26 February 2015: Colt Group S.A. (London Stock Exchange: COLT) today issues its audited results for the 12 months ended 31 December 2014.
Summary results
- Colt Group financial performance in 2014 reflected the ongoing transformation of our business, with a disappointing first half, but a second half that delivered to expectations.
- In May we restructured our business along four lines of business: Network, Voice, Data Centre and IT Services; increasing the focus on leveraging our assets more effectively.
- Group revenue declined 5.1% due largely to a reduction in Voice associated with our proactive withdrawal from low margin carrier voice trading contracts, and regulatory price declines.
- EBITDA before exceptional items declined 7.2% to €297.1m (2013: €320.1m), due largely to regulatory impacts in Voice, and product mix changes, particularly in Network Services.
- In December we completed the acquisition of KVH Asia, an infrastructure based service provider of networks and data centres across Asian cities. This strengthens Colt’s position as a global provider of Network, Voice, Data Centre and IT Services. Consolidated from 22 December, KVH contributed €3.9m to Colt Group revenue and €0.4m to EBITDA in 2014, and delivered pro-forma year-on-year revenue growth of 8.3% and a 12.0% EBITDA margin.
Key information:
| Twelve months to 31 December | ||||
| € millions | 2014 | 2013 | Nominal Movement | Constant Currency Movement |
| Audited | Audited | |||
| Total revenue | 1,495.5 | 1,575.8 | (5.1%) | (6.4%) |
| Network Services | 841.5 | 831.3 | 1.2% | (0.1%) |
| Voice Services | 452.1 | 553.5 | (18.3%) | (19.4%) |
| Data Centre Services | 120.2 | 111.3 | 8.0% | 5.7% |
| IT Services | 77.8 | 79.7 | (2.4%) | (3.4%) |
| KVH Asia | 3.9 | — | N/A | N/A |
| EBITDA1 | 297.1 | 320.1 | (7.2%) | (8.4%) |
| Profit before tax2 | 23.0 | 42.4 | 45.8% | 48.1% |
| Free cash outflow3 | (2.5) | (82.8) | 97.0% | N/A |
| Capital expenditure | 245.5 | 326.9 | (24.9%) | N/A |
| Cash | 77.4 | 195.6 | (60.4%) | N/A |
1 EBITDA reflects profit before net finance costs and related foreign exchange, tax, depreciation, amortisation and exceptional items
2 Profit before tax is stated before exceptional items
3 Free cash flow is net cash generated from operating activities less net cash used to purchase non-current assets and net finance costs paid
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Rakesh Bhasin, Chief Executive Officer, commented:
“Our performance in 2014 did not deliver what we set out to achieve, but we begin 2015 with reasonable momentum and a focused organisation.Our priorities for the year ahead will be on the continued focus and simplification of the business, delivering the turnaround in our IT Services business and generating positive operating cash flows.”
Busines Overview
The market continued to be challenging in 2014, with Colt Group financial performance also reflecting the ongoing transformation of our business with a weak first half followed by a second half that delivered to expectations: Our Network Services business mix is evolving with a decline in legacy SDH connections being countered by growth in managed networking, with associated negative margin impact; Voice Services performance reflected our proactive withdrawal from low margin carrier voice trading contracts; IT Services underperformed associated with investments made in the last few years to establish a cloud foundation platform to which the business is transitioning from traditional platforms; Data Centre Services grew, but slower than the market as it only recently refocused on retail colocation. We expect the completion of the transformation in 2015 should result in improved performance towards the end of the year.
Our strategy is defined by three priorities: a focus on key markets, delivering an exceptional customer experience and optimising the use of our assets. During 2014 we completed the restructuring of Colt along four lines of business: Network, Voice, Data Centre and IT Services; increasing the focus on our assets, providing end-to-end ownership and responsibility for revenue, profits and cash returns and enhancing visibility of performance and delivery.
At the end of the year we completed the acquisition of KVH, a similar business to Colt operating in Asia, expanding our capability in several key cities and strengthening our service capability as a global provider of Network, Voice, Data Centre and IT Services.
The acquisition of KVH enables us to offer our customers seamless solutions on a global basis and provides a solid platform for growth in Asian cities. Our network now spans three continents and 47 MANs. Our customers include 18 of the top 25 bank and diversified financial groups and 19 of the top 25 companies in both global media and telecoms industries (Forbes 2000 list, 2014). In addition, Colt works with over 50 exchange venues and 13 European central banks.
