Consolidated Annual Report & Accounts Year ended 31 March 2017 GROUP PLC WHO ARE WE Vianet Group plc (LSE: VNET) is a leading provider of actionable management information and business insight created through combining data from our smart Internet of Things (‘IOT’) solutions and external information sources. Servicing over 300 customers across the world and rendering live data to our IOT platform from over 250,000 connected machines daily, Vianet is one of the largest business to business (b2b) connected solutions providers in Europe with established long term relationships with blue chip customers and growing recurring revenues which are over 85% of our total revenues. Vianet’s game-changing smart technologies have been repositioned to describe our capabilities more accurately and recognise the wider opportunities. In our Smart Machines Division we connect a single data gathering device with its own on-board communication capability to a customer’s asset or system. The device then sends data back via our IOT platform to cloud based servers. The technology was originally developed for automated retailing machines, however the flexibility and functionality of the device means the technology can be applied to practically any machine which has the capability to output data. The device is also used to connect our contactless payment solution and communicate payment terms to our cloud based payment services providers where that application is also required. The Smart Zones Division is where we connect multiple data gathering devices into one or more systems or assets with the data from those devices being communicated back to our IOT platform and cloud based servers via a single 3G communications hub. The technology was originally developed for flow monitoring devices, temperature sensors, and asset management in drinks retailing but practically any data gathering device with a digital output could be connected to the communications hub where required such as gaming machines, utilities management and Electronic Point of Sale (EPOS). In both divisions the data collected is then structured and rendered through mobile applications and web interfaces to provide actionable data that supports operational and commercial decision making. Data is also structured in specific data sets and often combined with external data to deliver business insight for senior level decision makers. With a successful track record of connecting business assets via our smart devices and rendering the asset performance data to our website and mobile applications, our growth strategy will leverage this core capability in existing markets including the Leisure and Vending sectors, as well as new markets as they are identified. The business insight and actionable data Vianet provides to customers is focused on improving customer business process performance, asset management and utilisation and service efficiency where there is both scale and a transformational opportunity. By providing new insights to customers we empower them to make better decisions that drive real business change. These new solving by: insights support customer problem • • • Predicting a future asset performance to increase utilisation and significantly reduce servicing costs; Identifying inefficiencies, and wasted resources; and previously unknown trends, Building new procedures, revenue streams, automation services, and incorporating these into the customers’ existing processes. Building on our proven track record of converting IOT into actionable data and solutions for b2b markets, our mission is to become the recognised leader in delivering actionable management information and unparalleled insight that is game-changing for customers in our chosen markets. We aim to achieve this through: • • • Combining our ability to connect customer assets via our smart devices and IOT platform with powerful data analytics tools to deliver critical insight and information; Continuously striving to be a business that is passionate about developing innovative and game changing solutions by employing talented transforming business people performance; focused on Driving our financial performance through long term contracts which have recurring high cash margins and scalable annuity streams. Vianet Group plc i FINANCIAL HIGHLIGHTS (Continuing operations) 14000 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 TURNOVER PERFORMANCE £3.3 MILLION ADJUSTED* OPERATING PROFIT 14,147 TURNOVER (£’000) 14,358 14,290 14,263 OPERATING PROFIT (£’000) 3,316 3,238 3,150 3,017 3,350 3,300 3,250 3,200 3,150 3,100 3,050 3,000 2,950 2,900 2,850 Mar-14 Mar-15 Mar-16 Mar-17 Mar-14 Mar-15 Mar-16 Mar-17 RECURRING REVENUE 85% (2016: 83%) ADJUSTED* OPERATING PROFIT GROWTH (YOY) 9.9% OPERATIONAL CASH GENERATION UP 15% NET CASH OF £3.45 MILLION UP 71% CASH GENERATION (£’000) NET CASH/DEBT (£’000) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,930 3,422 2,869 1,607 Mar-14 Mar-15 Mar-16 Mar-17 4,000 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 3,446 2,011 Mar-14 Mar-16 Mar-17 (2,092) BASIC EPS (before tax) 5.30P (2016: 6.79p) Impacted by exceptional items PROPOSED FINAL DIVIDEND 4.00P (2016: 4.00p) Giving a full year of 5.70 pence per share (2016: 5.70 pence per share) * Adjusted operating profit is profit before exceptional costs, amortisation, interest and share based payments ii Vianet Group plc OPERATIONAL HIGHLIGHTS SMART ZONES • New drinks monitoring connections were driven by 380 total new system installations of which 278 were higher value iDraught™ systems. (2016: 455 and 372 systems respectively). • New six year contract extension with Greene King. SMART MACHINES • Number of new connected devices relating to Smart Machines was 5,092 (2016: 5,284). • • industry level of Payment Card Highest compliance (PCI-DSS level 1) was re-confirmed in September 2016 for Contactless Payment deployment. Smart Machines adjusted operating profit of £0.89m grew 19.1% from £0.75m on a like for like basis. Note: From 1 April 2016, the Technology division is a separate cost centre and costs are no longer absorbed by the Smart Zones and Smart Machines Divisions. 2016 comparatives have been amended to assume no cross charge in that year to give a like for like comparison. Our business is divided into two divisions: Smart Machines and Smart Zones. The momentum in the year continued with growth in Smart Machines former Vending) connected devices with resilient peformance in Smart Zones (including former Leisure) connected device estate. (including ALL CONNECTED DEVICES - MAR 17 20,129 230,489 Smart Zones Smart Machines The split in penetration showed the growth in Smart Machines as a key driver for our business. CONNECTED DEVICES - TOTAL Mar-17 230,489 20,129 Mar-16 236,272 15,912 0 50,000 100,000 150,000 200,000 250,000 300,000 Smart Zones Smart Machines Total number of devices decreased by 0.6% to 250,618 from 252,184 prior year with Smart Machines increases being offset by pub sector site closures in Smart Zones. Vianet Group plc iii CONTENTS Section Company Information Chairman’s Statement Strategic Report Report of the Directors Corporate Governance Statement Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash flow Statement Notes to the Consolidated Financial Statements Independent Auditor’s Report (Parent Company) Company Balance Sheet Company Statement of Changes in Equity Notes to the Company Balance Sheet Page 1 2 4 13 18 21 22 23 24 25 26-54 55 57 58 59-66 iv Vianet Group plc COMPANY INFORMATION Directors S W Darling (Chief Executive Officer) J W Dickson (Chairman) M H Foster (Chief Financial Officer) M McGoun (Non-Executive Director) C Williams (Non-Executive Director) Secretary M H Foster Registered office One Surtees Way Surtees Business Park Stockton on Tees TS18 3HR Registered number 5345684 Auditors Bankers Nominated Adviser Stockbroker Solicitors Registrars Grant Thornton UK LLP No 1 Whitehall Riverside Leeds LS1 4BN Lloyds Banking Group plc 1st Floor Black Horse House 91 Sandyford Road Newcastle NE1 8HQ Cenkos Securities plc 6. 7. 8. Tokenhouse Yard London EC2R 7AS Cenkos Securities plc 6. 7. 8. Tokenhouse Yard London EC2R 7AS Gordons LLP Riverside West Whitehall Road Leeds LS1 4AW Capita IRG The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Vianet Group plc 1 CHAIRMAN’S STATEMENT James Dickson Chairman Board and Staff We continue to evaluate the Board’s composition to ensure it remains effective and contains the optimum balance of experience and independence to support our operations and our growth agenda. The Group has an experienced management team which is focused on delivering the objectives set in line with the identified strong growth opportunities and developing new applications for Vianet’s IOT expertise and technology. In delivering leading Big Data capability for our customers, the Group continues to be engaged in large development projects and change programmes and it is pleasing that our people continue to respond with their usual enthusiasm, demonstrating commitment which continues to build the Group’s good reputation with customers. I would again like to thank all staff, senior management, and my Board colleagues, for their continued efforts and commitment in driving the Group forward over the past year. Outlook The Group is making good progress through its focus on strong growth opportunities and, against this background, there has been good momentum continuing into the new financial year. • • Our Smart Zones business area, which includes drinks flow monitoring and gaming machine monitoring, continues to evolve and innovate to deliver relevant solutions in a changing business environment both to sustain existing earnings performance from the extension of long term contracts whilst also developing new recurring income streams. Although the backdrop to trading in the pub industry may remain challenging, the rate of pub closures seems to be diminishing and prospects for increased device connectivity are encouraging. The Smart Machines division has seen exciting growth opportunities in vending in the UK and Europe and we believe it should deliver strong growth having made good progress in developing significant new sales opportunities with major global customers in these geographies. There is a concerted focus on developing our capability and accelerating growth to take advantage of our leading position in coffee device and contactless payment device connectivity where we expect sales momentum to continue to grow. Performance Encouraging progress has been made across our business, which has benefitted from the focus on exploiting growth opportunities in the Smart Machines division and optimising performance in the Smart Zones division. Group turnover from continuing operations was £14.26 million (2016: £14.29 million) whilst adjusted operating profit was up by 9.9% at £3.32 million. Group profit before taxation representing profit from continuing operations, amounted to £1.45 million post exceptional items (2016: £1.85 million). from costs Increased exceptional continuing operations of £0.96 million (2016: £0.55 million) relate principally to US litigation costs and office rationalisation. As outlined in our interim statement, the Group successfully defended itself in the US courts against certain claims asserted by third parties. This matter is now closed and no further costs will arise in connection with this situation. Additionally we closed our Bolton distribution and warehousing depot incurring office rationalisation costs. Basic pre-tax earnings per share, post-exceptional costs and deferred tax asset movement, reduced to 5.30 pence from 6.79 pence in 2016. Basic EPS after tax was 3.77 pence compared to 4.76 pence in 2016. Given the solid underlying performance, high quality income and the strong prospects for recurring the Group, the Board is proposing to maintain the final dividend at 4.00 pence which, if approved by shareholders, would give a total dividend for the year of 5.70 pence (2016: 5.70 pence). Subject to approval from shareholders at the Annual General Meeting, to be held on 29 June 2017, the final dividend will be paid on 28 July 2017 to shareholders on the register as at 16 June 2017. 2 Vianet Group plc • Group’s resources The are financial underpinned by high levels of recurring income and strong cash flow. This cash generation and strong balance sheet gives scope for investment in expansion and for selective acquisitions. The Board remains confident that Vianet’s long term strategy is the right one and that, within the parameters of its control and influence, the Group is well positioned to deliver earnings growth and expand the future strategic options for Vianet. James Dickson Chairman 5 June 2017 Vianet Group plc 3 STRATEGIC REPORT Stewart Darling Chief Executive Officer Vianet continues to deliver real value for its customers by providing actionable information and business insight with the power to drive real business change. We currently operate two business divisions: Smart Zones (historically beer monitoring and machine management services) and Smart Machines (currently comprises vending machine telemetry and contactless payment solutions). With over including several global blue 300 customers chip companies and more than 250,000 devices connected to our Internet of Things (IOT) platform, our experience and knowledge combine to form a powerful technology and insight capability that, we believe, few competitors in our markets can match. As the IOT evolves and businesses seek more data and insight on everything from asset performance to process automation, we believe Vianet is well placed to grow its position in this rapidly developing area. Material value creation for customers will be driven by data and insight which can improve informed decision making leading to real business change. At the same time, we recognise that enablement capability, such as hardware and connectivity, still has a significant role to play and whilst we may not always connect to customer assets using our Smart devices, our IOT platform has evolved so that our connectivity capability is device-agnostic. It is the gathering of information about customer asset performance which enables the creation of powerful data and insight and this, we believe, will drive sustained growth over the coming years. As a business that focuses on delivering business insight through data captured via our IOT platform and third party sources, we have resisted the distraction of developing all the other enablement technologies necessary to create the overall solution. Therefore our strategy is to build partnerships with leading providers and partners whose core business capability encompasses these activities such as our new contactless payment solution, delivered in partnership with Elavon and Creditcall, and external hardware providers. To accelerate the Group’s growth strategy, our legacy infrastructure is being migrated quickly to an agile cloud based technology environment which enables us to generate new data analytics and corresponding revenue streams. The Group is investing £1.5 million in FY2018 year to achieve this goal and allow us to exploit the power of cloud-based data and deliver a significant step forward in business capability and competence which will enable us to take a materially different approach to engaging with our customers. OPERATING REVIEW Smart Zones Our legacy core business of drinks monitoring and services for the UK Leisure sector remains resilient with high gross margins and strong cash generation. The combination of improved recurring revenues from long term contract extensions and ad-hoc support activity, combined with 278 iDraught™ sales, resulted in a largely stable income stream for the period under review despite the continued headwinds of pub disposals. Despite these pub disposals, our Smart Zones connected device base remains robust with over 230,000 devices in c 14,500 premises. The data sent from these devices forms the core of the information and insight delivered to customers via our website and mobile applications. CONNECTED DEVICES - SMART ZONES Mar-17 201,965 14,509 3,823 7,646 2,546 Mar-16 207,416 15,093 3,651 7,302 2,810 180,000 190,000 200,000 210,000 220,000 230,000 240,000 Flowmeters Panels Cooler Sensors Recirc Sensors Machines Whilst we focus on strengthening our recurring income streams, pub companies are also adapting to the changing landscape through different strategies such as developing managed estates from high performing or strategically located properties and creating franchised models with increased operating performance potential and greater transparency. We expect these different strategies to be beneficial to our business as the pub companies seek to improve retailing capability and quality standards and will likely be targeting investment expenditure on that basis. 