MNF Group
Annual Report 2016

Plain-text annual report

MNF Group Limited Annual Report 2016 Contents Board of Directors Letter from our Chairman Letter from our CEO About the MNF Group MNF Group Timeline Smart Network Group of Brands Company Structure Business Unit Profiles Innovation Spotlight Future Roadmap Directors’ Report Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Directors’ Declaration Auditor’s Independence Declaration Independent Auditor’s Report ASX Additional Information 2 3 5 7 8 10 11 12 13 16 18 21 35 36 37 38 41 68 69 70 73 Board of Directors Mr Terry Cuthbertson B. Bus., CA Chairman Mr Michael Boorne Electronics Eng. Dip. Non-Executive Director A Chartered Accountant, previously partner at KPMG with extensive corporate finance expertise and knowledge. Also a Director and Chairman of Australian Whisky Holdings Ltd, Austpac Resources N.L., Mint Wireless Ltd, South American Iron & Steel Ltd, Malachite Resources Ltd and Isentric Ltd. A successful entrepreneur with extensive track record in combining technical expertise with commercial and corporate experience. Founder of Sprit Modems and Mitron Pty Ltd and previously a Non Executive Director of Netcomm Ltd. MNF Director since December 2006 Ms Catherine Ly B.Bus., CPA Company Secretary since July 2006 MNF Director since March 2006 Mr Andy Fung B.E. MCom Non-Executive Director experience Extensive telecommunications. in Formerly Director of Business Development of Lucent Technologies. Co-Founder of MyNetFone, Symbio Networks Pty Ltd, and Symbio Wholesale Pty Ltd. MNF Director since March 2006 Mr Rene Sugo B.Eng. (Hon) Chief Executive Officer and Director experience Extensive telecommunications. in Formerly Technical Director of Lucent Technologies. Co-Founder of MyNetFone, Symbio Networks Pty Ltd, and Symbio Wholesale Pty Ltd. MNF Director since March 2006 Left to right: Mr Andy Fung, Mr Michael Boorne, Mr Rene Sugo, Mr Terry Cuthbertson Letter from our Chairman Fellow Shareholders, It is with great satisfaction that I present to you the 2016 full year results for the MNF Group Limited. It has been another very successful year for the MNF Group. The company achieved another record financial result for the sixth consecutive year. Our consolidated group revenue increased to $161 million, up 88% from the previous year. Our EBITDA rose by 46% to $17.8 million, and our NPAT rose 25% to $9.0 million. The company ended the year with no net debt, and the ability to redraw $13 million from our revolving acquisition facility. This year’s success is attributed to solid contribution from all three segments of the business – Domestic Retail, Domestic Wholesale, and our newest segment Global Wholesale. Particularly pleasing was the organic growth in the Domestic Wholesale segment which saw gross margin increase by 49% on prior year. The Global Wholesale segment also performed very strongly in its maiden full year result demonstrating a relative full year growth of 21% on prior year margin contribution. This year’s solid performance has allowed the board to declare an annual dividend of 7.0 cents per share fully franked – an increase of 22% over the previous year. The dividend is consistent with our track record of providing consistent returns to shareholders in the order of 50% of NPAT. Achievements During the year MNF Group grew thanks to some incredible achievements and the dedication and effort of our invaluable team. The highlights of our year are: • Completing the acquisition of TNZI – This large strategic acquisition has kick started the company’s global growth strategy. This year was one for completing the complex transaction and integrating staff and systems into the MNF Group. Other major milestones achieved as part of the transaction are the granting of a US carrier licence by the FCC, as well as upgrading infrastructure in London, Los Angeles and Hong Kong. There are still many more challenges to come in executing this global growth strategy, but the team is primed and ready to execute as effectively as possible. We look forward to more great things to come in the years ahead from this strategic acquisition. • Organic growth – As mentioned earlier, the company’s Domestic Wholesale segment grew organically 49% on the previous year at the margin level. This is due to the incredible momentum built up by the domestic wholesale sales and operations teams. The ability to deliver high value services in a fast and reliable fashion has meant that our existing wholesale customers can focus on growing their businesses, and many more wholesale customers are now choosing Symbio as their preferred platform for hosting their voice capabilities. • Innovation recognition – The MNF Group prides itself on developing its own proprietary software systems and building its own network. This is a key part of our market differentiator compared to other Australian communications providers. Our R&D team is growing steadily, as are their achievements. This year we have been recognised by several key industry bodies for our product innovation. We have been awarded the national Australian Internet Industry Association ‘iAward’, and the Australian Communications Alliance & CommsDay ‘ACOMMS’ award for our TollShield fraud mitigation platform. These awards are only a brief indication of the strength of our underlying intellectual property and skills base available inside the Group. The Future The company has established three very solid independently performing business segments, each with a well-defined strategy for growth. The Domestic Retail segment is performing steadily with some good potential in addressing small business and government customers. The Domestic Wholesale segment has excellent momentum coming out of last year, and is poised to capitalise on the company’s position in the domestic market. And finally the Global Wholesale 3 segment is on the cusp of a big push into the Asia-Pacific market to capitalise on our locally developed technology. In addition to developing our own organic growth strategy, the company continues to seek sensible acquisitions that will deliver incremental value to shareholders. Our goal is to find opportunities that allow us to leverage our strong intellectual property assets, incredibly skilled team, and massive synergy potential of our nationally interconnected voice network. Additionally, we continue to develop new technology, software and processes that will deliver new products and services into a market ripe with opportunity driven by change. Our strategy remains centered on voice communications technology and applications. We are constantly looking at how to push the boundaries of change in the global market and capture new emerging revenue streams in an Internet enabled world. The MNF Group is truly in a unique position to seize this new market opportunity as it emerges. On behalf of the board, I would like to thank all of the staff and management team in achieving another great result for our company. The board continues to provide its full support to the team to ensure the company maintains its momentum and growth into the future. I would also like to thank my fellow members of the Board for their hard work and dedication over the last 12 months. Their insight and vision has truly shaped an innovative and successful organisation that stands out as a rapidly emerging player in the Australian telecommunications market. I thank all shareholders for your continued and loyal support. The company is looking forward to a successful and rewarding year ahead. Terry Cuthbertson Chairman 4 Letter from our CEO Dear Shareholders, I am very pleased to report another record full year result for MNF Group, making it our 5th consecutive year of double-digit EBITDA growth. In this past year, our focus has been on integrating the prior year acquisition of the global TNZI voice business to create a springboard for new market opportunities; as well as developing organic growth in the strongly performing domestic business. MNF Group’s performance has been excellent delivering 46% EBITDA growth to $17.8 million (2015: $12.2 million) – slightly ahead of forecast thanks to solid margin growth & overhead costs control. Our NPAT grew to $9 million (2015: $7.2 million), an increase of 25% over the previous year and 23.5% CAGR over the last 5 years demonstrating solid consistent growth. The separation between NPAT from EBITDA is due to interest, depreciation and amortisation introduced through prior acquisitions, however this is a once-off occurrence and the separation is expected to stabilise going forward. Revenue grew 88% to $161 million (2015: $85.7 million) driven by full 12 month contribution from the TNZI acquisition (except TNZI USA revenue which only contributed one month), and very strong organic growth in the Domestic Wholesale segment. As always, we at MNF Group recognise the importance of delivering consistent shareholder returns. Both our Earnings Per Share (EPS) and Dividends Per Share (DPS) are at a record high this financial year at 13.45cps and 7.00cps respectively, with dividends representing 52% of EPS consistent with prior years. Segment Performance Shareholders will notice that segment reporting is a new element in this year’s report. By breaking out our three core market segments, we have endeavoured to deliver more insight into the Group structure & performance for our investors. All three segments performed strongly, reflecting our balanced and diverse portfolio of services. In particular the Domestic Wholesale segment delivered the standout performance with margin organically growing 49% on the previous year. The Domestic Retail segment was steady due to slight decline in the Residential sub-segment, which was largely offset by strong growth in Business, Enterprise and Government sub-segments. The Global Wholesale segment, incorporating newly acquired TNZI and the global customers of the Symbio business, also performed above expectation with full year relative margin growth of 21% and capable of big future potential long term organic growth. Our commitment to innovation & market disruption remains unwavering with all three segments focused on our area of specialisation – the delivery of new-generation voice communications driven by innovation, software development and network deployment. Network Expansion The key to leveraging the TNZI acquisition to create further growth has been the global network upgrade project. This included capacity and capability expansion in London and LA Points of Presence (PoPs), and the deployment of a new Hong Kong PoP. This was the final link in our global network ring, positioning TNZI as regional specialist and the voice ‘carrier of choice’ for European and US telcos seeking capabilities in the high potential Asia-Pacific region. This increased global presence is combined with deployment of Symbio’s new-generation capabilities and services into the TNZI network, enabling us to soon start selling value-added services into TNZI’s established customer base. Further service cross-pollination is planned for the year ahead to position TNZI as the ‘go to’ provider for new-generation communications in the Asia-Pacific region. 5 The next phase of Domestic Wholesale expansion will be the deployment of the Symbio model into New Zealand. While Symbio has offered certain capabilities in that market for many years, full deployment will allow us to shake up the wholesale market with a complete new-generation service suite. Future Roadmap As the world transitions to internet-based communications, we are seeing exciting opportunities at every market level. With the prevalence of ‘always connected’ devices, ‘any to any connectivity’ will be the main challenge. And where there is challenge – there is opportunity. Today, MNF Group’s smart network already delivers core building blocks for the voice communication needs of the future. We will continue to innovate and build our broad portfolio of capabilities to be the leading provider enabling this exciting voice communications revolution in our region. This commitment to creating value-added services and leveraging our own voice technology gives us confidence that organic growth will remain strong. We are also, of course, still looking for and evaluating potential further acquisitions. My thanks goes to all MNF Group staff globally, as well as the executive team, for their outstanding contribution and achievements accomplished this year. The future presents many opportunities, and we hope you are excited to be part of the journey with us. Kind regards, Rene Sugo CEO 6 About the MNF Group MNF Group is an integrated voice services business that provides IP communication technologies to Australia, New Zealand and the world. The Group was founded in Sydney in 2004, and listed on the Australian Stock Exchange in 2006 (ASX: MNF). Now a global business, the Group has grown from strength to strength in just over a decade and received many industry and retail awards. Our people Our capabilities Brands & customers Powering the dynamic product & brand mix is a specialist team of almost 250 staff across offices in Australia, New Zealand, UK and USA. team’s The record of track innovation positions the Group as a disruptor in the communications market. MNF Group specialises in the delivery of voice communications capabilities around the globe. The Group’s smart IP voice network delivers a diversified portfolio of voice products to over 250 global providers and 100,000 retail customers across multiple brands. Each brand in the MNF Group portfolio services a defined target market with products designed to meet evolving user needs. Customer profiles span next- service providers, generation carriers, and business government, right through to mums & dads. software products smart IP network global innovation people Global Voice Specialist brands wholesale retail value-added domestic international SaaS diversified voice portfolio offices in AUS NZ UK US customers next-gen providers carriers & service providers business, enterprise & government mums & dads 7 MNF Group Timeline A D T I B E $20M $18M $16M $14M $12M $10M $8M $6M $4M $2M • Tasmanian Government $20M Project win • Acquisition of CallStream Connexus GoTalk Wholesale • Exclusive Panasonic deal for SME phone system • Acquisition of Symbio Networks • Maiden Profit • ADSL2+ service launch 2009 2010 2011 2012 • TNZI integration • US completion • Acquisition of TNZI global voice network & OpenCA Softswitch • Integration of prior- year acquisitions • Acquisition of Pennytel & iBoss • Strong organic growth • CeBIT Outstanding Project Award for Tasmanian Governemnt Voice Carriage Project 2009 2010 2011 2012 2013 2014 2015 2016 Smart Network As the world moves to IP communications, MNF Group is building the network and technology to lead the way. Global Scale MNF Group’s Tier 1 carrier network spans the globe with Points of presence in Los Angeles, New York, Hong Kong, Singapore, London, Frankfurt, Sydney and Auckland and over 200 partner interconnects. Having developed market-leading managed voice services for its Australian network, the Group is now progressively rolling out these smart network capabilities to the rest of its global network. Unlike traditional carriers, the Group’s focus is on making it easy for service providers to do business – The Group’s smart network enables easy integration and has the flexibility to meet evolving customer needs. These innovative capabilities combined with first-mover advantage puts the MNF Group in prime position to be the carrier of choice for providers looking to reach the fast-growing Asia Pacific region. San Jose London New York London AAG Los Angeles San Jose London LA Frankfurt SWM-4 S. Korea SWM-3 Saudi Arabia UAE Hong Kong SWM-3 Oman SWM-3 Vietnam Thailand SWM-3 SWM-3 SJC Taiwan AAG Sri Lanka Malaysia EASSy SWM-4 Singapore Indonesia Japan AJC Guam AJC Mozambique SWM-3 A-PNG-2 SCCN Perth Sydney SCCN TAS-2 Tonga Norfolk Is. Auckland Nauru PNG Vanuatu Fiji SCCN SCCN Tokelau W. Samoa Cook Is. Niue Domestic Expertise In Australia, the Group owns and operates the country’s largest IP voice network and has established a robust network presence in New Zealand. High speed fibre connectivity between major cities and modern VoIP nodes in all 65 regional call collection areas make this network the ‘go to’ for new-generation OTT providers and global carriers looking to establish or expand their presence in Australia and New Zealand. 10 Group of Brands As the global voice specialist, MNF Group delivers comprehensive communications solutions through a diversified product portfolio offered across 3 key market segments. The multi-brand approach empowers the Group to tailor solutions to different customer needs while eliminating the risk of relying on any one product in today’s fast-paced technology environment. From call termination for global Tier 1 carriers, API-powered smarts for new-generation app players, innovative fraud prevention, to voice and data for home and business, MNF Group powers all levels of the IP voice revolution. The Group gathers consumer insights across all these segments to continue developing innovative software solutions and address customer needs in the changing communications landscape. Domestic Retail Domestic Wholesale Stable performance, with several strategic wins in enterprise and government sectors. Growth focus on SME with Virtual PBX refresh and strong pipeline of enterprise prospects. Fastest organically growing segment, with gross margin increasing 49% on previous year. Continued strong Australian performance and full deployment of New Zealand network underway. SIP Trunking Virtual PBX Pre-select Business Internet Call termination 13, 1300,1800 numbers Inbound & Virtual Numbers & Porting Number Porting Conferencing Home internet VoIP home phone Aus Domestic Retail Aus&NZ Domestic Wholesale Global Wholesale Co-location Call Data Feeds Wholesale aggregation Data enablement MVNO Voice carriage Billing ITFS Inbound & Virtual Numbers Class 4 Softswitch Toll Fraud prevention Global Wholesale Strong track record in global voice termination, leveraging global tier 1 reputation. Addition of new-generation services such as freephone and local numbers, and TollShield® is set to drive further growth. 