Builder of Gigabit Cities

Transcription

1 Builder of Gigabit Cities CityFibre Infrastructure Holdings plc Annual Report

2 CityFibre Infrastructure Holdings plc Annual Report CityFibre is the UK s largest alternative provider of wholesale fibre optic infrastructure powering a new generation of gigabit speed digital communications, and building a better fibre future for the UK. The company s networks, comprising over 2,900 route kilometres of ducts that host modern high capacity fibre optic cables, span major metro footprints in 37 cities, together with a national long distance network that connects to major datacentres across the UK and to key peering points in London. CityFibre s extensive customer base encompasses systems integrators, enterprise and consumer service providers and mobile operators. Providing a portfolio of active and dark fibre services, CityFibre s shared infrastructure covers an addressable market of 26,000 public sites, 7,400 mobile masts, 260,000 businesses and 3.7 million homes. CityFibre is listed on the AIM market of the London Stock Exchange and trades under the ticker CITY. Strategic report 01 Highlights 02 CityFibre at a glance 04 Chairman s statement 06 Operating review 08 KCOM asset acquisition 10 Business model 11 Investment proposition 12 Market overview 13 Strategy 14 Strategy in action 16 Financial review 19 Principal risks and uncertainties Corporate governance 20 Corporate governance statement 22 Directors 24 Senior management 25 Directors report 26 Directors remuneration report Financial statements 29 Independent auditor s report 30 Consolidated statement of comprehensive income 31 Consolidated statement of financial position 32 Consolidated statement of changes in equity 33 Consolidated statement of cash flows 34 Notes to the consolidated financial statements 49 Company statement of financial position 50 Company statement of cash flows 51 Company statement of changes in equity 52 Notes to the company financial statements 54 Company information

3 CityFibre Infrastructure Holdings plc Annual Report Strategic report 01 Highlights was a year of strong organic growth in footprint, customer connections and service provider relationships, culminating in a transformational acquisition. 36 % Growth in customer connections Financial Highlights: Turnover up 67%, to 6.4m (: 3.8m) Gross profit of 5.5m, up 68% Gross margin further expanded to 86% (: 85%) Adjusted EBITDA 1 loss of 2.9m, down from 3.6m in Total Contract Value 2 ( TCV ) of 23.2m added in the period, up 109% from 11.1m in Net loss after tax of 6.4m, improving from 7.0m in Operating Highlights: Direct fibre connected customer premises up to 1,200, from 885 in the prior period Completed route kilometres of ducted fibre increased to 743km, from 543km in Service provider relationships numbered 41 at period end, up from 25 in Three new city-wide metro duct and fibre infrastructure construction projects won: Newport, Edinburgh and Glasgow 67 % Revenue growth Master Services Agreement signed with Vodafone allowing for delivery of dark fibre across its footprint Joint Venture with Sky and TalkTalk progressing with delivery of gigabit speed FTTH within target economics. Sky and TalkTalk s Ultra Fibre Optic (UFO) brand launched to residential customers Acquisition of 24 city metro and national network assets (outside Hull and East Yorkshire) (the Acquisition ) from KCOM Group plc ( KCOM ), for a consideration of 90.0m in cash Post Period End Highlights: 23.2 m New contracts signed (+109% growth) Readmission to AIM on 14 January 2016 via 80.0m equity placing at 50p per share Closing of acquisition of metro and long distance duct and fibre assets from KCOM (the Network Assets ) on 18 January 2016 Total funding package of 180.0m secured to fund the acquisition and future development of the assets, comprising 80.0m via the placing, alongside 100.0m in committed debt facilities Combined footprint (including projects under construction) of 2,150 route kilometres of metro duct and fibre assets and 1,100 route kilometre national ducted backbone network, addressing 26,000 public sector sites, 7,400 cell sites, 260,000 businesses and 3.7m homes in 37 towns and cities Southend-on-Sea anchor contract secured, 50km network to serve 120 public sector sites First new business on the acquired national long haul Network Asset in deal with SSE Enterprise Telecoms Year-to-date 2016 showing strong momentum, with 37.5m in new TCV including revenue committed under the Acquisition, 101 new customer connections and 107 kilometres added on the legacy CityFibre footprint, and 450 connections sold on the acquired metro footprint within 90 days of the acquisition close First quarter 2016 moved into positive adjusted EBITDA Strategic report Corporate governance Financial statements 1 Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, also excluding share-based payments and significant non-recurring expenses. 2 Total contract value ( TCV ) is the total contracted customer revenues receivable up to the first contract break point.

