Financial Performance of Companies in Fixed Line Telecommunications - Case Study Example

Introduction

This chapter presents a discussion on the summary of literature related to the financial performances of Cable & Wireless Communication plc and KCOM Group. The financial ratio analysis for performance evaluation of the two companies will be conducted. This analysis will enable the reader of the reports to make sense of the huge amounts of financial information and data presented in company’s financial statements. The financial analysis helps one to evaluate the financial performance of the firm. Investors can also make decisions on where to invest based on the results of the study. The present study investigates two of the major players in telecommunication sector in the United Kingdom. In this section, different aspects of financial performance, including liquidity ratios, profitability rations, performance ratios, debt ratios, and investment evaluation ratios

Cable & Wireless Communication plc (CWC) is a company operating in the telecommunication industry offering services such as mobile services and data, fixed line communication, and broadband services to more than 5.6 million people (CWC, 2015). The company has its headquarters in London, United Kingdom. KCOM Group plc is one of the greatest competitors for Cable & Wireless Communication plc in telecommunication industry. Cable & Wireless Communication plc plays a very important role in the UK’s telecommunication sector. The company is headquartered in London but has operations in the Central America and the Caribbean. The company was formed in 2010 through the demerge of Cable & Wireless plc in which two companies were formed – Cable & Wireless Communication plc and Cable & Wireless Worldwide plc. The company has a number of brands which include CWC Business, Cable & Wireless Panama, and LIME.

KCOM Group also operates in the UK communication and IT services provision industry. KCOM has its headquarters in Yorkshire. It is a company listed in the London Stock and Exchange. Its customers include local residents and businesses which it serves with telephony services and Internet. KCOM has divided its operations into two: Integration and Managed Services which provides services to corporate and public sector organizations; and Telecoms and Internet Services which provides services to small and medium organizations and other selected consumer markets in United Kingdom.

Differences in Products and Services

Analysing the products offered by each of the two companies allows one to assess how well these products and services are helping the companies to have good or poor financial performances. While pursuing different competitive strategies, CWC and KCOM also follow different investment strategies with each offering products which are different from the other despite them operating in the same industry. KCOM’s customers include local residents and businesses which it serves with telephony services and Internet. The area around Hull, Beverley, and Cottingham does not have a BT landline; therefore, the local residents in these areas are only served with telecommunication services by KCOM. KCOM has maintained monopoly in Hull to the extent that some groups are calling for an end in KCOM’s monopoly (Tax Payers Alliance, 2011). Its internet provisioning in the area has been very poor leading to numerous complaints from its customers.

KCOM’s broadband service represents the only fixed-line residential broadband in Hull. KCOM provides Broadband and telephone services to a relatively small area compared to CWC which operates globally. However, there has been upcoming competition and this, together with its poor provision of services may explain why the revenues of the Group have been falling from 2012. Complains surrounding KCOM’s broadband provision started as early as 2005 when Giacom, a rival broadband provider lodged complains that KCOM was not providing network access on reasonable terms. Despite numerous complaints to the European Commission about the alleged monopoly of KCOM, the EU determined that KCOM was not acting in a way that would contribute to keeping out its rivals. This ruling ensured that KCOM maintained its monopoly position in the area. Therefore, KCOM has remained as the only incumbent supplier. However, most recently, there are other providers who are offering wireless internet services through satellite. Firms such as Connexin and Pure Broadband are both local independent companies and have taken some of KCOM’s customers. Limited products and services is making KCOM become overtaken by upcoming firms which are taking part of KCOM’s share market and this may have significantly contributed to the decline that has been witnessed across its financial performance measures.

On the other hand, Cable & Wireless Communication (CWC) plc provides both fixed networks and mobile services which are supported by and terrestrial optical and submarine fibre. In the past decades, CWC has engaged in acquisitions of other companies in order to boost its product and service provision. For instance, in early 2015, CWC acquired Columbus International Inc. making it deliver high-speed mobile services, video and broadband services (CWC, 2016). This has made the company one of the market leaders in mobile, broadband, fixed line, and video services. CWC has some services and products that are not offered by KCOM, including video services and fixed line services. Other services which the company provides include providing businesses and government customers with services via cloud technology, data centre hosting, customised IT services, and managed network services. These competencies have made CWC stay ahead of its competitors.

