Carphone Warehouse is one the great success stories of the mobile telecoms boom.
Established in 1989, the company has gone from strength to strength in an industry famed for its volatility.
Chief financial officer Roger Taylor joined six years ago, just before the company floated, and has helped the business establish itself as a solid FTSE350 performer, with a market capitalisation close to £1.5bn and a total of 1,500 stores.
Taylor, a former corporate finance partner with BDO Stoy Hayward, was asked by Carphone’s CEO Charles Dunstone to address some important issues within the company, and one of his most important tasks was to bring the finance department up to the standards required of a public company.
‘It was a fantastically entrepreneurial, high-growth business and had a lot of good qualities in terms of spirit and enthusiasm,’ says Taylor. ‘But in terms of its structure, the front office was probably a hundred miles ahead of its back office. That probably wasn’t as organised and structured as it could have been.’
It took Taylor around three years to sort out the backoffice issues before he could move onto other, more forward-thinking and strategic projects, including launching further into Europe and taking on BT with its own fixed-line businesses.
The company needed to move beyond the borders of its traditional business, to ensure it had ‘control of its own destiny’, says Taylor.
‘Financially, it was about developing more recurring revenue streams, so we’ve now got things like insurance, our fixed-line residential product, our fixed-line corporate product and a share of the revenue that our customers spend on their mobile phones.’
The mobile sector is rapidly maturing, so much so that there are the first signs of an explosion in mobile virtual network operators. Described by Taylor as the ‘next revolution’ in mobile telephony, an MVNO is where a company establishes itself but rents bandwidth from one of the existing operators.
Virgin Mobile is the most obvious example, but Carphone Warehouse has established its own network called Fresh, and it is easy to see why ? the margins the networks enjoy are more than 40%, leaving plenty of room for manoeuvre. ‘It’s quite a big margin to go at,’ concedes Taylor.
Carphone Warehouse will face analysts on Monday as it delivers its final-year results to the market, and they are expected to impress. ‘We anticipate that full-year profits will be at the upper end of market forecasts, and are excited about the investment and growth opportunities in the coming year,’ said Dunstone at the company’s fourth-quarter trading statement in April.
For the 12 months to March 2004, the group enjoyed profits of around £76.5m on a turnover just shy of £2bn. Next week, analysts are expecting the company to report at the upper end of forecasts of between £2.3bn and £2.5bn turnover and profits before tax of between £98m and £102m.
It is profit that Taylor looks to, rather than growth in either turnover or market cap, to determine how well the group is performing.
‘Profits, I think, will ultimately drive market cap. Gone are the days when people get ahead of themselves and say the share price should go up on a promise of tomorrow – the markets don’t operate that way. They want to have a very good visibility of performance.’
Such growth figures were predicted in April around the same time that veteran chairman Hans Snook, founder and chief executive of Orange, announced his departure from the Carphone Warehouse. His replacement, Tesco’s number two John Gildersleeve, will bring a wealth of experience to a fast-growing company looking for its next move.
The company is clearly on a high. Its Acton-based headquarters, which used to be a BBC props and costume warehouse, is testament to the thinking behind the company. Completely open plan, customer-facing agents share floor space with salesmen and directors. While Taylor has his own office, it is glass walled and the door always appears to be open.
‘It’s not very hierarchical,’ says Taylor. ‘We’ve never liked to have layers of management. We’re all very hands on, so we don’t have a structure like a lot of public companies may have. Everyone who sits on the main board is operationally involved.’
This means that Taylor gets involved in all aspects of the business, from discussing future acquisition possibilities to dealing with investor relations. But, he says the most difficult task he faces as CFO is marrying strong corporate governance with an entrepreneurial heartbeat.
‘The biggest challenge in my role is to ensure that we can put a lot of disciplines into the business, in terms of good governance, and at the same time make sure you don’t take away the oxygen of the business that allows it to operate,’ he says.
Taylor claims there is a fine balance between asking for an investment to be completely justified in terms of return on investment, and losing the ‘lifeblood’ of the company – entrepreneurialism. ‘I think we’ve found a position in Carphone where they do compliment each other, and it’s as much about the characters behind those two roles, so we have to try and respect each other,’ he explains.
These two characters are Dunstone and deputy chairman (and chartered accountant) David Ross, two of the most entrepreneurial minds in the country. Working with these men was one of the main factors that attracted Taylor to the company.
As one of the UK’s richest men – with a fortune of £550m according to this year’s Sunday Times’ Rich List – Dunstone was always going to be an interesting colleague to work alongside. ‘Both Charles and David had great reputations, and those reputations were justified,’ says Taylor. ‘They are a great couple of people to work with. I couldn’t have joined a better company for what I wanted to do.’
Dunstone and his CFO regularly discuss business propositions. Whether Dunstone gets involved in the more technical aspects of Taylor’s job, such as the implementation of international financial reporting standards, is a different matter, however. ‘They have taken up a lot of time over the past 12 months in terms of understanding and interpretation,’ he says.
‘The Big Four accountants must really struggle to interpret everything that is coming out and the pace with which it’s coming out. I’ve seen changes that occur by the day over the last six months in terms of how you interpret it. I’m not being critical of the accounting profession, I’m being critical of the accounting standards boards,’ he says.
Taylor believes the boards need to have more experience of the business world to understand what it is like to deal with the changes. ‘I don’t think they are in touch with that sense of reality all of the time,’ he says.
The implementation of the standards will cost business many millions of pounds, he says, describing the cost to Carphone as ‘immeasurable’ when all the finance staff hours and projects are taken into account. ‘In terms of external fees, it will run into six figures,’ he says. ‘Companies just have to bear that burden and get on with it. No one gives you any credit.’
IFRS was the only subject during our meeting that seemed to worry Taylor. Perhaps, being a former corporate finance partner and clearly not your stereotypical accountant means he is more interested in the strategic business-focused aspects of his position, rather than the drier, more technical work.
Or perhaps he has raised a serious problem in the implementation of the standards – their effective and consistent interpretation.
More likely, it is a combination of the two. Taylor clearly enjoys the more entrepreneurial aspects of his role, and Dunstone, it can be assumed, would much prefer a more aggressive business-focused CFO than other public companies might.
In Taylor, it seems he has found just the right mix, as he says: ‘It’s exciting times. The opportunities are really quite significant – it’s just about exploiting them. Identifying the right ones and exploiting them as best we can.’
Battling the revenue
As a modern, aggressive and competitive company, Carphone Warehouse will obviously seek out every possibility of revenue generation. So it is no surprise that the group is looking to reclaim tax from the Inland Revenue through joining a loss relief group litigation order.
The legal challenge, which is being spearheaded by Marks & Spencer, claims that UK companies should be able to claim tax relief from the government on losses incurred overseas. M&S alone is looking for a £30m rebate, with the scores of companies in the group litigation order taking the full amount over the £1bn mark.
‘We are a party to the M&S case, yes. You have an opportunity, so you either put down your claim or you lose the opportunity to do so. If we get the tax then that’s fantastic, but I’m not holding my breath,’ says Taylor.
The legal challenge, which received a major boost in April when a European judge sided with M&S, is one of the most important tax cases currently before the European Court of Justice, and could have a massive impact on our tax laws.
While adamant that Carphone Warehouse has every right to try and claim back the money, Taylor clearly feels for the position that the Revenue finds itself in. ‘I think some people use the European route to slightly abuse their own local territory’s regulation, which is unfortunate,’ he says.
A final ruling on the tax case is expected towards the end of the year. The loss relief group litigation order is just one of six such legal challenges to the UK tax system. Losing each case could cost the Exchequer as much as £20bn.