Throughout the year we remained committed to improving the services, products and experiences we provide to our customers. We transitioned to a Technical Service Desk model in the year, which gives our customers more direct access to technical resources. As with any large transformation, we experienced some challenges. Despite this, our net promoter score improved to 23%. The framework is now in place and we have seen first time resolution of customers’ faults improve from 20% to 58%. We see this trend continuing. We believe this is the right approach for our business and for our customers, but we still have a lot of work to do to continue to make it easier for them to do business with us.
We continued to reinforce our position as a market leader in ethernet services, demonstrated through a number of industry awards won. We also continue to gain market recognition, as evidenced through Colt’s position as a “Leader” in Gartner’s 2014 Magic Quadrant for Cloud-Enabled Managed Hosting, Europe 1.
1 Gartner, Magic Quadrant for Cloud-Enabled Managed Hosting, Europe, Tiny Haynes, Gianluca Tramacere, Lydia Leong, Gregor Petri, Douglas Toombs, Bob Gill; July 2014. Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.
Financial Review
Overview of 2014
Group revenue declined 5.1% due largely to a reduction in Voice associated with our proactive withdrawal from low margin carrier voice trading contracts, and regulatory price declines.
EBITDA declined 7.2% to €297.1m (2013: €320.1m). EBITDA performance was negatively impacted by margin compression from regulatory driven termination rate reductions in Voice Services and product mix changes in the business, particularly in Network Services, associated with the continued run-off of high margin legacy SDH (low bandwidth) circuits and increased proportion of off-net business from the growth in managed networking. €2.9m of costs associated with the acquisition of KVH are also included in 2014 EBITDA. The impact of these issues was partially offset by targeted savings from our restructuring and cost control programmes which occurred mainly in selling, general and administrative expenses. Currency movements did not have a significant impact on EBITDA.
Operating profit before exceptional items decreased from €39.4m to €21.0m mainly due to the reduction in EBITDA, partially offset by lower network infrastructure depreciation due to a reduction in accelerated depreciation on ceased network-connected buildings.
Net cash generated from operating activities (before exceptional items) has remained fairly flat at €268.7m (2013: €266.5m). Cash balances have declined to €77.4m (2013: €195.6m) largely as a result of our acquisition of KVH Asia Group (€128.0m) and payments made as part of our restructuring programmes.
Even after the €41.7m purchase in a strategic building in 2013, capital expenditure reduced to €245.5m (2013: €326.9m) mainly due to lower spend in IT and data centre infrastructure during the year.
Revenue
Total revenue for 2014 was €1,495.5m, a decrease of 5.1% over 2013 principally due to the commencement of our withdrawal from low margin carrier voice trading contracts and regulatory driven price reductions within Voice Services.
Network Services revenue increased by 1.2% to €841.5m (2013: €831.3m). On a constant currency basis Network Services revenue declined 0.1% as growth in managed networking was offset by declines in legacy low bandwidth (SDH) circuits.
Voice revenue decreased by 18.3% to €452.1m (2013: €553.5m) for the year. On a constant currency basis total Voice revenue decreased by 19.4%. Carrier voice revenue declined to €174.8m (2013: €250.4m) driven by our mid-year exit from low margin carrier voice trading contracts. Enterprise voice revenue fell to €277.3m (2013: €303.1m) driven by regulatory price declines of €16.2m.
Data Centre Services revenue grew 8.0% to €120.2m (2013: €111.3m). On a constant currency basis, Data Centre Services grew by 5.7%.
IT Services revenue declined by 2.4% (3.4% decline on a constant currency basis) to €77.8m (2013: €79.7m). This reduction was primarily driven by the proactive churn of several legacy dedicated hosting contracts as we focus the business, and our customers, on our next generation flexible shared hosting cloud platform.
Cost of sales and gross profit (before exceptional items)
Gross profit before exceptional items in 2014 declined by 3.4% to €386.6m due to regulatory driven termination rate reductions in Voice Services and product mix changes in the business, particularly in Network Services. This was partially offset by €11.1m lower infrastructure depreciation.
The profit decline in Network Services was due principally to the changing mix with growth of larger managed networking contracts resulting in increased use of third party networks (off-net connections) which carry lower margins. The contribution from our high margin legacy bandwidth products (SDH), which reduced to 7.8% (2013: 10.2%) of total Network Services revenue, also played a part in the gross profit decline. We have implemented a number of initiatives to improve the proportion of higher margin on-network business and general network utilisation going forward.