4 Vianet Group plc Whilst the overall rate of pub disposals appears to be slowing and is reduced versus the prior year, (2017: 940 and 2016: 1,100) the resulting impact was a net reduction of 616 licenced premises in our installation base over the financial year with a consequential impact on operating contribution. Commercial trials of our latest version of Smart Zones technology have been successful in terms of the results delivered and corresponding operating performance improvement. The challenge for the business in the coming year is to build growth on the back of this success and we are optimistic over progress. Vianet Americas Inc. Vianet Americas, which is contained within the Smart Zones division, has made progress both in sales and operating performance, with reduced losses which should close towards breakeven in 2017/18. indicates that Vianet’s Market analysis clearly iDraught™ solution is substantially ahead of all competitors in the USA, and this advantage, combined with our strategic alliance with Micro Matic USA for nationwide installation, service and sales support places us in a strong position to keep growing. Whilst the pace of delivery of results is slower than anticipated, the Board recognises that the USA market is significant in size and a good opportunity for the Group given the relatively modest level of investment required. Overall, the Board remains cautiously confident for the prospects of further growth in the Smart Zones division. The market opportunity remains extensive even when limited to the immediately addressable market projections of 300,000 vending machines rather than all vending machines across Europe. As technology adoption evolves, it is anticipated that the addressable market will grow to nearly 1 million vending machines with Vianet being at the forefront to grow with the market. SMART MACHINE PENETRATION 20,129 859,871 Available Penetration Penetration Available Our contactless payment solution, supported by leading industry partners Elavon and CreditCall, has given further impetus to providing a solution to the Smart Machines market where traditional cash-only payments have long been an inhibitor of vending-related consumption, usage and customer experience. We believe the evolution and growth of contactless payment solutions provides a material opportunity to change this dynamic and attract more consumers to the vending vertical. We expect that Vianet’s contactless payment solution and significant experience developed in this new and dynamic space will provide exciting growth opportunities in years to come. Smart Machines R&D Investment to the background Smart Machines connections grew in the year and combined with increasing traction for our contactless payment solution was the division delivering good progress in the period. This progress is principally attributed to the development of business capability which is exploiting powerful strategic drivers in the quality out of home coffee market, growth of contactless payment, and securing of vending contracts with major blue chip customers whose businesses are growing. The impact of all the above factors gave a divisional operating profit growth of 19.1%, on a like for like basis (see Financial Review – Smart Machines section). The successful implementation of our growth strategy is particularly encouraging when the impact of Smart Machines estate rationalisation is factored in, which is an inevitable outcome of installing our solution. invest in development The Group continues to activity and is accelerating this activity using some of the funds from the sale of the Fuel Division in January 2016. This development will broadly cover enhancements to the customer experience, revenue generating reporting insights from our new platforms which allows us to leverage new revenue streams and necessary infrastructure investment moving away from legacy systems and software to an agile cloud- based technology environment. This accelerated investment is expected to cost an additional £900k on top of the ‘normal’ development activity of £500k-£600k per annum. in The Board believes this further enhancing our core Big Data and technology capability will enable the Group to improve the quality of existing recurring revenue stream and to generate substantial new growth opportunities. investment Vianet Group plc 5 Strategic Report (continued) LOOKING FORWARD In our Smart Zones division, and in particular for our drinks flow monitoring area, the industry headwinds associated with soaring business rates, national living wage and rapidly rising input costs, will likely result in some pressure from pub closures and disposals, and reduced investment expenditure. However the Board does expect this to be offset by continued growth in iDraught™ installations as well as results from other revenue and efficiency initiatives. Our Smart Machines division continues to enjoy great traction in the marketplace particularly in the quality coffee segment where consumption growth is being driven by rampant consumer demand. With the addition of our new contactless payment solution and rapid adoption of technology by brand owners and machine operators, the division is in good health and poised for further growth. Focusing on delivering even greater value to customers through world class strategic insight and actionable data, together with rigorous cost management of Vianet’s legacy business and service provision, should deliver the desired benefits and performance for customers and shareholders alike. The Group has continued to make good underlying progress in a challenging environment and built a solid foundation, which positions Vianet well for future profitable growth, the execution of its strategy and broadening its reach into new areas and markets. 6 Vianet Group plc FINANCIAL REVIEW Mark Foster Chief Financial Officer GROWING PROFITABILITY Group operating profits, before amortisation of intangible assets, share based payments, option costs, and exceptional costs, were up 9.9% to a profit of £3.32 million (FY2016: £3.02 million). OPERATING PROFIT (£’000) 3,316 3,238 3,150 3,017 3,350 3,300 3,250 3,200 3,150 3,100 3,050 3,000 2,950 2,900 2,850 Mar-14 Mar-15 Mar-16 Mar-17 Gross margin remained healthy year on year at c70%. The average operating profitability per connected device has grown 10.6% YOY and is shown as follows; AVERAGE OPERATING PROFIT PER DEVICE (£) Mar-17 13.23 Mar-16 11.96 11.20 11.40 11.60 11.80 12.00 12.20 12.40 12.60 12.80 13.00 13.20 13.40 Operating profitability per device is measured by taking full year operating profit before amortisation, share based payments and exceptional items and dividing by the total number of connected devices at the year end. This KPI seeks to demonstrate the robustness of the profitability achieved per connected device at each reporting date. TURNOVER Turnover remained broadly flat year on year where growth in Smart Machines was offset by the headwinds in the pub market place, particularly gaming machine monitoring, which impacted Smart Zones turnover. 14,147 TURNOVER (£’000) 14,358 14,290 14,263 14000 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Mar-14 Mar-15 Mar-16 Mar-17 RECURRING REVENUE Blended recurring revenues across the two divisions was a healthy 85% (2016: 83%), reflecting growth in Smart Machines connected device estate and the ongoing contract renewals in Smart Zones. TURNOVER - MAR 17 15% 85% Hardware Recurring Hardware Recurring Vianet Group plc 7 Financial Review (continued) The average recurring revenue per connected device has grown 1.7% YOY and is shown as follows; AVERAGE RECURRING REVENUE PER DEVICE (£) Mar-17 48.18 Mar-16 47.38 46.80 47.00 47.20 47.40 47.60 47.80 48.00 48.20 48.40 PERFORMANCE SUMMARY The table below shows the performance of the Group; FY2017 FY2016 Change % Revenue Operating profit(a) Operating profit Profit before tax(b) Profit before tax Basic EPS(c) Dividend per share Net cash(d) £14.26m £14.29m £3.02m £2.58m £2.28m £1.85m 6.38p 5.70p £2.01m £3.32m £2.35m £2.41m £1.45m 7.30p 5.70p £3.45m (0.2) 9.9 (8.9) 5.7 (21.6) 14.4 - 71.6 (a) Pre-exceptional items, share based payments and amortisation on a continuing basis (b) Pre-exceptional items, on a continuing basis (c) Profit after tax pre-exceptional items, on a continuing basis (d) Cash at bank after deduction of bank loans EXCEPTIONALS US legal costs Office rationalisation VFS disposal Other items Total FY2017 ‘£000 FY2016 ‘£000 388 495 (102) 83 864 297 - 382 282 961 Other items in exceptional costs have reduced year on year by £199k. Current year costs are predominately related to US litigation (as referred to in the Chairman’s Statement) and the closure of the Bolton warehouse and distribution centre where activities were centralised to our head office. This rationalisation covers termination of lease, staff exit and stock rationalisation costs. The US litigation matter was concluded successfully and no future costs will arise in respect of this. DIVIDEND The Board is proposing to maintain the final dividend at 4.00 pence which, if approved by shareholders, would give a total dividend for the year of 5.70 pence (2016: 5.70 pence). On a profit after tax basis, dividend cover has remained at c 0.66 in 2017. We expect the cover to improve as a result of our anticipated growth in profits and a substantial reduction in exceptional costs in FY2018. CASH CASH GENERATION (£’000) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 4,000 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 3,930 3,422 2,869 1,607 Mar-14 Mar-15 Mar-16 Mar-17 NET CASH/DEBT (£’000) 3,446 2,011 Mar-14 Mar-16 Mar-17 (2,092) Cash generation from operating activities remains strong and continues to grow through a combination of profit per device and robust working capital management. The resulting net cash position improved in the year, after servicing the three year term loan that ceases in July 2017 and the mortgage on the head office freehold property. Cash was principally used to service R&D investment, dividend payment and servicing of borrowings leaving an inflow of £0.9m (2016: £0.2m pre disposal proceeds from discontinued operations). At the year end, the Group had borrowings of £1.10 million (2016: £1.59 million), and net cash of £3.45 million (2016: £2.01 million). 8 Vianet Group plc DIVISIONAL PERFORMANCE Currently the Smart Zones division principally consists of the core beer monitoring business (including the US) and gaming machine monitoring. Recurring revenue per device has increased 1.9% being a reflection of the strength of revenue stream across the mix of customer base. AVERAGE OPERATING PROFIT PER DEVICE (£) SMART ZONES Mar-17 16.89 FY2017 FY2016 Change % Turnover Operating profit(a) £4.82m Total connected devices 230,489 380 New Installation sales c14,500 YE Net premises iDraught penetration(b) 24.7% £11.93m £12.05m £4.57m 236,272 455 c15,100 22.5% (1.0) 5.5 (2.4) (16.5) (4.0) (a) Pre-exceptional items, share based payments and amortisation (b) UK and Europe only Turnover mix is shown below SMART ZONES TURNOVER (£) - MAR 17 SMART ZONES TURNOVER - MAR 17 1,358,688 10,576,538 Hardware Hardware Recurring Recurring Recurring revenues remain robust at 89% AVERAGE RECURRING REVENUE PER DEVICE (£) Mar-17 45.89 Mar-16 45.03 44.60 44.80 45.00 45.20 45.40 45.60 45.80 46.00 Mar-16 16.35 16.00 16.10 16.20 16.30 16.40 16.50 16.60 16.70 16.80 16.90 17.00 Average operating profitability per device is measured by taking full year operating profit before amortisation, share based payments and exceptional items and dividing by the total number of connected devices at the year end. Average adjusted operating profit per device (above) has increased c 3.3% benefitting from new unit sales and continuing overhead rationalisation offsetting the effect of pub disposals. The Smart Zones division has performed satisfactorily, particularly against what is a challenging pub market landscape that resulted in a net estate reduction of c 600 sites (2016: c 630) to c 14,300 (2016: 14,900) in the UK and Europe. SMART MACHINES The Smart Machines division currently consists of the telemetry and contactless monitoring business predominantly in the Vending sector. Turnover Operating profit(a) New Telemetry connections New Contactless connections YE Net estate FY2017 FY2016 Change % £2.33m £0.89m £2.18m £0.75m 4,275 4,736 817 c20,000 535 c16,000 6.9 19.1 (9.7) 52.7 25.0 (a) Pre-exceptional items, share based payments and amortisation on a continuing basis. Vianet Group plc 9 Financial Review (continued) Turnover mix is shown in the chart below. Recurring revenues, driven by ongoing growth in the number of connected devices, grew to 64% of turnover (2016: c 55%). SMART MACHINES TURNOVER (£) - MAR 17 SMART MACHINES TURNOVER - MAR 17 Average recurring revenue per device has decreased 9.5% principally due to lower pricing associated with a significant roll out in one of our largest customers. Importantly, this same growth in connected devices is however providing scale and driving improved profitability per device as shown below. 829,625 Mar-17 44.26 AVERAGE OPERATING PROFIT PER DEVICE (£) 1,498,492 Mar-16 33.12 Hardware Hardware Recurring Recurring Smart Machines has made progress in the year with good growth in total number of connected devices as shown in the table above with new contactless connections being 282 ahead of FY2016. Growth during the year is also reflected in the device estate figures. AVERAGE RECURRING REVENUE PER DEVICE (£) Mar-17 74.44 Mar-16 82.29 - 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00 Average operating profitability per device is measured by taking operating profit before amortisation, share based payments and exceptional items and dividing by the total number of connected devices at the year end. Average adjusted operating profit per device (above) has increased 33.6% due to increased sales activity set against a relatively fixed overhead. Technology During FY 2017 Technology and Stores were a mainstream cost centre servicing both divisions of the Group (historically this has been absorbed throughout the Divisions). 70.00 72.00 74.00 76.00 78.00 80.00 82.00 84.00 Taxation The Group has continued to utilise available tax losses during the year resulting in no tax being paid (2016: £nil). The Group will continue to utilise the available tax losses carried forward into FY2018. In the financial year under review, the tax line includes a deferred tax charge of £0.42 million (2016: £0.55 million) recognising the impact of the tax losses available and being utilised. 