11 Company Structure London, 4 Los Angeles Global voice services business, headquartered in Sydney Darwin Sydney, 140 Auckland, 2 Melbourne, 59 Wellington, 45 Hobart, 3 While operating across Australia, New Zealand, UK and USA, MNF Group’s structure is defined by function rather than geography, with several Business Units headed by highly skilled and experienced Chief Executives. Each unit focuses on a particular functional area and works across multiple brands, products and even office locations. This structure allows the Group to develop & leverage subject matter expertise of various teams to support a multi- brand strategy while ensuring operational efficiency. Rene Sugo CEO Indika Nanayakkara CTO Tim Dunning President - Global Commercial Jon Cleaver CCO Ritsa Hime COO Matthew Gepp CFO Helen Fraser General Counsel Platform & Networks Business unit Global Commercial Business Unit Domestic Commercial Business Unit Operations Business Unit Finance Business Unit Legal Commitment to Innovation Business Unit Headcount While expanding internationally, the MNF Group remain committed to in-house Research & Development and bringing disruptive new products to market. Approximately 25% of the Group headcount, residing in the Platform & Networks Business Unit, works in the R&D field. This includes new product development, new features, user experience improvement and core network stability and expansion. Global Commercial 6% Domestic Commercial 20% Legal 1% Finance 8% Platform & Networks 24% Operations 41% 12 Business Unit Profiles Domestic Commercial Business Unit - Jon Cleaver, CCO The Domestic Commercial Business Unit is responsible for executing the company’s multi-brand strategy in Australia through sales & marketing, combined with the vision and innovation from the product management and solutions teams ensuring we service what customers need today and anticipate their needs for the future. “I believe we have the structure just right,” said Jon Cleaver, COO. “Following a few key additions to our established team of specialists and industry veterans, I am confident we will stay well ahead of the curve. Our focus remains on providing further automation and efficiency in our current channels, whilst expanding into new segments through product innovation. This gives us a clear funnel for continued organic growth” The figures speak for themselves, but especially pleasing is the continued growth in the wholesale space and further gains in government and enterprise. In FY2017, NBN ramp up and further expansion in mobility will round out the Group’s full UC offerings. In-house development has also maximised automation on Symbio’s smart network, allowing us to easily deploy the wholesale model into other countries with New Zealand just around the corner. It is certainly an exciting outlook ahead. Global Commercial Business Unit - Tim Dunning, President The Global Commercial Business Unit continues to go from strength to strength as the benefits of integrating into the MNF Group accrue. Upgraded network assets in the United Kingdom, Los Angeles, and Hong Kong position TNZI to offer new- generation services to the global market. This investment further enhances network capacity and capability, supporting a growing presence and strength in the Asia- pacific and other regions. “Leveraging global relationships and intellectual property built from a long-tenure staffing base, we will continue to roll out MNF Group managed service solutions through building presence and infrastructure in new markets,” said Tim Dunning. Continued investment in network and software systems as well as recent front-line staff placements enhance the Global Commercial Business Unit’s ability to meet the challenges of a dynamic global environment. 13 Operation Business Unit - Ritsa Hime, COO Customer experience continues to be the focal point of the Operations Business Unit - this goes well beyond a friendly representative answering calls. It must include every touch point a customer experiences from online and self-serve portal capability through to the technical acumen of the team. For these reasons and coupled with customer feedback, the Operations Business Unit embarked on an operational efficiency drive focused on developing innovative online capabilities that deliver a superior customer experience. This will enable MNF Group customers to use the full suite of products and services with ease and flexibility, leveraging the high performance network and infrastructure that MNF is recognised for. “Over the past 12 months, we focused our energies on platform integrations and process improvements,” said Ritsa Hime. “We set plans and delivered effective training programs for our Operations staff to enable first call resolution support for our customers.” Operations continue to work closely with the Commercial Business Unit and other stakeholders across the MNF Group to ensure the company roadmap is strategically aligned. Finance Business Unit - Matthew Gepp, CFO FY2016 was another successful year for MNF Group, not just in terms of the outstanding result that we reported but also the successful integration of the TNZI business which we had only just acquired at the start of the year, and which now forms the foundation of the global wholesale segment. The year saw significant investment in both the domestic and global voice infrastructure, which has created a more robust network with the available capacity and reach to enable further growth and see our key products, namely our intellectual property in the form voice enablement software, reach global markets. We are particularly pleased with the organic growth that was delivered through both the domestic and global wholesale segments in 2016. MNF finished the year with a strong balance sheet, which will allow us to move decisively to take advantage of growth opportunities as they are presented. “The Finance BU continues to focus on preserving the value that has been created for the benefit of our shareholders and creating the platform that will promote sustainable organic and acquisitive growth into the future,” said Matthew Gepp. “This is achieved by delivering internal stakeholders the support they require to achieve the ambitious goals we have set for ourselves in the coming years.” 14 Platform & Networks - Indika Nanayakkara, CTO The Platforms & Networks Business Unit builds and operates the infrastructure and software systems which underpin the suite of products and services delivered by the MNF Group. “FY2016 was a busy year with the expansion of TNZI POPs and the Australian network, as well as the work on integrating the TNZI systems into the MNF Group network,” said Indika Nanayakkara, CTO. “A number of major customer migrations and system consolidations were also carried out to meet data retention obligations.” The in-house software development and systems integration skills continue to be a key differentiator for the MNF Group, with the team’s capabilities being reflected in the awards for innovation received from ACOMMS and iAwards. FY2017 is expected to be another busy year for the BU with many development activities planned to leverage the infrastructure, intellectual property and software systems that the MNF Group has developed over the years. Some of the highlights include: • Expanding the New Zealand network which will allow the MNF Group to offer its full suite of products and services to NZ customers. Enhancements to the product suite for Small Business, Enterprise and Government customers Enhancements to B2B APIs to make it simpler for customers and partners to integrate their systems with the MNF Group infrastructure • • Legal Services Unit - Helen Fraser, General Counsel The Legal Services unit provides advice and support to the Board and the business as a whole at both strategic and operational levels. Transactions, regulatory, corporate governance and intellectual property rights are all key areas of focus. “Working closely with stakeholder groups across the company, we look for pragmatic, business savvy solutions to facilitate their business objectives and meet the strategic needs of the group,” said Helen Fraser. “With this in mind, FY2016 has seen the development of a new contract framework and standard terms for our TNZI brand, which will provide a platform for global sales of a wider product range.” The goal is to establish frameworks and solutions which are flexible and scalable to support the company as it grows while still meeting the business’ legal requirements. 15 Innovation Spotlight In a few short years, TollShield® has grown from an in- house innovation to become an industry-recognised tool, essential in the fight against new-generation threats. Anatomy of a toll fraud attack Toll fraud begins when criminals hack into phone systems or VoIP devices, allowing them to make thousands of unauthorised calls. Without TollShield With TollShield Fraudsters call overseas premium- rate numbers - which they own. The calls are billed to the victim, and the fraudster collects easy money. With TollShield® toll fraud can be rapidly detected and stopped. Without TollShield® the attack may continue for hours, even days. How TollShield® fights toll fraud The challenge of toll fraud Toll fraud relies upon unsecured devices, like VoIP modems or PBXs, which provide a ‘backdoor’ for hackers to make unauthorised voice calls. For telcos, toll fraud is impossible to prevent. Every customer and every device is a potential weak point. Worse, the costs of toll fraud are often passed on to the service provider – because victims are understandably reluctant to pay. An innovative, real time solution TollShield® is the MNF Group’s proprietary toll fraud mitigation software. It uses advanced machine-learning technology to attune to a network and ‘understand’ the difference between toll fraud and legitimate call traffic. TollShield® enables telcos to pinpoint toll fraud in near real-time. By catching fraud early, service providers can mitigate its impact on brand and revenue. 16 2014 Today The basic idea of TollShield® was conceived in September 2014, during an internal innovation session to better protect business and enterprise customers from toll fraud. Since global launch at ITW (2015) TollShield® has been deployed by networks in the UK, Asia, NZ and Australia. TollShield® is standard on the TNZI and Symbio Networks. Days later Estimated global losses from toll fraud1 US$ 38,000,000,000 If toll fraud is undetected, the ‘per minute’ costs quickly compound. In 2015, fraud-related losses were estimated at $38 billion (US).1 TollShield® enables service providers to detect, investigate and block toll fraud in near real time - mitigating loss and brand damage. Awards & recognition 1. CFCA, 2015. TollShield® will be our first line of defence against toll fraud by providing a new level of visibility and blocking capacity. Dee Telecom Thailand. Vice President, Mr John Clark. Multi award-winning TollShield® has been listed among Australia’s Smart 100 innovations (Anthill 2015), and has recently won industry honours from the ACOMMS (Emerging Vendor Innovation 2016) and the iAwards (NSW Industry & Platforms Innovation of the Year 2016; NSW Business Service of the Year 2016). Caption: iAwards and ACOMMs trophies - 2016 17 Future Roadmap The next step in the new-generation voice communications evolution is “any to any” connectivity, with applications working across all devices. This requires smart networks and applications that act as the glue between the ever growing ecosystems of devices. MNF Group is a credible small player in this very big and still growing market, with plenty of opportunity for growth. An expert in new-generation voice, MNF has the first-mover advantage in delivering these communication solutions of the future. Powering innovation While other telcos ‘traditional’ networks are being dug out of the ground, MNF Group’s smart network is already delivering the building blocks of the future. beyond Applications imagination Virtual numbers APIs Legacy products Mobile MVNO iBoss enablement NBN Portals MNF Voice Network The Group combines the scale and credibility of a global Tier 1 network with the flexibility of a new-generation software- defined network that continuously evolves to anticipate customer needs. Looking to the future, MNF Group will continue to focus on creating value-added innovations right here in Australia, and exporting them to the world by leveraging existing Tier 1 relationships of its Symbio & TNZI global brands. Domestic Opportunity Global Expansion Industry consolidation creates gap in middle of the market – MNF steps in New Mobile MVNO capabilities will drive growth New portals and API capabilities to embed and lock in customer loyalty MNF Group has the most extensive wholesale eco-system in Australia/NZ Global players buy access to regional infrastructure to create a global capability MNF’s smart, API-driven network is the building block for new-generation cloud communication solutions TNZI provides access to global players and pathway into the Asia-Pacific region 18 MNF Group Limited ABN 37 118 699 853 30 June 2016 Annual Financial Report Directors’ Report MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report For the year ended 30 June 2016 Your directors present this report, together with the financial statements of the Group, being the company and its controlled entities, for the financial year ended 30 June 2016. Information on directors The directors of the Company at any time during or since the end of the financial year are: Name and qualifications Experience, special responsibilities and other directorships Mr Terry Cuthbertson B. Bus., CA Chairman Mr Michael Boorne Electronics Eng. Dip. Non-Executive Director Mr Cuthbertson is the Chairman and an independent non-executive director; he was previously a partner at KPMG and has extensive corporate finance expertise and knowledge. Mr Cuthbertson is also a director and Chairman of Australian Whisky Holdings Ltd, Austpac Resources N.L., Malachite Resources Ltd, South American Iron & Steel Ltd and Mint Wireless Ltd. He is also a non-executive director of Isentric Ltd. Mr Cuthbertson has been a director since March 2006. Mr Boorne is an independent non-executive director; he is a successful entrepreneur with extensive experience in combining technical expertise with commercial and corporate experience. He has founded start-up businesses such as Sprit Modems and Mitron, and is a director and committee member of numerous private companies and charitable foundations. He was previously a non-executive director of Netcomm Ltd. Mr Boorne is the Chairman of the Audit and Remuneration committees, and has been a director since December 2006. Mr Andy Fung B.E. MCom Non-Executive Director Mr Fung is a non-executive director; he is a co-founder and was formerly Managing Director of My Net Fone since its inception in 2006 until February 2012. He has been a director of Symbio Networks Pty Ltd since 2002 and Symbio Wholesale Pty Ltd since 2009. Mr Fung has been a director since March 2006. Mr Rene Sugo B.Eng. (Hon) CEO and Director Mr Sugo is the CEO and a director; he is a co-founder and was formerly Technical Director of My Net Fone since its inception in 2006 until February 2012 when he was made Chief Executive Officer. He is a director of all MNF Group operating companies globally. Mr Sugo is a strong industry advocate, representing the interests of MNF Group and competition in general. He has been a director of the Australian Communications Alliance and the INMS (Industry Number Management Services) since 2015. Mr Sugo sits on various industry committees locally and overseas including the Numbering Steering Group (NSG) and the ITW Global Leaders Forum (GLF). Mr Sugo also regularly contributes articles and opinions on issues affecting the industry, such as the NBN, regulatory policy and innovation. Mr Sugo has been a director since March 2006. Company Secretary Ms. Catherine Ly B.Bus., CPA. Ms Ly was appointed Company Secretary in July 2006. www.mnfgroup.limited 21 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Board and Committee Meetings From 1 July 2015 to 30 June 2016, the directors held 11 board meetings and 2 audit committee meetings. Each director’s attendance at those meetings is set out in the following table: Directors Mr. Terry Cuthbertson Mr. Michael Boorne Mr. Andy Fung Mr. Rene Sugo Board Audit Eligible to attend Attended Eligible to attend Attended 11 11 11 11 11 11 11 11 2 2 2 2 2 2 2 2 Principal activities and significant changes in nature