not material.
It is Group policy that all borrowings are approved by the Chief Financial Officer to ensure that it is not taking on significant risk related
to possible movements in interest rates. Although the Board accepts that this policy neither protects the Group entirely from the risk
of paying rates in excess of current market rates nor eliminates fully cash flow risk associated with variability in interest payments,
it considers that it achieves an appropriate balance of exposure to these risks.
Market risk
The market risk relates to foreign exchange. Foreign exchange risk arises because the Group has a small operation located in Hungary
whose functional currency is not the same as the functional currency in which the Group companies are operating. Although the fact that its
overseas operations are small compared to those in the UK reduces the Group’s operational risk, the Group’s net assets arising from such
overseas operations are exposed to currency risk resulting in gains or losses on retranslation into sterling. Given the levels of materiality, the
Group does not hedge its net investments in overseas operations as the cost of doing so is disproportionate to the exposure.
Foreign exchange risk also arises when individual Group entities enter into transactions denominated in a currency other than their
functional currency; the Group has very few customers who are invoiced in currency other than sterling and very few suppliers invoice
in currency other than sterling. Again, these transactions are not hedged because the cost of doing so is disproportionate to the risk.
As of 31 December 2014 and 31 December 2015, the Group’s exposure to foreign exchange risk was not material.
A sensitivity analysis for market risk has not been prepared as the risk is immaterial.
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Financial statements
Liquidity risk
Liquidity risk arises from the Group’s management of working capital. It is the risk that the Group will encounter difficulty in meeting its
financial obligations as they fall due.
It is the Group’s aim to settle balances as they become due.
The Board receives annual 24-month cash flow projections. At the end of the financial year, these projections indicated that the Group
expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.
The following table sets out the contractual maturities (representing undiscounted contractual cash flows) of financial liabilities:
Up to 3
months
£m
Between
3 and 12
months
£m
Between
1 and 2
years
£m
Between
2 and 5
years
£m
Over
5 years
£m
23.9
–
23.9
–
–
–
–
–
–
–
–
–
–
–
–
Up to 3
months
£m
Between
3 and 12
months
£m
Between
1 and 2
years
£m
Between
2 and 5
years
£m
Over
5 years
£m
21.5
–
21.5
–
0.1
0.1
–
–
–
–
–
–
–
–
–
2015
Trade and other payables
Contingent consideration
Total
2014
Trade and other payables
Contingent consideration
Total
More details in regard to the line items are included in the respective notes:
→→trade and other payables – note 17.
Capital disclosures
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising its return
to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from the prior
year. The Group monitors “adjusted capital”, which comprises all components of equity (i.e. share capital, share premium reserve, merger
reserve, share option reserve and retained earnings).
The Group’s objectives when maintaining capital are:
→→to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and
benefits for other stakeholders; and
→→to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Group has historically maintained very low levels of gearing and is not exposed to externally imposed capital requirements. The
Group will continue to manage the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes
adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.
Total equity
Cash and cash equivalents
Capital
Total equity
Overall financing
Capital-to-overall financing ratio
Gamma Communications plc Annual Report and Accounts 2015
2015
£m
66.7
24.8
91.5
66.7
66.7
1.37
2014
£m
51.2
13.4
64.6
51.2
51.2
1.26
73
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
19. Provisions
Leasehold dilapidation provision
Onerous lease provision
Due within one year or less
Due after more than one year
Leasehold
dilapidation
provision
£m
0.9
0.4
1.3
At 1 January 2015
Additional provision in the year
At 31 December 2015
2015
£m
1.3
0.1
1.4
0.1
1.3
2014
£m
0.9
–
0.9
0.1
0.8
Onerous
lease
provision
£m
–
0.1
0.1
Total
£m
0.9
0.5
1.4
Leasehold dilapidations relate to the estimated cost of returning a leasehold property to a defined condition at the end of the lease in
accordance with the lease terms. Once the stage of the lease has been reached at which a reliable estimate of the costs can be made, a
provision is recognised in the profit and loss. The main uncertainties relate to estimating the cost that will be incurred at the end of the
lease and also whether the option to break from the lease will be exercised.
20. Deferred tax
Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 18% (2014: 20%).
The movement on the deferred tax account is as shown below:
2015
£m
2.1
0.2
(0.7)
1.6
Asset/(liability) at 1 January
Tax credit recognised in profit and loss
Recognised directly in equity
Asset at 31 December
2014
£m
(0.4)
0.6
1.9
2.1
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. All deferred tax has been
recognised as the Group is consistently profitable.