4 02 CityFibre Infrastructure Holdings plc Annual Report Strategic report CityFibre at a glance 37 Major metro networks serving over 3,000 customer sites Who we are CityFibre is a nationwide provider of wholesale fibre optic infrastructure in towns and cities outside London. The Company s infrastructure is shared by service provider partners to deliver high capacity, future-proofed connectivity solutions to their end customers as a competitive alternative to BT Openreach. The company s overarching vision is of the Gigabit City, in which every segment of the local market is served via a dense ducted pure fibre network delivering gigabit speeds as standard. The power of gigabit connectivity can be harnessed in many ways to drive transformation of the city and invigorate its local economy: Public sector The City of York Council initially delivered a revolutionary improvement in connectivity to its schools and Council premises via CityFibre s original network deployment, and has subsequently established a free WiFi network across the city, as well as on board its buses, as an amenity for citizens and visitors, all powered by CityFibre s 125km fibre network; Business community CityFibre s Peterborough launch partner, GreenCity Solutions, has transformed business connectivity in the local market, by introducing gigabit products at an affordable price, which in turn has driven further demand to connect additional business parks which had previously been poorly served; Mobile operators In Kingston upon Hull, CityFibre constructed a highly resilient 56km doubleducted network to connect 37 cell sites on behalf of MBNL. This enables mobile operators Three UK and EE to scale bandwidth in line with their own technology roadmaps, unconstrained by the product set and cost of a traditional leased line provider; and Consumers CityFibre s Fibre-tothe-Home trial in conjunction with joint venture partners Sky and TalkTalk is delivering gigabit level services to homes in York today, enabling world-class experiences in video, gaming, teleworking, cloud computing and smart home applications. The dense metro duct networks can serve as key enablers of Fibre-to-the-Home in every market where CityFibre operates, supporting the high fibre capacity needed, speeding time to market and reducing deployment costs. 90 m Acquisition of KCOM s national fibre assets Our networks explained Ducts and modern high capacity fibre optic cables are the key components of CityFibre s 37 city-wide metro fibre networks. Multiple primary ducts of approximately 100mm in diameter reside deep in the carriageway, forming the foundation of CityFibre s infrastructure. Each of these primary ducts is typically split into sub-ducted segments which can hold high capacity cables of up to 1,000 fibre strands. These ducts and fibre cables can be accessed at regular intervals via chambers or cabinets installed along the route of the network. CityFibre mitigates construction risk through an anchor tenant model. An initial anchor customer in a city may only use a small fraction of the duct and fibre capacity installed, leaving the remainder available for use in large scale fibre network extensions to business parks, cellular towers, and Fibre-to-the- Home deployment areas. Fibre optic cables are the globally acknowledged enablers of superior, future-proof internet connectivity. The only constraint to data transmission over fibre is the optical transmission equipment placed at either end of the cable to light it.

5 CityFibre Infrastructure Holdings plc Annual Report Presence in 24 of 30 top UK cities outside London Dark Fibre As electronics evolve, the one key constant factor is the superior transmission capacity of the underlying fibre optic cable, which in its unlit form (before the optical transmission equipment is connected) is called dark fibre. The dark fibre business model is an attractive one, due to its simplicity, cost advantages, and significant operating leverage. Key features include: Long economic lifetime, of at least 20 years, and possibly as many as 40 years; No cost or technology risk associated with advancements in optical networking; Low operating and maintenance costs; Near-infinite transmission capacity in each fibre strand; Significant latent capacity a single fibre optic cable may contain more than 1,000 fibre strands; Shared infrastructure model for multiple customers across all market segments; and Complete flexibility for the customer to differentiate services. GIGABIT CITY LAUNCH PLAN Launch programme of Gigabit Cities across the acquired metro networks in 2016 Edinburgh GIGABIT CITY Ayr Kirklees CORE Coventry GIGABIT CITY Plymouth Huddersfield Aberdeen Dundee Edinburgh Newcastle Bradford Halifax Manchester Sheffield Derby Birmingham Newport Coventry Aberdeen GIGABIT CITY Harrogate Bristol York GIGABIT CITY Hull CORE Presence in 24 of the top 30 cities by population outside of London Coverage in attractive tech hubs 22 cities are interconnected to the national long distance network York Leeds Wakefield Bath Swindon Weston Super Mare Bracknell Exeter Bournemouth Hull Doncaster Rotherham Nottingham Leicester Reading Slough Peterborough Northampton Milton Keynes London Peterborough GIGABIT CITY Former KCOM Metro Network CityFibre Metro Network Interconnect PoPs Long Distance Network Strategic report Corporate governance Financial statements

6 04 CityFibre Infrastructure Holdings plc Annual Report Strategic report Chairman s statement It was a truly momentous year for the Group, with significant footprint expansion on both an organic and inorganic basis. I am very pleased to present this second set of full year financial results for CityFibre Infrastructure Holdings plc ( CityFibre or the Group ). It was a truly momentous year for the Group, with significant footprint expansion on both an organic and inorganic basis. We entered three new markets Newport, Edinburgh and Glasgow with Edinburgh comprising two anchor deals with lifetime total contract value 1 ( LTCV ) of c. 20.0m, at a very high capex coverage level. We continued to gain traction with both local/ regional and national service provider partners, who numbered 41 at the year end. The year culminated in our announcement of the acquisition of certain national network assets from KCOM Group plc, an acquisition which accelerates our expansion by between five and seven years, more than doubles our metro network footprint, adds a 1,100km national core network to our portfolio, and establishes CityFibre as a national alternative to Openreach with significant presence in 37 UK towns and cities. Overview of results The Group added 23.2m in new TCV during the period, an improvement of 109% from, due to both strong new city wins as well as incremental sales growth in existing cities. Revenue for the period was 6.4m (: 3.8m), up 67% versus the prior year period. Gross margin of 86% marks an improvement of one percentage point during the period and demonstrates the improving operating leverage inherent in the dark fibre business model as we continue to focus on writing highly profitable new business. Adjusted EBITDA loss of 2.9m is in line with expectations and marks a reduction of 20% over the previous period. Financial position Cash and cash equivalents at the end of the period totalled 9.7m. In anticipation of the close of the Acquisition early in 2016, the Group redeemed the outstanding portion of the Citibank credit facility, totalling 1.7m, in December. As a result, the Group had no interest bearing liabilities at 31 December. For more on our financial position, see pages 16 to 18 Strategy The Group continues to execute its anchor-then-commercialise strategy across all market verticals. The addition of the Network Assets to the portfolio of cities gives us enhanced scale and relevance to our service provider partners, both local/regional and national, and KCOM becomes our largest customer, anchoring across 24 footprints, 21 of which are entirely new to CityFibre. The Group has a stated medium term aspiration to expand to 50 cities, comprising an addressable market of approximately 10,000 mobile cell site locations, 35,000 public sector sites, 350,000 businesses and 5 million homes. Additionally, the Group aims to have relationships with approximately 100 service provider partners within three years, from 46 today. For more on our strategy, see page 13 1 Lifetime total contract value ( LTCV ) is the total contracted customer revenues receivable.