of activities The principal activity of the MNF Group is providing voice communications, broadband Internet, and cloud based communications services to residential, business, government and wholesale customers in Australia and internationally. In the financial year the MNF Group derived revenue from the sale of the above mentioned communications services. These fees consist of recurring charges for access to facilities and capabilities, as well as consumption charges for variable usage of those facilities. There was also revenue derived from the sale of hardware, equipment and consulting services to support the primary products of the business. The company acquired the global wholesale voice business of Telecom New Zealand International (TNZI) in April 2015. The company is now operating three main segments: • Domestic Retail – based on the original MyNetFone brand and other retail acquisitions, focussing on selling directly to residential, small business, enterprise and government customers; • Domestic Wholesale – based on the original Symbio Networks brand, focussing on selling to Australian & New Zealand domestic carriers, carriage service providers (CSP), cloud providers and application providers; and • Global Wholesale – based on the TNZI acquisition and some pre-existing global customers, focussing on selling to global carriers, carriage service providers (CSP), cloud providers and application providers. The overall nature of the business has not changed during the financial year. Operating Result Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 46% to $17.8 million, with net profit after tax (NPAT) increasing by 25% to $9.0 million, compared to the prior year. The result is slightly ahead of forecast, with EBITDA finishing 2.9% above forecast and NPAT finishing 7.0% above forecast. Revenue for the year increased 88% to $161.2 million. The total dividend for the full year has increased by 22% to 7.0 cents per share fully franked, with the company now declaring a final dividend of 3.5 cents per share for the second half. The full year dividend represents 52% of the FY16 EPS. 22 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) MNF performance at a glance: 160 140 120 100 80 60 40 20 0 FY12 FY13 FY14 FY15 FY16 REVENUE $161 Million MARGIN $49 Million FY16 Revenue increased 88% on the prior corresponding period (PCP) to $161m. With 12 months of the TNZI acquisition (versus 3 months in FY15) plus 1 month from the US part of the TNZI acquisition, combined with strong organic growth in the Domestic Wholesale segment. FY16 Margin increased 53% on the PCP to $49m. All segments made strong contributions to the result. Year on year the Global Wholesale segment benefited from 12 months contribution from TNZI, with Domestic Wholesale showing the biggest organic growth, and Domestic Retail steady. EBITDA $17.8 Million FY16 EBITDA increased 46% on the PCP to $17.8m. The result is slightly ahead of expectation due to strong margin growth and good cost control on overheads. 18 16 14 12 10 8 6 4 2 0 50 45 40 35 30 25 20 15 10 5 0 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 EPS 13.45¢ EPS at 13.45c represents an increase of 17% on the PCP. This result represents a 5 year CAGR of 19.2% demonstrating the consistent long term shareholder return from the business. NPAT $9.0 Million FY16 NPAT increased 25% on the PCP to $9.0m, a pleasing result which was 7% above initial forecasts. This NPAT CAGR is a solid 23.8% over the last 5 years. 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY12 FY13 FY14 FY15 FY16 DIVIDEND 7.00¢ A final declared dividend of 3.50c brings the full year dividend to 7.00c, a 22% increase on the PCP. This represents 52% of EPS, which is consistent with prior years. FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 www.mnfgroup.limited 23 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Review of operations Year ended 30 June 2016 Year ended 30 June 2015 % change $161.2m $48.6m $17.8m $9.0m $85.7m $31.8m $12.2m $7.2m 13.45 cents 11.49 cents +88% +53% +46% +25% +17% Revenue Gross profit EBITDA NPAT EPS Net cash flow The closing cash balance as at 30 June 2016 was $52.9m (2015: $6.3m). At year end debt in the form of a $27.0m revolving acquisition facility was $13.7m (2015: $25.3m). The company had no net debt as at year end (2015: $19.0m). Acquisitions MNF Group acquired the voice business of Telecom New Zealand International (TNZI) in April 2015. Subsequently, and after completing US regulatory approvals, on 31 May 2016 MNF Group completed the acquisition of the US assets of TNZI. That completed the acquisition of TNZI in its entirety. There have been no further acquisitions in the current period. Business outlook The MNF Group is now operating three very solid independent segments – Domestic Retail, Domestic Wholesale and Global Wholesale. Inside each segment are multiple product lines with excellent diversity of customers and profit contribution. All segments operate in our core area of specialisation, being enabling new and disruptive voice communications through software development and network deployment. Each segment has a well-defined strategy for investment and growth. The business is confident of sustainable organic gross margin and profit growth across all three segments. Additionally, the business has shown an ability to find value accretive acquisitions and integrate them quickly and effectively to improve the overall performance of the business. With a discerning and conservative approach, the Board of MNF Group will continue to actively search for further acquisition opportunities; whilst the business remains totally committed to driving organic growth and overall financial performance within the business. Domestic Retail Segment This segment is based on the original MyNetFone brand and other retail acquisitions, focussing on selling directly to residential, small business, enterprise & government customers. The segment overall is performing steadily with Gross Margin contribution stable at $15.1M for the full year – the stability is a result of the diversification within the segment, with residential in gradual decline, and small business and enterprise & government growing strongly albeit from a smaller base. a. Residential The Residential sub-segment consists of selling residential VoIP, DSL broadband and NBN broadband to consumers in Australia. The sub-segment operates under the brands of MyNetFone, PennyTel and theBuzz. Each brand has its own value proposition, web site, and product range; however, all brands are operated across the same network and same operations team, providing a high level of synergy. Despite the decline in the residential sub-segment it is still viewed as providing critical mass and volume and an opportunity for future growth. 24 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) The residential voice market is declining due to the market shift towards mobile communications and mobilecap plans. The company however has been implementing a defensive strategy of cross selling DSL broadband services, and most recently NBN broadband services into this customer base. This action has stemmed the decline in revenue and margin, and provided a useful retention tool. The residential DSL subscriber base declined slightly to 13,504 services in operation, and the VoIP base fell slightly overall to 91,369 services in operation. The decline in DSL services is due to migration towards the NBN and MNF being sub-scale in terms of NBN reach and market voice. The business is looking at improving NBN reach by being certified across all access types, and putting in place backhaul agreements to be able to reach all 121 Points-of-Interconnect (POI). Total residential subscriptions across all brands totals 109,000. In terms of new customer acquisition the business is now signing on more new NBN customers than it is new DSL customers. This is consistent with the NBN deployment breaking through the 50% population coverage milestone. The NBN still presents big challenges to smaller broadband companies like MNF – being the ability to reach 121 POI nationally, the usage based cost of the Capacity Virtual Circuit (CVC), and the explosion in data usage demands of consumers due to the adoption of over-the-top (OTT) video and content services. The company is still committed to servicing the residential customer base as it still provides a large user base generating solid margins on the VoIP and DSL products. The base also provides an opportunity for further innovation and potential growth in an NBN era. The business is looking at innovative ways to grow scale on the NBN, including acquisitions of additional subscriber bases and new marketing techniques. b. Small Business The Small Business sub-segment consists of selling business grade MyNetFone Virtual PBX and SIP trunks, as well as business grade DSL, NBN and Ethernet broadband services within Australia. The sub-segment operates under the brands MyNetFone, Connexus and CallStream. Each brand has its own value proposition, web site, and product range; however, all brands are operated across the same network and same operations team, providing a high level of synergy. The small business market sub-segment is strategic to MNF with strong prospects for future growth. The company has some leading products in the market and continues to innovate. The NBN roll out will provide additional growth impetus to this segment when the NBN reaches more centralised business areas, as it will force customers to move off legacy copper PSTN services and find new alternatives for telephony. The Virtual PBX and SIP trunk products in service grew by 11% to 3,245 services in operation, and overall business voice services fell slightly to 8,466 services in operation. The decline in business voice services is all under the CallStream brand and due to a reclassification of active services in operation – the revenue and margin from this business has not been affected and remains steady. Business data services fell slightly to 2,017 services in operation, mainly due to reclassification of some older Connexus services to residential. In terms of new customer acquisition the business continues to push the Virtual PBX as the leading service. The business has recently re-launched the business customer web site - https://business.mynetfone.com.au/ - as well as released higher value included plans which are very popular. The product is undergoing a cosmetic and feature refresh which should be completed by the end of the year. Based on our competitive analysis, the product is still very strong in terms of price and functionality when compared to all competitors selling a hosted PBX product. The business is constantly looking at new ways to market effectively whilst keeping costs under control. c. Enterprise & Government The Enterprise & Government sub-segment consists of selling enterprise grade MyNetFone SIP trunks and other value added services to enterprise and government organisations within Australia. The sub-segment operates under the MyNetFone brand. This sub-segment is strategic to the group with strong organic growth in the last 12 months, and an excellent pipeline of prospects looking forward to next year. The company has adopted a long-term strategy to pursue domestic government business as VoIP technology increases its foothold in all levels of government. The Enterprise & Government sector is generally more conservative than small business, and the migration to next generation telephony has been lagging that of small business. However recently www.mnfgroup.limited 25 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) the sector has been more focussed on cost reduction and efficiency, resulting in the increased rate of migration into centralised private cloud telephony services, and the need for data centre based high capacity centralised SIP trunks. This is the same model adopted by the Tasmanian Government in 2012 which was a pioneer in this space. MyNetFone had initial success with the Tasmanian Government in 2012, where it was awarded a long term contract to provide telephony services to government. Recently the Tasmanian Government has elected to exercise all extensions to the initial contract, securing MyNetFone as an exclusive supplier of voice carriage until 2022. MyNetFone is also actively engaged with the Tasmanian Government in providing additional value added services and product innovation to assist the Government in delivering services to its constituents. Recently the company has also secured several large contracts with government enterprises in NSW. These contracts are for inbound and outbound voice carriage, as well as value added services and product innovation. These are multi-year contracts with initial terms of 3 years, and potential extensions of up to 7 years. Based on recent success with both Tasmanian and NSW government enterprises, the company is increasing its resourcing to support and drive growth in the Enterprise & Government sector. These additional resources are in the area of business development, account management, bid management and customer life cycle management. The company currently holds the following government certifications: Municipal Association of Victoria (MAV), Western Australian Local Government Association (WALGA), NSW Procurement ICT Services Scheme, Queensland Government IT&T Procurement Panel and Tasmanian Government. As a result of these efforts the company is winning successful business with many local governments, universities and several state government departments around Australia. The company continues to pursue additional Government certifications and tenders in other areas. The company also maintains several key certifications with leading enterprise grade equipment vendors such as: Microsoft, Cisco, Avaya, Samsung, Panasonic and many others. The company is still the only carriage service provider in Australia certified by Microsoft for the Lync unified communications platform. Domestic Wholesale Segment This segment is based on the original Symbio Networks brand, and now includes the iBoss software platform. The segment is focussed on selling to Australian & New Zealand domestic carriers, carriage service providers (CSP), cloud providers and application providers. This segment is strategic to the group and is currently the fastest organically growing segment with gross margin contribution growing 49% on the PCP to $12.5M. It should be noted that certain Symbio customers are now included in the Global Wholesale segment as result of the new segmentation following the acquisition of the TNZI voice business. Revenue, margin and relative growth have been adjusted for this fact to make comparisons meaningful. The key products sold into this market are: 1. Wholesale voice – termination of high volume wholesale voice minutes; 2. Wholesale managed services – providing unbranded capabilities and services such as Local Number Portability, voice end-points, phone numbers, and numerous other in-house developed cloud based value added services; 3. Wholesale aggregation services on the iBoss software platform – providing customer branded services such as: DSL broadband, NBN broadband, Legacy ISDN/PSTN voice resale, mobile telephony resale and also providing access to the complete suite of Symbio wholesale managed services; 4. Software-as-a-Service (SaaS) – leveraging the company’s extensive software intellectual property assets and monetising them by means of selling cloud based capabilities on a monthly recurring basis. The main product is the iBoss enablement platform. These products leverage the extensive fully interconnected national voice network that is also used to carry the group’s retail and globally originated traffic, in addition to an extensive amount of proprietary intellectural property that has been developed by the company over the last 14 years. The domestic wholesale business is currently hosting over 238 unique service provider customers, an increase of 13% on the previous year. Each customer generally purchases one or more products from the above suite of products. In addition 26 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) to the increase in service provider customers, the customers themselves are generally growing organically, providing a compounding growth effect – hence the strong margin growth for this segment. Services provided in this segment continue to experience strong growth, with Local Number Portability (LNP) growing 16% to 502,000 inbound ported numbers, and the total volume of hosted Direct-In-Dial (DID) numbers growing 10% to 2.7 million numbers. Wholesale aggregation subscriptions (iBoss) increased to 3,000, up 50% on the prior year. Global Wholesale Segment This segment is based on the TNZI brand, and the customer base acquired together with some pre-existing Symbio customers that are global operators. The segment is focussed on selling to global carriers, carriage service providers (CSP), cloud providers and application providers. This segment is strategic to the group and has the biggest potential for long term organic growth through leveraging its global market reach to sell the company’s high margin products. Initial focus for global growth is the Asia-Pacific region where the opportunity and the company is strongest. The main product sold by TNZI has historically been global voice termination. The TNZI brand