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Press Release -- February 16th, 2012
Source: Cable & Wireless Worldwide
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Cable & Wireless Worldwide plc Interim Management Statement and Interim Business Review 16 February 2012

  • Full year 2011/12 outlook unchanged.
  • Focus on sustainable cash generation and returns from capital invested
  • Target to reduce business complexity, build internal capability and reduce cost
  • Building on the strength of client relationships in the UK and overseas
  • Planned increase in hosting capacity starting to come on stream
  • Received commitment letters in relation to the £260m refinancing of the revolving credit facility

Trading highlights

  • Trading in three months to December 2011 in line with management expectations. Challenging market conditions continue since interim results, full year outlook remains unchanged.
  • Continued customer acquisition and retention across all sectors. Communications supplier to 70 of FTSE100 companies.
  • On track to increase hosting capacity in the UK (new Southern data centre) and overseas (partnership with Equinix) in response to increase in hosting sales pipeline.

Business review - Interim Report

  • CEO’s business review on-going. Business to be re-focussed on delivering sustainable cash flow.
  • Emphasis on pace and quality of execution and reduction in complexity and cost.
  • Performance improvement plan delivering near term benefits of improved sales force focus, reduced operational expenditure and refocused capital expenditure.
  • Medium term strategic agenda outlined with further update in May 2012.
  • Received commitment letters in relation to the refinancing of the revolving credit facility; documents to be signed soon.

Gavin Darby, Chief Executive Officer, said:

"My first three months at Cable&Wireless Worldwide have reconfirmed my initial view that this is a business with significant assets including a strong blue chip client base and a dedicated workforce committed to delivering for our clients in challenging market conditions. I aim to address our recent underperformance by re-focussing our objectives on cash generation and return on capital whilst continuing to deliver for our customers.

"We have already made progress in the delivery of our performance improvement plan which underpins the trading update we have made today and our confidence in delivery of the full year 2011/12 results. Actions to reduce operational expenditure, reprioritise capital expenditure and deliver sustainable cash generation are underway. We have designed a new operational model which will focus our leadership team on cash generation and we have continued to enhance the leadership team.

"We are working on a number of medium term strategic initiatives aimed at enabling future growth, reducing complexity and structurally reducing the cost base. We will update the market on progress on these initiatives in May.

"I recognise that we still have much more to do to realise the potential of Cable&Wireless Worldwide but we have made a good start in the last three months."

Contacts - Cable&Wireless Worldwide

Matt Hotson
Director, Investor Relations and Group Communications
+44 (0)7822 873 039

Roy Teal
Investor Relations Manager
+44 (0)7822 820 762

Will Cameron
Head of PR
+44 (0)7822 803 889

A presentation for analysts and institutional investors will be made at 9.00am (UKT) on Thursday 16 February audio broadcast of the presentation will also be available for both UK and International on: +44 (0)20 3059 8125. To access this audio conference, you will need to quote confirmation password – 'Q3 IMS'. A replay will be available on: +44 (0)121 260 4861, code confirmation: 2225394. A recorded video webcast of the presentation will be accessible at www.cw.com.

Access to the conference call can also be achieved by using the following QR code. Please ensure you have the appropriate software on your mobile device and scan the image.

020 3059 8125

For any further information or queries, please email ir@cw.com.

Forthcoming Events

Preliminary Results 2011/12: 23 May 2012
Annual General Meeting: 18 July 2012

Forward looking statement disclaimer

This document contains forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could or other words of similar meaning. Undue reliance should not be placed on any such statements because, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and Cable&Wireless Worldwide‘s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.

There are several factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are changes in the global, political, economic, business, competitive, market and regulatory environment, future exchange and interest rates, changes in tax rates and future business combinations or disposals. A summary of some of the potential risks faced by Cable&Wireless Worldwide is set out in the Company's most recent Annual Report.

Forward-looking statements speak only as of the date they are made and Cable&Wireless Worldwide undertakes no obligation to revise or update any forward-looking statement contained within this presentation or any other forward-looking statements it may make, regardless of whether those statements are affected as a result of new information, future events or otherwise (except as required by the UK Listing Authority, the London Stock Exchange, the City Code on Takeovers and Mergers or by law).