7 CityFibre Infrastructure Holdings plc Annual Report 05 Our people, our passion Board and employees There were no changes to the composition of the Group s Board in the period, and committee membership remained unchanged from last year. The Board did create a non-statutory sub-committee dedicated to Risk and Strategy, reflecting the many and various changes and proposed changes affecting the structure and function of the UK broadband infrastructure market. This committee considers, amongst other items, the potential long-term impacts on the Group of Ofcom rulings around regulated dark fibre pricing and measures to protect the interests of shareholders. The Group s resources during the second half of financial year were intensely focused on closing the Acquisition and associated financing projects. The senior executives, managers and employees of CityFibre have significantly contributed to the creation of the enlarged Group. I would like to thank them for their consistent hard work and support, particularly during the acquisition, fundraising and readmission to AIM. CityFibre is fully supportive of apprenticeship schemes, employee volunteering within the local community, and has selected The Stroke Association as its charity of choice for Our people are passionate about making a change to the status quo in the UK broadband infrastructure market, and we are uniquely equipped to deliver that change. CityFibre was created via an acquisition of existing fibre network assets, and in our brief history we ve designed, built and acquired an enlarged asset footprint, giving us the opportunity to change the broadband experience of businesses, institutions and individuals in roughly 20% of the UK. From our Board and senior management right through to our sales, design, project management, construction and marketing teams, our people possess a level of subject matter expertise in the deployment and integration of fibre infrastructure unrivalled in the UK. Across the organisation, our experts possess up to 25 years fibre infrastructure expertise, encompassing incumbent telecoms networks, challenger wholesale infrastructure players, metro fibre networks, cable networks, international IP carriers, wireless infrastructure providers and datacentres. This depth and breadth of experience means that we have a deep knowledge and appreciation of the challenges faced by customers across our key market verticals, and of how we can best work with them to deliver solutions for the long term. Strategic report Corporate governance Financial statements Outlook The Board is enthusiastic about the Group s prospects in 2016 and believes that management s investment in both organic and inorganic footprint expansion in positions it strongly for future growth. Our aspiration is to successfully launch up to 10 Gigabit Cities in the course of 2016 across the acquired footprint, as well as continue to selectively pursue green-field organic opportunities. We believe the experience and resources of the Group s executives, management and employees uniquely enable it to become a national force in the fibre infrastructure arena. We continue to assess the potential impacts of recent Ofcom decisions around availability and pricing of dark fibre, and to explore possible risk mitigation, including appeal. Peter Manning Chairman 15 April 2016

8 06 CityFibre Infrastructure Holdings plc Annual Report Strategic report Operating review The Group is now strongly positioned in the rapidly evolving wholesale fibre infrastructure market. The Group continued to expand its network footprint coverage during the financial year, adding three new cities to its growing portfolio of projects. Service provider relationships continued to expand, with an increase to 41 at period end, up from 25 in December. Notable amongst the additions to the service provider roster was Vodafone Limited, which delivered its first order under a national Master Services Agreement ( MSA ) with CityFibre in October. We closed out the year with the announcement of the Acquisition on 14 December. The transaction gives the Group an estimated national market coverage of c.15% on a pro forma basis, and a presence in 21 entirely new markets, with a deep-ducted metro and long-haul footprint three times larger than the organic footprint we have been developing since the founding of the Group in The Group is now strongly positioned in the rapidly evolving wholesale fibre infrastructure market as the largest national alternative to Openreach, and the only player of significant scale with extensive metro duct and fibre infrastructure. Network footprint expansion On 4 February, the Group announced a partnership with Logicalis, the global provider of IT solutions and managed services, to construct a 40-site Community Safety Network a high capacity resilient duct infrastructure with a pure fibre ring in Newport, Wales third largest city. The project was awarded under the UK s Public Services Network (PSN) framework and is the first for CityFibre in Wales, marking the second win for CityFibre s dark fibre solutions in partnership with an accredited provider to the framework following the deal with Easynet in the metropolitan borough of Kirklees, announced in August. On 3 March, CityFibre announced an agreement with leading Scottish network service provider, Commsworld, for the first phase of deployment of an extensive double-ducted pure fibre network infrastructure in Edinburgh. The initial 50km build is backed by a contractual commitment from Commsworld to migrate a significant proportion of its large existing base of business customers onto CityFibre s new fit-for-purpose infrastructure. Our FTTH trial in York continues to progress, with CityFibre s reference design and economics successfully validated. In May, our joint venture partners, Sky and TalkTalk, unveiled their jointly developed brand identity, Ultra Fibre Optic ( UFO ) and have recently launched commercial propositions into the York market. On 8 September, the Group announced the signing of a 100km extension to its previously announced Edinburgh Gigabit City project in a 294-site, 5.6m deal, also with Commsworld. The seven-year deal, with options to extend to a maximum of 19 years and an LTCV of 16.0m, represents CityFibre s largest contract win to date and is one of the largest metro UK public services network awards in recent years. When completed CityFibre will own over 150km of deep-ducted fibre infrastructure across Edinburgh, future-proofing the city. The contract is part of a wider 186.0m outsourced ICT procurement for the council won by global ICT firm CGI, which will create the single largest pure fibre city roll-out in the UK.