operates high quality voice termination to all countries around the globe through direct and indirect partnerships. TNZI is globally recognised as a “Tier 1” quality brand, having being an innovator and pioneer of global minutes trading for the past 25 years. The TNZI organisation is a member of many exclusive global infrastructure organisations and committees, including the ITW Global Leaders Forum (GLF), Pacific Islands Telecommunications Association (PITA), the i3 Forum standards organisation and the Pacific Telecommunications Council (PTC). This has been the first full year of ownership of the TNZI business. The integration of the TNZI business has been going well with all major milestones for the first 12 months being completed. These include – staff integration, staff resource expansion, Wellington office relocation, IT systems separation, customer novations, and US licensing & transaction completion. The acquisition of TNZI was a large and complex transaction, and completing the integration has been an onerous task for management over the last 12 months. The global network expansion and upgrade program is also well underway. The expansion of the UK (London) Point of Presence (PoP) was finalised earlier this year, and the US (Los Angeles) PoP upgrade has been completed recently in July 2016. After some logistics delays the Hong Kong PoP is due to be fully operational by September 2016. Additionally, the NZ (Auckland) and Singapore PoPs are due to be upgraded and expanded in FY17. In addition to the traditional TNZI product suite, the Symbio products are being productised and made available to the TNZI global customer base. This is expected to provide additional high margin recurring revenue streams to the TNZI business, similar to what Symbio is achieving in the Australian and New Zealand domestic markets. The international wholesale network is currently hosting over 209 service provider customers, most of which are major global Tier 1 service providers. Due to the cost and complexity of managing a global customer base, the focus for TNZI is large service providers with significant positive margin contribution, so smaller nonperforming customers are regularly disconnected to save network and operational resources. The Group is investing in additional global marketing of the TNZI brand, and is deploying additional Business Development resources in the UK, USA and New Zealand in order to capture an increase in market share for both traditional and next generation products. Significant changes in the state of affairs There were no significant changes in the state of affairs of the company during the financial year. After balance date events Dividends proposed The dividend as recommended by the Board will be paid subsequent to the balance date. Options Exercised 60,000 options with an exercise price at $3.00 were exercised subsequent to year end. www.mnfgroup.limited 27 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Future developments The Board is committed to growing the company organically as well as by way of targeted acquisitions. The Company has a strict policy around the evaluation of acquisition targets and will continue to look to build through leveraging synergies, adding products and services through the acquisition of intellectual property and avoiding companies that are pure re-sellers of other networks. Environmental issues The Group’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory. Dividends paid or recommended Fully franked dividends paid or declared for payment during the financial year are as follows: $000 Franking Dividends paid during the year: 2015 Final dividend of 3.25 cents per share paid on 29 September 2015 2016 Interim dividend of 3.50 cents per share paid on 30 March 2016 2,170 2,342 Dividends recommended (subsequent to year end): 2016 Final dividend of 3.50 cents per share recommended on 16 August 2016 2,363 100% 100% 100% The 2016 final dividend is to be paid on 29 September 2016 to shareholders registered as at 5 September 2016. Options Shares under option or issued on exercise of options No options have been granted since the end of the 2015 financial year. Below are the details of shares issued to directors throughout the 2016 financial year as a result of the exercise of options. Director Date of expiry Exercise price Number of options Terry Cuthbertson Michael Boorne Andy Fung Rene Sugo 31 August 2016 31 August 2016 31 August 2016 31 August 2016 $3.00 $3.00 $3.00 $3.00 100,000 100,000 100,000 150,000 450,000 Below are the details of shares issued to executives and staff throughout the 2016 financial year as a result of the exercise of options. Date of expiry Exercise price Number of options Executives and Staff 31 December 2015 Executives and Staff 31 August 2016 $1.70 $3.00 10,000 85,000 95,000 At the date of this report, the unissued ordinary shares of MNF Group Limited under options which were granted in previous financial years is as follows: Grant date 1 July 2014 28 Date of expiry Exercise price Number of options 31 August 2016 $3.00 355,000 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Remuneration Report Audited This Remuneration Report for the year ended 30 June 2016 outlines the remuneration arrangements of the Company and the Group in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308 (3C) of the Act. Introduction The Remuneration Report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any director (whether executive or otherwise) of the Parent. For the purposes of this report, the term “executive” includes the Chief Executive Officer (CEO), executive directors and other senior executives of the Company or the Group. Non-executive directors Terry Cuthbertson Chairman Michael Boorne Andy Fung Executive director Rene Sugo Other KMPs Director Director Chief Executive Officer Matthew Gepp Chief Financial Officer Catherine Ly Company Secretary & Treasurer There were no changes to KMP between the reporting date and date the finanical report was authorised for issue. Remuneration governance Remuneration Committee Due to the size of the Company the functions of the Remuneration Committee are undertaken by a full Board. Mr Boorne chairs the Remuneration Committee. The Board approves the remuneration arrangements of the CEO and other executives and all awards made under short and long term incentive plans. The Board also sets the aggregate remuneration of non-executive directors, which is then subject to shareholder approval. www.mnfgroup.limited 29 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Remuneration Report (continued) Use of remuneration consultants The Company does not currently engage remuneration consultants. The Board may consider the use of remuneration consultants in the future as the company grows. Remuneration report approval at the 2015 AGM The 2015 remuneration report received positive shareholder support at the 2015 AGM with a vote of 97.97% in favour. (2014: 94.8%) Executive remuneration arrangements Remuneration principles and strategy The Board has established salary arrangements for the directors that are comparable with other companies in the sector of similar revenue, market capital and earnings levels. The Board has established salary arrangements for the key executives that are commensurate with their level of experience. The Board will continually review its approach to setting remuneration levels by balancing short and long term benefits and linking remuneration to performance. Details of short term incentive (STI) plans As part of their respective employment agreements the CEO, CFO and other senior managers are eligible for a cash bonus subject to the attainment of clearly defined objectives. Non-executive directors are not eligible for an STI. STIs for the previous and current financial years are based on meeting agreed net profit after tax targets as set by the Board and are subject to Board approval. STI amounts paid in FY16 are in relation to the FY15 company performance and targets. Details of long term incentives (LTI) plans The Board may issue options to executive and other employees under the company Employee Option Plan in order to align remuneration with the creation of shareholder value over the long term. As such, LTI awards are only made to executives and other key employees who have an impact on the Group’s performance. Shareholders returns The following table sets out MNF Group’s earnings and movements in shareholder wealth over the past five years: Revenue (‘000) NPAT (‘000) Basic EPS (cents) Dividends paid (‘000) Dividends per share (cents) Share price (as at 30 June) Change in share price 2016 2015 2014 2013 2012 $161,217 $85,675 $59,306 $46,209 $38,292 $8,990 13.45 $4,512 7.00 $4.00 $0.18 $7,184 11.49 $3,128 5.75 $3.82 $1.40 $5,778 9.26 $2,498 4.50 $2.42 $1.22 $4,141 6.98 $1,770 3.50 $1.20 $0.64 $74M $3,069 5.55 $862 2.30 $0.56 $0.38 $31M Market capitalisation $270M $240M $151M 30 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Remuneration Report (continued) Remuneration details of key management personnel for the year ended 30 June 2016 Details of the nature and amount of benefits and payments for each director and KMP of the Company for the 2015 and 2016 financial years are as follows: Short term benefits Post employment benefits Share based payments Total Cash salary & fees STI/Bonus Superannuation Options $ $ $ $ $ Non-executive directors: Mr T Cuthbertson Mr M Boorne Mr A Fung Executive director: Mr R Sugo Other KMPs: Mr M Gepp Ms C Ly Total 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 109,000 94,784 83,000 72,312 71,000 61,812 410,779 298,550 246,667 225,000 154,250 146,742 - - - - - - 43,900 66,350 57,500 40,000 - - 1,074,696 101,400 899,200 106,350 Key terms of employment agreements 10,355 9,004 7,885 6,870 6,745 5,872 43,195 34,666 28,896 25,175 14,654 13,940 111,730 95,527 - 22,000 - 22,000 - 22,000 - 33,000 - 11,000 - 4,400 119,355 125,788 90,885 101,182 77,745 89,684 497,874 432,566 333,063 301,175 168,904 165,082 - 1,287,826 114,400 1,215,477 The Company has entered into an Executive Employment Agreement with Rene Sugo. The remuneration and terms of employment for other Key Executives are also set out in written agreements. Each of these employment agreements are unlimited in term but may be terminated by written notice by either party and by the Company making payment in lieu of notice. Each of these agreements sets out the arrangements for total fixed remuneration, performance-related cash bonus opportunities, superannuation, termination rights and obligations and eligibility to participate in the employee equity- based incentive scheme. Executive salaries are reviewed annually. The executive employment agreements do not require the Company to increase base salary, incentive bonuses or to continue the participants’ participation in equity-based incentive programs. www.mnfgroup.limited 31 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Remuneration Report (continued) The Company may terminate the employment of the Key Executives without notice and without payment in lieu of notice in some circumstances. This includes if the executive: commits an act of serious misconduct; commits a material breach of the executive employment agreement; 1. 2. 3. denigrates or engages in any behaviour that may materially damage the reputation of, or otherwise bring the Company into disrepute; or is convicted of any criminal offence which would in the reasonable opinion of the Board of Directors adversely affect the carrying out of the executive’s duties. The Company may terminate the employment of the Key Executive at any time by giving the executive notice of termination or payment in lieu of such notice. The amount of notice required from the Company in these circumstances is set out in the following table: Name of key executive Company notice period Employee notice period Termination provision Rene Sugo Matthew Gepp Catherine Ly 6 months 3 months 6 months 1 month 3 months 1 month 6 months base salary 3 months base salary 6 months base salary Directors’ interests in shares and options of the company or related bodies corporate At the date of this Report, the particulars of shares and options held by the directors of the company in the company or in related bodies corporate which are required to be declared in the register of directors’ share holdings are as follows: Name of Director Mr Andy Fung Mr Rene Sugo Mr Terry Cuthbertson Mr Michael Boorne Total Share holding 13,969,216 13,160,576 920,000 705,067 28,754,859 This concludes the remuneration report, which has been audited. Options - - - - - 32 MNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report for the year ended 30 June 2016 (continued) Directors benefits No director has received or has become entitled to receive, during or since the financial year, a benefit because of a contract made by the company, controlled entity or related body corporate with a director, a firm which a director is a member or an entity in which a director has a substantial financial interest. Indemnifying officers or auditor During the year, the Group confirmed a contract insuring the directors, the company secretary and all executive officers of the Group and any related body corporate, against a liability incurred by a director, company secretary or executive officers to the extent permitted by the Corporations Act 2001. The Group has indemnified the directors, the company secretary and all executive officers of the Group for costs incurred, in their capacity as officers of the Group, for which they may be held personally liable, except where there is a lack of good faith. Details of the amount of the premium paid in respect of the insurance policies are not disclosed as such disclosure is prohibited under the terms of the contract. No indemnities have been given or agreed to be given or insurance premiums paid or agreed to be paid, during or since the end of the financial year, to the auditors of the Group or any related entities against a liability incurred by the auditors. Proceedings on behalf of the Group No person has applied for leave of a court to bring proceedings on behalf of the Group or intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the Group for all or any part of those proceedings. The Group was not a party to any such proceedings during the year. Non-audit services During the current and prior year MNSA Pty Ltd Chartered Accountants, the Group’s auditor did not provide any non- audit services. The total amount received by MNSA Pty Ltd Chartered Accountants for non-audit services was $Nil (2015: $Nil). Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 has been received and can be found on page 69 of the financial report. Rounding off The Group is of a kind referred to in ASIC Class order 98/100 report 10 July 1988 and in accordance with that Class Order, amounts in the consolidated financial statements and Director’s have been rounded off to the nearest thousand dollars, unless otherwise stated. This directors’ report, incorporating the remuneration report, is signed in accordance with a resolution of the Board of Directors. Terry Cuthbertson Chairman Sydney, 16 August 2016 Rene Sugo Director www.mnfgroup.limited 33 Financial Statements 2016 MNF Group Limited Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June Continuing operations Revenue Cost of sales Gross profit Finance revenue Employee benefits expense Depreciation and amortisation Other expenses Costs related to acquisition Financing costs Profit before income tax Income tax expense Profit from continuing operations Net profit for the year Other comprehensive income: Items that may be reclassified to profit or loss: Exchange differences on translation of foreign operations Changes in fair value of cash flow hedges Total comprehensive income for the year Consolidated group 2016 $000 2015 $000 161,217 (112,576) 48,641 85,675 (53,891) 31,784 249 88 (21,223) (4,709) (9,872) (200) (1,061) 11,825 (13,840) (1,983) (5,846) (332) (225) 9,646 (2,835) (2,462) Notes 4a 4a 4b 4c 4d 4e 5 8,990 8,990 (484) (582) (1,066) 7,924 7,184 7,184 155 (23) 132 7,316 11.49 11.32 Earnings per share from continuing operations - Basic earnings per share (cents) - Diluted earnings per share (cents) 26 26 13.45 13.38 The accompanying notes form part of these consolidated financial statements www.mnfgroup.limited 35 MNF Group Limited Consolidated statement of financial position As at: Assets Current assets Cash and cash equivalents Trade and other receivables Income tax receivable Inventories Other financial assets Total current assets Non-current assets Property, plant and equipment Deferred income tax asset Goodwill and other intangibles Consideration paid in advance Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Loans and borrowings Deferred revenue Income tax payable Finance lease liability Financial Instruments Provisions Total current liabilities Non-current liabilities Loans and borrowings Financial instruments Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Consolidated group 30 June 2016 30 June 2015 Notes $000 $000 6a 7 8 9 5c 23 25 10 11 13 15 12 14 11 12 14 16a 52,889 29,067 195 305 - 82,456 12,011 735 30,802 - 43,548 126,004 66,550 2,500 1,668 - - 2,812 1,300 74,830 11,190 282 734 12,206 87,036 38,968 26,440 419 12,109 38,968 6,287 29,706 - 185 323 36,501 7,797 527 29,308 4,420 42,052 78,553 29,304 2,500 1,843 1,201 16 - 1,169 36,033 22,790 23 659 23,472 59,505 19,048 9,932 1,485 7,631 19,048 The accompanying notes form part of these consolidated financial statements 36 MNF Group Limited Consolidated statement of cash flows Consolidated group For the year ended 30 June 2016 Notes $000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Receipt on supplier novations Interest received Interest paid Income tax paid Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Decrease/(increase) in other financial assets Receipt/(payment) for business acquisitions Payment in advance for business acquisition Software development costs Net cash (used in) investing activities 6b Cash flows from financing activities Proceeds from share placement and options exercised Dividends paid Proceeds from borrowings Repayment of borrowings Repayment of finance lease liability Net Cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 July Cash and cash equivalents at 30 June 6a 173,115 (157,611) 41,464 144 (873) (4,415) 51,824 (5,958) 323 182 - (150) (5,603) 16,508 (4,511) - (11,600) (16) 381 46,602 6,287 52,889 2015 $000 81,694 (69,010) - 88 (225) (3,001) 9,546 (3,811) (25) (24,128) (4,420) (817) (33,201) 425 (3,129) 26,790 (1,588) - 22,498 (1,157) 7,444 6,287 The accompanying notes form part of these consolidated financial statements www.mnfgroup.limited 37 MNF Group Limited Consolidated statement of changes in equity Attributable to owners of the company For the year ended 30 June 2016 Ordinary share capital Share- based payment reserve Trans- lation reserve Hedging reserve Retained earnings Total $000 $000 $000 $000 $000 $000 Balance at 30 June 2014 9,507 1,157 Profit for the period Other comprehensive income Dividends paid Share options exercised Share-based payment transactions - - - 425 - - - - - 196 - - - - 155 (23) - - - - - - 3,576 14,240 7,184 - 7,184 132 (3,129) (3,129) - - 425 196 Balance at 30 June 2015 9,932 1,353 155 (23) 7,631 19,048 Profit for the period Other comprehensive income Dividends paid Share options exercised Share placement Shares issued - DRP - - - 1,607 14,449 452 - - - - - - - (484) - (582) - - - - - - - - 8,990 - (4,512) - - - 8,990 (1,066) (4,512) 1,607 14,449 452 Balance at 30 June 2016 26,440 1,353 (329) (605) 12,109 38,968 The accompanying notes form part of these consolidated financial statements 38 Notes to the Consolidated Financial Statements MNF Group Limited Notes to the consolidated financial statements Table of Contents 1. Corporate Information ........................................................................................................................ 