As a percentage of revenue, gross profit before exceptional items marginally increased to 25.9% (2013: 25.4%). This increase was driven by the exit from low margin Voice business and lower depreciation, offset by the margin compression in Network Services.
Operating expenses (before exceptional items)
Operating expenses of €365.6m (2013: €360.8m) increased 1.3% (€4.8m) driven by an increase in other depreciation (excludes network depreciation) due to increased spend on IT systems which came into operation at the end of the prior year, relating to enhancements to our order processing, billing and customer relationship management systems. Operating expenses were adversely impacted by foreign currency movements of €8.6m due to the impact of the strengthening of Sterling against the Euro. The impact of our restructuring was insufficient to offset this movement.
Selling, general and administrative expenses decreased by €1.7m to €311.1m (2013: €312.8m). The impact of cost savings measures, including restructuring, was largely offset by an adverse foreign currency impact of €6.7m.
EBITDA and operating profit (before exceptional items)
EBITDA1 decreased by 7.2% to €297.1m (2013: €320.1m) with the fall in gross profit before depreciation partially offset by the reduction in selling, general and administrative expenses. EBITDA margin as a percentage of sales fell slightly to 19.9% (2013: 20.3%). EBITDA was not materially affected by currency movements.
Operating profit excluding exceptional items decreased to €21.0m (2013: €39.4m) mainly due to the decline in EBITDA.
1 EBITDA is profit for the period before net finance costs and related foreign exchange, tax, depreciation, amortisation and exceptional items
Exceptional items
In April 2014, Colt announced a reorganisation of its business resulting in workforce restructuring actions. The Group incurred an exceptional expense of €31.1 million in 2014 associated with the costs of implementing these actions. Of the €22.3m restructuring cash payments made during the year, €14.6m were made in relation to this restructuring programme with the balance relating to the 2012 transformation programme.
The establishment of the lines of business in 2014 has facilitated an alignment of our IT Services product portfolio with customer demand for cloud based services in addition to rationalising our cost structure to improve profitability. As a result of the portfolio realignment, which is focused on growth areas in both the enterprise and service provider space, we have reviewed the carrying values of non-current assets in IT Services and recorded a non-cash impairment expense of €15.0m in 2014. This cost has been treated as an exceptional item.
Taxation
The Group recognised a taxation charge for the year of €5.1m (2013: €4.4m). The increase in overall taxation is due mainly to a lower deferred tax credit recognised in the period. The current tax charge amounted to €5.2m (2013: €6.9m).
The current tax charge did not reduce in line with the reduction in profit compared to 2013, as most of the current tax the Group pays does not vary with profit. This is mainly because tax is payable in jurisdictions which are structurally profitable and profits generated in other jurisdictions are sheltered by tax losses brought forward, which does not give rise to a current tax cost.
Profit after tax
Profit after tax (before exceptional items) decreased by 52.9% mainly as lower operating profit was offset by a foreign exchange gain of €6.7m, mainly due to the strengthening of Sterling against the Euro. Including the 2014 exceptional restructuring charge of €31.1m and €15.0m impairment charge, the Group reported a loss after tax of €28.2m (2013: profit of €38.0m).
Net cash flow
Net cash from operations before exceptional items and restructuring payments increased by €2.2m to €268.7m (2013: €266.5m). The impact of lower EBITDA which decreased by €23.0m to €297.1m (2013: €320.1m) was offset by improved working capital performance (trade receivables and payables) of €17.2m (2014: outflow of €26.6m, 2013: outflow of €43.8m). There was a reduction in both payables and receivables due to the exit of the Voice trading business and trade payables fell significantly due to the timing of certain payments which were outstanding at the end of 2013 and paid in 2014. Restructuring payments increased to €22.3m in 2014 (2013: €21.3m) as a result of the restructuring programme announced with the Q1 2014 results.
Capital expenditure net of disposals decreased by €81.4m to €245.5m (2013: €326.9m). Excluding the €41.7m purchase of a strategic property in 2013, capital expenditure declined by €39.7m. This was mainly due to lower spend on internal IT systems and investment in our data centre capacity, as we sought to maximise our return on investment.
KVH Asia acquisition
On 22 December 2014 Colt completed the acquisition of KVH Asia Limited, an infrastructure based service provider of networks and data centres, which will provide us with a strong platform in Asia. We acquired net assets of €62.3m on completion in exchange for total cash consideration of €128.0m, generating €65.7m of provisional goodwill. KVH Asia results have been consolidated from 22 December 2014, contributing €3.9m revenue and €0.4m EBITDA respectively to full year 2014 results. For the year ended 31 December 2014, KVH Asia’s pro-forma revenue and EBITDA was €144.6m and €17.4m respectively.