The deferred taxation asset/(liability) consists of the tax effect of temporary differences as follows:
Asset
£m
2015
Difference in capital allowances and depreciation/amortisation
Other temporary and deductible differences
Deferred tax on share options
Business combinations
Deferred tax asset/(liability)
0.1
0.1
1.8
–
2.0
Asset
£m
2014
Difference in capital allowances and depreciation/amortisation
Other temporary and deductible differences
Deferred tax on share options
Business combinations
Deferred tax asset/(liability)
74
(0.1)
0.1
2.3
–
2.3
Liability
£m
(0.3)
–
–
(0.1)
(0.4)
Liability
£m
–
–
–
(0.2)
(0.2)
Net
£m
(0.2)
0.1
1.8
(0.1)
1.6
Net
£m
(0.1)
0.1
2.3
(0.2)
2.1
(Charged)/
credited to
profit or
loss
£m
(0.1)
–
0.2
0.1
0.2
(Charged)/
credited to
profit or
loss
£m
0.5
(0.4)
0.4
0.1
0.6
Credited to
equity
£m
–
–
(0.7)
–
(0.7)
Credited to
equity
£m
–
–
1.9
–
1.9
Strategic report
Corporate governance
Financial statements
21. Share capital
At 31 December 2015, the share capital was as follows:
Allotted and fully paid
Ordinary Shares of £0.0025 each
Deferred Shares of £0.0025 each
2015
Number
2015
£m
2014
Number
2014
£m
90,250,607
–
0.2
–
0.2
88,529,127
1,717,323
0.2
–
0.2
On 20 February 2015, Gamma Communications plc bought back 1,717,323 Deferred Shares at a price of £0.0025 per share from
distributable profits.
Ordinary Share movement in the year is as follows:
1 January 2015
23 March 2015
21 May 2015
9 September 2015
2 December 2015
31 December 2015
Number
88,529,127
1,099,111
12,000
221,561
388,808
90,250,607
Notes
(a)
(a)
(a)
(a)
(a) Ordinary Shares were issued to satisfy options which had been exercised.
In the prior year, the share capital movements were as follows:
On incorporation, the issued share capital of the Company was one Ordinary Share of £1.00. The share capital from 17 March 2014
(incorporation) to 12 May 2014 was as follows:
Allotted and fully paid
Ordinary Shares of £1 each
2014
Number
2014
£m
1
0.0
0.0
On 12 May 2014, the Company acquired the Group headed by Gamma Telecom Holdings Limited by virtue of a share for share
exchange. 1,699,983 B1 Ordinary Shares of £0.01 each and 20,590,196 Ordinary Shares of £0.01 were issued on that date. The share
capital from 12 May 2014 to 2 October 2014 was as follows:
Allotted and fully paid
B1 Ordinary Shares of £0.01 each
Ordinary Shares of £0.01 each
2014
Number
2014
£m
1,699,983
20,590,196
–
0.2
0.2
In addition to the above shares, the Company also had another class of share being an A1 Ordinary Share of £0.001 each with none
in issue.
The Ordinary Shares and B1 Shares together (the “Equity Shares”) confer on their holders the right to receive notice of and to attend,
speak, and vote at all general meetings of the Company and to sign written resolutions of the Company. The holders of A1 Shares were
not entitled to receive notice of or to attend general meetings of the Company and were not entitled to vote thereat nor were they entitled
to receive or participate in written resolutions of the Company.
Every dividend to be paid by the Company, other than a dividend payable on or following the occurrence of certain changes of control,
will be distributed to the holders of the Equity Shares pro rata to their holdings of Equity Shares. The holders of any shares not being
Equity Shares are not entitled to participate in or receive any dividend other than a dividend payable on or following the occurrence
of an Event.
Gamma Communications plc Annual Report and Accounts 2015
75
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
21. Share capital continued
On or following the occurrence of a change of control, the receipts from the acquirer would have been applied as follows:
(a) firstly, to the holders of the Ordinary Shares and A1 Shares, an amount equal to £3.75 for each Ordinary Share or A1 Share held
by them on the date of the acquisition or, if the receipts from the acquirer divided by the aggregate number of Ordinary Shares
and A1 Shares in issue at the date of the acquisition (on a fully diluted basis) is less than £3.75, the whole of the receipts at such
date shall be paid to the holders of the Ordinary Shares and A1 Shares pro rata to the number of Ordinary Shares and A1 Shares
held by them;
(b) the balance thereof (if any) shall be paid to the holders of the Equity Shares pro rata to their respective holdings of Equity Shares.
On 2 October 2014, in preparation for the flotation, the share capital of the Company underwent a four for one split. The share capital
on 2 October 2014 was as follows:
Allotted and fully paid
B1 Ordinary Shares of £0.0025 each
Ordinary Shares of £0.0025 each
2014
Number
2014
£m
6,799,932
82,360,784
–
0.2
0.2
Following the share split on 2 October 2014, 3,356,528 B1 Ordinary Shares of £0.0025 each in the Company were redesignated as
3,356,528 Ordinary Shares, subject to a payment from the Shareholder of the sum of £3.1m to the Company (being £0.9375 per B1
Ordinary Share registered in his name).