10 Vianet Group plc Earnings per share Business risk Earnings per share has been impacted by the recognition of the deferred tax assets provision referred to above, realising the losses carried by the Group and the unwinding of that provision in FY2014. The underlying profit before tax from continued operations pre-exceptional items earnings per share is 8.83 pence for FY2017 compared to 8.41 pence for FY2016. Underlying fully diluted earnings per share (before exceptional costs), which takes account of all outstanding share options, amounted to 8.79 pence in FY2017 which compares to 8.37 pence for FY2016. Basic EPS was 3.77 pence compared to 4.76 pence in 2016 Balance sheet and cash flow The Group balance sheet remains strong. The Group generated operating cash flow of £3.93 million (2016: £3.42 million) an increase of 14.9%, with positive working capital movement. Despite the headwinds in Smart Zones’ core beer market and losses in the US, albeit reduced, the division had a healthy operational cash generation of c £5.5 million (2016: £5.1 million). The cash generated in FY2017 was utilised to invest in the Group’s technology through research and development, to service borrowings and to fund dividends. At the year end, the Group had borrowings of £1.10 million (2016: £1.59 million), and net cash of £3.45 million (2016: £2.01 million). The balance sheet and cash generating capacity of Vianet provides a solid platform to pursue the significant growth opportunities that the Board has identified in order to generate increased shareholder value. The Board and senior management review business risk on a regular basis. The Directors have considered areas of potential risk to the business to assess its future. On the basis of their review they consider the results and business projections taking into account market conditions that the business is of sound financial footing and has a sustainable operating future. In particular they note that the business has achieved an acceptable result in the year despite the difficult trading conditions for the pub sector, and overall market confidence in liquidity and credit. The Directors consider that other material business risks are limited to: • • • The ongoing impact of the Statutory Code implementation which is being managed as and when there is sufficient clarity on the outcomes. The potential for a Cyber security breach where data security is compromised resulting in unauthorised access to information which is sensitive and/or proprietary to Vianet or its customers. This threat is in common with most technology businesses, however both short term and long term mitigation plans are in place. Payment Card Industry Data Security Standard (PCI DSS - Level 1) highest level of compliance has already been achieved to support the Group’s contactless payment solutions. The Board potentially failing to ensure that the business builds a capable architecture and software development infrastructure to meet our growth demands and expectations. This risk is mitigated by ongoing evolution of our systems architecture, infrastructure, people and security protocols. Vianet Group plc 11 Financial Review (continued) Key performance indicators Percentage of revenue from recurring income streams1 Gross Margin2 Employee Turnover3 Notes to KPIs Target 80% 70% 2% Actual 2017 85% 70% 4.3% Actual 2016 83% 70% 2.7% 1 Percentage of revenue from recurring income streams = recurring income streams as a percentage of all income streams. Group trading companies aim to increase shareholder value through growth in revenue, linked to profitability (see Gross Margin below). Source data is taken from management information. The recurring contractual nature of the company’s income stream has led to continued improvement in performance versus target. The achievement of this target depends on the mix of new hardware sales versus on going recurring revenue. 2 Gross Margin = Gross profit as a percentage of revenue. Group trading companies aim to generate sufficient profit for both distribution to shareholders and re-investment in the company, as measured by Gross Margin. Source data is taken from the audited financial statements. The above gross margin represents continuing operations excluding the margin impact of the fuel business which operated on lower margins. It is important to recognise the margins we achieve are a reflection of the direct cost of sale and not do not include some of the key infrastructure overheads required to provide the services to our customers. 3 Employee Turnover = Group trading companies aim to be seen as a good, attractive employer with positive values and career prospects, measured against internal People & Development reports. In addition to normal employee turnover the figure also includes employees leaving as a result of business rationalisation activity. The Strategic Report includes the above sections on Business risks and KPI’s. On behalf of the Board Stewart Darling Chief Executive Officer 5 June 2017 12 Vianet Group plc REPORT OF THE DIRECTORS Directors left to right, Chris Williams non-executive, Mark Foster CFO, Stewart Darling CEO, James Dickson Chairman, Mike McGoun non-executive The Directors present their report and the audited financial statements for the year ended 31 March 2017. Business Risk Business risk is discussed in the Chief Executive’s report pages 4 to 12. Going Concern The Directors, after having made appropriate enquiries, including (but not limited to) a review of the Group’s budget for 2017/2018, and cash generating capacity at least 12 months from the date of signing (underpinned by long term contracts in place and historical results), have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. Financial Instruments Information about the use of financial instruments by the company and its subsidiaries and the Group’s financial risk management policies is given in note 17. Environment The Group’s policy with regard to the environment, and in particular Health and Safety requirements, is to ensure that the Group’s operational subsidiaries understand and effectively operate in such a way that they comply with all the legal requirements relating to the Health and Safety environments in which they operate. During the period covered by this reports no Group company has incurred any fine or penalties or been investigated for any breach of Health and Safety regulations. Employees The Group places great importance on the involvement of its employees, the majority of whom are able to work closely with their managers on a daily basis. Employees are encouraged to be involved in the Group’s performance through the use of share options. Employees have frequent opportunities to meet and have discussions with management. The Group aims to keep employees regularly informed of the financial and economic factors affecting the performance of the Group and its objectives in part through the Group intranet and website and in part through regular communication. The quality and commitment of our people overall has continued to play a major role in our business performance, despite several changes in personnel in the previous 12 months. This has been demonstrated in many ways, including improvements in customer satisfaction, contract gains and continued profitability, the development of customer Vianet Group plc 13 Report of the Directors (continued) offering and the flexibility they have shown in adapting to changing business requirements and new ways of working. Employees’ performance is aligned to company goals through an annual performance review process that is carried out with all employees. Employee turnover was 4.3%, above the taget of 2% we have set. The Group’s policy is that, where it is reasonable and practicable within existing legislation, all employees, including disabled persons are treated in the same way in matters relating to employment, training and career development. Research and Development The Group has a continuing commitment to levels of research and cost in ensuring systems are at the forefront of technological advance to ensure future growth. During the year expenditure on research and development was £705,000 (2016: £746,000) all of which has been capitalised as an asset on the balance sheet (2016: £746,000). Dividends The Directors recommend the payment of a final dividend of 4.00p per share (2016: final 4.00p), taking the full year dividend to 5.70p. (2016: 5.70p). Capital Structure Details of the authorised and issued share capital, together with details of the movements in the company’s issued share capital during the year are shown in note 20. The company has one class of ordinary shares which carry no right to fixed income. Each share carries the right to one vote at general meetings of the company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the company’s shares that may result in restrictions on the transfer of securities or on voting rights. Details of employee share schemes are set out in note 23 and no person has any special rights of control over the company’s share capital and all issued shares are fully paid. Directors’ Indemnity Qualifying third party indemnity provisions are in force for the benefit of the Directors. Directors and their interests The current Directors of the company are shown below. Those Directors serving at the end of the period had interests in the share capital of the company at 31 March as follows: S W Darling J W Dickson M H Foster C Williams M McGoun 14 Ordinary shares of 10p each 2017 63,244 4,754,469 228,000 9,250 - Ordinary shares of 10p each 2016 33,244 4,658,420 228,000 9,250 - Vianet Group plc Directors’ emoluments Details of Directors’ emoluments for the year are as follows: Executive M H Foster S W Darling Non-executive J W Dickson S C Gilliland C Williams M McGoun Total Salary and fees 2017 £’000 Other emoluments 2017 £’000 Total emoluments 2017 £’000 Salary and fees 2016 £’000 Other emoluments 2016 £’000 Total emoluments 2016 £’000 250 304 176 - 30 30 790 33 37 14 - - - 84 283 341 190 - 30 30 874 266 293 173 28 30 30 820 33 36 32 - - - 101 299 329 205 38 30 30 921 1. Executive remuneration is determined by the remuneration committee consisting of non-executive Directors C Williams, M McGoun and J W Dickson. 2. No payments were made to any Director in respect of compensation for loss of office in 2017 or 2016 3. Other emoluments received consist of the provision for private medical care, motor car allowances and pension contributions. 4. S Gilliland’s fees were paid to SMDH Consulting Limited, a company of which he is a Director. S Gilliland retired on 31 December 2015 5. C William’s fees are paid to MCHD Investments Limited, a company of which he is a Director 6. M McGoun’s fees are paid to Noble Adamson Limited, a company of which he is a Director 7. Pension contributions represent payments made to defined contribution schemes. Payments made are disclosed within other emoluments. Non-executive Directors are not entitled to retirement benefits 8. J W Dickson salary and fees for 2017 includes exceptional fees of £87,000 relating to time spent on the Group’s successful litigation defence in the US court. Directors’ share options Details of the share options held by Directors are as follows: J W Dickson M H Foster S W Darling At 1 April 2016 75,000 18,600 18,600 135,000 124,000 18,600 285,000 At 31 March 2017 - 18,600 18,600 135,000 124,000 18,600 285,000 Option price Date granted 123.0p 96.5p 96.5p 85.0p October 2006 January 2011 January 2011 May 2014 103.0p December 2015 January 2011 May 2014 96.5p 85.0p Share options are exercisable between nil and ten years from the date of the grant. The market price of the Company’s shares at the end of the financial year was 93.0p and the range of market prices during the year was between 90.0p and 106.5p. Vianet Group plc 15 Report of the Directors (continued) Joint Ownership Plan The following awards over shares in the Company were made to the following Executive Directors of the Company on 25 September 2009 by a Joint Ownership Plan. Director J W Dickson M H Foster S W Darling Number of Plan shares in which the Director has an interest 100,000 100,000 100,000 Awards were made by the Company’s Remuneration Committee through the Company’s employee benefit trust operated by Halifax EES Trustees International Limited. The awards are subject to EPS performance targets and dependant on performance vest on 31 March 2014. No value has been paid on grant of the Plan shares and participants are entitled to growth over the Plan term. Long Term Incentive Plan Vianet adopted a new LTIP scheme on 17 December 2015. On 21 December 2015, awards were granted to five members of staff, who each have a percentage entitlement in the overall awards pool. Further detail is provided on page 53. Substantial Shareholdings The Company has been informed that on 25 May 2017 the following shareholders (excluding Directors) held substantial holdings of the issued ordinary shares of the company: Livingbridge AXA Investment Managers UK Helium Fund Management Hargreaves Lansdown Asset Management Lazard Asset Management Downing LLP TD Direct Investing Barclays Wealth and Investment Management Artemis Fund Managers Limited Miton Assest Management Blackrock Investment Management UK Unicorn Asset Management Holding of Ordinary shares Number Issued Share capital % 2,693,982 2,665,000 2,132,000 1,333,257 1,196,180 1,017,650 973,876 770,033 735,000 700,000 689,273 625,200 9.63% 9.53% 7.62% 4.77% 4.28% 3.64% 3.48% 2.75% 2.63% 2.50% 2.46% 2.24% Annual General Meeting The Annual General Meeting will be held on 29 June 2017 at 11.30am, at the offices of Grant Thornton UK LLP, No 1 Whitehall Riverside, Leeds, LS1 4BN. Statement of Directors’ responsibilities for the financial statements The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have to prepare group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and the parent company has elected to prepare company statements in accordance 16 Vianet Group plc with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the parent company and of the profit or loss of the company and Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently • make judgements and accounting estimates that are reasonable and prudent • • state whether applicable UK Accounting Standards or IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as each of the Directors is aware • • there is no relevant audit information of which the Company’s auditor is unaware; and the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditor Grant Thornton UK LLP has indicated its willingness to continue in office. A resolution for its re-appointment as independent auditor will be proposed at the AGM. Approval The report of the Directors was approved by the Board on 5 June 2017 and signed on its behalf by: Mark Foster Director Vianet Group plc 17 CORPORATE GOVERNANCE STATEMENT General Principle The Group is committed to high standards of corporate governance in all its activities. Whilst the company does not comply with the UK Corporate Governance Code and is not required to do so, the Board recognises the value of the Code and has regard to its principles as far as it considers practicable and appropriate for a public company of its size and nature. The Board The Board consists of two Executive and three Non-Executive Directors as follows: Executive Directors S W Darling (Chief Executive Officer) M H Foster (Chief Financial Officer and Company Secretary) Non-Executive Directors J W Dickson (Chairman) M McGoun C Williams All Directors have access to the advice and services of the Company Secretary. There is a clear division of responsibilities between the Chairman, who is responsible for the running of the Board, and the Chief Executive Officer, who, together with the other Executive Director, are responsible for running the business. The Board meets regularly, with no less than eight meetings planned over 10 days in any one calendar year. Each Director is provided with sufficient information to enable them to consider matters in good time for meetings and enable them to discharge their duties properly. There is a formal schedule of matters reserved for Board approval. In principle the Board agrees the Group business plan, determines overall Group Strategy, acquisition, investment, people and development and health and safety policies, as well as approval for major items of capital expenditure. All Directors have access to independent professional advice at the Group’s expense. The Directors continually ensure they are trained in association with duties and responsibilities of being a director of a listed Company. The independent non-executive Directors bring an independent judgement to the management of the Group. They are free from any business or other relationships which could interfere with the exercise of their judgement. The non-executive Directors fulfil a key role in corporate accountability. Board Committees The Group has established a number of committees, details of which are set out below and all of which operate with defined Terms of Reference: Audit Committee This consists of: C Williams (Chairman) J W Dickson M McGoun It meets at least twice in any year, and is usually attended as a minimum by the Chief Executive Officer and the Chief Financial Officer, as well as the Group’s External Auditor. 