41 2. Significant accounting policies ........................................................................................................... 41 3. Segment note ....................................................................................................................................... 50 4. Revenue and expenses ....................................................................................................................... 51 5. Income tax ........................................................................................................................................... 52 6. Statement of cash flows reconciliation ............................................................................................ 53 7. Trade and other receivables .............................................................................................................. 53 8. Other financial assets ......................................................................................................................... 53 9. Property, plant and equipment ......................................................................................................... 54 10. Trade and other payables ................................................................................................................... 55 11. Loans and borrowings ......................................................................................................................... 55 12. Financial liabilities ............................................................................................................................... 55 13. Deferred revenue .................................................................................................................................. 56 14. Provisions .............................................................................................................................................. 56 15. Finance lease liability ......................................................................................................................... 57 16. Issued capital ...................................................................................................................................... 57 17. Share based payments ....................................................................................................................... 58 18. Commitments and contingencies ..................................................................................................... 59 19. Events after reporting date ................................................................................................................ 59 20. Auditors remuneration ...................................................................................................................... 59 21. Director and executive disclosures ...................................................................................................... 60 22. Controlled entities .............................................................................................................................. 61 23. Goodwill and other intangible assets ............................................................................................... 62 24. Impairment testing ............................................................................................................................ 63 25. Business combinations ...................................................................................................................... 64 26. Earnings per share .............................................................................................................................. 65 27. Dividends paid and proposed ............................................................................................................ 65 28. Parent entity ........................................................................................................................................ 66 29. Financial risk management objectives and policies ......................................................................... 66 30. Company details ................................................................................................................................. 67 MNF Group Limited Notes to the consolidated financial statements 1. Corporate Information These consolidated financial statements and notes represent those of MNF Group Limited and controlled entities (the “Company” or the “Group”) for the year ended 30 June 2016. At the 2015 AGM, shareholders approved a resolution to change the company name from My Net Fone Limited to MNF Group Limited. This name change is representative of the fact that the company is now a large and sophisticated group, trading under multiple brand names, in a global market. MNF Group Limited is a for profit entity limited by shares and incorporated and domiciled in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX) and is the ultimate parent entity in the Group. The separate financial statements of the parent entity, MNF Group Limited, have not been presented within this financial report as permitted by the Corporations Act 2001. The financial statements were authorised for issue on 16 August 2016 by the directors of the Company. The nature of the operations and principal activities of the Group are described in the Directors’ Report. 2. Significant accounting policies a. Basis of preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in the financial statements containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards as issued by the IASB. Material accounting policies adopted in the preparation of these financial statements are presented below and have been consistently applied unless otherwise stated. The financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. Fair Value which is level 3 “unobservable inputs” is determined primarily from inputs reflective of management expectations. b. New and amended accounting policies adopted by the Group and New Accounting Standards for application in future periods Accounting Standards and Interpretations issued by the AASB that are not yet mandatorily applicable to the Group, together with an assessment of the potential impact of such pronouncements on the Group when adopted in future periods, are discussed below: AASB 9: Financial Instruments and associated Amending Standards (applicable to annual reporting periods beginning on or after 1 January 2018). The Standard will be applicable retrospectively (subject to the provisions on hedge accounting outlined below) and includes revised requirements for the classification and measurement of financial instruments, revised recognition and derecognition requirements for financial instruments and simplified requirements for hedge accounting. The key changes that may affect the Group on initial application include certain simplifications to the classification of financial assets, simplifications to the accounting of embedded derivatives, upfront accounting for expected credit loss and the irrevocable election to recognise gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. AASB 9 also introduces a new model for hedge accounting that will allow greater flexibility in the ability to hedge risk, particularly with respect to hedges of non-financial items. Should the entity elect to change its hedge policies in line with the new hedge accounting requirements of the Standard, the application of such accounting would be largely prospective. Although the directors anticipate that the adoption of AASB 9 may have an impact on the Group’s financial instruments, including hedging activity, it is impracticable at this stage to provide a reasonable estimate of such impact. www.mnfgroup.limited 41 MNF Group Limited Notes to the consolidated financial statements (continued) AASB 15: Revenue from Contracts with Customers (applicable to annual reporting periods commencing on or after 1 January 2017). When effective, this Standard will replace the current accounting requirements applicable to revenue with a single, principles-based model. Except for a limited number of exceptions, including leases, the new revenue model in AASB 15 will apply to all contracts with customers as well as non-monetary exchanges between entities in the same line of business to facilitate sales to customers and potential customers. The core principle of the Standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. To achieve this objective, AASB 15 provides the following five-step process: • • • • • identify the contract(s) with a customer; identify the performance obligations in the contract(s); determine the transaction price; allocate the transaction price to the performance obligations in the contract(s); and recognise revenue when (or as) the performance obligations are satisfied. This Standard will require retrospective restatement, as well as enhanced disclosures regarding revenue. Although the directors anticipate that the adoption of AASB 15 may have an impact on the Group’s financial statements, it is impracticable at this stage to provide a reasonable estimate of such impact. AASB 16: Leases (applicable to annual reporting periods commencing on or after 1 January 2019). When effective, this Standard will: • • • replace AASB 117 Leases and some lease-related Interpretations; require all leases to be accounted for ‘on-balance sheet’ by lessees, other than short-term and low value asset leases; and require new and difference disclosures about leases. This Standard will require retrospective restatement, as well as new and difference disclosures. Although the directors anticipate the adoption of AASB 16 may have an impact on the Group’s financial statements, it is impracticable at this stage to provide a reasonable estimate of such impact. c. Principles of consolidation The consolidated financial statements incorporate the assets, liabilities and results of entities controlled by MNF Group Limited at the end of the reporting period. A controlled entity is any entity over which MNF Group Limited has the ability and right to govern the financial and operating policies so as to obtain benefits from the entity’s activities. Control will generally exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity. In assessing the power to govern, the existence and effect of holdings of actual and potential voting rights are also considered. In preparing the consolidated financial statements, all inter-group balances and transactions between entities in the consolidated group have been eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with those adopted by the parent entity. Where controlled entities have entered or left the Group during the year, the financial performance of those entities are included only for the period of the year that they were controlled. A list of controlled entities is contained in Note 22 to the financial statements. d. Business combinations Business combinations occur where an acquirer obtains control over one or more businesses and results in the consolidation of its assets and liabilities. All business combinations, including those involving entities under common control, are accounted for by applying the acquisition method. Consideration transferred for the acquisition comprises the fair value of the assets transferred, liability incurred and the equity interests issued by the acquirer. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. Any deferred consideration payable is discounted to present value using the entity’s incremental borrowing rate. Acquisition related costs are expensed as incurred. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of fair value of consideration transferred, over the acquisition-date fair values of identifiable net assets. 42 MNF Group Limited Notes to the consolidated financial statements (continued) e. Going concern The financial report has been prepared on a going concern basis. This presumes that funds will be available to finance future operations and the realisation of assets and settlement of liabilities will occur in the normal course of business. For the year ended 30 June 2016 the Group generated profit after tax of $9.0m (2015: $7.2m), as at the balance date the Group’s total assets exceeded total liabilities by $39.0m (2015: $19.0m). The Directors believe that the going concern basis of accounting is appropriate due to the expected cash flows to be generated by the Group over the next twelve months. The Directors closely monitor cash flows as the Group grows and if revenues do not increase as expected, the directors will look to contain costs. The Directors believe that these actions, if required, will be sufficient to ensure that the company will be able to pay its debts as and when they fall due for the next twelve months. Notwithstanding the above, the directors acknowledge that there are a number of risk factors that could materially affect the Group’s future profitability and cash flows, which include, but are not limited to: (i) Competition There can be no assurance given in respect of the Group’s ability to continue to compete profitably in the competitive markets in which the Group operates. The potential exists for change in the competitive environment in which the Group operates. (ii) Management of growth The Group achieved a profit during the year, however, there is always an inherent risk the Group may have insufficient working capital to meet its business requirements and the expansion of the Group will depend upon the ability of management to implement and successfully manage the Group’s growth strategy. (iii) Reliance on key management The responsibility of overseeing the day-to-day operations and strategic management of the Group is substantially dependent upon its senior management and its key personnel. There can be no assurance given that there will be no detrimental impact on the Group if one, or a number of, these employees cease their employment. (iv) New products and technological developments The Group’s current core business of broadband telecommunications is highly competitive and is subject to the introduction of new and improved products and services into the market on a regular basis. (v) Broadband access arrangements The Group currently has certain access to the Internet backbone network. Terms of the supply of broadband are negotiated regularly. There is no guarantee that future access arrangements will be able to be negotiated on commercially acceptable terms. (vi) Distribution channels and device suppliers The Group benefits from its good working relationship with its distribution channels to promote its products and services and with its device suppliers to provide its VoIP adaptors. There is no guarantee that these relationships will continue in the future. (vii) Legislation, regulation and policies Any material adverse changes in government or other regulatory organisation policies or legislation which impacts on the telecommunications industry, may affect the viability and profitability of the Group. (viii) Internet access The use of VoIP technology is dependent on quality and speed of access to the Internet. The market growth of VoIP may be limited by the take up rate of broadband and other fast Internet access or by the quality of such access. f. Critical accounting estimates and judgments The directors evaluate estimates and judgments incorporated into the financial statements based on historical knowledge and best available current information. Estimates assure a reasonable expectation of future events and are www.mnfgroup.limited 43 MNF Group Limited Notes to the consolidated financial statements (continued) based on current trends and economic data, obtained both externally and within the Group. Key estimates that have a significant risk of causing adjustments to the carrying amounts of certain assets and liabilities within the next annual reporting period are: (i) Share based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an independent valuer using a Black- Scholes model. The accounting estimates and assumptions relating to equity-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may have impact on profit or loss and equity. (ii) Useful lives of property, plant and equipment The Group reviews the estimated useful lives of property, plant and equipment at the end of each financial year. The Group adjusts the remaining effective useful life of its assets to better reflect their actual usage and future economic benefit. (iii) Utilisation of tax losses The Company and its wholly-owned Australian subsidiaries elected to join as members of a tax consolidated group under Australian taxation law as of 1 July 2011. Each entity in the tax consolidated group contributed tax losses to the Group. The Group has no tax losses to currently utilize. (iv) Research & Development (R&D) tax concession When calculating the income tax provision for the year, there is an operating assumption that the Research & Development tax concession for 2016 will be materially the same as for 2015. The directors believe the estimate is reasonable and conservative. This may be subject to change following the approval of the R&D tax concession application from AusIndustry in due course. g. