Profile: Paul Simpson, CFO of KCOM

Paul Simpson, KCOM CFO

Banks that six months ago were falling over each other to lend money are now
bunkering down. Stock markets that were surging have plunged and merger and
acquisition activity has all but dried up. It is enough to make any CFO fret ­
but KCOM’s Paul Simpson isn’t panicking, he has seen it all before.

He joined the telecom and internet provider in 2000 in a business development
role months after it had made its debut on the FTSE 250 as part of the dotcom
boom. Its share price was 225p at that time.

Then known as Kingston Communications, it briefly reached the heights of the
FTSE 100 as dotcom fever drove the stock price to 1592p, valuing the company at
£56bn at its peak.

A year later things had changed drastically. Markets began to unpick the
assumption that simply investing massive sums in its infrastructure would
guarantee revenue success. Of course, the dotcom bubble burst and Kingston
Communications was dragged down with the rest of its ICT peer group. Seven years
on and KCOM Group is a small cap stock trading at around 50p to 60p. The days of
FTSE 100 glory and £15+ shares are a distant memory.

‘It was an incredible period of growth and there was great expectation of
huge upside for our entire peer group,’ Simpson reflects.

‘Nobody knew exactly how the internet business model would work and create
value, but capital was free and markets were throwing money at businesses. If
you didn’t invest fast enough, it was assumed someone else would nip in and take
your space.’

But as the capital stampede into technology stocks started to slow in 2001
and 2002, Simpson knew it was time to make some tough decisions, recalibrate
expectations and set the business on a sustainable footing.

‘People started to say yes, we have invested in infrastructure, but where is
our route to success? If you go back and look at the 2000 period the growth
forecasts and market expectations were unachievable and obviously there was
going to be a fall-out,’ he says.

Simpson’s role changed from looking at growth and investment opportunities,
to focusing on financial performance and delivering returns on investment. It
was a change that would eventually lead to his appointment as chief financial
officer in 2004. ‘My role went from being very externally focused to internally
focused. It was not about closing anything down but resetting expectations and
realigning resources,’ Simpson explains.

Humble beginnings

The background to KCOM must be one of UK business’s most unusual stories.

KCOM Group, formerly known as Kingston Communications, is unique. Formed in
1882 when Hull City Council first bid for telephone licenses, Kingston
Communications became one of the first municipal-owned telephone networks.

When all the other municipal-owned networks were absorbed into the Post
Office Telephone Network, which would eventually evolve into BT, Hull held on to
its licence and to this day it remains the only part of the UK with a telephone
network that is not serviced and maintained by BT, a fact visibly demonstrated
by the cream rather than red telephone boxes that line Hull’s streets.

But its rapid growth, fuelled by its move into internet services ­ and market
optimism in internet-based business models ­ proved impossible to handle.

‘One of the problems for any company that grows from something very small to
very large in a short space of time is that the focus is always in the next wave
of growth, rather than taking time to ask what the business will look like when
the growth stops.

‘Capital markets have their role to play in that, because they put pressure
on a business to keep growing and don’t always understand the need to take
stock.’

Experiencing the hype and subsequent fall of the dotcom bubble first hand has
helped Simpson to develop a more sanguine approach to the vagaries of stock
market movements.

He does not panic when the price drops off and he doesn’t get too excited
when it shoots up, but he always keeps an eye on it and looks at what it is
saying.

‘Your share price does tell you something. It tells you about sentiment,
about the general economy and the belief in your strategy. It can be frustrating
when it falls and you feel it should be higher, but it is foolish to react to
every market movement.
‘Fundamentally, you need to stick to your strategy,’ he says.

Indeed strategy has been the key focus for Simpson and he has played a key
role over the last four years in positioning the business to target the business
market, offering a suite of services to customers and to differentiate itself
from giant players BT and Cable & Wireless.

This strategy culminated with the company renaming itself KCOM, as the
company sought to streamline its structure following a series of acquisitions
over the last four years.

During this time the company acquired business internet service provider
Eclipse Internet, data networking group Omnetica and network storage specialist
Technica. The company then purchased business applications integrator Smart421
and converged-IP contact centre JAM IP.

‘Over the last few years we have invested heavily in acquiring skills to
increase our capability in the corporate space. We are targeting this market
because it has great growth potential and we can offer a good quality service
and a range of solutions.

‘There are two large network operators in the UK in BT and Cable &
Wireless. We couldn’t compete there, so our route was to invest in a different
set of skills and services and provide a different proposition,’ Simpson says.

He is confident that the group is now ready to deliver on these plans. After
a busy period of acquisition and repositioning, the business has been renamed
and its structure simplified. The forecast now is to deliver earnings growth and
margins of 7-10% by 2010, which will place the group at the top end of its peer
group in terms of return on investment.

Despite the credit freeze and economic slowdown, Simpson says these targets
remain in place and achievable.

‘If people are concerned about the economic environment, confidence is lower.
Businesses may step back and delay investment, but equally, as businesses are
forced to look at how to become more efficient, technology becomes an enabler.

Rather than focusing on businesses holding back on investment, we need to
focus on the ones seeking efficiencies,’ Simpson says.

He also believes that although access to capital is tightening, it will not
dry up completely: ‘Banks are in the business of lending money. The returns may
be tighter and they may be more selective about who they lend to, but the
capital is there. You also need to keep in mind that there are still large
corporates out there returning substantial sums of cash,’ he says.

Simpson is clearly not about to get too down about the economic gloom. He
has, after all, been there before.

Local connection

There are not many companies that are as entrenched in their local community
as KCOM Group. The company has been a core part of the Hull community since
1882, when the Hull Council bought up one of the first ever telephone licences.

To this day Hull remains the only town that has a telephone network that is
not owned by BT, with KCOM Group looking after its telecommunications needs.
KCOM is also the sponsor of Hull’s football and rugby league teams.

Until May 2007 the links between the town and the company were even closer.
Hull City Council had been the owner of the company since 1882, and eventually
floated a part of the business in 1999 on the London Stock Exchange.

Last year, after close to a decade of holding a large stake in the business,
the council finally sold its remaining 30% holding.

For Paul Simpson, KCOM chief financial officer, the sale marked the end of a
unique relationship between the board and the Hull City Council.

‘The council had two non-executive director seats on the board. The challenge
was that local politics is quite different from running a business. We had a lot
of movement in non-executive roles, and in some cases we had people who would
leave the board and then come back on,’ he says.

The involvement of the council did not have much impact on strategy, however,
but the exit of the Council has helped to improve liquidity in the stock and
change City perceptions.

‘We now have a wider share ownership and because there is no longer one
shareholder with a large stake that isn’t going anywhere, liquidity is much
better. I also think investors now feel that we are more open to different
strategies. Before that I think there was a perception that because the council
was involved certain things couldn’t be done,’ Simpson says.