18 Vianet Group plc The Audit Committee has terms of reference (which are available for inspection) to report on matters such as the Group’s annual accounts, interim reports, major accounting issues and developments, the appointment of external auditor and their fee, the objectivity of the auditor, the Group’s statement on internal control systems and the scope and findings of external audit. Remuneration Committee This consists of: M McGoun (Chairman) J W Dickson C Williams The Remuneration Committee has terms of reference (which are available for inspection) and meets at least twice per year, reviewing and advising upon the remuneration and benefit packages of the Executive Directors and other senior management. The remuneration of the Chairman and non-executive Directors is decided upon by the full Board. The Remuneration policy is to attract, retain and motivate high quality executives capable of achieving the Group’s objectives and thereby enhancing shareholder value. The remuneration of the Executive Directors consists of a basic salary and benefits, performance related bonuses and share options. The non-Executive Directors are eligible for performance related share options. Nominations Committee This consists of: J W Dickson (Chairman) C Williams M McGoun The Committee met as required during the course of the year. The Committee has terms of reference which are available for inspection. Internal Control and Risk Management The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness, and recognises these systems are designed to manage rather than eliminate the risk of material loss. The Board monitors risk through ongoing processes and provides assurance that the significant risks faced by the Group are being identified, evaluated and appropriately managed. The main elements of the internal control systems are: • management structure with clearly identified responsibilities • • • budget setting process including longer term forecast review comprehensive monthly financial reporting system, with comparison to budget, supported by written report from the Chief Executive Officer and Chief Financial Officer report to the Audit Committee from the external auditor stating the material findings arising from the audit. This report is also considered by the main Board and action taken where appropriate Vianet Group plc 19 Corporate Governance statement (continued) • • a framework for capital expenditure and controls including authorisation procedures and rules relating to delegation of authority risk management policies to manage issues relating to health and safety, environment, legal compliance, insurance and security • day to day hands on involvement of the Executive Directors As a result of the above systems and controls, and due to its current size, the Group does not operate an internal audit function, but is keeping its position under review. Shareholder Communication The Group places a high level of importance on communicating with its shareholders and welcomes and encourages such dialogue within the regulations governed by the London Stock Exchange. The Board are keen to encourage the participation of a broad base of both institutional and private investors in the Group. Communication with shareholders will be maintained through the Annual General Meeting, annual and interim reports, press releases and periodic presentations. Share Options The share option plans in existence at 31 March 2017 were the EMI plan, the Executive plan, the Employee Plan, the Employee Company Share Option Plan, an Executive Joint Ownership Plan and a Long Term Incentive Plan. Share options will be issued at appropriate intervals in order to motivate and retain Executive Directors, senior management and other key staff whilst aligning their interests with those of the Group’s shareholders. Such grants are approved by the Remuneration Committee. 20 Vianet Group plc INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF VIANET GROUP PLC We have audited the group financial statements of Vianet Group Plc for the year ended 31 March 2017 which comprise the consolidated balance sheet, the consolidated statement of comprehensive income, the consolidated cash flow statement, the consolidated statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Statement of Directors’ Responsibilities for the financial statements set out on page 16, the Directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the group financial statements: • • • give a true and fair view of the state of the group’s affairs as at 31 March 2017 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the Strategic Report and Directors’ Report for the financial year for which the group financial statements are prepared is consistent with the group financial statements. the Strategic Report and Directors’ Report has been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and Directors’ Report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: certain disclosures of Directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. • • Other matter We have reported separately on the parent company financial statements of Vianet Group Plc for the year ended 31 March 2017. Mark Overfield BSc FCA Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Leeds 5 June 2017 Vianet Group plc 21 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 March 2017 Continuing operations Revenue Cost of sales Gross profit Administration and other operating expenses Operating profit pre amortisation and share based payments Intangible asset amortisation Share based payments Operating profit post amortisation and share based payments Net finance costs Profit from continuing operations before tax Income tax expense Profit from continuing operations Profit/(loss) from discontinued operations Profit and other comprehensive income for the year Earnings per share Total - Basic - Diluted Continuing Operations - Basic - Diluted Discontinued Operations - Basic - Diluted Note 3 6 5 7 8 8 8 8 8 8 Before Exceptional 2017 £000 Exceptional 2017 £000 14,263 (4,327) 9,936 (6,621) 3,315 (693) (206) 2,416 (5) 2,411 (417) 1,994 - 1,994 Total 2017 £000 14,263 (4,327) 9,936 Total 2016 £000 14,290 (4,279) 10,011 (7,585) (7,433) 2,351 (693) (206) 2,578 (661) (28) - - - (964) (964) - - (964) 1,452 1,889 - (964) - (964) 100 (864) (5) 1,447 (417) 1,030 100 1,130 4.14p 4.12p 3.77p 3.76p 0.37p 0.36p (44) 1,845 (553) 1,292 (275) 1,017 3.74p 3.72p 4.76p 4.73p (1.02)p (1.01)p The accompanying accounting policies and notes form an integral part of these financial statements. Details of the exceptional items are included in note 4. 22 Vianet Group plc CONSOLIDATED BALANCE SHEET at 31 March 2017 Assets Non-current assets Goodwill Other intangible assets Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Tax asset Cash and cash equivalents Total assets Equity and liabilities Liabilities Current liabilities Trade and other payables Borrowings Provisions Non-current liabilities Borrowings Provisions Deferred tax Equity attributable to owners of the parent Share capital Share premium account Share based payment reserve Own shares Merger reserve Retained profit Total equity Note 2017 £000 2016 £000 10 11 12 13 14 19 15 16 18 16 18 19 20 15,503 2,000 3,069 20,572 1,308 2,708 460 4,549 9,025 15,503 1,982 3,143 20,628 1,810 3,564 482 3,605 9,461 29,597 30,089 3,728 325 62 4,115 778 48 395 1,221 2,843 11,287 418 (1,221) 310 10,624 24,261 4,016 489 - 4,505 1,103 - - 1,103 2,843 11,287 217 (1,221) 310 11,045 24,481 Total equity and liabilities 29,597 30,089 The Group financial statements were approved by the Board of Directors on 5 June 2017 and were signed on its behalf by: J Dickson Director The accompanying accounting policies and notes form an integral part of these financial statements. Vianet Group plc 23 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2017 At 1 April 2015 Dividends Issue of shares Share based payments Share option forfeitures Exercise of options Share capital £000 2,831 - 12 - - - Share premium account £000 11,198 - 89 - - - Own shares £000 (1,381) - - - - 160 Transactions with owners 12 89 160 Profit and total comprehensive income for the year Total comprehensive income less owners’ transactions At 31 March 2016 At 1 April 2016 Dividends Share based payments Share option forfeitures Transactions with owners Profit and total comprehensive income for the year Total comprehensive income less owners’ transactions - - - 12 89 160 2,843 11,287 (1,221) 2,843 - - - 11,287 - - - (1,221) - - - - - - - - - - - - At 31 March 2017 2,843 11,287 (1,221) Share based payment reserve £000 Merger reserve £’000 Retained profit £000 Total £000 24,768 (1,549) 101 43 - 101 11,601 (1,549) - - 35 (59) (1,573) (1,304) 1,017 1,017 (556) (287) 11,045 24,481 11,045 (1,557) - 6 24,481 (1,557) 207 - (1,551) (1,350) 1,130 1,130 (421) (220) 310 - - - - - - - - 310 310 - - - - - - 310 10,624 24,261 209 - - 43 (35) - 8 - 8 217 217 - 207 (6) 201 - 201 418 24 Vianet Group plc CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 March 2017 Cash flows from operating activities Profit for the year Adjustments for Net interest payable Income tax expense Amortisation of intangible assets Depreciation Payment of deferred consideration Profit on sale of property, plant and equipment and businesses Share based payments Operating cash flows before changes in working capital and provisions Change in inventories Change in receivables Change in payables Change in provisions Cash generated from operations Net cash generated from operating activities Cash flows from investing activities Proceeds on disposal of subsidiary division Cash disposed with subsidiary Purchases of property, plant and equipment Purchases of intangible assets Net cash used in investing activities Cash flows from financing activities Net interest payable Issue of share capital Share options exercised Repayments of borrowings Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Vianet Group plc Note 2017 £000 2016 £000 1,130 1,017 5 417 693 348 - (50) 207 2,750 502 857 (289) 110 1,180 3,930 3,930 100 - (325) (711) (936) (5) - - (488) (1,557) (2,050) 944 3,605 4,549 25 44 553 818 449 (22) (207) 43 2,695 (34) (338) 1,099 - 727 3,422 3,422 3,400 (90) (383) (855) 2,072 (44) 101 100 (486) (1,549) (1,878) 3,616 (11) 3,605 25 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2017 Significant accounting policies 1. 1.1 Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (IFRS). IFRS includes Interpretations issued by the International Financial Reporting Interpretations Committee. The financial statements have been prepared on the historical cost convention with the exception of certain items which are measured at fair value as disclosed in the principal accounting policies set out below. The measurement bases and principal accounting policies of the Group are set out below. These policies have been consistently applied to all years presented unless otherwise stated. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from these estimates. The Directors, after having made appropriate enquiries, including (but not limited to) a review of the Group’s budget for 2017/2018, and cash generating capacity at least 12 months from the date of signing (underpinned by long term contracts in place and historical results), have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. 1.2 Subsidiaries The consolidated financial statements incorporate the results, assets, liabilities and cash flows of the company and each of its subsidiaries for the financial year ended 31 March 2017. Subsidiaries are entities controlled by the Group. Control is deemed to exist when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results, assets, liabilities and cash flows of subsidiaries are included in the consolidated financial statements from the date control commences until the date that control ceases. Unrealised gains on transactions between the Group parent and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. 1.3 Business combinations For business combinations occurring since 1 January 2010, the requirements of IFRS 3R have been applied. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’ s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at the acquisition date fair values. 1.4 Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents the amounts receivable for goods provided in the normal course of business, net of all related discounts and sales tax. 26 Vianet Group plc Significant accounting policies (continued) 1. Smart Zones and Smart Machines Machine, Payment and Vending equipment The revenue from the sale is recognised at the point of installation when the transfer of risk and reward is made to the customer. Sale of data insight services The revenue is recognised over the length of the service contract in accordance with the respective customer’s agreements. Machine & vending monitoring sale of equipment The revenue from the sale is recognised at the point of installation when the transfer of risk and reward is made to the customer. Machine monitoring licence and support, vending service revenue The revenue is recognised over the length of the service contract in accordance with the respective customer’s agreements. Machine monitoring data management services The revenue is recognised over the length of the service contract in accordance with the respective customer’s agreements. Interest income Interest income is accrued on a time basis using the effective interest method. Rental income Income from equipment leased to customers is accounted for on a straight-line basis over the period to which it relates. These arrangements are operating leases, where the risk and reward of the unit, which is capitalised, remains with the Group. 1.5 Foreign currencies Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Non-monetary items that are measured at historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Any exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognised in the profit or loss in the period in which they arise. 1.6 Goodwill Goodwill on acquisition of subsidiaries represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary. Goodwill is not amortised, but tested at least annually for impairment, and carried at cost less accumulated impairment losses. Impairment losses are immediately recognised in profit or loss and are not subsequently reversed. Goodwill arising on acquisitions before the date of transition of 1 January 2010 to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Tests have been undertaken using commercial judgements and a number of assumptions and estimates have been made to support the carrying amount, assessed against discounted cash flows. The details of these assumptions are set out in note 10. Vianet Group plc 27 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 1. 