On 6 October 2014, the holders of all the remaining issued B1 Ordinary Shares of £0.0025 in the Company voluntarily converted their B1
Ordinary Shares into 1,726,481 Ordinary Shares and 1,717,323 Deferred Shares pursuant to the articles of association of the Company.
The conversion rate was calculated by applying a formula based on the Placing Price to reflect the equity value of the B1 Ordinary
Shares.
Also on 6 October 2014, 12,000 Ordinary Shares were issued and allotted to satisfy an exercise of options which had taken place earlier
at an exercise price of 62.5p; 608,481 Ordinary Shares were issued following the exercise of options held by certain employees pursuant
to the 2013 Unapproved Share Option Scheme and the Unapproved Share Option Scheme. A further 256,320 Ordinary Shares were
allotted to the SIP Trust.
On 9 October 2014, an additional 6,152 Ordinary Shares were issued at a price of £1.87.
As a result of the above share transactions, on 10 October 2014 (at flotation) the share capital was as follows:
Allotted and fully paid
Ordinary Shares of £0.0025 each
Deferred Shares of £0.0025 each
2014
Number
2014
£m
88,326,746
1,717,323
0.2
–
0.2
The Deferred Shares had no voting rights and did not carry any entitlement to attend general meetings of the Company, nor were they
admitted to trading on AIM or any other market. They did not carry any dividend rights and would only have been entitled to a payment on
a return of capital or winding-up of the Company after each Ordinary Share had received a payment of £0.1m. They are not transferable
without the prior written consent of the Company.
On 20 November 2014, 202,381 Ordinary Shares were issued to satisfy options which had been exercised.
At 31 December 2014, the share capital was as follows:
Allotted and fully paid
Ordinary Shares of £0.0025 each
Deferred Shares of £0.0025 each
76
2014
Number
2014
£m
88,529,127
1,717,323
0.2
–
0.2
Strategic report
Corporate governance
Financial statements
22. Reserves
The following describes the nature and purpose of each reserve within equity:
Reserve
Share premium
Merger reserve
Share option reserve
Investment in own shares
Retained earnings
Description and purpose
Amount subscribed for share capital in excess of nominal value.
Represents the share capital and share related movements of the previous holding company
Gamma Telecom Holdings Limited following the common control transaction as set out in note 1.
Represents credit to equity relating to share based payment expense on share options.
Purchase of own shares under a SIP scheme.
All other net gains and losses and transactions with owners (e.g. dividends) not recognised
elsewhere.
23. Leases
The Group had commitments under non-cancellable operating leases as set out below:
2015
In one year or less
Between one and five years
In five years or more
2014
In one year or less
Between one and five years
In five years or more
Land and
buildings
£m
Other
£m
1.0
3.3
1.7
6.0
0.1
0.1
–
0.2
Land and
buildings
£m
Other
£m
1.0
3.2
2.1
6.3
–
0.2
–
0.2
24. Retirement benefits
The Group operates a defined contribution pension scheme for the benefit of its employees. The assets of the scheme are administered
by trustees in a fund independent from those of the Group. The pension costs charged for each year are listed below:
Defined contribution pension scheme
2015
£m
1.6
2014
£m
1.2
25. Share based payment
Share options granted
On 8 May 2015, the Board approved an issue of options under the Company Share Option Plan which granted 370,349 options over
£0.01 Ordinary Shares at an exercise price of £2.70. These will vest in May 2018.
On 8 June 2015, the Board approved an award under the Long Term Incentive Plan for the senior management team. 530,999
options were granted over £0.01 Ordinary Shares at an exercise price of £0.0025 per share which will vest on 1 April 2018 subject to
performance conditions. The awards granted will have a performance period of three years starting from the vesting commencement
date, being 31 March 2015.
The awards issued under the Long Term Incentive Plan will vest as follows:
→→15% of the shares are subject to an award if annual compound total shareholder return over the performance period equals 8%
and 50% of the shares are subject to an award if the annual compound total shareholder return over the period equals or exceeds
15% with pro rata straight line vesting in between; and
→→15% of the shares are subject to an award if annual compound growth of the Company’s adjusted earnings per share over the
performance period equals 8% between the financial years at the beginning and the end of the performance period and 50% of the
shares are subject to an award if the annual compound growth of the Company’s adjusted earnings per share equals or exceeds
20% with pro rata in between.
Gamma Communications plc Annual Report and Accounts 2015
77
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
25. Share based payment continued
Share options modified
On 31 October 2015, the following modifications were made to existing share options:
2015
Date of original grant
6 October 2014
6 October 2014
No. of options
modified
157,971
49,885
Original
vesting date
1 February 2016
1 February 2017
Modified
vesting date
1 June 2016
1 June 2016
Exercise
price
£0.2500
£0.2500
There is not considered to be a material impact on the fair value of the options. The options concerned had no performance conditions
attached to them.