9 CityFibre Infrastructure Holdings plc Annual Report 07 On 6 October, the Group announced the first contract under a Master Services Agreement ( MSA ) with Vodafone Limited. The MSA sets out standard contractual terms under which CityFibre may supply fibre connectivity to parts of Vodafone UK s national estate of mobile cell site locations, selected corporate customer locations, as well as additional interexchange connectivity to support the enhancement of its national network. This first call-off under the agreement is in the City of York, utilising CityFibre s existing 125km metro fibre network for interexchange connectivity. On 26 November, CityFibre announced the selection of Glasgow as its next Gigabit City project. The 10-year deal with Highland Network Limited ( HighNet ) will see the Inverness-based business ISP migrate 100 of its existing customers onto a new fibre network under construction by CityFibre in Central Glasgow. This first phase of what is anticipated to be a significant network deployment programme in the city carries a TCV of 3.0m, with high TCV/capex coverage. Separately, HighNet also committed to migrate a minimum of 50 customers onto the CityFibre network in Aberdeen. On 14 December, the Group announced the acquisition of certain national duct and fibre infrastructure assets of KCOM Group plc (the Acquisition ) for a total proposed consideration of 90.0m together with an underwritten equity placing to raise 80.0m at 50 pence per ordinary share of 1 pence each ( Ordinary Shares ), as well as the conclusion of an agreement for up to 100.0m of committed debt facilities to part-fund the acquisition and support the commercialisation of the acquired assets. The acquisition closed on 18 January The national infrastructure acquired by CityFibre comprises approximately 1,100 route kilometres of ducted metro fibre assets in 24 towns and cities, and a national long distance network totalling approximately 1,100 route kilometres of two-way ducting and fibre that connects 22 towns and cities and offers connectivity into key datacentres and wholesale internet peering points in London. The acquired assets do not include KCOM s network assets in Hull and East Yorkshire. The consideration of 90.0m in cash is estimated by the Directors to represent a 45% discount to costs of replicating the networks. Under the terms of the Acquisition, CityFibre will provide KCOM with access to the acquired infrastructure for a term up to fifteen years, subject to a minimum term of five years and a minimum revenue of 5.0m per annum for those five years. The Acquisition expands CityFibre s footprint of deep ducts and fibre to 37 cities and major towns across the UK, providing pure fibre connectivity for use by regional and national service providers and mobile operators as a competitive wholesale alternative to BT Openreach. As at 31 December, CityFibre s duct and fibre network footprint comprised 743km (: 543km) serving 1,200 customer premises, up from 885 in. Employees The Group ended the year with 105 full-time equivalent staff (FTEs), versus 76 as at the end of. Post period events The Acquisition and associated Placing were approved at the general meeting of the Group held on 12 January The Acquisition completed on 18 January The Acquisition constituted a reverse takeover under Rule 14 of the AIM Rules for Companies, requiring de-listing and readmission, which occurred on 14 January The Group issued 160,000,000 new Ordinary Shares at a price of 50p per Ordinary Share, raising 80.0m before fees and expenses. The resulting number of shares in issue following admission was 265,672,644. For more on our strategy, see page 13 Overall, year-to-date in 2016 the Company displays strong momentum: adding 37.5m in TCV (including the 25.0m minimum commitment from the Acquisition); connecting 101 new customer premises and delivering 107 kilometres of new build on the legacy CityFibre footprint; contracts signed for 450 additional connections and TCV of 6.4m already sold on the acquired footprints in Bristol, Leeds and Bradford less than 90 days after closing the acquisition; selling the first capacity on the acquired national long haul network in a 2.3m deal with SSE Enterprise Telecoms; winning a 3.2m contract for 120 sites across a 50km new build in Southend-on-Sea, our 37th city; } } turning adjusted EBITDA positive in Q1. Strategic report Corporate governance Financial statements

10 08 CityFibre Infrastructure Holdings plc Annual Report Strategic report KCOM asset acquisition Transforming our business Before/After the acquisition CityFibre Metro Network KCOM Metro Network Long Distance Network