1.7 Significant accounting policies (continued) Intangible assets: business combinations Acquisition as part of a business combination Identifiable intangible assets acquired as part of a business combination are initially recognised separately from goodwill at their fair value, irrespective of whether the asset had been recognised by the acquiree before the business combination. An intangible asset is considered identifiable only if it is separable or if it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. Intangible assets acquired as part of a business combination and recognised by the Group include customer contracts, patents and order book. After initial recognition, intangible assets acquired as part of a business combination are carried at cost less accumulated amortisation and any impairment losses recognised in administrative expenses in the statement of comprehensive income. Amortisation Intangible assets are amortised on a straight-line basis, to reduce their carrying value to their residual value, over their estimated useful lives. The following useful lives were applied during the year: Customer contracts and relationships Software Trademarks Order book 2 to 5 years 5 years 10 years 2 to 5 years Methods of amortisation, residual values and useful lives are reviewed, and if necessary adjusted, at each balance sheet date. Intangible assets: Research and development 1.8 Expenditure on research (or the research phase of an internal project) is recognised as an expense in the period in which it is incurred. Development costs incurred on specific projects are capitalised when all the following conditions are satisfied: • • • • • completion of the intangible asset is technically feasible so that it will be available for use or sale the Group intends to complete the intangible asset and use or sell it the Group has the ability to use or sell the intangible asset the intangible asset will generate probable future economic benefits. Among other things, this requires that there is a market for the output from the intangible asset or for the intangible asset itself, or, if it is to be used internally, the asset will be used in generating such benefits there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and • the expenditure attributable to the intangible asset during its development can be measured reliably. Development costs not meeting the criteria for capitalisation are expensed as incurred. The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. 28 Vianet Group plc Significant accounting policies (continued) 1. Directly attributable costs include employee (other than Directors) costs incurred on development and directly attributable overheads. The costs of internally generated software developments are recognised as intangible assets. Capitalised development costs are amortised over the life of the product within cost of sales, which is usually no more than five years. However, until completion of the development project, the assets are subject to impairment testing only. 1.9 Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment losses. Cost comprises the purchase price of property, plant and equipment together with any directly attributable costs. Subsequent costs are included in an asset’s carrying value or recognised as a separate asset, when it is probable that future economic benefits associated with the additional expenditure will flow to the Group and the cost of the item can be measured reliably. All other costs are charged to the profit or loss when incurred. Depreciation commences when an asset is available for use. Depreciation is charged so as to write off the depreciable amount of assets to their residual values over their estimated useful lives using a method that reflects the pattern in which the assets’ future economic benefits are expected to be consumed by the Group. Depreciation is charged in equal annual instalments over the following periods: Freehold land and buildings Plant, vehicles and equipment Fixtures and fittings 50 years 3 - 5 years 4 years Methods of depreciation, residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date. The gain or loss arising from the disposal or retirement of an item of property, plant and equipment is determined as the difference between the net disposal proceeds and the carrying amount of the item, and is included in the profit or loss. 1.10 Impairment At each balance sheet date, the Group assesses whether there is any indication that its assets have been impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. The value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. This present value is discounted using a pre-tax rate that reflects current market assessments of the time value of money and of the risks specific to the asset for which future cash flow estimates have not been adjusted. If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is recognised as an impairment loss. An impairment loss relating to assets carried at cost less any accumulated depreciation or amortisation is recognised immediately in the profit or loss. Goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the combination. Vianet Group plc 29 Notes to the Financial Statements for the year ended 31 March 2017 (continued) Significant accounting policies (continued) 1. Goodwill is tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. An impairment loss is recognised for cash-generating units if the recoverable amount of the unit is less than the carrying amount of the unit. The impairment loss is allocated to reduce the carrying amount of the assets of the unit by first reducing the carrying amount of any goodwill allocated to the cash-generating unit, and then reducing the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. If an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount but limited to the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised in profit or loss. Impairment losses on goodwill are not subsequently reversed. 1.11 Operating leases The costs of all operating leases are charged to the profit or loss on a straight-line basis. Incentives to sign operating leases are recognised in the profit or loss in equal instalments over the term of the lease. 1.12 Own shares The Group holds shares in both an employee benefit trust and in treasury. The consideration paid for the purchase of these shares is recognised directly in equity. Any disposals are calculated on a weighted average method with any gain or loss being recognised through reserves 1.13 Inventories Inventories are stated at the lower of cost and net realisable value on an average pricing basis. Cost of finished goods and work in progress includes materials and direct labour. Net realisable value is the estimated selling price, which would be realised after deducting all estimated costs of completion, and costs incurred in marketing, selling and distributing such inventory. 1.14 Taxation The tax expense represents the sum of current tax and deferred tax. Current tax Current tax is based on taxable profit for the year and is calculated using tax rates enacted or substantively enacted at the balance sheet date. Taxable profit differs from accounting profit either because items are taxable or deductible in periods different to those in which they are recognised in the financial statements or because they are never taxable or deductible. Deferred tax Deferred tax on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes is accounted for using the balance sheet liability method. Using the balance sheet liability method, deferred tax liabilities are recognised in full for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. However, if the deferred tax asset or liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit, it is not recognised. Deferred taxation is measured at the tax rates that are expected to apply when the asset is realised or the liability settled based on tax rates and laws enacted or substantively enacted at the balance sheet date. 30 Vianet Group plc Significant accounting policies (continued) 1. Deferred tax assets and liabilities, calculated on an undiscounted basis, are offset only when there is a legally enforceable right to set off current tax amounts and when they relate to the same tax authority and the Group intends to settle its current tax amounts on a net basis. Current and deferred tax are recognised in the profit or loss except when they relate to items recognised directly in equity, when they are similarly taken to equity. 1.15 Pension Costs The Group operates a defined contribution pension scheme. The assets of these schemes are held separately from those of the Group in an independently administered fund. The pension cost charge represents contributions payable by the Group to the scheme for the year. 1.16 Financial instruments The Group classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes party to the contractual provisions of the instrument. The particular recognition and measurement methods adopted for the Group’s financial instruments are disclosed below: Trade receivables and Cash and cash equivalents Trade receivables and cash and cash equivalents are categorised as loans and receivables, which are recognised initially at fair value and are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment. Cash and cash equivalents comprise cash on hand and demand deposits, short term overdrafts, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Trade payables and borrowings Trade payables and borrowings are recorded initially at fair value, net of direct issue costs, and subsequently are recorded at amortised cost using the effective interest method. 1.17 Dividends Final dividends are recognised as a liability in the period in which they are approved by the company’s shareholders. Interim dividends are recognised when they are paid. 1.18 Employee share option schemes All share-based payment arrangements are recognised in the financial statements in accordance with IFRS 2. All goods and services received in exchange for the grant of any share-based payment, including awards made under the Joint Ownership Plan (an equity settled scheme) are measured at their fair values. Where employees are rewarded using share-based payments the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). All equity-settled share-based payments are ultimately recognised as an expense in the profit or loss with a corresponding credit to “Share based payment reserve”. Vianet Group plc 31 Notes to the Financial Statements for the year ended 31 March 2017 (continued) Significant accounting policies (continued) 1. If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium. 1.19 Equity Equity comprises the following: • • • • • “Share capital” represents the nominal value of equity shares. “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. “Share based payment reserve” represents equity-settled share-based employee remuneration until such share options are exercised. “Own shares reserve” represents the costs/ proceeds of purchasing/ selling own shares. “Merger reserve” represents the excess over nominal value of fair value of consideration attributed to equity shares issued in part settlement for subsidiary company shares acquired. • “Retained earnings reserve” represents retained profits. 1.20 New IFRS standards and interpretations not applied New standards and interpretations currently in issue but not effective that will have an impact on the financial statements are listed below. These will affect presentation only, apart from IFRS 16 Leases: • • • • • • • • • IFRS 14 Regulatory Deferral Accounts 1 January 2016 IFRS 16 Leases 1 January 2019 IFRS 9 Financial Instruments 1 January 2018 IFRS 15 Revenue from Contracts with Customers 1 January 2018 Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017 Amendments to IAS 7: Disclosure Initiative 1 January 2017 Clarifications to IFRS 15 Revenue from Contracts with Customers 1 January 2018 Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions 1 January 2018 Amendments to IFRS 4: Applying IFRS 9 financial instruments with IFRS 4 Insurance Contracts. 1 January 2018 32 Vianet Group plc 1. Significant accounting policies (continued) • Annual improvements to IFRS 2014-2016 Cycle - Relating to IFRS 1 First time adoption of IFRS and IAS 28 Investment in associates and joint ventures 1 January 2018 • • • Annual improvements to IFRS 2014-2016 Cycle - Relating to IFRS 12 Disclosure of interest in other entities 1 January 2017 IFRIC Interpretation 22 Foreign currency transactions and advance considerations 1 January 2018 Amendments to IAS 40: Transfers of investment property 1 January 2018 The Directors anticipate that the adoption of the majority of these standards and interpretations in future periods (with the exception of IFRS16) will have no material impact on the financial statements of the Group except for additional disclosure and presentational requirements. IFRS 16 operating leases will have a material impact on the financial statements and will need to be shown on the balance sheet as opposed to note 22 currently. 1.21 Exceptional Items The Group seeks to highlight certain items as exceptional operating income or costs. These are considered to be exceptional in size, frequency and/or nature rather than indicative of the underlying day to day trading of the Group. These may include items such as acquisition costs, restructuring costs, employee exit and transition costs, legal costs, material profits or losses on disposal of property, plant and equipment, profits or losses on the disposal of subsidiaries. All of these items are charged or credited before calculating operating profit or loss. Material profits or losses on disposal of property, plant and equipment are shown as separate items in arriving at operating profit or loss whereas other exceptional items are charged or credited within operating costs and highlighted by analysis. The Directors apply judgement in assessing the particular items, which by virtue of their size and nature are disclosed separately in the Statement of Comprehensive Income and the notes to the financial statements as exceptional items. The Directors believe that the separate disclosure of these items is relevant to understanding the Group’s financial performance. 2. Critical accounting judgements and key sources of estimation uncertainty 2.1 Significant judgements and key sources of estimation uncertainty The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income, expenses and related disclosures. The estimates and underlying assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. This forms the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may however differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Changes in accounting estimates may be necessary if there are changes in the circumstances on which the estimate was based, or as a result of new information or further information. Such changes are recognised in the period in which the estimate is revised. Certain accounting policies are particularly important to the preparation and explanation of the Group’s financial information. Key assumptions about the future and key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities over the next twelve months are set out below. Vianet Group plc 33 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 2. Critical accounting judgements and key sources of estimation uncertainty (continued) Impairment of intangible assets and property, plant and equipment The Group tests goodwill at least annually for impairment, and whenever there is an indication that the asset may be impaired. All other intangible assets and property, plant and equipment are tested for impairment when indicators of impairment exist. Impairment is determined with reference to the higher of fair value less costs to sell and value in use. Value in use is estimated using adjusted future cash flows. Significant assumptions are made in estimating future cash flows about future events including future market conditions and future growth rates. Changes in these assumptions could affect the outcome of impairment reviews. See notes 10 to 12. Intangible assets acquired in a business combination Intangible assets acquired in a business combination including customer contracts and customer lists are recognised when they are identifiable or arise from contractual or other legal rights and their fair value can be reliably measured. Fair value is estimated using risk adjusted future cash flows. Significant assumptions are made in estimating future cash flows about future events including future market conditions and future growth rates. Changes in these assumptions could affect fair values. Income taxes The determination of the Group’s tax liabilities requires the interpretation of tax law. The Group obtains appropriate professional advice from its tax advisors in relation to all significant tax matters. The Directors believe that the judgements made in determining the Group’s tax liabilities are reasonable and appropriate, however, actual experience may differ and materially affect future tax charges. Development costs Careful judgement by the Directors is applied when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any product development is uncertain and may be subject to future technical problems at the time of recognition. Recognition is based on judgements at the time expenditure is incurred. In addition, all internal activities related to the research and development of new software products are continuously monitored by the Directors. 