According to Clausen (2009), profitability ratio analysis of firm’s financial statements plays a very important role of measuring the firm’s profit performance. Income statements and balance sheets are the two key documents for measuring the net worth and revenues of the firm. Income statement is discussed as a document that displays the net revenues of an organisation by deducting expenses from gross profit. On the other hand, the balance sheet is discussed as the document that displays the value of assets and liabilities. Therefore, the present section will display the net worth of the two companies by subtracting their liabilities from assets. As stated by Clausen (2009), the balance sheet does not report revenues; however, there exists a close correlation between the assets and the profits.

Tugas (2012) has discussed how financial statement analysis tend to focus of organisations that belong to industries that significantly contribute to the success of economy or ones that operate in highly competitive environments. Both Cable & Wireless Communication plc and KCOM Group play a very important role in the development of the UK economy because of their financial contribution and communication support that they provide to individuals and other organisations. Secondly, both the Cable & Wireless Communication plc and KCOM Group operate in a highly competitive industry – telecommunication industry. Therefore, it is interesting conducting the financial analysis of both of these companies.

This section aims to analyse the company’s documents of the two companies for 2013/2014 and 2014/2015 using profitability ratios, liquidity ratios, market value ratios, and leverage ratios. Tugas (2012) states that for liquidity, one can use ratios such as current ratio, average collection period, acid-test ratio, cash flow liquidity ratio, and days payable outstanding. He further stated that for profitability, one can use the net profit margin, return on total assets, return on equity, operating profit margin, and basic earning power ratio. For activity, one can use ratios such as fixed assets turnover, accounts payable turnover, total assets turnover, and accounts receivable turnover.

However, it is very important to first specify why the financial analysis is being conducted. In their work, Fraser & Ormiston (2004) stated that the aims of the analysis vary based on the perspective of the user of financial statement and the specific questions that the financial statement data analysis addresses. Among the needs addressed include those of the management, creditors, and investors. Both the Cable & Wireless Communication plc and KCOM Group have management bodies, creditors, and investors. Their financial statements are focused on these groups. Therefore, comparison on how each one of them addresses the need of these groups is very important to these groups because it will help them adjust themselves or make certain decisions, including where to invest and which area to improve on.

In their work, Brigham & Houston (2009) stated that financial analysis involves comparing the performance of a firm to another firm or other firms within the same industry/sector and evaluate the financial trends of that firm(s) over a period of time. Both the Cable & Wireless Communication plc and KCOM Group have audited financial statement which will provide a rich source of information for comparison purposes. Fraser & Ormiston (2004) have discussed five categories of ratios which are used in analysis, including activity ratios, liquidity ratios, leverage ratios, market value ratios, and profitability ratios. There are numerous other literature studies which have discussed financial performance analysis tools (Zain, 2008; Clausen, 2009; Thachappilly, 2009; Nelgadde, 2010; Nelgadde, 2009; Mtetwa, 2010; Jenkins, 2009; White, 2008; Hutchinson, 2010).

CWC and KCOM’s financial performances have been characterised by calculating ratios such as return on equity, operating margin, quick ratio, current ratio, equity to capital, return on assets, receivables turnover, and interest convergence. This ratio classification represents the most commonly used financial ratio classification (Lehtinen, 1996; Lev, 1974). The financial information used to calculate these ratios have been obtained from financial reports of the two companies (2012-2015).

Liquidity ratios

Fraser & Ormiston (2004) have indicated that current ratio is used to measure the firm’s short-run solvency or its ability to meet its debt requirements every time they arise. They have stated that the current liabilities represent the most urgent debts which require retirement within one-year operation cycle. As a result, it is necessary that current liabilities be used as the denominator of the ratio.