Statement of financial position
Non-current assets increased by €191.6m to €1,747.6m (2013: €1,556.0m) driven by the acquisition of KVH Asia and recognition of related goodwill. Net cash and deposits of €77.4m decreased by €118.2m, largely attributable to the €128.0m cash consideration paid to acquire KVH Asia. Shareholders’ funds increased by €8.8m to €1,519.9m (2013: €1,511.1m) mainly due to an increase in translation reserves due to the strengthening of Sterling against the Euro, partially offset by the loss in the year.
Revolving credit facility
In August 2014 the Group entered into a revolving credit facility agreement for €150.0m with a group of banks. The agreement is for an initial three year term which can be extended at the Group’s option for an additional two years. The facility will be used to manage the Group’s working capital position. As at 31 December 2014 the facility remained undrawn.
BUSINESS REVIEW
Network Services
Our Network Services business provides a range of data connectivity products and services from simple broadband access to complex managed networking solutions to support businesses and wholesale carriers across Europe, Asia and North America. Our services are dedicated to business and wholesale customers so our network investment is focused on the cities and information hubs (such as business parks, financial districts and major data centres) where our customers do business. Our network offers a unique combination of local access and international breadth to meet a range of connectivity needs from the local SME to the large multinational. Colt network expansion in 2014 focused on providing connectivity for key partners and verticals, while expanding on past investment successes to build further capacity and reach. We introduced growth initiatives including wireless backhaul to mobile network operators as well as targeted plans to fill empty space in network-ready buildings and data centres. In Ireland, the continued demand for low latency connectivity across the Irish Sea funded a second PoP and new fibre ring in Dublin. In the Netherlands we extended the existing Long Distance Network (LDN) to Utrecht, Den Bosch and Eindhoven and connected seven key partner and customer datacentres. We added new low latency connectivity between Madrid, Lisbon and Porto to meet wholesale and enterprise demand on this key route. We connected 24 new third party data centres across Europe, with a particular focus on the UK market, and with the acquisition of KVH we now connect 521 third party data centres globally. Over 900 new customer buildings were connected to the Colt network, bringing total on net buildings to over 21,000 across Europe with a further c.1,500 added with KVH.
We continue to be recognised for our leading ethernet services, winning seven awards at the Metro Ethernet Forum including best retail and wholesale provider in the EMEA region as well as best service of the year in APAC.
For 2014, Network Services revenues grew 1.2% (2013: 0.1%), with the continuing decline of legacy SDH compensated by sustained strong growth in managed networking. EBITDA declined 6.0% to €234.8m (2013: €249.8m) as margins were pressured by a change in the revenue mix and increased provisioning of off-net business with the growth in managed networking.
Voice Services
Our Voice Services business delivers reliable carrier and enterprise grade voice services with a focus on customers in Western Europe and, through our recent acquisition of KVH, in Asia. We provide traditional telephony services as well as VoIP to both enterprises and service providers (carriers, cloud service providers).
In 2014 we are particularly encouraged by the developments in our strategic product areas of VoIP and service provider solutions where we grew 27% and 20% respectively, outperforming the market. We successfully planned and executed our strategic withdrawal from low margin carrier voice trading contracts and increased our focus on IN and VoIP businesses.
For 2014, the combination of our withdrawal from low margin carrier voice trading contracts and continued regulatory impacts contributed to a reduction in overall Voice Services revenues of 18.3% (2013: 4.9%). However, the €75.6m decline in carrier voice revenue was driven entirely by the strategic decision to exit low margin carrier voice trading contracts. Enterprise voice revenue is demonstrating improving trends declining by 5.5% in the second half, roughly half the rate of the industry decline. Headline EBITDA was impacted by regulatory declines, reducing 6.1% to €60.3m (2013: growth of 30.8%) but the EBITDA margin improved to 13.3% (2013: 11.6%) with the evolution in the product mix, and should continue this trend with the full annualised effect of the withdrawal from low margin carrier voice trading contracts.
Data Centre Services
Our Data Centre Services offer colocation and value added data centre services in secure, carrier neutral facilities across Europe and Asia.