Interim Management Statement

Despite difficult trading conditions in the third quarter, Cable&Wireless Worldwide broadened and deepened existing relationships with key enterprise and public sector clients as well as winning new client mandates in the UK and overseas. Corporate and public sector customers continued to take a cautious approach to their ICT spend, reflecting on-going economic concerns and market uncertainty.

Voice margins have declined in line with recent guidance. Growth in the IP & Data market continues to slow as downward price pressure on contract re-sign nullifies the opportunities from increased demand for data capacity. Our addressable hosting market (i.e. the provision of managed hosting services to UK enterprise and public sector clients) is growing at around 12%* per annum. As discussed at our interim results in November, we remain capacity constrained in this area. The planned expansion of our existing data centres at Leeds and Swindon are on plan for completion in 2012 and we recently agreed the completion of a 15 year deal with Infinity SDC to provide us with an additional 4.3MW of hosting capacity, which will come on stream from late 2012. We also announced collaboration with Equinix which will enable us to provide managed hosting and cloud computing services to global enterprises.

* Based on market estimates (2011-2014) from Gartner, Forrester, Ovum and OC&C

Chief Executive Officer's Interim Update

Cable&Wireless Worldwide is a significant player in the UK and global enterprise communications market. In the UK we are the second largest provider of voice and data connectivity to UK enterprises and government. Competition is increasing with new players in the mid-market and local government space and dedicated hosting and data providers in UK enterprise. Increasingly we are working with large systems integrators to win consultancy led communications mandates from our clients. Internationally we are competing with global telecoms players in the provision of global connectivity and hosting to multi-national enterprises. We have an established presence in Asia and smaller positions in the Americas and continental Europe.

Over many years we believe we have established deep and strong relationships with an impressive group of customers. Our client base includes 70 of the FTSE100. Of our top 150 customers over 70% of their 2011/12 gross margin is currently contracted into 2012/13. We have a good track record of selling multiple services to these clients including voice, international and UK managed data networks, hosting and applications. We are continuing to win new client mandates across our markets with clients increasingly interested in purchasing integrated solutions. However, overall revenue and margin growth has been challenging in the last 18 months.

In response to deteriorating margins, short term decisions were made to defer investment. Under investment has left the business with an inefficient cost base and insufficient capacity to participate in the high growth hosting market. The investment made in 2011 in improving customer delivery has improved customer service but has led to an increase in the run rate of operational expenditure.

The business is overly complex. In recent years a multiplicity of networks, support systems and overly bespoke products has resulted in a highly complex business model. The use of offshore capability has helped mitigate the costs of this increased complexity. In addition, we need to improve our focus on delivering returns from a significant capital expenditure programme.

Furthermore, performance management of the business has placed undue focus on gross margin and EBITDA with insufficient focus on the generation of sustainable and growing cash flow.

Performance Improvement Plan

We believe the business is capable of delivering better returns for shareholders. We can deliver more but some of the strategic challenges outlined above will take time to address. We have already commenced implementation of many of the initiatives required to streamline the business and improve execution in the following areas:-

Revenue and Margin: A review of contracts has commenced with the aim of capturing all revenue opportunities and improving revenue retention at contract re-sign. Progress has been made on moving towards a standardised service catalogue which should deliver lower costs for new client wins and free up the business to write more volume. Our UK enterprise sales effort is fully aligned to industry verticals with expertise in retail, banking, insurance and utilities. In line with previous announcements, hosting capacity has been increased with new capacity in existing data centres in Swindon and Leeds coming on stream and the contract to launch our new data centre in West London signed with Infinity SDC which will further increase capacity in late 2012.

Operational and Capital Expenditure: We have executed plans with the aim of reducing support function cost. Headcount in support functions is down 7% since the beginning of 2011/12 and will fall further by the year end. Several internal projects have been postponed and we are seeking savings in procurement. We are developing plans to further reduce the cost base through process efficiency and reduced cost per employee. All senior managers have been targeted to deliver run rate cost savings as part of the 2012/13 budget process.