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable after taking into account any trade discounts and volume rebates allowed. The following specific recognition criteria must also be met before revenue is recognised: (i) Rendering of services Revenue from telecommunication services is recognised when the services are provided to the customer. Deferred revenue represents the unused proportion of cash received in advance for call credits determined on a specific account basis at balance date. (ii) Interest income / Finance revenue Interest revenue is recognised using the effective interest rate method, which, for floating rate financial assets, is the rate inherent in the instrument. h. Leases Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the period in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term. i. Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. 44 MNF Group Limited Notes to the consolidated financial statements (continued) j. Trade and other receivables Trade receivables and other receivables, which generally have 30-90 day terms, are recognised and carried at original invoice amount less an allowance for any amounts determined to be un-collectable or amounts subject to dispute. An allowance for doubtful debts is made when there is objective evidence that the Group will not be able to collect the debts. Bad debts are written off when it is determined there is no chance of recovering the debt. An allowance for credit notes is made when invoiced amounts are subject to dispute and there is objective evidence that the dispute will be successful. k. Foreign currency transactions and balances (i) Functional and presentation currency The functional currency of each group entity is measured using the currency of the primary consolidated environment in which the entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency. (ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. (iii) Group Companies The financial results and position of foreign operations whose functional currency is different from the group’s presentation currency are translated as follows: - Assets and liabilities are translated at year end exchange rates prevailing at the reporting date. - Income and expenses are translated at average exchange rates for the period. - Retained earnings are translated at the exchange rates prevailing at the date of the transaction. On consolidation, assets and liabilities have been translated into Australian dollars at the closing rate at the reporting date. Income and expenses have been translated into the Group’s presentation currency at the average rate over the reporting period. The exchange differences are taken to other comprehensive income (OCI) in the consolidated financial report. l. Income tax The income tax expense (income) for the year comprises current income tax expense (income) and deferred tax expense (income). Current income tax expense charged to the profit or loss is the tax payable on taxable income. Current tax liabilities (assets) are measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses if any. Current and deferred income tax expense (credit) is charged or credited outside profit or loss when the tax relates to items that are recognised outside profit or loss. Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. www.mnfgroup.limited 45 MNF Group Limited Notes to the consolidated financial statements (continued) Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (a) a legally enforceable right of set-off exists; and (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Tax consolidation: MNF Group Limited and its wholly-owned Australian subsidiaries are part of a tax consolidation group under Australian taxation law. MNF Group Limited is the head entity in the tax consolidation group. Tax expense, deferred tax liabilities and deferred tax assets arise from temporary differences of the members of the tax-consolidation group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. MNF Group Limited, as the head entity in the tax consolidated group, recognises the current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of all entities in the Australia group. m. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. n. Inventories Inventories are measured and recorded at cost and are valued at the lower of cost and net realisable value. o. Property, plant and equipment Plant and equipment are measured on the cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as apporpriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred. 46 MNF Group Limited Notes to the consolidated financial statements (continued) Depreciation The depreciable amount of all fixed assets is depreciated on a straight-line basis over the asset’s useful life to the consolidated group commencing from the time the asset is held ready for use. The depreciation rates used for each class of depreciable assets are: Funiture & Fittings Office Equipment Leasehold improvements Network Infrastructure and IT Systems Group 6 to 10 years 3 to 5 years 3 to 5 years 2 to 10 years The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An assets’ carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the statement of comprehensive income. When re-valued assets are sold, amounts included in the revaluation surplus relating to that asset are transferred to retained earnings. p. Financial instruments Non-derivative financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the company commits itself to either the purchase or sale of the asset (i.e. trade date accounting is adopted). Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified ‘at fair value through profit or loss’, in which case transaction costs are expensed to profit or loss immediately. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Loans and receivables are included in current assets, except for those which are not expected to mature within 12 months after the end of the reporting period. (All other loans and receivables are classified as non-current assets.) (ii) Investments in subsidiaries held by the parent Investments in subsidiaries held by the parent entity are recognised and subsequently measured at cost in the separate financial statements of the Company, less any impairment. (iii) Derivative financial instruments and hedge accounting The group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then the hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the amount accumulated in reserves is reclassified to profit or loss. Derivatives are initially recognised at fair value; any directly attributable transaction costs are recognised in profit or loss as incurred. Cash flow hedges When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income (OCI) and accumulated in the hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount accumulated in equity is retained in OCI and reclassified to profit or loss in the same period or periods during which the hedged item affects profit or loss. www.mnfgroup.limited 47 MNF Group Limited Notes to the consolidated financial statements (continued) Fair value hedges When a derivative is designated as a fair value hedging instrument, the hedged item is re-measured to take into account the gain or loss attributable to the hedged risk, with the gains or losses arising recognised in profit or loss. This offsets the gain or loss arising on the hedging instrument which is measured at fair value through profit or loss. Changes in fair value of the derivative instrument are recognised in profit or loss. q. Intangible assets and goodwill (impairment testing) At the end of each reporting period, the Group assesses whether there is any indication that an asset may be impaired. The assessment will include the consideration of external and internal sources of information including dividends received from subsidiaries, associates or jointly controlled entities deemed to be out of pre-acquisition profits. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of comprehensive income. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recognition and measurement: Goodwill Brands Research and development Other intangible assets Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. Goodwill Assets are not subject to amortisation and are tested for impairment on an annual basis, or whenever an indication of impairment exists. Brands identified on acquisitions are measured and recorded at valuation less accumulated impairment losses. Brands are not subject to amortisation and are tested for impairment on an annual basis, or whenever an indication of impairment exists. Expenditure on research is recognised in profit or loss as incurred. Development expenditure is capitalised only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognised in profit or loss as incurred. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortisation and any accumulated impairment losses. Other intangible assets, including customer contracts, patents and trademarks and software acquired by the Group that have finite lives are measured at cost less accumulated amortisation and any accumulated impairment losses. Amortisation Amortisation is calculated to write off the cost of intangible assets less their residual values using the straightline method over their estimated useful life, and is generally recognised in profit or loss. Goodwill is not amortised. The estimate useful life of intangibles is as follows: • • • Patents and trademarks Software and Software development costs Customer relationships 5-20 years 5-10 years 3-5 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. r. Trade and other payables Trade and other payables represent the liability outstanding at the end of the reporting period for goods and services received by the Group during the reporting period which remains unpaid. The balance is recognised as a current liability with the amount being normally paid within 30 days of recognition of the liability. s. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the Statement of Comprehensive Income net of any reimbursement. 48 MNF Group Limited Notes to the consolidated financial statements (continued) Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the Statement of Financial Position date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. t. Employee leave benefits Provision is made for the Group’s liability for employee benefits arising from services rendered by employees to balance date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. In determining the liability, consideration is given to employee wages increases and the probability that the employee may satisfy vesting requirements. Those cash outflows are discounted using market yields on national government bonds with terms to maturity that match the expected timing of cash flows. u. Contributed capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. v. Earnings per share Basic earnings per share is determined as net profit/(loss) attributable to members of the group, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares. Diluted earnings per share include options outstanding that will have the potential to convert to ordinary shares and dilute the basic earnings per share. w. De-recognition of financial assets and financial liabilities Financial assets are de-recognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are de-recognised where the related obligations are either discharged, cancelled or expired. The difference between the carrying value of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss. x. Share-based payment transactions The Group provides benefits to its employees and Directors (including key management personnel) in the form of share-based payments, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). The cost of these equity-settled transactions with employees and Directors is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using a Black-Scholes model. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees and Directors become fully entitled to the award (the vesting date). At each subsequent reporting date until vesting, the cumulative charge to the consolidated statement of profit or loss and other comprehensive income is the product of: (i) the grant date fair value of the award; (ii) the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and (iii) the expired portion of the vesting period. The charge to the consolidated statement of profit or loss and other comprehensive income for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding credit to equity. www.mnfgroup.limited 49 MNF Group Limited Notes to the consolidated financial statements (continued) 3. Segment note Operating Segments The Group operates in one business segment being telecommunications. Prior to the acquisition of the TNZI voice business in April 2015 the Group operated primarily out of one geographic segment, Australia, and in one business segment, Telecommunications. During the 2016 year the Group has re-structured its business and the segmentation reporting and now identifies three core segments. Segment comparatives reflect the organisational changes that have occurred since the 2015 reporting period in order to present a like-for-like comparison. Australian Domestic Retail • The core MyNetFone brand, services residential, SMB (small to medium business), Enterprise and Government customers in Australia. • Other brands in this segment include, Connexus, callstream, PennyTel and theBuzz. • Key products in this segment include: o VoIP, Internet, Virtual PBX and SIP trunking o Conferencing, toll free numbers and number porting. Australia/New Zealand Domestic Wholesale • • The core Symbio and iBoss brands service wholesale customers based in Australia & New Zealand. Key products in this segment include o Call termination, pre-select, SIP trunking, inbound numbers, virtual numbers and porting. o Wholesale aggregation, SaaS, data enablement and MVNO. Global Wholesale • • During the year international customers supplied under the Symbio brand have transitioned over to being serviced The TNZI Brand services the global wholesale market • • by the TNZI Global team. TollShield and OCA (Open CA) also operate under the Global Wholesale segment Key products include: o Voice carriage and International toll free services (ITFS) o o Class 4 Softswitch and billing Toll Fraud prevention The Group has identified its operating segments based on internal management reporting that is used by the executive management team (chief operating decision makers) in assessing the performance and allocating resources. The accounting policies used by the Group in reporting segment information internally, is the same as those contained in note 2 to the financial statements. Australia Domestic Retail Australia/New Zealand Domestic Wholesale Global Wholesale Total $000 $000 $000 $000 28,917 - 28,917 15,078 29,253 - 29,253 15,150 23,445 6,582 30,027 12,479 20,991 810 21,801 8,363 108,855 1,420 110,275 21,084 35,431 - 35,431 8,271 161,217 8,002 169,219 48,641 85,675 810 86,485 31,784 2016 External revenue Inter-segment revenue Segment revenue Segment margin 2015 External revenue Inter-segment revenue Segment revenue Segment margin 50 MNF Group Limited Notes to the consolidated financial statements (continued) For the year ended 30 June 4. Revenue and expenses a. Revenue Rendering of services Finance revenue consists of: Interest on bank deposits b. Employee benefits expense Wages and salaries Superannuation Shared based payments expense Other employee benefits expense c. Depreciation and amortisation Depreciation of fixed assets Amortisation of intangibles d. Other expenses Marketing Property Technology & support Distribution Accounting and audit Legal and consulting Bank and transaction costs Other administrative expenses e. Financing costs Finance charges payable under finance lease Finance charges related to hedge instrument Finance charges payable on bank loan 2016 $000 2015 $000 161,217 85,675 249 88 18,527 1,295 - 1,401 21,223 3,244 1,465 4,709 1,401 1,068 2,248 307 358 544 379 3,567 9,872 - 107 954 1,061 11,940 1,068 196 636 13,840 1,474 509 1,983 1,145 793 969 218 196 88 362 2,075 5,846 8 - 217 225 www.mnfgroup.limited 51 MNF Group Limited Notes to the consolidated financial statements (continued) For the year ended 30 June 2016 $000 2015 $000 5. Income tax a. Income tax expense The major components of income tax expense are as follows: Current tax Adjustment in respect of prior year tax Origination and reversal of temporary differences Total b. Reconciliation between tax expense and the accounting profit Profit before income tax At the Group’s statutory rate of 30% (2015: 30%) Tax incentives Effect of tax rates in foreign jurisdictions Non-temporary differences Change in recognised deductible temporary differences Adjustment in respect of prior year Total c. Deferred tax asset Recognised in the accounts: Relating to temporary differences 2,951 34 (150) 2,835 11,825 3,548 (250) (64) (433) - 34 2,835 2,475 (26) 13 2,462 9,646 2,894 (222) (50) 156 (290) (26) 2,462 735 735 527 527 The total value of temporary differences not brought to account in the current year is $118k (2015: Nil). d. The Company and its wholly-owned Australian entities are members of a tax consolidated group. Transactions within the Group have been eliminated in full on consolidation. The tax consolidated group is treated as a single entity for income tax purposes. 