Movements in the number of options during the year were as follows:
The options below were exercised at a weighted average exercise price of £3.15.
2015
Date of grant
6 June 2014
6 June 2014
6 June 2014
6 June 2014
6 June 2014
2 September 2014
6 October 2014
6 October 2014
6 October 2014
6 October 2014
6 October 2014
6 October 2014
8 May 2015
8 June 2015
31 October 2015
Start of year
716,668
36,000
100,000
120,320
181,078
1,399,352
922,880
329,244
703,384
372,477
123,200
67,892
–
–
–
Granted
–
–
–
–
–
–
–
–
–
–
–
–
370,349
530,999
–
Forfeited
–
–
–
–
–
(243,440)
–
–
–
(49,885)
–
–
–
(75,781)
–
Modified
–
–
–
–
–
–
–
–
(157,971)
(49,885)
–
–
–
–
207,856
Exercised End of year
(457,500)
259,168
(36,000)
–
(100,000)
–
(120,320)
–
(181,078)
–
–
1,155,912
(703,383)
219,497
–
329,244
–
545,413
–
272,707
(123,200)
–
–
67,892
–
370,349
–
455,218
–
207,856
Exercise
price
£0.2500
£0.6250
£0.7500
£0.4940
£0.0025
£0.0025
£0.0025
£0.0025
£0.0025
£0.0025
£1.8700
£0.0025
£2.7000
£0.0025
£0.0025
Class of
share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Notes
(a)
(a)
(a)
(a)
(a)
(b)
(a)
(a)
(c)
(d)
(e)
(b)
(f)
(g)
(h)
Notes:
(a) Options have vested and are exercisable.
(b)The awards granted will have a performance period of three years starting from the vesting commencement date, being 1 April 2014. The awards will vest as
follows:
i.15% of the shares are subject to an award if annual compound total shareholder return over the performance period equals 8% and 50% of the shares are
subject to an award if the annual compound total shareholder return over the period exceeds or equals 15% with pro rata straight line vesting in between;
and
ii.15% of the shares are subject to an award if annual compound growth of the Company’s adjusted earnings per share over the performance period equals
8% between the financial years at the beginning and the end of the performance period and 50% of the shares are subject to an award if the annual
compound growth of the Company’s adjusted earnings per share exceeds or equals 20% with pro rata in between.
(c) Awards vest on 1 February 2016; there are no vesting conditions.
(d) Awards vest on 1 February 2017; there are no vesting conditions.
(e)123,200 options over Ordinary Shares at an exercise price of £1.87 to compensate holders of options over A Ordinary Shares which were granted in
conjunction with the issue of B shares for the loss of capital gains tax treatment in relation to the reorganisation of the share capital. These options are fully
vested and exercisable
(f) The awards granted will have a performance period of three years starting from the grant date, being 8 May 2015.
(g)The awards granted will have a performance period of three years starting from the vesting commencement date, being 31 March 2015. The awards will vest
as follows:
i.15% of the shares are subject to an award if annual compound total shareholder return over the performance period equals 8% and 50% of the shares are
subject to an award if the annual compound total shareholder return over the period exceeds or equals 15% with pro rata straight line vesting in between;
and
ii.15% of the shares are subject to an award if annual compound growth of the Company’s adjusted earnings per share over the performance period equals
8% between the financial years at the beginning and the end of the performance period and 50% of the shares are subject to an award if the annual
compound growth of the Company’s adjusted earnings per share exceeds or equals 20% with pro rata in between.
(h)On 31 October 2015, 49,885 options with a vesting date of 1 February 2017 and 157,971 with a vesting date of 1 February 2016 were modified to have a new
vesting date of 1 June 2016.
Apart from the options noted as exercisable, all other options above are outstanding.
78
Strategic report
Corporate governance
Financial statements
Movements in the number of options during the previous year were as follows:
The options below were exercised at a weighted average share price of £1.96.
2014
Date of grant
6 June 2014
6 June 2014
6 June 2014
6 June 2014
6 June 2014
2 September 2014
6 October 2014
6 October 2014
6 October 2014
6 October 2014
6 October 2014
6 October 2014
Post
conversion
906,668
72,000
100,000
120,320
795,169
1,399,352
–
–
–
–
–
–
Granted
–
–
–
–
–
–
922,880
329,244
703,384
372,477
123,200
67,892
Forfeited
–
–
–
–
–
–
–
–
–
–
–
–
Exercised End of year
(190,000)
716,668
(36,000)
36,000
–
100,000
–
120,320
(614,091)
181,078
–
1,399,352
–
922,880
–
329,244
–
703,384
–
372,477
–
123,200
–
67,892
Exercise
price
£0.2500
£0.6250
£0.7500
£0.4940
£0.0025
£0.0025
£0.0025
£0.0025
£0.0025
£0.0025
£1.8700
£0.0025
Class of
share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Notes
(a)
(a)
(a)
(a)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(b)
Notes:
(a) Options have vested and are exercisable.