3. Segment reporting Business segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses. The segment operating results are regularly reviewed by the Chief Operating Decision Maker to make decisions about resources to be allocated to the segment and assess its performance. Vianet Group is analysed into to two trading segments (defined below) being Smart Zones (mainly adopted in the leisure sector, including US (particularly in pubs and gaming)) and Smart Machines (mainly adopted in the vending sector (particularly in vending machines)) supported by Corporate/Technology costs. The products/services offered by each operating segment are: Smart Zones: design, product development, sale and rental of fluid monitoring equipment, data insights and related services Smart Machines: design product development, sale and rental of machine monitoring equipment, data insights and related services. Corporate/Technology: Centralised Group overheads along with technology related costs for the Group The inter-segment sales are immaterial. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated assets and liabilities comprise items such as cash and cash equivalents, certain intangible assets, taxation, and borrowings. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one period. Previously, Technology was shown as a separate segment. 34 Vianet Group plc Segment reporting (continued) 3. 2017 Continuing Operations (post exceptional items) Total revenue Pre-exceptional segment result Exceptional costs Post exceptional segment result Finance costs Profit/(loss) before taxation Taxation Profit for the year from continuing operations Other information Additions to property, plant, equipment and intangible assets Depreciation and amortisation Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Smart Zones £000 Smart Machines £000 Corporate/ Technology £000 Total £000 11,935 2,328 - 14,263 4,677 (325) 4,352 (17) 4,335 539 (25) 514 - 514 (2,800) (614) (3,414) 12 (3,402) 2,416 (964) 1,452 (5) 1,447 (417) 1,030 553 405 116 351 367 285 1,036 1,041 Smart Zones £000 25,350 460 25,810 4,584 395 4,979 Smart Machines £000 Corporate/ Technology £000 - - - - - - 3,787 - 3,787 357 - 357 Total £000 29,137 460 29,597 4,941 395 5.336 The asset base of the Vianet Group plc cannot be split across Smart Zones, Smart Machines or Technology, so has been allocated to Smart Zones. Vianet Group plc 35 Notes to the Financial Statements for the year ended 31 March 2017 (continued) Segment reporting (continued) 3. 2016 Continuing Operations (post exceptional items) Total revenue Pre-exceptional segment result Exceptional costs Post exceptional segment result Finance costs Profit/(loss) before taxation Taxation Profit for the year from continuing operations Other information Additions to property, plant, equipment and intangible assets Depreciation and amortisation Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Smart Zones £000 Smart Machines £000 Corporate/ Technology £000 Total £000 12,051 2,179 60 14,290 3,946 (438) 3,508 (30) 3,478 240 - 240 - 240 (1,858) (1) (1,859) (14) (1,873) 2,328 (439) 1,889 (44) 1,845 (553) 1,292 345 469 Smart Zones £000 25,938 - 25,938 5,161 - 5,161 529 285 165 288 1,039 1,042 Smart Machines £000 Corporate/ Technology £000 - - - - - - 3,669 482 4,151 447 - 447 Total £000 29,607 482 30,089 5,608 - 5,608 The asset base of the Vianet Group plc cannot be split across Smart Zones, Smart Machines or Technology, so has been allocated to Smart Zones. 36 Vianet Group plc Segment reporting (continued) 3. Analysis of revenue by category Continuing operations Sale of goods - Smart Zones and Smart Machines Rendering of services - Smart Zones and Smart Machines Geographical analysis - United Kingdom - Rest of Europe - United States/Canada - Other Discontinued operations Rendering of services - fuel Geographical analysis - United Kingdom - Rest of Europe 4. Exceptional items US litigation Bolton rationalisation Corporate restructuring and transitional costs Disposal of VFS subsidiary 2017 £000 2016 £000 1,984 1,993 12,279 14,263 12,999 987 277 - 14,263 2017 £000 - - - - - 2017 £000 388 495 83 (102) 864 12,297 14,290 13,308 749 231 2 14,290 2016 £000 4,951 4,951 4,852 99 4,951 2016 £000 297 - 282 382 961 Corporate restructuring and transitional costs have reduced year on year, the primary background being the transition of people and management to ensure we have the succession and calibre of people on board to deliver the strategic aims and aspirations of the Group. Disposal of VFS subsidiary at 31 January 2016 relates to all costs incurred in disposing of the subsidiary offset by the proceeds from the sale ie loss on sale. For details behind the US litigation costs, see the Chairman’s statement. Vianet Group plc 37 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 5. Profit for the year The following items have been included in arriving at profit for the year: Employee benefits expense (note 21) Depreciation of property, plant and equipment (note 12) Amortisation of intangible assets (note 11) Profit on disposal of property, plant and equipment and businesses Operating lease rentals payable Auditor’s remuneration Services to the company and its subsidiaries Fees payable to the company’s auditor for the audit of the annual financial statements Fees payable to the company’s auditor and its associates for other services: Audit of the financial statements of the company’s subsidiaries pursuant to legislation Other services relating to tax - taxation compliance services Other services relating to tax - all other Other services - half year reporting and accounting advice 6. Net finance costs Interest payable on bank borrowings Interest receivable on bank deposits 2017 £000 6,665 348 693 (50) 197 2016 £000 7,770 449 818 (207) 293 2017 £000 2016 £000 15 21 7 - 16 59 2017 £000 25 25 2017 £000 20 20 15 27 8 26 13 89 2016 £000 48 48 2016 £000 4 4 38 Vianet Group plc 7. Taxation Analysis of charge in period Current tax expense - Amounts in respect of the current year - Amounts in respect of prior periods Deferred tax charge/credit - Amounts in respect of the current year - Amendment re-recognition of losses Income tax credit - 2017 £000 - - - 427 (10) 417 2016 £000 - - 553 - 553 Reconciliation of effective tax rate The tax for the 2017 period is higher (2016 was higher) than the standard rate of corporation tax in the UK (2017: 20% and 2016: 20%). The differences are explained below: Profit before taxation - Continuing operations Profit before taxation multiplied by rate of corporation tax in the UK of 20% (2016:20%) Effects of: Other expenses not deductible for tax purposes Amortisation of intangibles Movement on losses Adjustments for prior years Research and development Total tax charge 2017 £000 1,547 309 25 125 266 (10) (298) 417 2016 £000 1,570 314 (38) 120 440 - (283) 553 Vianet Group plc 39 Notes to the Financial Statements for the year ended 31 March 2017 (continued) Earnings per share 8. Earnings per share has been impacted by the release of a deferred tax asset provision. After adjustment for the lower tax charge, the overall basic earnings per share for the year ended 31 March 2017 before exceptional costs reduced to 7.30 pence compared to 7.28 pence at March 2016. Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders (£1,130k) by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share are calculated on the basis of profit for the year after tax divided by the weighted average number of shares in issue in the year plus the weighted average number of shares which would be issued if all the options granted were exercised The table below shows the earnings pre and post the impact of the movement in the deferred tax asset. Post-tax profit attributable to equity shareholders Pre-tax profit attributable to equity shareholders Of which is attributable to continuing operations Pre-tax, pre-exceptional profit attributable to equity shareholders Post-tax, pre-exceptional profit attributable to equity shareholders 2017 Basic earnings per share Diluted earnings per share 4.14p 5.67p 5.30p 4.12p 5.64p 5.28p Earnings £000 1,130 1,547 1,447 2016 Basic earnings per share Diluted earnings per share 3.74p 5.78p 6.79p 3.72p 5.75p 6.76p Earnings £000 1,017 1,570 1,845 2,411 8.83p 8.79p 2,284 8.41p 8.37p 1,994 7.30p 7.27p 1,978 7.28p 7.24p Weighted average number of ordinary shares Dilutive effect of share options Diluted weighted average number of ordinary shares 9. Ordinary dividends 2017 Number 2016 Number 27,302,694 114,063 27,168,095 141,814 27,416,757 27,309,909 Final dividend for the year ended 31 March 2016 of 4.0p (year ended 31 March 2015: 4.0p) Interim dividend paid in respect of the year of 1.70p (2016: 1.70p) Amounts recognised as distributions to equity holders 2017 £000 1,092 465 1,557 2016 £000 1,087 462 1,549 In addition, the Directors are proposing a final dividend in respect of the year ended 31 March 2017 of 4.0p per share. If approved by shareholders, it will be paid on 28 July 2017 to shareholders who are on the register of members on 17 June 2017. Total dividend payable 5.70p (2016: 5.70p). 40 Vianet Group plc 10. Goodwill Group Cost At 1 April Disposal At 31 March Accumulated impairment losses At 1 April Disposal At 31 March Net book amount 2017 £000 2016 £000 15,503 - 15,503 - - - 17,973 (2,470) 15,503 (250) 250 - 15,503 15,503 Goodwill is tested for impairment annually or when events or changes in circumstances indicate that the carrying amount may not be recoverable. The goodwill impairment test is performed by comparing the carrying value of the CGU including associated goodwill with the aggregate recoverable amount. The carrying value of goodwill is allocated to the following cash generating units: Smart Zones Carrying amount 31 March 2017 £000 15,503 15,503 2016 £000 15,503 15,503 The recoverable amounts attributed are based on value in use calculations. The key assumptions made in undertaking the value in use calculations are set out below. Budgeted profit and cash flow forecasts for the financial year ended 31 March 2018 were extrapolated for a five year period using sector growth assumptions and used as the basis for the impairment review. The key assumption included within these is a improvement in profitability, based on committed (medium to long term contracts) and pipeline orders. Budgets and assumptions are based around historical track record and committed medium to long term contracts. Sector growth assumptions, applied to the Smart Zones segment: 3% based on estimates of specific industry rates, where available. Discount rate assumptions, applied to the Smart Zones segment: 10% based on management’s view of risks specific to the group. If sector growth assumption rates were applied at 3% and a discount rate assumption of 15% was applied, the Smart Zones segment would require no impairment. If sector growth assumption rates were applied at 0% and a discount rate assumption of 15% was applied, the Smart Zones segment would require no impairment. Vianet Group plc 41 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 11. Other intangible assets Group Cost At 1 April 2015 Reclassified (note 12) Internally generated development costs Additions Disposals At 31 March 2016 Internally generated development costs Additions At 31 March 2017 Amortisation At 1 April 2015 Reclassified (note 12) Charge for the year Disposals At 31 March 2016 Charge for the year At 31 March 2017 Net book amount At 31 March 2017 At 31 March 2016 Capitalised development £000 Order book £000 Software £000 Customer contracts £000 Patents £000 Total £000 4,322 - 745 - (1,033) 4,034 705 - 4,739 2,002 - 736 (510) 2,228 620 2,848 1,891 1,806 281 - - - - 281 - - 281 281 - - - 281 - 281 - - - 223 - 38 - 261 - 1 262 - 77 62 - 139 66 205 57 122 2,136 - - - (691) 1,445 - - 1,445 2,069 - 19 (643) 1,445 - 1,445 - - 82 - - 6 - 88 - 5 93 33 - 1 - 34 7 41 52 54 6,821 223 745 44 (1,724) 6,109 705 6 6,820 4,385 77 818 (1,153) 4,127 693 4,820 2,000 1,982 Where appropriate, intangible assets identified in business combinations have been recognised in accordance with the provisions of IFRS 3 (Business Combinations) and IAS 38 (Intangible Assets). Intangible assets have only been recognised where they have identifiable future economic benefits that are controlled by the entity, it is probable that these benefits will flow to the entity and their fair value can be measured reliably. The £705,000 of capitalised development costs represents expenditure developing technological advancements to ensure the group is at the forefront of technology that fulfils the requirement of IAS 38. These costs will be amortised over the future commercial life of the related product, commencing on the sale of the first commercial unit. 42 Vianet Group plc 12. Property, plant and equipment Group Cost At 1 April 2015 Additions Reclassified (note 11) Disposals At 31 March 2016 Additions Disposals At 31 March 2017 Accumulated depreciation At 1 April 2015 Charge for the year Reclassified (note 11) Disposals At 31 March 2016 Charge for the year Disposals At 31 March 2017 Net book amount At 31 March 2017 At 31 March 2016 13. Inventories Raw materials Write down on raw materials Freehold Land and buildings £000 Plant, vehicles and equipment £000 Fixtures and fittings £000 3,125 - - - 3,125 - - 3,125 532 61 - - 593 61 - 654 2,471 2,532 1,006 139 - (281) 864 225 (171) 918 564 179 - (155) 588 134 (120) 602 316 276 3,169 244 (223) (110) 3,080 100 (6) 3,174 2,667 209 (77) (54) 2,745 153 (6) 2,892 282 335 2017 £000 1,442 (134) 1,308 Total £000 7,300 383 (223) (391) 7,069 325 (177) 7,217 3,763 449 (77) (209) 3,926 348 (126) 4,148 3,069 3,143 2016 £000 1,815 (5) 1,810 No reversal of previous write-downs was recognised as a reduction of expense in 2016 or 2017. In 2017 £2,221,735 (2016: £2,312,393) was included in the statement of comprehensive income under cost of sales. None of the inventories are pledged as securities for liabilities. The Group’s inventories comprise of products, which are not generally subject to rapid obsolescence on account of technological, deterioration in condition or market trends. Consequently management considers that there is little risk of significant adjustments to the Group’s inventory assets within the next financial year. Vianet Group plc 43 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 14. Trade and other receivables Trade receivables Other receivables Prepayments and accrued income 2017 £000 2,208 33 467 2,708 2016 £000 2,900 153 511 3,564 The Directors consider that the carrying amount of trade and other receivables approximates their fair value. All trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired and a provision of £29,000 (2016: £45,000) has been recorded accordingly (note 17) In addition some of the unimpaired trade receivables were past due at the balance sheet date as follows: Not past due Not more than three months More than three months but not more than six months More than six months but not more than one year 15. Trade and other payables Trade payables Other taxation and social security Accruals and deferred income 2017 £000 1,350 790 68 - 2,208 2017 £000 870 628 2,230 3,728 2016 £000 1,738 1,054 80 28 2,900 2016 £000 789 726 2,501 4,016 The Directors consider that the carrying amount of trade and other payables approximates their fair value. 