Annual Report and Accounts 2007/08

Directors’ report

Business & operating review

Telecoms & Internet Services

The T&IS business continues to perform strongly, benefiting from its high level of recurring revenues. We have fully integrated the Mistral Internet acquisition and have been encouraged by the performance of our expanded hosting proposition following this acquisition. We have seen continued strong performance from broadband and bandwidth services, in both East Yorkshire and across the regions of the UK.

Overall T&IS revenue growth of 9.7 per cent arises from the combination of acquisition-driven growth and organic growth of 1.8 per cent. The organic revenue growth reflects growth in business telecoms of 4.2 per cent, business internet of 19.1 per cent and consumer growth of 5.9 per cent, offset by a decline in partner services revenue. Whilst there has been the expected decline in the volume of voice traffic in both the business and consumer segments, this has been more than compensated for by growth in network access and bandwidth revenue in the business segment and broadband revenues in the consumer segment. At 31 March 2008, our broadband base stood at 203,000 representing year on year growth of 12.0 per cent.

Contract wins secured across the Telecoms & Internet business in the year include North East Lincolnshire Council, Arco, Windsor Telecom and Northern Rail.

Strong consumer revenue growth within East Yorkshire means that there has been a 1.4 per cent increase in revenue generated within the Original Licensed Area (OLA). Penetration of broadband within our OLA stood at approximately 52 per cent as of 31 March 2008. The strength of the East Yorkshire operation underpins the performance of the T&IS segment and we remain confident in its continuing strong performance.

The competitive and regulatory environment within our East Yorkshire business has not changed materially in the last twelve months. We remain vigilant to the possibility of direct competition in East Yorkshire and therefore continue to differentiate our service offerings from those offered in the rest of the UK. Consistent with this approach is the additional investment we are making in the local broadband infrastructure to generate improved broadband speeds for our customers. We continue to provide a quality of service in the local market that compares favourably to that provided by other ISPs across the UK.

Our partner services channel has seen a £2.2 million decline in revenue in the current year as a result of the previously reported ongoing reduction in wholesale dial-up internet volumes and a decline in premium rate call volumes.

A combination of revenue growth, consistent operating margins, tight cost management and the impact of the Mistral acquisition mean that EBITDA grew 7.5 per cent to £62.8 million. There has been a modest EBITDA margin decline from 26.2 per cent to 25.7 per cent as a consequence of a higher proportion of revenues being delivered on networks owned by third parties.

The T&IS segment has continued to deliver strong returns during the financial year with the 15.9 per cent growth in EBITDA less capital expenditure demonstrating the continued ability of this business to deliver positive cash flows.

Based on the strength of these returns and high level of revenue visibility we have committed to further investment in the business in order to improve the breadth of services we can offer on our carrier network, including providing network hosted IP solutions to the business market. Alongside these network investments, we have also invested in further data centre capacity in the Global Switch 2 facility in London, taking our total leased and owned capacity to 14,700 square feet. This is in addition to the existing co-location space within our network exchange premises and supports the continued growth we anticipate in hosted services.