(b)The awards granted will have a performance period of three years starting from the vesting commencement date, being 1 April 2014. The awards will vest as
follows:
i.15% of the shares are subject to an award if annual compound total shareholder return over the performance period equals 8% and 50% of the shares are
subject to an award if the annual compound total shareholder return over the period exceeds or equals 15% with pro rata straight line vesting in between;
and
ii.15% of the shares are subject to an award if annual compound growth of the Company’s adjusted earnings per share over the performance period equals
8% between the financial years at the beginning and the end of the performance period and 50% of the shares are subject to an award if the annual
compound growth of the Company’s adjusted earnings per share exceeds or equals 20% with pro rata in between.
(c) Awards vest on 1 February 2015; there are no vesting conditions.
(d) Awards vest on 10 October 2015; there are no vesting conditions.
(e) Awards vest on 1 February 2016; there are no vesting conditions.
(f) Awards vest on 1 February 2017; there are no vesting conditions.
(g)123,200 options over Ordinary Shares at an exercise price of £1.87 to compensate holders of options over A Ordinary Shares which were granted in
conjunction with the issue of B shares for the loss of capital gains tax treatment in relation to the reorganisation of the share capital. These options are fully
vested and exercisable.
The share options are subject to equity-settled share based payments.
The share options outstanding at 31 December 2015 represented 4% of the issued share capital as at that date (2014: 6%) and
would generate additional funds of £1.1m (2014: £0.6m) if fully exercised. The weighted average remaining life of the share options
was 16 months (2014: 20 months), with a weighted average remaining exercise price of 33p (2014: 11p).
Shadow Share Option Scheme (cash settled)
Under this scheme, the Group used to award employees with a shadow share option which vested on a change of control in the
Company or a listing. Within 30 days of vesting (which was at the time of the listing), the employee received a payment equal to the
number of units multiplied by the difference in market value at the date of vesting and market value at the date of grant. No awards
were made in either period.
Gamma Communications plc Annual Report and Accounts 2015
79
Financial statements
Notes forming part of the financial statements
For the year ended 31 December 2015 continued
25. Share based payment continued
Share based payment expense
Equity-settled share based payments are measured at fair value (excluding the effect of market-based vesting conditions) at the date
of grant. The fair value determined at the grant date of the equity-settled share based payments is expensed over the vesting period,
based on the Company’s estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.
Application of the fair value measurement results in a charge to operating expenses within the subsidiary company Gamma Telecom
Limited. The charge has been made to the profit and loss account of the subsidiary as the employees’ services are provided to the
subsidiary company. The charge for each year is as listed below:
Share options issued to key management
Share options issued to other employees
Modified share options in respect of key management
Shadow Share Options
Total share based payment expense
2015
£m
3.5
0.5
0.1
–
4.1
2014
£m
2.9
0.1
–
0.2
3.2
Fair value is measured using the Black-Scholes model and the Monte Carlo model where market performance conditions are imposed.
The information set out in the table below is used in the calculations. The expected life used in the model assumes that vesting conditions
will be met and all options will be exercised at the earliest opportunity.
Share price at grant date (pence)
Exercise price (pence)
Expected volatility
Risk free rate
Expected dividend yield
2015
267–284
0.25–270
30%
0.97–1.405%
2.2%
2014
187
0–62.5
30%
0.7–1.06%
3%
The share price at grant date and the exercise price have been adjusted for the share split.
The assumptions relating to volatility and the risk free rate are calculated with reference to other comparable companies within the
telecommunications sector.
The Group did not enter into any share based payment transactions with parties other than employees during any of the periods.
26. Fair value measurement of financial instruments
Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three Levels of a fair
value hierarchy. The three Levels are defined based on the observability of significant inputs to the measurement, as follows:
→→level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
→→level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly;
and
→→level 3: unobservable inputs for the asset or liability.
The Group only had one Level 3 financial liability in the prior period, being the contingent consideration, and none in the current period.
The Group’s finance team performs valuations of financial items for financial reporting purposes, including Level 3 fair values, in
consultation with third party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics
of each instrument, with the overall objective of maximising the use of market-based information. The finance team reports directly to the
Chief Financial Officer.
The valuation techniques used for instruments categorised in Level 3 are described below.