52 MNF Group Limited Notes to the consolidated financial statements (continued) For the year ended 30 June 6. Statement of cash flows reconciliation a. Cash and cash equivalents 2016 $000 2015 $000 Cash and cash equivalents balance comprises: Cash at bank 52,889 6,287 b. Reconciliation of net profit after tax to net cash flows from operating activities: Profit for the year Adjustments for: Depreciation and amortisation Share based payments expense Tax expense Changes in assets and liabilities, net of the effects of acquisitions: Change in trade and other receivables Change in inventories Change in trade and other payables Change in deferred revenue Change in provisions and employee benefits Cash generated from operating activities 8,990 4,709 - 2,835 639 (120) 39,155 (175) 206 56,239 7,184 1,983 196 2,462 (8,770) 65 9,075 117 235 12,547 Tax paid (4,415) (3,001) Net cash flow from operating activities 51,824 9,546 7. Trade and other receivables Trade receivables Doubtful debts provision Provision for credit notes Other receivables 8. Other financial assets Term deposits 28,307 (1,001) (300) 2,061 29,067 29,224 (768) (250) 1,500 29,706 - 323 Term deposits relate to cash on deposit securing bank guarantees and are not available for immediate use. Short term deposits are made for fixed terms and earn interest at the prevailing short term rates. www.mnfgroup.limited 53 MNF Group Limited Notes to the consolidated financial statements (continued) 9. Property, plant and equipment a. Reconciliation of carrying amount Office furniture & equipment Leasehold improvements Network infrastructure & equipment Total $000 $000 $000 $000 Consolidated Cost: At 1 July 2014 Acquisitions Additions Disposals Reclassify asset category Effect of movement in exchange rates At 30 June 2015 At 1 July 2015 Acquisitions Additions Disposals (c) Reclassify asset category Effect of movement in exchange rates At 30 June 2016 Accumulated depreciation: At 1 July 2014 Acquisitions Depreciation expense Disposals Reclassify asset category Effect of movement in exchange rates At 30 June 2015 At 1 July 2015 Acquisitions Depreciation expense Disposals (c) Reclassify asset category Effect of movement in exchange rate At 30 June 2016 Net book value: At 30 June 2015 At 30 June 2016 886 441 297 - - 26 1,650 1,650 - 1,171 (389) - (9) 2,423 (580) (421) (158) - - (24) (1,183) (1,183) - (316) 389 - 8 (1,102) 467 1,321 - - 237 - 50 - 287 287 - 502 - - - 789 - - (54) - (35) - (89) (89) - (465) - - - (554) 198 235 4,038 12,749 3,277 (44) (50) 487 20,457 20,457 974 4,719 (3,327) - (617) 22,206 (2,627) (9,037) (1,262) 44 35 (478) (13,325) (13,325) - (2,463) 3,327 - 710 (11,751) 4,924 13,190 3,811 (44) - 513 22,394 22,394 974 6,392 (3,716) - (626) 25,418 (3,207) (9,458) (1,474) 44 - (502) (14,597) (14,597) - (3,244) 3,716 - 718 (13,407) 7,132 10,455 7,797 12,011 b. Property, plant and equipment work in progress Included in leasehold improvements is $86k of WIP (work in progress) that is expected to complete in August 2016. c. Disposals Asset disposals relate to equipment that is fully written down to net book value $Nil and is no longer in use. There was no impact to the profit or loss account in relation to these disposals. 54 MNF Group Limited Notes to the consolidated financial statements (continued) For the year ended 30 June 10. Trade and other payables Trade payables Other creditors and accruals Security deposits held 11. Loans and borrowings Current liabilities: Secured bank loan Non-current liabilities: Secured bank loan 2016 $000 52,608 13,895 47 66,550 2015 $000 8,787 20,477 40 29,304 2,500 2,500 11,190 22,790 13,690 25,290 The Group’s bank facility (the “Facility”) consists of a $27,000,000 revolving acquisition facility and an $850,000 (2015: $500,000) revolving multi-option credit facility. The Facility has a maturity date of 20 April 2020. The Facility is secured by a fixed and floating charge over the assets of the Group. During the year there were no defaults or breaches on the Facility. 12. Financial liabilities Current liabilities Forward foreign exhange contract - fair value hedge Non-current liabilities Interest rate swap contract - cash flow hedge 2,812 282 3,094 - 23 23 The Group’s bank facility is a variable interest rate facility. It is the Groups policy to protect a portion of the bank facility from exposure to fluctuations in interest rates. Accordingly on 23 April 2015 the Group entered into an interest rate swap agreement to protect the loan facility from exposure to increasing interest rates. A hedge relationship was designated on this date. Under this interest rate swap, the Group is obliged to receive interest at a variable rate and pay interest at a fixed rate of 2.64% per annum. The swap covers 89% (2015: 52%) of the floating rate exposure under the Facility. The contract requires settlement of the net interest receivable or payable each 90 days which coincides with the dates on which interest is payable on the underlying facility making it highly effective. The gain or loss from remeasuring the hedging instrument at fair value is recognised in other comprehensive income and deferred in equity in the hedge reserve. It is reclassified into profit or loss when the hedged interest expense is recognised. www.mnfgroup.limited 55 MNF Group Limited Notes to the consolidated financial statements (continued) Forward foreign exchange contract - fair value hedge There are significant creditor balances derived in foreign currencies, including Euro, Japanese Yen, Pound Sterling, and U.S. Dollar. These exposures on creditor balances are largely offset by debtor balances in corresponding currencies. Where this is not the case it is the Groups policy to protect these liabilities from exposure to fluctuations in foreign exchange rates. Accordingly, on 31 May 2016 the Group entered into a forward foreign exchange contract to protect the exposed creditor balances from increasing foreign exchange rates. A hedge relationship was designated on this date. During the year ended 30 June 2016 the Group recognised a $2,368k foreign exchange loss on the fair value hedge excluding transaction costs and a $2,102k gain on the hedged items. There has been no material ineffectiveness on the fair value hedge relationship during the year. For the year ended 30 June Foreign exchange hedge effectiveness Foreign exchange movement Foreign currency term deposits Foreign currency liabilities Gain in foreign currency valuations Fair value of hedging contract Less transaction costs of hedging contract Loss in valuation of hedge Hedge effectiveness 13. Deferred revenue 2016 $000 2015 $000 1,969 133 2,102 2,812 (444) 2,368 89% - - - - - - - Pre-paid calling credits 1,668 1,843 Deferred revenue relates to cash received in advance from customers with respect to pre-paid calling credits, The balance represents the unused call credits as at balance date. 14. Provisions As at 1 July 2015 Arising during the year Acquired during the year Utilised during the year As at 30 June 2016 Current Non-current Annual leave Long service leave $000 $000 1,169 1,096 63 (1,028) 1,300 1,300 - 659 103 - (28) 734 - 734 Total $000 1,828 1,199 63 (1,056) 2,034 1,300 734 A provision has been recognised for employee entitlements relating to long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. The measurement and recognition criteria relating to employee benefits have been included in Note 2. 56 MNF Group Limited Notes to the consolidated financial statements (continued) For the year ended 30 June 15. Finance lease liability Finance lease liability: Current Finance lease liability: Non-current 2016 $000 2015 $000 - - 16 - Refer to note 18 (b) for the terms and conditions relating to the finance lease obligations. 16. Issued capital a. Ordinary shares Issued capital 26,440 9,932 Movements in ordinary shares on 2016 2015 issue: At 1 July Exercise of share options (i) Exercise of share options (ii) Issued for cash (iii) Issued from DRP participation (iv) Number of shares $000 Number of shares $000 62,710,215 10,000 535,000 4,054,054 145,068 9,932 15 1,592 14,449 452 62,460,215 250,000 9,507 425 - - - - - - At 30 June 67,454,337 26,440 62,710,215 9,932 10,000 options were exercised with an exercise price of $1.70. (i) (ii) 535,000 options were exercised with an exercise price of $3.00. (iii) 4,054,054 shares were issued at a price of $3.70. (iv) 145,068 shares were issued as a result of participation in the MNF Group dividend reinvestment plan (at an issue price of $3.17 and $3.11). Share capital movements above are presented net of transaction costs. Ordinary shares have the right to receive dividends as declared and in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the company. www.mnfgroup.limited 57 MNF Group Limited Notes to the consolidated financial statements (continued) b. Share options 2016 2015 Movements in share options on issue: Number WAEP $ Number WAEP $ Outstanding at 1 July Granted during the year Exercised during the year Exercised during the year Expired during the year Outstanding at 30 June Exercisable 910,000 - (10,000) (535,000) (10,000) 355,000 355,000 2.97 - 1.70 3.00 1.70 3.00 3.00 270,000 890,000 (250,000) - - 910,000 910,000 1.70 3.00 1.70 - - 2.97 2.97 The outstanding options balance as at 30 June 2016, issued under the share based payment option scheme to directors, executives and employees is represented by 355,000 options with an exercise price of $3.00 and an expiry date of 31 August 2016. 17. Share based payments Outstanding options as at year end: Employee option plan Option granted to directors Total 2016 2015 Number Number 355,000 - 355,000 460,000 450,000 910,000 a. Employee option plan (EOP) The Board may issue options under the EOP to any employee of the Group, including executive directors and non- executive directors. Options will be issued free of charge, unless the Board determines otherwise. Each option is to subscribe for one share and when issued, the shares will rank equally with other shares. Unless the terms on which an option was offered specify otherwise, an option may be exercised at any time after one year from the date it is granted, provided the employee is still employed by the Company. An option may also be exercised in special circumstances, that is, at any time within 6 months after the employee’s death, total and permanent disablement, or retrenchment. An option lapses upon the termination of the employee’s employment by the Company and, unless the terms of the offer of the option specify otherwise, lapses three years after the date upon which it was granted. The exercise price per share for an option will be the average closing market price of the Company’s share over the five trading days before their issue. The maximum number of options on issue under the EOP must not at any time exceed 5% of the total number of shares on issue at that time. b. Share options granted to the directors No options were granted to Directors during the year. The following table illustrates the number and weighted average exercise prices (WAEP) of and movements of share options held by directors during the year: 2016 2015 Number WAEP $ Number WAEP $ Outstanding at 1 July Granted during the year Exercised during the year Outstanding as at 30 June 450,000 - 450,000 - 3.00 - 3.00 - - 450,000 - 450,000 - 3.00 - 3.00 58 MNF Group Limited Notes to the consolidated financial statements (continued) 18. Commitments and contingencies a. Operating lease commitments Operating leases relate to premises with lease terms remaining between 3 and 6 years. The consolidated entity does not have an option to purchase the leased assets at the expiry of the lease terms. Future minimum rentals payable under non-cancellable operating leases as at 30 June 2016 are as follows: Within one year After one year, not more than five years More than five years b. Finance lease commitments 2016 $000 1,105 4,195 230 5,530 2015 $000 771 526 - 1,297 The Group has used finance leases to acquire Network infrastructure and equipment. Future minimum lease payments under purchase contracts together with the present value of the net minimum lease payments are as follows: 2016 2015 Within one year After one year, not more than five years More than five years Total minimum lease payments Less amounts representing finance charges Present value of minimum lease payments Included in the financial statements as: Finance lease liability: Current Finance lease liability: Non-current Total $000 $000 - - - - - - - - - 16 - - 16 - 16 16 - 16 The finance lease obligations consisted of one finance lease with a maturity date of August 2015. The finance lease liabilities were secured against the assets to which they relate. 