During 2014 we increased our focus on retail colocation, where market demand remains strong. We have ceased active marketing of our modular ftec data halls this year, though we will continue to supply these where there is demand for standardised units. Customer demand for colocation space has seen us extend our data centre estate across Europe with the addition of space in new sites in Birmingham (UK) and Stockholm in addition to expanding our capacity in Hamburg and London. Through our acquisition of KVH we have a further seven sites with colocation capacity across Asia (Tokyo (2), Osaka (2), Hong Kong, Singapore and Busan). We have also increased our sales capability and developed our portfolio of value added services resulting in an enhanced service and support offering for our customers. Our Netherlands 3 colocation facility received a Data Centre Design and Build award and our London 2 data centre had its M&O Stamp of Approval renewed.
For 2014, Data Centre Services posted revenue growth of 8.0% associated with improvements in underlying colocation and ftec data centre sales. EBITDA improved 6.6% to €27.4m (2013: €25.7m) with a similar margin, 22.8% (2013: 23.1%), despite a larger contribution from lower margin ftec sales in the mix.
IT Services
IT Services provide IT infrastructure, platform and workload solutions for enterprises and channel partners. Our latest generation cloud platform provides customers with a standardised set of modular managed IT services enabling them to build the solutions they need, without major capital expenditure, and with the flexibility to evolve the solution as their needs change. Our business is transforming towards this cloud platform from a historical focus on traditional hosting platforms. Our solutions can also be fully integrated with our network, data centre and voice services. Through our partnerships with leading technology vendors such as VMware, EMC, Solidfire, Symantec and Virtustream, we are positioning ourselves as a key facilitator of enterprise cloud. We provide integrated IT services that are efficient, flexible and secure.
This year has been about focus. We completed the creation of our foundation cloud platform suite and have commenced the process of transitioning customers off legacy platforms. Our new cloud platform supports all our products and services and provides greater efficiency and scale as well as an improved end-to-end service experience for our customers. We also focused our product portfolio onto three key product areas where we see traction in the market and this helped us secure some significant customer wins. We were once again recognised as a leader in the Gartner Magic Quadrant for Cloud-Enabled Managed Hosting, Europe 1.
For 2014, IT Services posted a revenue decline of 2.4% associated mainly with proactive churn in the legacy hosting business. The EBITDA loss increased to €25.8m (2013: €19.6m) associated with the investments in cloud services and the costs of the transformation of the business initiated towards the end of the first half of 2014.
1 Gartner, Magic Quadrant for Cloud-Enabled Managed Hosting, Europe, Tiny Haynes, Gianluca Tramacere, Lydia Leong, Gregor Petri, Douglas Toombs, Bob Gill; July 2014. Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose
Trading Outlook
At a capital markets day in May 2012 Colt outlined several targets for revenue, EBITDA and strategic capex investment levels over the 2012 to 2016 period. These targets are no longer relevant due to an accumulation of factors over the last few years, particularly the sustained weakness of general macroeconomic conditions across Europe, and in the enterprise market in particular, and the continued aggressive regulatory impacts on voice termination.’
While we remain committed to investing to develop profitable growth and improved returns for the business through a mixture of organic and inorganic programmes, our current priority is to improve cost control, returns on investment and free cash flow. We aim to update the market with more detailed medium term plans at a capital markets day to be held in the second half of 2015.
FORWARD LOOKING STATEMENTS
This report contains ‘forward looking statements’ including statements concerning plans, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. Colt Group S.A., ‘the Group’, wishes to caution readers that any such forward looking statements are not guarantees of future performance and certain important factors could in the future affect the Group’s actual results and could cause the Group’s actual results for future periods to differ materially from those expressed in any forward looking statement made by or on behalf of the Group. These include, among others, the following: (i) any adverse change in regulations and technology within the IT services and communications industries, (ii) the Group’s ability to manage its growth, (iii) the nature of the competition that the Group will encounter and wider economic conditions including economic downturns, (iv) unforeseen operational or technical problems and (v) the Group’s ability to raise capital. The Group undertakes no obligation to release publicly the results of any revision to these forward looking statements that may be made to reflect errors or circumstances that occur after the date hereof.
Investor conference call details: Date: Thursday 26 February 2015, 08.00 (GMT)
Register for the call by following this link.
The conference call will be recorded and a replay service will be available at 13:00 GMT on 26 February 2015 for 30 days on +44 (0) 20 7031 4064 or +1-954-334-0342, access code 951311
Investor Relations:
Morten Singleton
DDI: +44 (0)20 7863 5314
Mobile: +44 (0)7535 445159
Email: morten.singleton@colt.net
Press:
Helen Toft
DDI: +44 (0)20 7039 2420
Mobile: +44 (0)7855 301078
Email: helen.toft@colt.net
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