The fair value of contingent consideration related to the acquisition of Gamma Network Solutions Limited (see note 17) was based on the
expected gross margins earned by the business in the five years following acquisition. During 2015, the remaining payment was made
with regards to the deferred consideration and as at 31 December 2015 no further payments are due.
80
Strategic report
Corporate governance
Financial statements
Level 3 fair value measurements
The reconciliation of the carrying amounts of financial instruments classified within Level 3 is as follows:
2015
£m
0.1
–
(0.1)
–
Contingent consideration at 1 January
Adjustment to contingent consideration
Realised during period
Contingent consideration at 31 December
2014
£m
2.1
0.6
(2.6)
0.1
27. Capital commitments
The Group had no capital commitments at 31 December 2015 and 31 December 2014.
28. Related party transactions
Details of key management’s remuneration are given in note 7. As at 31 December 2015, an amount of £3.0m (2014: £3.1m) was owed to
the Group by key management personnel.
Bob Falconer
Andrew Belshaw
Richard Bligh
Other key management
1 January 2015
£000
2,591
50
325
112
3,078
Loan made
£000
–
–
–
448
448
Repaid 31 December 2015
£000
£000
–
2,591
(50)
–
(325)
–
(112)
448
(487)
3,039
On 2 October 2014, the Company agreed certain arrangements with Bob Falconer to enable him to maintain his holding of 5% of the
issued Ordinary Share capital of the Company for the purposes of enabling him to benefit from “entrepreneur’s relief” from UK capital
gains tax. In order to achieve this, Bob Falconer agreed to pay to the Company the sum of £3.1m, being £0.9375 in respect of each of
the 3,356,528 B1 shares held by him, such that each of his B1 shares converted into one Ordinary Share (each, a “Converted Share”).
To part fund that payment, the Company’s subsidiary, Gamma Telecom Holdings Limited, made an interest free loan to Bob Falconer
of £2.6m (“Loan”). If Bob Falconer ceases to be a Director of the Company the Loan is repayable on expiry of his notice period or three
months after termination if no notice period applies. The Loan is also repayable if Bob Falconer disposes of the Converted Shares or
upon certain events of default, including his bankruptcy or within six months of his death. There is also a part repayment obligation if
Bob Falconer sells only part of the Converted Shares. The Loan is secured by an unregistered charge over 1,580,159 Ordinary Shares
registered in Bob Falconer’s name. As part of these arrangements, the Company cancelled Bob Falconer’s options over 549,132 A
shares in return for a cancellation payment to Bob Falconer of £1.6m, being equal to the capped value of the A shares pursuant to the
terms of the Company’s articles of association in force at that time less the option exercise price for those A shares. Bob Falconer used
part of the cancellation payment to repay a loan of £0.3m which had previously been made by Gamma Telecom Holdings Limited to him
in April 2014.
On 6 May 2014, a subsidiary (Gamma Telecom Holdings Limited) made an interest free loan of £50,000 to Andrew Belshaw to enable
him to repay a loan of £50,000 from the Employee Benefit Trust. This loan was repaid on 2 December 2015.
On 6 May 2014, a subsidiary (Gamma Telecom Holdings Limited) made an interest free loan of £75,000 to Richard Bligh to enable him
to repay a loan of £75,000 from the Employee Benefit Trust. This loan was repaid on 31 March 2015. On 2 July 2014, a subsidiary
(Gamma Telecom Limited) made an interest free loan of £250,000 to Richard Bligh. This loan was fully repaid by 3 June 2015.
Dividends of £0.6m (2014: £Nil) were paid to Directors during the year and no dividends were payable to Directors at the year end.
There were no other transactions with related parties during the period.
29. Ultimate controlling party
There is no ultimate controlling party.
Gamma Communications plc Annual Report and Accounts 2015
81
Financial statements
Company balance sheet
As at 31 December 2015
2015
£m
2014
£m
2
3.8
3.8
2.3
2.3
3
20.3
7.6
27.9
11.4
6.7
18.1
27.9
31.7
18.1
20.4
0.2
3.7
3.6
24.2
31.7
0.2
3.2
2.1
14.9
20.4
Note
Fixed assets
Investments in subsidiaries
Current assets
Debtors
Cash at bank and in hand
Net current assets
Total assets less current liabilities
Capital and reserves
Called-up equity share capital
Share premium account
Share option reserve
Retained earnings
Shareholders’ funds
The financial statements of Gamma Communications plc (registered number 08943488) on pages 82 to 85 were approved and
authorised for issue by the Board of Directors on 21 March 2016 and were signed on its behalf by:
Andrew Belshaw
Chief Financial Officer
The notes on pages 84 to 85 form part of these financial statements.