44 Vianet Group plc 16. Borrowings Current Bank loans Non-current Bank loans 2017 £000 325 325 2016 £000 778 778 2016 £000 489 489 2015 £000 1,103 1,103 Bank loans are denominated in £ sterling and bear interest based on Bank of Scotland Base Rate plus a rate of between 1% and 3%. The bank loans are secured by a fixed charge over the land and buildings of the Group. The weighted average effective interest rates on the Group’s borrowings were as follows: Bank overdrafts - floating rates Bank borrowings - floating rates The maturity profile of the Group’s non-current bank loans and hire purchase was as follows: Between one and two years Between two and five years More than five years 2017 % 2.5 1.5 2017 £000 160 482 136 778 2016 % 2.5 1.5 2016 £000 325 486 292 1,103 The Group’s bank borrowings bear interest at floating rates, which represent prevailing market rates. Vianet Group plc 45 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 17. Financial Instruments The Group is exposed on a minimal basis to market risk through its use of a US Dollar and a Euro account. The Group’s risk management is co-ordinated by the Directors who focus actively on securing the Group’s short to medium term cash flows through regular review of all the operating activities of the business. The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Group is exposed are described below. Foreign currency sensitivity Exposures to currency exchange rates arise from the Group’s overseas activities, all of which are denominated in US Dollars and Euros. Due to the non material nature of the Group’s exposure to foreign currency risk, sensitivity analyses to movement in exchange rates are not produced. Foreign currency denominated financial assets and liabilities are set out below. Financial assets Financial liabilities Financial assets Financial liabilities 2017 $000 238 - 238 2017 €000 13 - 13 2016 $000 110 - 110 2016 €000 23 - 23 The Group has no long term foreign exchange exposure. At the beginning and end of the year, the Group had no unexpired forward foreign exchange contracts. Credit risk analysis The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date and which are set out below. Cash and cash equivalents Trade and receivables 2017 £000 4,549 2,241 6,790 2016 £000 3,605 3,053 6,658 The Group continuously monitors credit risk of customers and other counterparties and incorporates this information into its credit risk controls. The Group takes up trade references on all new customers and its policy is to deal only with credit worthy companies. The movement on the bad debt provision in the period is analysed below. The Group provides for bad debts on a specific basis with reference to the age profile of the trade receivables held at the year end 46 Vianet Group plc 17. Financial Instruments (continued) Credit risk analysis (continued) Bad debt provision at 31 March 2016 Amounts provided Amounts utilised Amounts released Bad debt provision at 31 March 2017 £000 45 29 (32) (13) 29 Management considers that all the above financial assets are of good credit quality, including those that are past due. None of the Group’s financial assets are secured by collateral or other credit enhancements. In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds is considered negligible, since the counterparty is a reputable bank with a high quality external credit rating. Liquidity risk analysis The Group manages its liquidity needs by carefully monitoring all scheduled cash outflows. Liquidity needs are monitored in various time bands, on a day-to-day and week to week basis, as well as on the basis of a rolling eight week projection. Longer term needs are monitored as part of the Group’s regular rolling monthly reforecasting process. Loans and receivables Current assets Cash and cash equivalents Trade and receivables Current liabilities Financial liabilities measured at amortised cost Non current liabilities Financial liabilities measured at amortised cost Net financial assets The carrying value of the above assets and liabilities are equal to their fair value. Vianet Group plc 2017 £000 4,549 2,241 6,790 2017 £000 3,425 826 4,251 2,539 2016 £000 3,605 3,053 6,658 2016 £000 3,779 1,103 4,882 1,776 47 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 17. Financial instruments (continued) Capital management policies and procedures The Group’s capital management objectives are to ensure its ability to continue as a going concern and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. The Group’s dividend policy is to monitor reserves available for distribution to shareholders The Group monitors capital on the basis of carrying amount of equity less cash and cash equivalents as presented on the face of the balance sheet. Capital for the reporting periods under review is set out below. Total equity Less cash equivalents 2017 £000 24,261 (4,549) 19,712 2016 £000 24,481 (3,605) 20,876 The Group is not subject to external imposed capital requirements, other than the minimum capital requirements and duties regarding reduction of capital as imposed by the Companies Act 2006 for all public limited companies. 18. Provisions Group 1 April 2016 Increase in provision At 31 March 2017 Provisions are analysed between current and non-current as follows: Current Non-current Onerous leases £000 Dilapidations £000 - 75 75 - 35 75 2017 £000 62 48 110 Total £000 - 110 110 2016 £000 - - - The provision for onerous leases is in respect of leasehold properties from which the Group no longer resides, but is liable to fulfil rent and other property commitments up to the lease expiry date. If a property is sub-let below the head rent, or for a period shorter than the remaining lease term, provision is made for the onerous element of the lease. Obligations are payable within a range of 1 to 2 years. The Group provides for the estimated cost of property dilapidations, where appropriate, during the period of the tenancy. The provisions are expected to be utilised over the next 1 to 2 years. 48 Vianet Group plc 19. Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 19% (2016: 19%). The movement on the deferred tax account is as shown below: Deferred tax asset At 1 April Adjustment re VFS disposal Profit and loss credit in respect of losses utilised At 31 March Deferred tax liability At 1 April Profit and loss credit in respect of timing differences At 31 March 2017 £000 862 - (402) 460 2017 £000 (380) (15) (395) 2016 £000 1,388 (11) (515) 862 2016 £000 (342) (38) (380) During the period, management took the decision to split the net tax asset in to a tax asset and a deferred tax liability. Deferred tax has been recognised during the year in respect of tax losses in certain of the group’s subsidiaries as the Directors believe there is sufficient certainty over the extent and timing of their recovery to do so. Included in the amount of £460k (2016: £862k) are amounts of £460k relating to tax losses (2016: £862k). The group has unused tax losses amounting to £nil (2016: £nil) for which no deferred tax asset has been recognised Vianet Group plc 49 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 20. Issued share capital Issued and fully paid Ordinary shares of 10p each: 28,427,164 (2016: 28,427,164) 2017 £000 2016 £000 2,843 2,843 Own shares The Group accounts for its own shares held by the Trustees of the employee option scheme as a deduction from shareholders equity. At 31 March 2017, the Trust owned 668,470 shares (2016: 668,470 shares) with a nominal value of £66,847 (2016: £66,847). At 31 March 2017, Vianet Group plc owned 456,000 shares (2016: 456,000 shares) with a nominal value of £45,600 (2016: £45,600), all held in treasury. Own shares held in Trust and Treasury are value at cost. Dividends payable on these shares have been waived. 21. Employees and Directors Employee benefit expense during the period Wages and salaries Social security costs Pension costs Share based payments Average monthly number of people (including Directors) employed Sales Engineering Volume Recovery Management Administration Key management personnel - Directors Group Short term employment benefits Pension contributions Share based payments 2017 £000 5,720 533 206 206 6,665 2016 £000 6,812 714 201 43 7,770 2017 Number 2016 Number 6 28 5 12 108 159 2017 £000 828 46 206 1,080 9 51 5 8 135 208 2016 £000 858 63 44 965 During the year two (2016: three) Directors had benefits accruing under defined contribution pension schemes. 50 Vianet Group plc 21. Employees and Directors (continued) Highest paid director Short term employment benefits Pension contributions 2017 £000 316 25 341 2016 £000 305 24 329 22. Operating lease commitments The Group lease various motor vehicles and property under non-cancellable operating leases. The leases have been entered into under normal commercial terms. Total future minimum lease payments under non-cancellable operating leases: Group Within one year After one year and less than five years Motor Vehicles £000 Land and Buildings £000 176 366 542 33 8 41 2017 Total £000 209 374 583 2016 Total £000 143 155 298 Included in the above operating lease commitment is the onerous lease provided for in Note 18 23. Share-based payments There are six share option plans in place the EMI Plan, the Executive Plan, the Employee Plan, an Employee Company Share Option Plan, an Executive Joint Ownership Plan, and a Long Term Incentive Plan. Under the share option plans, the Directors can grant options over shares in the company to employees. Options are granted with a fixed exercise price equal to the market value of the shares at the date of grant. The contractual life of an option is 10 years. Options granted under the EMI share option plans will become exercisable immediately, and options granted under the Executive Plan and the Employee Plan will become exercisable on the third anniversary of the date of grant. Exercise of an option is subject to continued employment. Details of share options outstanding during the period (including those held by Directors) are set out below: At start of the financial year Exercised Granted Forfeited Lapsed At end of financial year Exercisable at end of financial year Vianet Group plc 2017 2016 Number of share options 1,782,800 - 100,000 (105,500) (176,000) 1,601,300 251,800 Weighted average exercise price(p) 94.2 - 95.0 (90.8) (123.0) 91.5 104.4 Number of share options 1,909,300 (269,000) 384,000 (241,500) - 1,782,800 447,800 Weighted average exercise price(p) 90.7 75.1 96.8 92.5 - 94.2 111.4 51 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 23. Share-based payments (continued) Name of director / senior employee Date of grant Number of options Exercise price Exercise date J W Dickson M H Foster S Darling M H Foster S Darling M H Foster 27/01/11 27/01/11 27/01/11 09/04/14 09/04/14 21/12/15 18,600 18,600 18,600 135,000 285,000 124,000 96.5p 96.5p 96.5p 85.0p 85.0p 103.0p - - - - - - Weighted average share price at date of exercise - - - - - - Gain on exercise Exercise period - - - - - - 28/01/14 to 27/01/21 28/01/14 to 27/01/21 28/01/14 to 27/01/21 10/04/17 to 09/04/24 10/04/17 to 09/04/24 21/12/18 to 20/12/25 Expected volatility was determined by discounting the weighted average volatility of comparable listed companies to a comparable private company volatility. The share price of £0.348 was agreed with HMR&C as the fair value of Vianet Group plc shares at the time of grant of the EMI options. The fair value of the other shares was as per market value at date of grant as shown above. The risk free rate of return is the yield on zero coupon UK government bonds of a term consistent with the assumed option life. The fair value on the EMI Plan, the Executive Plan, the Employee Plan and the Employee Company Share Option Plan were all calculated under the Black Scholes model. The Group recognised an expense of £206,000 (2016: £44,000) in relation to equity settled share-based payment transactions in the year. During the year 100,000 options were granted on 20 March 2017. The estimated fair value of these options granted was £20,000 Weighted average share price (p) Weighted average exercise price (p) Expected volatility (%) Expected life (years) Risk free rate (%) Fair value (p) Joint Ownership Plan 2017 95.5 95.5 22.86 10 3.75 19.8 The following awards over shares in the Company were made to the following Executive Directors of the Company on 25 September 2009 by a Joint Ownership Plan. Director J W Dickson M H Foster S Darling Number of Plan shares in which the Director has an interest 100,000 100,000 100,000 Awards were made by the Company’s Remuneration Committee through the Company’s employee benefit trust operated by Halifax EES Trustees International Limited. The awards are subject to EPS performance targets and dependant on performance vest on 31 March 2015. No value has been paid on grant of the Plan shares and participants are entitled to growth over the Plan term. The fair value on the Joint Ownership Plan was calculated under the Black Scholes model. 52 Vianet Group plc Long Term Incentive Plan The Group adopted a new Long Term Incentive Plan (LTIP) on 17 December 2015 and on 21 December 2015, awards were granted to two executive Directors and three key management personnel under the scheme. LTIP awards give a conditional right to a ‘cash payment’ at three separate points in time 30 June 2018, 30 June 2019 and 30 June 2020. The amount of the cash payment is determined by the participant’s percentage entitlement to the award pool at each date, and the size of the award pool itself is based upon performance criteria relating to growth in the parent company’s share price and dividends over the period to 30 June 2020. There is no clawback of earlier awards if performance declines in later periods. The entitlement of Stewart Darling and Mark Foster in the overall award pool is 38% and 29% respectively. Any cash payment awarded under the LTIP will (after the deduction of income tax and employee national insurance) be used to acquire a number of shares in the Company based upon the prevailing market value on behalf of the participant. Accordingly, the LTIP is accounted as an equity settled share based payment with a net settlement feature. The fair value of the LTIP was calculated at the date of grant using the Monte Carlo Model and the following key assumptions: Expected volatility (%) Risk free rate (%) Expected dividend yield (%) Share price on grant date (p) Exercise price (p) The fair values of each award pool are the following: 30 June 2018 30 June 2019 30 June 2020 21 December 2015 27.3 1.15 5.534 103.0 0 £000 305 143 108 24. Related party transactions IAS 24 (Related party transactions) requires the disclosure of the details of material transactions between reporting entities and related parties. Transactions with group entities are eliminated on consolidation. C Williams, a non-executive director, invoiced Vianet Group plc for fees totalling £30,706 (2016: £31,193). As at 31 March 2017, there was £nil outstanding (2016: £nil). M McGoun, a non-executive director, invoiced Vianet Group plc for fees totalling £36,000 (2016: £38,146). As at 31 March 2017 there was £nil outstanding (2016: £nil). Vianet Group plc 53 Notes to the Financial Statements for the year ended 31 March 2017 (continued) 25. Cash flows from discontinued operations Prior to disposal on 31 January 2016, Vianet Fuel Solutions Limited contributed the following cash flows to the Group Cash flows from operating activities Loss for the year Adjustments for Amortisation of intangible assets Depreciation Payment of deferred consideration Loss on sale of property, plant and equipment Share based payments Operating cash flows before changes in working capital and provisions Change in inventories Change in receivables Change in payables Cash generated from operations Income taxes refunded Net cash generated from operating activities Cash flows from investing activities Purchases of property, plant and equipment Purchases of intangible assets Net cash used in investing activities Cash flows from financing activities Intercompany funding Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 2016 £000 (274) 156 61 (22) 18 15 (46) (3) 33 53 83 37 - 37 (75) (148) (223) (70) (70) (256) 346 90 26. Post balance sheet event On 3 April 2017 the Company entered in to a £200,000 convertible loan with Screenreach Interactive Limited and Vianet Limited secured over the assets of Screenreach Interactive Limited. The Chairman of Vianet Group plc is also the Chairman of Screenreach Interactive Limited. 