11 CityFibre Infrastructure Holdings plc Annual Report cities (21 additive to CityFibre) 1,100 km (of metro network) 1,100 km (national long-distance network) The acquired assets On 18 January 2016, CityFibre completed the 90.0m acquisition of a portfolio of national duct and fibre network assets from KCOM Group Plc, outside Hull and East Yorkshire. The assets comprise 1,100 route kilometres of deep-ducted metro network in 24 cities, 21 of which are completely new to CityFibre, as well as a 1,100 kilometre national backbone network connecting 22 cities. As a result of the acquisition, CityFibre s network of ducts and fibre today covers 37 towns and cities, spanning over 1,800 kilometres of metro local access duct and fibre and 1,100 kilometres of long haul duct and fibre, serving over 3,000 customer premises. KCOM retains a contractual right to serve existing customers on the network, and thus becomes CityFibre s single largest customer. Benefits of the Acquisition The Acquisition delivers a number of benefits to CityFibre and its shareholders, amongst them: Acceleration of 5 7 years in footprint expansion, without anchor or build risk; Combined footprint of approximately 2,100 km of metro duct infrastructure (including projects under construction) capable of rapidly rolling out and lowering the deployment cost of Fibre-to-the- Home or Fibre-to-the-Tower networks; Assets acquired at an estimated 45% discount to replacement cost; Minimum revenue guarantee of 5.0m per annum from KCOM for the continued use of the network, for a minimum period of five years, and potentially up to 15 years; and Financing package funds expansion to 50 cities, covering an addressable market of 10,000 mobile sites, 35,000 public sector sites, 350,000 businesses and 5m homes. Strategic report Corporate governance Financial statements Post-Acquisition market positioning Following the integration of the acquired assets into the Group, CityFibre occupies a considerably more significant position in the UK fibre infrastructure market: Coverage of 24 of the top 30 towns and cities by population outside London, many of which are attractive and vibrant tech and commercial hubs; Provides a highly relevant scale alternative to Openreach in our markets, and the only alternative based on deep underutilised ducts and dark fibre; Long distance duct network offers multiple new revenue streams to be leveraged; and Good progress to date in commercialisation, with over 450 connections sold on the acquired metro footprint, and the first capacity sale on the long distance network coming in the first 90 days after closing.

12 10 CityFibre Infrastructure Holdings plc Annual Report Strategic report Business model What we do Builder of Gigabit cities Each of CityFibre s metro networks is built to match its Well Planned City (WPC) design. This design principle builds enough duct capacity to form the core of future FTTH/P deployments. The WPC has three overarching design principles: Gigabit speed dark fibre capability from day one to the home, business or tower Resilient core metro architecture based on rings Ample duct capacity to allow for upgrades to full point-to-point FTTH rollout over time Point-to-Point Dark Fibre Fibre connectivity between two or more points; for example a datacentre connecting to another datacentre. A CityFibre customer purchasing point-to-point dark fibre will typically commit to a multi-year contract and install its own optical equipment to transmit data via the fibre. Fibre-to-the-Premises (FTTP) Fibre connectivity between an office building, public sector or other location and the internet. These fibre connections are leased under multi-year contracts to public sector-focused or business-focused service providers to enable gigabit speed services to their customers, and may comprise either dark fibre or basic Ethernet service. Fibre-to-the-Tower (FTTT) Fibre connectivity between a mobile operator s cell site and its core network. These fibre connections are leased under multi-year contracts to mobile operators and wireless providers enabling high-speed mobile data services such as 4G. Fibre-to-the-Home (FTTH) With 37 cities with significant metro core duct and fibre infrastructure the Company has laid the foundation for a rapid and future-proofed FTTH deployment. In the joint venture company s trial in York, the WPC reference design in use allows for gigabit speeds to every home today, capable of full point-to-point upgrade later without digging, and a resilient ring architecture at the cabinet level. These fibre connections can be leased to consumer service providers to enable gigabit speed broadband to their consumer customers. How we do it 1. Anchor core network build 2. Densify volume of connections Public Sector Business Mobile Consumer FTTH 3. Expand to FTTH with national ISPs When entering a new city, CityFibre secures an anchor contract with one or more service providers from its various market verticals. This anchor contract should cover the majority, if not all, of the associated cost of deploying an extensive deep two-way ducted core network throughout the city under a reference design we call the Well Planned City design. It then markets the network to adjacent verticals in the market, adding density to the network and increasing network utilisation with high returns on incremental investment. How we create value Shareholders Rapid revenue and EBITDA growth Deep intrinsic asset value generating long-term secure yields Wholesale Partners & Customers Differentiated service capabilities Alternative to the incumbent s product set Consumers & Businesses Superior connectivity and value for money Enhanced productivity Employees Rewarding career development Making a difference to the UK s growth prospects Society Economic stimulus Innovation in delivery of social services