82
Strategic report
Corporate governance
Financial statements
Company statement of changes in equity
For the year ended 31 December 2015
Share
capital
£m
–
0.2
–
0.2
Share
premium
£m
–
3.2
–
3.2
Share option
reserve
£m
–
–
2.1
2.1
Retained
earnings
£m
–
–
–
–
Total
equity
£m
–
3.4
2.1
5.5
–
–
–
–
–
–
14.9
14.9
14.9
14.9
31 December 2014
0.2
3.2
2.1
14.9
20.4
1 January 2015
Dividends paid
Share based payments
Exercise of share options
Transaction with owners
0.2
–
–
–
–
3.2
–
–
0.5
0.5
2.1
–
3.1
(1.6)
1.5
14.9
(5.5)
–
–
(5.5)
20.4
(5.5)
3.1
(1.1)
(3.5)
–
–
–
–
–
–
14.8
14.8
14.8
14.8
0.2
3.7
3.6
24.2
31.7
On incorporation
Share issues
Share buybacks and cancellations
Transaction with owners
Profit for the year
Total comprehensive income
Profit for the year
Total comprehensive income
31 December 2015
Gamma Communications plc Annual Report and Accounts 2015
83
Financial statements
Notes forming part of the Company financial statements
For the year ended 31 December 2015
1. Accounting policies
Basis of preparation
As advised to shareholders at the AGM on 21 May 2015, the financial statements have been prepared in accordance with Financial
Reporting Standard 100 Application of Financial Reporting Requirements and Financial Reporting Standard 101 Reduced Disclosure
Framework.
The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been
consistently applied to all the years presented, unless otherwise stated.
The financial statements have been prepared on a historical cost basis, except for the revaluation of certain properties and financial
instruments. The presentation currency used is sterling and amounts have been presented in round millions (“£m”).
The accounts are prepared on the going concern basis. In assessing whether the going concern assumption is appropriate, the Directors
have taken into account all relevant available information about the future trading including profit and cash forecasts and available
facilities and funding. It is therefore considered appropriate to adopt the going concern basis of accounting in the preparation of the
annual financial statements.
As a consolidated profit and loss account is published, a separate profit and loss account for the parent company is omitted from the
Group financial statements by the virtue of section 408 of the Companies Act 2006. The profit in respect of the Company for the year
was £14.8m (2014: £14.9m).
Disclosure exemptions adopted
In preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore
these financial statements do not include:
→→certain disclosures regarding the Company’s capital;
→→a statement of cash flows;
→→the effect of future accounting standards not yet adopted;
→→the disclosure of the remuneration of key management personnel; and
→→disclosure of related party transactions with other wholly owned members of the Group headed by Gamma Communications plc.
Investments
Investments are recorded at cost less amounts written off. The cost of acquisition is the amount of cash or cash equivalents paid and the
fair value of other purchase consideration given by the acquirer, together with the expenses of the acquisition. Where the payment of
consideration for an acquisition is to be made after the date of acquisition, reasonable estimates of the amounts expected to be paid are
included in the cost of acquisition at their present values. The cost of acquisition is adjusted when revised estimates are made, with
consequential corresponding adjustments continuing to be made to the cost of the investment, and therefore goodwill, until the ultimate
amount is known.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities.
Dividends and distributions relating to equity instruments are debited direct to equity.
2. Investments
At 1 January 2015
Additions
At 31 December 2015
2015
£m
2.3
1.5
3.8
2014
£m
–
2.3
2.3
At 31 December 2015, the Company held share capital of the following subsidiaries, all of which are registered in England and Wales with
the exception of Peach Amber Kft which is registered in Hungary.
84
Strategic report
Entity
Gamma Telecom Holdings Limited
Gamma Telecom Limited
Gamma Business Communications Limited
Gamma Network Solutions Limited
Peach Amber Kft
Gamma Metronet Limited
Uniworld Bureau Services Limited
Go Worldwide Solutions Limited
Blue Spot Technologies Limited
Corporate governance
Nature of business
Intermediate holding company
Telephony services
Retail telephony services
Data and communications networks
Software services
Dormant
Dormant
Dormant
Dormant
Financial statements
Proportion held
100%
100%
100%
100%
100%
100%
100%
100%
100%
Note
(a)
(a)
(b)
(a)
(a)
(b)
(b)
(b)
Notes:
(a) All 100% owned via intermediate holding company Gamma Telecom Holdings Limited.
(b) All 100% owned via intermediate trading entity Gamma Business Communications Limited.
Gamma Telecom Limited is also a member of NP4UK Limited which is a dormant company (limited by guarantee) incorporated in the
United Kingdom.
3. Debtors
Amounts owed from Group undertakings
Other debtors
2015
£m
20.2
0.1
20.3
2014
£m
11.4
–
11.4
4. Share capital
Details of the share capital and movement during the period are given in note 21 to the consolidated accounts.
5. Dividends paid
Details of the dividends paid during the period are given in note 10 to the consolidated accounts.