The current capital expenditure programme has been reviewed with £20m of 2012 capital expenditure projects being put on hold. We are implementing a facility with external lenders to finance customer capital expenditure. In the first instance, these savings will be used to fund investment in the short term performance improvement plan and medium term initiatives outlined below.

Management: New MDs of Hosting (Michelle Senecal de Fonseca) and Thus (Sean Mahon) have been appointed. A new organisation model has been agreed which will devolve greater P&L responsibility to business unit MDs, deliver a streamlined corporate centre and enable the move to cash based targets and incentives. Our sales incentive scheme in 2012/13 will reward cash flow from new sales, not just gross margin. Governance, reporting and disclosure changes to match the new model are being developed.

Target Operating Model

The principal objective of our strategy is to deliver growth in cash flow which is sustainable into the future. Execution is based around five key themes.

  1. Delivering sustainable cash flow. We will refocus the business around cash generation. Management decisions will be made with reference to their impact on cash flow. This will involve a restructuring of business operations and reporting to enable greater visibility of cash generation. Senior management and the sales force will be targeted and incentivised on the generation of cash, not just gross margin or EBITDA.
  2. Improving returns on capital. This is a capital intensive business. We plan to create headroom to enable strategic investment by improving the capital efficiency of the business. We will improve the prioritisation of the current capital investment programme. We will seek alternative funding options for customer capital expenditure. We will improve our capital management capability to ensure that all capital projects meet or beat our specified return on capital thresholds. Increasingly we will develop new products with external partners to improve capital efficiency.
  3. Developing the strength of our customer franchise. Our focus is on the delivery of communications services to enterprise, public sector, wholesale and mid-market customers in the UK and overseas. We remain focussed on customer service with minimal client losses due to service issues in the last two years. We will build on our established customer relationships, increasing revenue per customer through the provision of higher value managed data services, hosting and applications. We aim to grow market share across our channel mix.
  4. Building the internal capabilities required to meet our customers’ increasing demands. Our people are central to exploiting the opportunity from our customer base. We already have a strong and dedicated communications engineering workforce and the platforms to deliver high quality technical solutions to our customers. We will invest in building our capabilities in consultancy, hosting and applications. We intend to address the organisational culture, injecting more pace and energy, ensuring greater accountability and improved efficiency across the business. We are seeking to increase the amount of work we undertake with partners, looking to buy and rent assets where it is economically better than in-house build.
  5. Reducing business complexity. In the past, strategic investment in system rationalisation and process efficiency has been deferred. Consequently, operational expenditure is high and systems and processes are inefficient. We will address this complexity by restructuring the business to simplify management structures and commencing a medium term programme of investment to address system and process deficiencies. There is scope to increase the use of offshore with associated cost reduction. However we also need to address the underlying drivers of process complexity.

Medium Term Strategic Initatives

A number of medium term initiatives, primarily aimed at enabling more growth, reducing complexity and structurally reducing the cost base are in development. These initiatives may involve more significant, strategic decisions and include addressing issues surrounding how to realise returns from the investment we have made in the network both in the UK and internationally, how to rationalise infrastructure to enable structural reduction in the cost base (e.g. reducing the multiplicity of networks and systems) and how to build out further into the hosting and applications space in a timely, capital efficient manner.

Refinancing Update

To support these 'in flight' initiatives the medium term financing of the business must be secure. Discussions with our banking group on the refinancing of our revolving credit facility have been positive and are at an advanced stage. We have received commitment letters for a £260m revolving credit facility, which represents an over-subscription to our initial requirements. We expect to finalise documentation soon and will make a further announcement when complete.

Trading Outlook and Strategy Timetable

We will provide a further update on progress against our performance improvement plan and medium term strategic initiatives at our preliminary 2011/12 results in May. This will include an update on the short term performance improvements and medium term initiatives outlined above. In addition, we will publish additional operational metrics to improve visibility of business unit performance and which we will use to measure progress on the transition to sustainable free cash flow generation. In the future cash generation, measured by trading cash flow, will be our key performance metric.

The outlook for each of our product markets has not changed since our interim results presentation in November 2011. We anticipate full year performance to be in line with current management expectations.

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