13 CityFibre Infrastructure Holdings plc Annual Report 11 Investment proposition 1 Substantial 2 Disciplined, 3 Growing scale in an attractive market Coverage in 24 of the 30 top cities outside London 22 interconnected cities on our national long distance network Our target cities outside London contain three quarters of all digital businesses in the UK, though a legacy of underinvestment has deprived them of any alternative source of wholesale fibre connectivity until now. Our ducted metro fibre network footprint covers an addressable market of an estimated 26,000 public sector sites, 260,000 businesses, 7,400 cell sites, and 3.7m homes, or roughly 15% of the UK population. This makes us the largest alternative wholesale fibre network in the UK, and the main challenger to Openreach. The addition of the national long distance network opens up new revenue opportunities in providing intercity/ inter-regional connectivity. success-based investment model De-risked approach, no speculative builds High financial returns on incremental capex All our Gigabit City projects are based on long-term anchor contracts which cover a substantial portion, if not all, of the initial capex committed to developing a Gigabit City. Typically these generate gross margins in excess of 90%, due to the limited operating market penetration 46 service provider relationships today Blend of local and national players expenses required to manage passive fibre networks. Our Well-Planned City design methodology routes the duct network near areas of future demand, delivering high financial returns on incremental capex as we commercialise the network further. Strategic report Corporate governance Financial statements As a wholesale-only infrastructure provider, CityFibre relies on its service provider partners to drive rapid revenue generation. CityFibre s network of partners includes a growing number of systems integrators to the public sector, business ISPs, mobile network infrastructure operators and consumer ISPs. These range from local and regional champions to national players such as Vodafone, MBNL, Three UK, EE, Interoute, Capita, Serco, Sky and TalkTalk. We aim to grow our total service provider relationships to over 100 within three years, from 46 today. 4 Diversified, secure revenue streams generating stable long-term yields Multiple market verticals served Variety of contract lengths and payment profiles As we sell across all market verticals within a Gigabit City, our revenues are spread across a number of service provider partners under contracts varying in length from three years to more than 10 years, with a high propensity to renew. This provides us with a diverse and stable revenue base from which to grow and generate stable long-term yields. We also tailor payment profiles to the customer, ranging from term contracts to indefeasible right of use (IRU) structures.

14 12 CityFibre Infrastructure Holdings plc Annual Report Strategic report Market overview Growing demand for fibre Global IP traffic: 23% CAGR between The UK s fibre infrastructure lags behind other countries Exabytes per month E 2016F 2017F 2018F 2019F Source: CityFibre, Cisco VNI Global IP traffic has increased 5x in the past 5 years, and will increase 3x in the next 5 years Global mobile data will grow 3x faster than fixed IP traffic Metro traffic will account for 66% of total IP traffic by 2019 Sweden Spain Netherlands France US Italy Germany Canada UK FTTP Deployment, Mid 0% 10% 20% 30% 40% 50% 60% 70% UK fibre connectivity continues to lag behind many developed countries BT has limited desire to invest in fibre to the premise Problem is magnified outside London Source: Ofcom By 2019 forecasts indicate that approximately two thirds of total IP traffic will originate or terminate within urban metro networks. Internet protocol (IP) traffic worldwide continues to grow at a staggering rate, due to the proliferation of connected devices at work and in the home, the popularity of over-the-top content platforms such as Netflix, iplayer and Amazon Prime, as well as the mass adoption of cloud-based services of every description. Global IP traffic has increased fivefold over the past five years and is forecast to triple over the next five years, and by 2019 forecasts indicate that approximately two thirds of total IP traffic will originate or terminate within urban metro networks. The transmission networks of communications service providers must support the exponential growth of traffic that results from the aggregated data demands of their end users. This is particularly the case in mobile networks where mobile data traffic is forecast to grow three times faster than in fixed networks. The UK boasts one of the highest levels of internet adoption in the world, and internet-related economic activity accounts for a larger proportion of GDP in the UK than in any other G-20 member nation. We firmly believe that the state of the UK s fibre optic infrastructure today is not commensurate with the increasingly significant role which the internet will play in the nation s future, due to a legacy of underinvestment in the past 15 years. According to figures published by Ofcom in, the UK is lagging behind most developed countries in terms of fibre connected buildings, and nearly half of small and medium enterprises endure connectivity of 10Mbps or less. Whereas London supports a competitive market of alternative fibre infrastructure providers via metro area networks, the availability to service providers of alternative wholesale fibre infrastructure via metro area networks outside of London is very limited. However, with an estimated three quarters of digital businesses located outside of the Greater London area, there is a pressing need to improve connectivity options in regional towns and cities to support new business formation and local economic regeneration. CityFibre is best placed to address this demand, with the most extensive portfolio of alternative duct and fibre network assets outside the Greater London area. With a significant network presence in 37 regional towns and cities, including 24 of the top 30 cities outside London by population, CityFibre s mission is to dramatically improve connectivity across the public sector, business, mobile and consumer markets through its Gigabit City vision.

15 CityFibre Infrastructure Holdings plc Annual Report 13 Strategy 1 Drive yield from existing assets CityFibre s extensive footprint with presence in 37 cities gives it a great base from which to grow via further commercialisation. With KCOM as an anchor customer in 21 entirely new city markets, CityFibre is embarking on a programme of up to 10 Gigabit City marketing launches in As with our previous successful launches, the Gigabit City vision will be marketed widely throughout the acquired footprint, through engagement with service provider launch partners, local authorities, the local business community, and the community at large, to drive the highest possible uptake of services. 3 2 Extend the footprint In parallel with the commercialisation effort within existing network assets, the Company will continue to selectively add green-field Gigabit City developments to its project portfolio, in keeping with its medium term goal of having a significant presence in 50 towns and cities, equating to roughly 20% population coverage of the UK. Management are highly focused on prioritising new city selection based on a rigorous matrix of criteria, with return on investment and future revenue potential at the forefront. 4 Strategic report Corporate governance Financial statements Expand service provider relationships As a pure wholesale infrastructure provider, channel partners and resellers are the lifeblood of our business. We re pleased with the progress we ve made to date in growing to 46 highly valued service provider relationships, at the local, regional and national levels. We aim to reach 100 over the next three years, which would make us a partner of choice for nearly 20% of the UK service provider universe. Capture large scale strategic upsides We believe our newly expanded footprint gives us enhanced scale and relevance to service providers across every market segment and region. However, two potential opportunities have the ability to drive much broader and deeper network expansion than in our traditional city-by-city anchoring model. With a current footprint addressing an estimated 7,000 cell sites and 3.5m homes, we offer the ideal platform for largescale Fibre-to-the-Tower (FTTT) and Fibre-to-the- Home (FTTH) deployments. For instance, in our metro WPC core networks we have enough duct capacity to be sub-ducted eight-ways, carrying thousands of strands of fibre capable of feeding FTTH cabinets which, in turn, directly connect pure fibre into the home. This extensive existing footprint offers a significant headstart to any mass FTTH deployment in time and cost savings.