54 Vianet Group plc INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF VIANET GROUP PLC We have audited the parent company financial statements of Vianet Group Plc for the year ended 31 March 2017 which comprise the Company balance sheet, the Company statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ Responsibilities for the financial statements set out on page 16, the Directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the parent company financial statements: • • give a true and fair view of the state of the company’s affairs as at 31 March 2017 and of its loss for the year then ended; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. the Strategic Report and Directors’ Report has been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the parent company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and Directors’ Report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: Vianet Group plc 55 Independent auditor’s report to the members of Vianet Group plc (continued) • • • • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of Directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the group financial statements of Vianet Group Plc for the year ended 31 March 2017. Mark Overfield BSc FCA Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Leeds 5 June 2017 56 Vianet Group plc COMPANY BALANCE SHEET at 31 March 2017 Fixed assets Investments in subsidiaries Other intangible assets Tangible assets Current assets Debtors Cash at bank Creditors: amounts falling due within one year Net current assets Net assets Capital and reserves Ordinary share capital Share premium Share based payment reserve Own shares Merger reserve Retained earnings Total equity Note 2 3 4 5 6 7 8 8 8 8 8 2017 £000 4,929 71 25 5,025 7,190 3,618 10,808 2016 £000 4,905 113 12 5,030 9,790 3,326 13,116 (373) (471) 10,435 15,460 2,843 11,287 418 (1,227) 310 1,829 15,460 12,645 17,675 2,843 11,287 218 (1,227) 310 4,244 17,675 The company’s loss for the financial year was £864,000 (2016: loss £2,923,000). The balance sheet was approved by the Board on 5 June 2017 and signed on its behalf by: J Dickson Director Company number: 5345684 The accompanying accounting policies and notes form an integral part of the financial statements. Vianet Group plc 57 COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2017 Own shares £000 Share based payment reserve £000 Merger reserve £’000 Retained earnings £000 At 1 April 2015 Dividends Issue of shares Share based payment Share option forfeiture Exercised options Share capital £000 2,831 - 12 - - - Share premium £000 11,198 - 89 - - - (1,387) - - - - 160 Total transactions with owners 12 89 160 Profit and total comprehensive income for the year - - - At 31 March 2016/1 April 2016 2,843 11,287 (1,227) Dividends Share based payment Share option forfeiture Total transactions with owners Profit and total comprehensive income for the year - - - - - - - - - - - - - - - Total £000 18,843 (1,550) 101 44 - 160 5,682 (1,550) - - 35 - (1,515) (1,245) 77 77 310 - - - - - - - 310 4,244 17,675 - - - - - (1,557) - 6 (1,557) 206 - (1,551) (1,351) (864) (864) 209 - - 44 (35) - 9 - 218 - 206 (6) 200 - At 31 March 2017 2,843 11,287 (1,227) 418 310 1,829 15,460 The accompanying accounting policies and notes form an integral part of the financial statements. 58 Vianet Group plc NOTES TO THE COMPANY BALANCE SHEET 1. Principal accounting policies 1.1 Statement of compliance These financial statements have been prepared in accordance with applicable accounting standards and in accordance with Financial Reporting Standard 101 - ‘The Reduced Disclosure Framework’ (FRS 101). The principle accounting policies adopted in the preparation of these financial statements are set out below. These policies have all been applied consistently throughout the year unless otherwise stated. The financial statements have been prepared on a historical cost basis. The financial statements are presented in Sterling (£) 1.2 Disclosure exemptions In preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include • • • • • • • • • A statement of cash flows and related notes The requirement to produce a balance sheet at the beginning of the earliest comparative period The requirements of IAS 24 related party disclosures to disclose related party transactions entered in to between two or more members of the group as they are wholly owned within the group Capital management disclosures Presentation of comparative reconciliation of the number of shares outstanding at the beginning and at the end of the period The effect of future accounting standards not adopted Certain share based payments disclosures Disclosures in relation to impairment of assets Fair value measurement disclosures (other than disclosures required as a result of recording financial instruments at fair value) Vianet Group plc 59 Notes to the Company Balance Sheet (continued) Income taxes 1. Principal accounting policies (continued) 1.3 Tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Calculation of current tax is based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period. Deferred income taxes are calculated using the liability method. Calculation of deferred tax is based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period that are expected to apply when the asset is realised or the liability is settled. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the entity expects to recover the related asset or settle the related obligation. Certain of the Company’s investment property portfolio is to be recovered through sale whereas investment property occupied by group companies is expected to be recovered through use. Deferred tax assets are recognised to the extent that it is probable that the underlying tax loss or deductible temporary difference will be utilised against future taxable income. This is assessed based on the Company’s forecast of future operating results, adjusted for significant non-taxable income and expenses and specific limits on the use of any unused tax loss or credit. Deferred tax assets are not discounted. Deferred tax liabilities are generally recognised in full with the exception of the following: on the initial recognition of goodwill on investments in subsidiaries and joint ventures where the Company is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future on the initial recognition of a transaction that is not a business combination and at the time of the transaction affects neither accounting or taxable profit. Deferred tax liabilities are not discounted. Investment in subsidiaries 1.4 Investments in subsidiary undertakings, associates and joint ventures are stated at cost less any applicable provision for impairment. 1.5 Employee share option schemes All share-based payment arrangements are recognised in the financial statements in accordance with IFRS 2. All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). All equity-settled share-based payments are ultimately recognised as an expense in the profit and loss account with a corresponding credit to “share based payment” reserve. Subsidiary costs are treated as a capital contribution and added to the cost of investment. Upon exercise of share options the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium. 60 Vianet Group plc 1. Principal accounting policies (continued) 1.6 Tangible assets Property plant and equipment (PPE) is initially recognised at acquisition cost or manufacturing cost, including any costs directly attributable to bringing the assets to the location and condition necessary for them to be capable of operating in the manner intended by the Company’s management. Depreciation commences when an asset is available for use. Depreciation is charged so as to write off the depreciable amount of assets to their residual values over their estimated useful lives using a method that reflects the pattern in which the assets’ future economic benefits are expected to be consumed by the Company. Depreciation is charged in equal annual instalments over the following periods: Fixtures and fittings 4 years Methods of depreciation, residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date. The gain or loss arising from the disposal or retirement of an item of property, plant and equipment is determined as the difference between the net disposal proceeds and the carrying amount of the item, and is included in the Group statement of comprehensive income. 1.7 Intangible assets Patents Patents are stated at cost net of amortisation and any provision for impairment. Software Purchased software are stated at cost net of amortisation and any provision for impairment. Amortisation Intangible assets are amortised on a straight-line basis, to reduce their carrying value to their residual value, over their estimated useful lives. The following useful lives were applied during the year: Trademarks expected length of trademark Purchased software 4 years Methods of amortisation, residual values and useful lives are reviewed, and if necessary adjusted, at each balance sheet date. 2. Investments in subsidiaries Company Cost and net book amount: Shares in subsidiaries At 1 April Additions Impairment Disposal At 31 March Additions relate to the subsidiary costs of the employee share option scheme. Vianet Group plc 2017 £000 2016 £000 4,905 24 - - 4,929 5,199 5,272 (2,066) (3,500) 4,905 61 Notes to the Company Balance Sheet (continued) Investments in subsidiaries (continued) 2. The company owns the whole of the issued ordinary share capital of the following subsidiaries: Subsidiary Shareholding Retail & Forecourt Solutions Limited Energy Level Systems Limited Brulines Group Limited Vianet Americas Inc Vianet Limited 100% 100% 100% 100% 100% Country of incorporation UK UK UK USA UK Principal activity Dormant Dormant Dormant Leisure Solutions Leisure Solutions Brulines Limited and Machine Insite Limited, are indirect investments via Vianet Limited in Leisure. 3. Other intangible assets Patents £000 Software £000 Cost At 1 April 2015 Additions At 31 March 2016 Additions At 31 March 2017 Amortisation At 1 April 2015 Charge for the year At 31 March 2016 Charge for the year At 31 March 2017 Net book amount At 31 March 2017 At 31 March 2016 54 6 60 5 65 9 6 15 6 21 44 45 161 4 165 - 165 56 41 97 41 138 27 68 Total £000 215 10 225 5 230 65 47 112 47 159 71 113 62 Vianet Group plc 4. Tangible Assets Cost At 1 April 2015 Additions At 31 March 2016 Additions At 31 March 2017 Accumulated depreciation At 1 April 2015 Charge for the year At 31 March 2016 Charge for the year At 31 March 2017 Net book amount At 31 March 2017 At 31 March 2016 5. Debtors Amounts due from subsidiaries Trade debtors Other debtors Other taxation All intercompany debt is repayable on demand. Interest is charged at base rate +2.25% 6. Creditors: amounts falling due within one year Other payables Accruals and deferred income Vianet Group plc Fixtures and fittings £000 6 10 16 21 37 2 2 4 8 12 25 12 2016 £000 9,551 2 213 24 9,790 2016 £000 88 383 471 63 2017 £000 7,103 - 71 16 7,190 2017 £000 103 270 373 Notes to the Company Balance Sheet (continued) 7. Issued share capital Issued and fully paid Ordinary shares of 10p each: 28,427,164 (2016: 28,427,164) Allotments during the year 2017 £000 2016 £000 2,843 2,843 Since the end of the financial year no shares have been issued under the share option scheme. Share capital and reserves 8. Called-up share capital - represents the nominal value of shares that have been issued Share premium account - includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium Own shares - represents the shares held in Trust and Treasury at historical cost. Share based payment reserve - represents the fair value of all share options issued by the Company which have yet to be exercised Merger reserve - excess of fair value of shares issued over nominal value when shares are issued in exchange for obtaining at least a 90% interest in the equity share capital of another entity Profit and loss account - includes all current and prior period retained profits and losses 9. Dividends Final dividend for the year ended 31 March 2016 of 4.0p (year ended 31 March 2015: 4.0p) Interim dividend paid in respect of the year of 1.70p (2016: 1.70p) Amounts recognised as distributions to equity holders 2017 £000 1,092 465 1,557 2016 £000 1,087 462 1,549 In addition, the Directors are proposing a final dividend in respect of the year ended 31 March 2017 of 4.0p per share. If approved by shareholders, it will be paid on 28 July 2017 to shareholders who are on the register of members on 17 June 2017. Total dividend payable 5.70p (2016: 5.70p). 64 Vianet Group plc 10. Employees and Directors Employee benefit expense during the period Wages and salaries Social security costs Pension costs Share based payments Average monthly number of people (including Directors) employed Management 11. Directors Directors’ emoluments Pension contribution The amounts in respect of the highest paid director are as follows: Directors’ emoluments Pension contribution 2017 £000 774 103 46 206 2016 £000 781 117 63 44 1,129 1,005 2017 Number 5 6 5 2016 Number 6 2017 £000 828 46 874 2017 £000 316 25 341 2016 £000 858 63 921 2016 £000 305 24 329 For other Directors’ emoluments see page 13 in the Report of the Directors. 12. Share-based payments The company disclosures required under FRS 101 are identical to those required under IFRS. See Group accounts, note 22, for details. 13. Parent Company Profit and Loss Account The parent company has taken advantage of section 408 of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The parent company’s loss for the financial year was £864,000 (2016: loss £2,923,000). Vianet Group plc 65 Notes to the Company Balance Sheet (continued) 14. Related Party Transactions As permitted by FRS 101 related party transactions with wholly owned members of Vianet Group plc have not been disclosed Non-executive director payments were incurred in the company during this year. IAS 24 (Related party transactions) requires the disclosure of the details of material transactions between reporting entities and related parties. Transactions with group entities are eliminated on consolidation. C Williams, a non-executive director, invoiced Vianet Group plc for fees totalling £30,706 (2016: £31,193). As at 31 March 2017, there was £nil outstanding (2016: £nil). M McGoun, a non-executive director, invoiced Vianet Group plc for fees totalling £36,000 (2016: £38,146). As at 31 March 2017 there was £nil outstanding (2016: £nil). See Group accounts, Report of the Directors for details of non-executive Directors’ emoluments. 66 Vianet Group plc NP0317.2316 DELIVERING REAL CHANGE THROUGH UNPARALLELED INSIGHT One Surtees Way, Surtees Business Park, Stockton on Tees, TS18 3HR www.vianetplc.com