6. Contingent liabilities
The Company had no contingent liabilities at 31 December 2014 or 31 December 2015.
7. Capital commitments
The Company had no capital commitments at 31 December 2014 or 31 December 2015.
8. Related party transactions
The Company has taken advantage of the exemption available within FRS 101 Reduced Disclosure Framework not to disclose
transactions with other members of the Group headed by the Company. See note 28 for details of the disclosed related party
transactions.
9. First time adoption of FRS 101 Reduced Disclosure Framework
This is the first year that the Company has presented its financial statements under FRS 101 (Financial Reporting Standard 101) issued
by the Financial Reporting Council.
The last financial statements under a previous GAAP (UK GAAP) were for the year ended 31 December 2014 and the date of transition
to FRS 101 was therefore 1 January 2015.
In applying FRS 101 for the first time the Company has made the following elections:
→→to retain the carrying amounts of property, plant and equipment at the previous carrying amounts under applicable UK
accounting standards.
Other than the adoption of the reduced disclosures there was no material effect of applying FRS 101 for the first time.
The disclosure exemptions adopted are included in note 1 to the financial statements.
Gamma Communications plc Annual Report and Accounts 2015
85
Supplementary information
Glossary of terms
“Cloud PBX”
A “multi-company” phone system that is located in Gamma data
centres and provides advanced phone system functionality, and
is regularly updated with new features and functionality. It also
enables businesses to pay for phone services out of Opex
rather than Capex.
This service is part of a wider trend in ICT, whereby businesses
are replacing hardware with services from the Cloud. It is
impacting significantly on IT, Software and Telecoms.
Inbound
A software-based service that enables businesses to dynamically
manage phones calls into their business – where they arrive, who
they go to, what services are added (voicemail, call queuing, etc)
to inbound calls.
IP telephony
A method of delivering telephony calls over “data” lines, such
as broadband, using Internet Protocol. This negates the need for
businesses to have both data and voice lines for their premises.
ISDN
Means an integrated service digital network and BT’s telephony
product of that name which is generally sold and/or resold to
businesses. The service is used primarily as a dedicated voice
line for businesses.
86
MPLS
“Multi Protocol Layer Switching”. A technology implemented
across private wide area data networks that enables businesses
to prioritise traffic by type – voice, video, data etc.
“SIP Trunking”
A business grade service that carries voice over a data circuit,
instead of having a dedicated voice circuit (such as ISDN),
enabling businesses to reduce the number of lines they pay for
and has greater flexibility than dedicated voice lines (around phone
numbering, capacity changes and speed of installation).
TDM
Time Division Multiplexing: A means of transmitting and switching
calls and data across a single channel by providing dedicated time
slots.
CPN
Converged Private Networks is our fully-managed WAN (Wide
Area Network) solution that interconnects sites to support the
passing of data, both internally and externally to the internet,
and hosted applications. The service is ideal for businesses
with multiple sites that want to boost the performance, improve
the security and reduce the cost of their network.
MVNO
A mobile virtual network operator is a wireless communications
services provider that does not own the wireless radio access
network assets. An MVNO provides mobile services to
customers from platforms and systems that interconnect
to Mobile Network Operators.
Company information
Registered Office
5 Fleet Place
London
EC4M 7RD
Head Office
Kings House
Kings Road West
Newbury
Berkshire
RG14 5BY
Nominated Adviser and Broker
Investec Bank plc
2 Gresham Street
London
EC2V 7QP
Auditors to the Company
Deloitte LLP
Abbots House
Abbey Street
Reading
RG1 3BD
Legal Advisers to the Company
Bird & Bird LLP
15 Fetter Lane
London
EC4A 1JP
Registrar
Capita Registrars Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Company website
www.gamma.co.uk
Company number
08943488
This report is printed on Condat Digital Silk paper. Manufactured at a mill that is FSC® accredited.
Printed by Principal Colour.
Principal Colour are ISO 14001 certified, Alcohol Free and FSC® Chain of Custody certified.
Designed and produced by SampsonMay
Telephone: 020 7403 4099 www.sampsonmay.com
Newbury Head Office
Kings House
Kings Road West
Newbury
Berkshire
RG14 5BY
Glasgow
1st Floor
7 West Nile Street
Glasgow
G1 2PR
Manchester
1st Floor
The Malthouse
Elevator Road
Trafford Park
Manchester
M17 1BR
Portsmouth
The Port House
Marina Keep
Port Solent
Portsmouth
PO6 4TH
Unit C Focal Point
The Village
Third Avenue
Trafford Park
Manchester
M17 1FG
Budapest
Peach Amber IP Mérnöki Kft
Széchenyi Rakpart 8
1054 Budapest
Hungary
London
Holland House
4 Bury St
London
EC3A 5AW
www.gamma.co.uk
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