16 14 CityFibre Infrastructure Holdings plc Annual Report Strategic report Strategy in action Leveraging our footprint York Gigabit City York was the UK s first Gigabit City, launched in The City of York Council was dissatisfied with the level of connectivity being delivered to its schools and council offices. Via its IT outsourcing provider Pinacl Solutions, York procured a 95km dark fibre network from CityFibre capable of delivering gigabit speeds to locations which had previously struggled with 10Mbps connectivity. The initial 10-year contract, with TCV of 4.2m, connected 105 premises at a build cost of 4.5m. The network has subsequently been expanded based on demand for incremental services from the council and local businesses, and today encompasses 125km of ducted fibre connecting over 300 customer premises. Cumulative TCV on the network totalled 8.4m as at the end of, against cumulative capex of 6.3m, with a gross margin of 93%. York was the obvious choice for a demonstration of FTTH deployment on an existing metro fibre footprint and the time and cost benefits that such an approach can deliver.

17 CityFibre Infrastructure Holdings plc Annual Report 15 Edinburgh Gigabit City Edinburgh-based business ISP Commsworld, which has served hundreds of customers across Scotland for over 20 years, was in search of an alternative wholesale provider of connectivity solutions to differentiate its product offerings. Commsworld selected CityFibre s dark fibre solution for the Edinburgh market, as it offered cost advantages and flexibility not available from other incumbent providers. In March, Commsworld signed a contract with CityFibre which would see the Group deploy a new 50km network in the heart of Edinburgh, in exchange for a commitment by Commsworld to migrate a significant number of existing customers to the new network. This agreement strongly positioned CityFibre and Commsworld to tender for the Public Services Network contract, which the two were subsequently awarded in September. This contract, part of a larger 186m outsourced ICT procurement awarded to global systems integrator CGI, involves a further 100km network extension in Edinburgh, bringing the total network footprint to 150km and nearly 500 connected customer premises across the business and public sector segments upon completion. As such, it is CityFibre s largest network construction project undertaken to date. Strategic report Corporate governance Financial statements

18 16 CityFibre Infrastructure Holdings plc Annual Report Strategic report Financial review Financial results for reflect a year of strong organic growth and improved performance in EBITDA as the business model showed the initial benefits of scaling. Financial results for reflect a year of strong organic growth and improved performance in EBITDA as the business model showed the initial benefits of scaling. In addition, it was necessary to invest in resource to secure the Acquisition, together with preparing the organisation for the post-acquisition integration and commercialisation of those assets. The Group is well positioned and fully financed to attain its medium term objectives. A summary of the financial performance for the year is given below: Financial measure Revenue Gross margin Operating loss Administrative costs Loss after tax result and narrative Increased by 67% to 6.4m (: 3.8m), driven by the continued expansion in footprint along with the delivery of incremental revenues from both existing and new cities. Notably revenues from the business vertical improved by 1.0m. Increased by one percentage point, to 86%, from 85% in, reflecting the high profitability of new business added during the period. Decreased to 6.2m (: 7.5m), largely driven by increased gross profit of 5.5m (: 3.3m). Increased to 11.7m from 10.7m in the prior period. The movements include: Staff costs excluding share-based payments increased to 6.1m (: 4.7m). This included non-recurring costs of 0.6m in relation to the Acquisition and non-recoverable operational costs in respect to the York FTTH trial. Average headcount was 83 staff, up from 46 in, largely as a result of the full year effect of an expansion through the second half of. The increase is primarily due to the addition of operational staff, reflecting the expanded number of projects under way. Other general administrative costs increased by 0.3m as a result of the expanded number of new and in-life projects. Share-based payment charges reduced by 1.1m to 0.3m. The prior year included exceptional share option awards associated with the IPO and secondary placing in June. Depreciation increased by 0.3m as new assets were brought into service. Total non-recurring costs were 1.0m in and are detailed below. Excluding non-recurring costs, depreciation and amortisation, and sharebased payments charges, underlying growth in administrative costs was 22%. Improved to 6.4m from 7.0m in. This reflects investment made to establish, operate and expand the business. Adjusted results The adjusted EBITDA loss of 2.9m is in line with expectations and a 20% improvement on the prior period adjusted EBITDA loss of 3.6m. A reconciliation of operating profit to adjusted EBITDA appears on page 18.