19. Events after reporting date a. Dividends The dividend as recommended by the Board will be paid subsequent to the balance date. b. Share Options Subsequent to year end 60,000 options with an exercise price of $3.00 were exercised by employees. Since the reporting date, there have been no other significant events, other than those mentioned above, which would impact on the financial position of the Company as disclosed in the Statement of Financial Position as at 30 June 2016, and on the cash flow of the Company for the year ended on that date. 20. Auditors remuneration The Auditor of the Group is MNSA Pty Ltd Chartered Accountants. Auditors of the company: Amounts received or due and receivable by MNSA Pty Ltd Chartered Accountants for: Audit and review of the annual report of the entity Non-audit services Other Auditors: Audit and review of financial statements www.mnfgroup.limited 2016 $000 2015 $000 255 - 57 312 112 - 36 148 59 MNF Group Limited Notes to the consolidated financial statements (continued) 21. Director and executive disclosures a. Details of Key Management Personnel (KMP) Mr Terry Cuthbertson Mr Michael Boorne Mr Andy Fung Mr Rene Sugo Mr Matthew Gepp Ms Catherine Ly Chairman and Non-executive Director Non-executive Director Non-executive Director Director & Chief Executive Officer Chief Financial Officer Company Secretary b. Compensation of Key Management Personnel The Group has applied the exemption under Corporations Amendments Regulation 2006 No 4 which exempts listed companies from providing remuneration disclosures in relation to their key management personnel in their annual financial reports by Accounting Standard AASB 124 Related Party Disclosures. These disclosures are provided in the Directors’ Report designated as audited. c. Shareholdings of Key Management Personnel Directors: Mr Terry Cuthbertson Mr Michael Boorne Mr Andy Fung Mr Rene Sugo Executives: Mr Matthew Gepp Ms Catherine Ly Year 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Balance at the beginning of period Traded during the year Options exercised 1,000,000 1,125,000 682,500 1,019,749 14,448,955 14,488,955 13,488,955 13,488,955 50,000 - 260,000 210,000 (180,000) (125,000) (77,433) (337,249) (579,739) (40,000) (478,379) - (50,000) - 2,665 - 100,000 - 100,000 - 100,000 - 150,000 - - 50,000 20,000 50,000 The above shareholdings are held directly and indirectly through controlled entities. d. Share options of Key Management Personnel Year 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Balance at the beginning of period Granted Options exercised 100,000 - 100,000 - 100,000 - 150,000 - 50,000 50,000 20,000 50,000 - 100,000 - 100,000 - 100,000 - 150,000 - 50,000 - 20,000 (100,000) - (100,000) - (100,000) - (150,000) - - (50,000) (20,000) (50,000) Directors: Mr Terry Cuthbertson Mr Michael Boorne Mr Andy Fung Mr Rene Sugo Executives: Mr Matthew Gepp Ms Catherine Ly 60 Balance at end of period 920,000 1,000,000 705,067 682,500 13,969,216 14,448,955 13,160,576 13,488,955 - 50,000 282,665 260,000 Balance at end of period - 100,000 - 100,000 - 100,000 - 150,000 50,000 50,000 - 20,000 MNF Group Limited Notes to the consolidated financial statements (continued) 22. Controlled entities The consolidated financial statements include the financial statements of MNF Group Limited and the subsidiaries listed in the following table: Name Country of Incorporation Ownership interest 2016 2015 My Net Fone Australia Pty Limited Symbio Networks Pty Limited Symbio Wholesale Pty Limited Internex Australia Pty Limited Pennytel Australia Pty Limited Numbering Services Australia Pty Limited Symbio Wholesale (Singapore) Pte Limited Symbio Wholesale International Pty Limited (i) TNZI USA LLC TNZI New Zealand Limited TNZI Australia Pty Limited TNZI UK Limited TNZI Singapore Pte Limited Symbio Wholesale NZ Pty Limited (ii) Australia Australia Australia Australia Australia Australia Singapore Australia USA New Zealand Australia United Kingdom Singapore New Zealand 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - (i) On 28 June 2016 the board resolved to change the name of Symbio Wholesale International Pty Limited to TNZI International Pty Limited (ii) Symbio Wholesale NZ Pty Limited was registered on 19 January 2016 www.mnfgroup.limited 61 MNF Group Limited Notes to the consolidated financial statements (continued) 23. Goodwill and other intangible assets Consolidated Goodwill Brands Customer contracts Software develop- ment costs Software and other assets# Total $000 $000 $000 $000 $000 $000 Adjustment to fair value from 2,710 provisional accounts (TNZI) Additions - Balance at 30 June 2016 17,327 1,823 1,433 Cost Balance at 1 July 2014 Acquisition of iBoss Acquistion of OpenCA Acquisition of TNZI Additions Balance at 1 July 2015 Accumulated Amortisation Balance at 1 July 2014 Amortisation Balance at 1 July 2015 Amortisation Balance at 30 June 2016 Net Book Value At 30 June 2015 At 30 June 2016 11,951 - - 2,666 - 14,617 - - - 1,811 - 1,811 12 - - - - 1,377 - 1,377 56 - - - - - - - - - - - - (69) (69) (290) (359) - - - - 817 817 - 150 967 - - - - - - 11,951 1,580 500 9,115 - 11,195 31 - 1,580 500 14,969 817 29,817 2,809 150 11,226 32,776 - (440) (440) - (509) (509) (1,175) (1,465) (1,615) (1,974) 14,617 17,327 1,811 1,823 1,308 1,074 817 967 10,755 9,611 29,308 30,802 # Acquired externally or purchased as part of a business combination. 62 MNF Group Limited Notes to the consolidated financial statements (continued) 24. Impairment testing For the purpose of undertaking impairment testing, MNF Group Limited identifies cash generating units (CGUs). CGUs are determined according to the smallest group of assets that generates cash flows that are separately identifiable. The carrying amount of goodwill broken out into CGUs is detailed below: Goodwill CGUs Wholesale Data Retail International 30 June 2016 30 June 2015 $000 6,086 4,533 1,332 5,376 17,327 $000 6,086 4,533 1,332 2,666 14,617 Goodwill assets are not subject to amortisation and are tested for impairment on an annual basis, or whenever an indication of impairment exists. The recoverable amount of the cash generating units has been determined based on value-in-use calculations using cash flow projections based on five year financial forecasts and assumptions that represent management’s best estimate of the range of business and economic conditions at the time. Calculations are reviewed and approved by the Board of Directors. Value-in-use represents the present value of the future net cash flow arising from the assets continued use and subsequent disposal. Any reduction in the carrying value is recognised as an expense in the consolidated statement of profit or loss and other comprehensive income in the reporting period in which the impairment loss occurs. In determining value in use, management applies its best judgement in establishing forecasts of future operating performance, as well as a selection of growth rates, terminal rates and discount rates. These judgements are applied based on management’s understanding of historical information and expectation of future performance. Management considers that, as the wholesale, retail and data CGUs operate in the Telecommunications Industry in Australia servicing the same markets, the risks specific to each unit are comparable and therefore a discount rate of 9.6% (2015: 10.0%) is applicable to all domestic CGUs. The long-term growth rate used to extrapolate the cash flows beyond five years (the Terminal Value) for each CGU is 2.5% (2015: 2.5%). The International CGU has been assessed using a discount rate of 14.0% (2015: 14.6%) and a Terminal Value of 2.0% (2015: 2.0%) Based on the results of the tests undertaken no impairment losses were recognised in relation to goodwill. www.mnfgroup.limited 63 MNF Group Limited Notes to the consolidated financial statements (continued) 25. Business combinations On 1 April 2015 MNF Group Limited purchased the global wholesale voice business of Telecom New Zealand International (TNZI) from Spark New Zealand Limited for NZD 22.4m (A$22.0m). Completion of the US component of the acquisition took place on 31 May 2016. From that date the US assets and liabilities have been included in the consolidated balance sheet of the Group. Following completion of the US component and after further assessment of the fair value of the identifiable assets and liabilities of the whole TNZI acquisition, including subsequent adjustments to the purchase price through the working capital adjustment, the final consolidated acquisition accounting is illustrated in the table below: Purchase consideration paid Plus working capital adjustment Less US TNZI voice business component Net cash paid for TNZI voice business Less fair value of identifiable net assets Goodwill Identifiable net asset acquired: Trade receivables Doubtful debts provision Other Debtors Deferred tax asset Fixed assets Accumulated depreciation Customer contracts Brand names Software Trade and other payables Income tax payable Provisions Provisional fair value of identifiable net assets 2016 Consolidated final 2015 Consolidated provisional $000 $000 22,010 4,502 - 26,512 (21,136) 5,376 20,216 (938) 1,446 78 14,188 (9,459) 1,433 1,823 9,146 (16,190) (292) (315) 21,136 22,010 4,684 (4,420) 22,274 (19,608) 2,666 14,985 (686) 1,342 78 13,190 (9,459) 1,377 1,811 9,115 (11,601) (292) (252) 19,608 The fair value of TNZI’s intangible assets (brand name, customer bases and software assets) has been measured based on an independent valuation. Consideration paid in advance: For US TNZI voice business Consolidated final Consolidated provisional - 4,420 With the acquisition of the US TNZI voice business complete, the consideration paid in advance for the US component has been accounted for in the acquisition accounting above. 64 MNF Group Limited Notes to the consolidated financial statements (continued) 26. Earnings per share Earnings and weighted average number of ordinary shares used in calculating basic and diluted earnings per share are: Net profit attributable to ordinary equity holders of the Company 2016 $000 8,990 2015 $000 7,184 Weighted average number of shares: Number Number Weighted average number of ordinary shares for basic earnings per share Add effect of dilution: - Share options Weighted average number of ordinary shares for diluted earnings per share $000 66,851 355 67,206 $000 62,538 910 63,448 27. Dividends paid and proposed Cents per share $000 Date of payment Recognised amounts: 2015 fully franked final dividend declared and paid 2016 fully franked interim dividend declared and paid 3.25 3.50 2,170 2,342 29 September 2015 30 March 2016 Unrecognised amounts: 2016 fully franked final dividend declared (i) 3.50 2,363 - (i) The final dividend was declared on 16 August 2016. The amount has not been recognised as a liability in the 2016 financial year and will be brought to account in the 2017 financial year. The proposed payment date of the 2016 final dividend is 29 September 2016. The amount of franking credits available for future reporting periods is $4,207,757 (2015: $2,764,834). The tax rate at which paid dividends have been franked is 30% (2015: 30%). Dividends proposed will be franked at the rate of 30%. www.mnfgroup.limited 65 MNF Group Limited Notes to the consolidated financial statements (continued) 28. Parent entity Key financial information relating to the parent entity is summarised below: Statement of profit or loss and other comprehensive income Profit/(loss) attributable to the owners of the company Other comprehensive income Total comprehensive income/(loss) attributable to the owners of the company Statement of financial position Total current assets Total non-current assets Total current liabilities Total non-current liabilities Net assets Issued Capital Reserves Retained earnings Total equity 2016 $000 23,120 259 23,379 6,582 44,485 (374) (13,951) 36,742 31,255 1,071 4,416 36,742 2015 $000 (3,661) (23) (3,684) 3,781 43,968 (2,698) (43,167) 1,884 14,747 1,329 (14,192) 1,884 In 2014 MNF Group Limited issued a guarantee to Telstra Corporation Limited. This guarantee covers the primary obligations including any debts of its wholly owned subsidiary Symbio Wholesale Pty Limited. It does not impose any greater liability on MNF Group Limited than is already in place for Symbio Wholesale Pty Limited. During the year MNF Group Limited has not entered into any material contractual commitments for the acquisition of property, plant and equipment. 29. Financial risk management objectives and policies The Group’s principal financial instruments as at year end comprise cash at bank, short term deposits and loan facility. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below: Interest rate risk The Group’s interest rate exposure relates to short term cash and long-term loans, both are subject to the floating interest rate. The Group policy is to maintain at least 50% of its long term loan at fixed rates using interest rate swaps whereby the Group agree to exchange at defined periods the net difference between fixed and floating interest rates based on an agreed notional principal amount. This interest rate swap is designated into a hedge relationship and satisfies the requirements for hedge accounting. Foreign currency risk The Group is exposed to foreign exchange risks arising from various currency exposures, primarily with respect to the United States Dollar (USD) and the New Zealand Dollar (NZD). Much of the USD exposure is subject to a natural hedge, as the buy and sell side of most transactions is in USD. The Groups policy to manage its foreign exchange risk against its functional currency is to hedge firm commitments and highly probable and material forecast transactions over varying time horizons using forward exchange contracts. 66 MNF Group Limited Notes to the consolidated financial statements (continued) Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and interest revenue through the use of current accounts and short term deposits. Credit risk The company has no significant exposure to credit risk. For credit sales the company only trades with recognised creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. Moreover, the company considers it is appropriate to provide a provision for doubtful debts for the year ended 30 June 2016. Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments recognised in the financial statements. Financial assets Cash Weighted average effective interest rate 0.1% (2015: 1.4%) Cash at call Weighted average effective interest rate 3.2% (2015: 3.1%) Trade and other receivables Other financial assets Weighted average effective interest rate Nil% (2015: 3.1%) Financial liabilities On statement of financial position Trade payables Loans and borrowings 2016 2015 Carrying amount Fair value Carrying amount Fair value 11,259 11,259 5,870 5,870 41,630 41,630 417 417 29,067 29,067 29,706 29,706 - - 323 323 66,550 13,690 66,550 13,690 29,304 25,290 29,304 25,290 Weighted average effective interest rate 4.87% (2015: 4.57 %) Forward foreign exchange contract - fair value hedge Interest rate swap contract - cash flow hedge 2,812 282 2,812 282 - 23 - 23 30. Company details The registered office and principal place of business of MNF Group Limited is: Level 3, 580 George Street, Sydney, NSW, 2000, Australia (effective 8 August 2016) www.mnfgroup.limited 67 MNF Group Limited Directors’ Declaration In accordance with a resolution of the directors of MNF Group Limited, the directors of the Company declare that: 1. The financial statements and notes, as set out on pages 34 to 67, are in accordance with the Corporations Act 2001 and: a. comply with Australian Accounting Standards, which, as stated in accounting policy Note 2 to the financial statements, constitutes compliance with International Financial Reporting Standards (IFRS); and b. give a true and fair view of the financial position as at 30 June 2016 and of the performance for the year ended on that date of the consolidated group; in the directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and the directors have been given the declarations required by s295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer. 2. 3. On behalf of the Board Terry Cuthbertson Chairman Rene Sugo Director Sydney, 16 August 2016 68 69 70 29 32 71 ASX Additional Information MNF Group Limited ASX Additional Information Additional information required by the ASX Ltd and not shown elsewhere in this report is as follows. The information is current as at 01 August 2016. (a) Distribution of equity securities (i) Ordinary share capital 67,504,337 fully paid ordinary shares are held by 2,693 individual shareholders. All issued ordinary shares carry one vote per share and carry the rights to dividends. (ii) Options 305,000 unlisted options are held by 15 individual option holders. Options do not carry a right to vote. The numbers of shareholders, by size of holding, in each class are: Fully Paid Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over The number of security investors holding less than a marketable parcel of ordinary shares is 80. (b) Substantial shareholders Ordinary shareholders Mr Andy Fung & Ms Monique Ly Avondale Innovations Pty Ltd Citicorp Nominees Pty Ltd National Nominees Limited Fully Paid Number 13,969,216 12,138,955 6,299,538 6,072,765 716 1,095 414 439 29 2,693 Percentage 20.69 17.98 9.33 9.00 www.mnfgroup.limited 73 MNF Group Limited ASX Additional Information (c) Twenty largest holders of quoted equity securities Mr Andy Fung & Ms Monique Ly Avondale Innovations Pty Ltd Citicorp Nominees Pty Ltd National Nominees Limited BNP Paribas Noms Pty Ltd L & C Pty Ltd RACS SMSF Pty Ltd Kore Management Services Pty Ltd Boorne Gregg Investments Pty Ltd Boorne Superannuation Fund Pty Ltd Lee Superfund Management Pty Ltd JP Morgan Nominees Australia Limited G & E Properties Pty Ltd Mr Michael John Boorne Earglow Pty Ltd ABN AMRO Clearing Sydney Nominees Pty Ltd Mr Christopher John Ayres Endan Pty Ltd Ms Catherine Ly Mr Michael Karl Korber (d) On-market buy back There is currently no on-market buy back. Number 13,969,216 12,138,955 6,299,538 6,072,765 2,024,343 1,997,315 1,021,621 920,000 860,000 805,000 550,000 549,954 521,522 357,567 335,000 321,087 300,000 288,294 282,665 246,500 49,861,342 Fully Paid Percentage 20.69 17.98 9.33 9.00 3.00 2.96 1.51 1.36 1.27 1.19 0.81 0.81 0.77 0.53 0.50 0.48 0.44 0.43 0.42 0.37 73.85 74 Corporate Information Directors Terry Cuthbertson (Chairman) Michael Boorne Andy Fung Rene Sugo (CEO) Company Secretary Catherine Ly Chief Financial Officer Matthew Gepp Registered Office Level 3, 580 George Street Sydney NSW 2000 Australia Principal Place of Business Level 3, 580 George Street Sydney NSW 2000 Australia Phone: 61 2 8008 8000 Share Register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Australia Phone: 61 2 8280 7100 This annual report covers both MNF Group Limited as an individual entity and the consolidated group comprising MNF Group Limited and its subsidiaries. The Group’s functional and presentation currency is AUD (s). The company is listed on the Australian Securities Exchange under the code MNF. The Annual General Meeting of MNF Group Limited will be held at Level 3, 580 George Street, Sydney at 11:00 on 25 October 2016. Bankers Westpac Banking Corporation Westpac Place Sydney NSW 2000 Australia Auditors MNSA Pty Ltd Chartered Accountants Level 2, 333 George Street Sydney NSW 2000 Australia Annual Report Copies of the 2016 Annual Report with the Financial Statements can be downloaded from: www.mnfgroup.limited/investors/annual-reports www.mnfgroup.limited 75 MNF Group Limited Annual Report 2016 

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