The telecommunication sector in the United Kingdom

Cable & Wireless Communication plc

Cable & Wireless Communication plc plays a very important role in the UK’s telecommunication sector. The company is headquartered in London but has operations in the Central America and the Caribbean. The company was formed in 2010 through the demerge of Cable & Wireless plc in which two companies were formed – Cable & Wireless Communication plc and Cable & Wireless Worldwide plc. The company has a number of brands which include CWC Business, Cable & Wireless Panama, and LIME. In 2015, the company acquired Columbus Communications which has enabled it to rebrand its LIME operations. However, in 2015, announcement was made that Liberty Global was intending to purchase Cable &Wireless Communication and the company was eventually acquired by Liberty Global on May 16, 2016 where it is intended to be taken through a six-month integration period into the Liberty’s Latin American and Caribbean Group (Bloomberg, 2015). KCOM Group also operates in the UK communication and IT services provision industry. KCOM has its headquarters in Yorkshire. It is a company listed in the London Stock and Exchange. Its customers include local residents and businesses which it serves with telephony services and Internet. KCOM has divided its operations into two: Integration and Managed Services which provides services to corporate and public sector organizations; and Telecoms and Internet Services which provides services to small and medium organizations and other selected consumer markets in United Kingdom.

During the period 2012/2013, CWC experienced a dynamic and busy year. CWC’s Chief Financial Officer, Tim Pennington indicated that he was pleased with the company’s financial performance (CWC, 2013). The Group recorded improved revenues in mobile category 2013 compared to the previous year (2012). However, the other three categories (broadband, fixed voice, and enterprise, data and others) recorded a slight decline. The decline in the three categories affected the Group’s revenues where it experienced a 2 percent drop to $586 million. Mobile category experienced an increase of 3 percent from 2012. The mobile category maintained its leadership in the market with data penetration of the subscriber base increasing to 31 percent. There was high data usage in the 2013 financial year particularly in the prepaid segment as a result of the availability of short-term flexible plans resulting in 47 percent growth in non-voice category thus offsetting the decline in voice revenue.

Compared to CWC’s revenues, KCOM’s revenues were lower. In 2013 financial period, KCOM recorded revenues of $494.95 million (KCOM, 2013). Similar to CWC, KCOM also experienced a decline in its revenue. In 2012, KCOM recorded revenues of $514.06 million. CWC revenues dropped from $601 million in 2012 to $586 million in 2013. CWC also experienced a drop in EBITDA from $256 million in 2012 to $239 million in 2013. The profit margin of CWC dropped from 43 percent in 2012 to 41 percent in 2013 (CWC, 2013). On the other hand, KCOM’s EBITDA dropped from $103.4 million in 2012 to $102.07 million in 2013. The 1.3 percent drop in EBITDA recorded by KCOM was as a result of increased investment in the company and the to some extent lower revenue realization (KCOM, 2013).

In 2014, KCOM realised revenues amounting to $492.03 million. This was a further drop from 2013 where the Group had realised revenues amounting to $494.95 million. KCOM’s revenues continued to drop further in 2015 with the Group recording revenues amounting to $461.9 million (KCOM, 2015). In 2015, CWC revenues increased significantly reaching $1.8 billion. The Group attributed this increase to high sales of its products and services. CWC also experienced a 7 percent increase in its EBITDA in the same year. CWC’s EBITDA amounted to $585 million. This improvement may have been realised due to the announcement by Liberty Global that it intends to acquire CWC. The Chief Executive Officer of CWC referred to 2015 as the Group’s year of transformation – with a new business culture of placing their client at the heart of business and business leadership (CWC, 2015). KCOM Group experienced a further drop in its EBITDA recording $98.62 million.

In 2015, CWC experienced an improvement in almost all its financial aspects. Regarding capital expenditure, CWC realised a 76 percent increase from 2013/2015 financial period. Operating cash flow fell by 52 percent compared to operating cash flow in 2013/2014 financial period. Adjusted earnings per share also increased by 114 percent in comparison to the 2013/2014 period. Full year dividend experienced a zero percent change compared to the 2013/2014 period.

Financial KPIs

The previous section has discussed and compared the revenues and EBITDAs of the two firms. CWC was found to have a relatively low performance in the 2012/2013 financial period in comparison to the 2013/2014 and 2014/2015 financial period. In the period 2014/2015, CWC recorded one of the most impressive financial performances in years. In 2014/2015 financial period, the Group experienced a rapid growth in all its financial aspects, including revenues, EBITDA, profit before tax, net cash inflow from operations, and net debt. On the contrary, KCOM Group has continued to experience a drop in its financial performances. This drop has been progressing slightly from 2012 to 2015. However, compared to the growth that CWC has experienced, KCOM’s drop in financial performance seems significant. This implies that investors are more inclined to invest in CWC rather than in KCOM. CWC has realised rapid growth across its entire product and service categories, including mobile category, broadband, managed services, and video services.