19 CityFibre Infrastructure Holdings plc Annual Report 17 Financial measure result and narrative Non-recurring and other items Non-recurring costs in the period totalled 1.0m. During the year the Group made an additional investment in resources of 0.6m, primarily to execute the Acquisition, but also to establish an enlarged organisational structure to enable the business to successfully integrate and commercialise the assets. In addition certain non-recoverable operational costs were incurred in respect to the York FTTH trial. Costs included 0.2m of legal and professional fees in relation to ensuring current regulatory reviews fairly take into account the Group s competitive position. During the year Ofcom announced a strategic review of the structure of BT (the Strategic Review of Digital Communications) and a review of the availability and pricing of fibre products (the Business Connectivity Market Review). Other non-recurring costs related to the Acquisition. Balance sheet Acquisition of property, plant and equipment (PPE) totalled 13.9m, comprising 13.8m of network assets. These consisted primarily of the 11.4m construction of the Group s key Gigabit City projects in Peterborough, Hull, Kirklees, Aberdeen, Edinburgh, and Glasgow. The remaining 2.4m of network asset build was to support additional customer connections in existing cities. Intangible assets additions in the year totalled 0.6m. This primarily reflects expenditure on systems required to manage the network assets and the end to end sales process. Cash and debt Operating cashflow for the period was a net outflow of 5.4m, an increase of 1.8m versus the prior year. There was a working capital cost of 1.3m in compared to a 1.2m benefit in the prior year due to an expanded number of construction projects spanning the year end which led to a working capital requirement. At the year-end the cash balance was 9.7m. Shortly prior to year end, the Group made a payment of 1.7m to Citibank to redeem the remaining balance outstanding on its loan facility, in advance of the new debt financing put in place in support of the acquisition. At the year end the Group had no external bank debt. Strategic report Corporate governance Financial statements Shares On 22 January, the Company issued 231,781 ordinary shares to the Nedgroup Trust (Jersey) Limited (the Trustee ), in its capacity as the trustee of the CityFibre Employee Benefit Trust. The JSOP Shares will be held by the Trustee for the joint benefit of itself and Stephen Charlton, Non-Executive Director, with Mr. Charlton being beneficially interested in any value in each of the JSOP Shares above 100p. On 21 December the Company granted nil-cost options over a total of 2,112,889 ordinary shares under the Long Term Incentive Plan (LTIP) adopted at the Company s AGM on 20 April. The award which covers has been made to employees excluding Directors in line with the intention set out in the Company s AIM Admission Document published on 14 December. KCOM asset acquisition On 18 January 2016 the Group completed the transformational 90.0m acquisition of network assets from KCOM Group plc. The acquisition constituted a reverse takeover under Rule 14 of the AIM Rules for Companies, requiring re-admission to AIM, which occurred on 14 January The acquisition was funded by an 80m placing of 160,000,000 new Ordinary Shares at 50p per Ordinary Share, along with committed debt facilities of 100.0m extended by Proventus AB, of which 35.0m was utilised in the asset purchase. Under the terms of the Acquisition, CityFibre will provide KCOM with access to the acquired infrastructure for a term up to fifteen years, subject to a minimum term of five years and a minimum revenue of 5.0m per annum for those five years. The acquired assets will be recognised on the enlarged Group s balance sheet principally as network assets, with a minor value attributable to stock to reflect the opportunity for sales of indefeasible rights of use over the national network. Following the transaction the Group immediately became profitable at the adjusted EBITDA level.

20 18 CityFibre Infrastructure Holdings plc Annual Report Strategic report Financial review continued Financial measure Credit facilities result and narrative On 14 December, Group subsidiary company CityFibre Limited (as borrower) entered into a facility agreement with Proventus Capital Partners III AB (as agent and security agent) (the Facility Agreement ). The lenders are funds managed by Proventus Capital Management AB or Proventus Capital Partners III and affiliated funds. The facility agreement comprises three main facilities: a 35.0m term loan facility which was drawn upon deal completion to partly fund the Acquisition; a 35.0m term capex facility which will be used to finance permitted growth capital expenditure by reference to contracted revenues under customer contracts and permitted acquisitions and which will be available for two years; and a 30.0m super senior revolving credit facility (RCF) which will be used for the same purposes as the capex facility and up to 5.0m towards general corporate and working capital purposes and which will be available for five years and 11 months. In addition, the Facility Agreement contains a 65.0m accordion facility which may be made available by any lender under the term facilities at its discretion to refinance loans under the RCF. The term loan facilities carry a margin of 10% above LIBOR, and the RCF carries a margin of 4.5% above LIBOR. A ratchet mechanism based on leverage levels may bring these margins down to 8% and 4% respectively. The Term Facilities do not amortise and are payable in full seven years from the date of the Facility Agreement. The RCF will terminate six years from the date of the Facility Agreement. Reconciliation of operating profit to adjusted EBITDA Year to 31 Dec Year to 31 Dec Operating loss per accounts (6,159) (7,450) Add back: Depreciation 1,707 1,393 Amortisation EBITDA (4,219) (5,943) Fees in connection with Regulatory review 220 Share-based payments charge 343 1,393 One-off bonuses 585 One-off costs relating to fundraising activities 322 Operational and financing costs in respect of the Acquisition and the Joint Venture 736 Adjusted EBITDA (2,920) (3,643)