Colt posts H1 revenue rise

Source: Colt

Colt Group S.A. (London Stock Exchange: COLT) issued today the results for the six months ended 30 June 2012.

Highlights of first half 2012:

• Overall Group revenue grew by 4.1% (2.6% at constant currency). Growth occurred across all major product categories
• Data revenue growth of 1.8% reflects the continued take-up of Ethernet services (12.8% growth) more than compensating for the decline in legacy bandwidth services
• Managed Services revenue grew by 15.4% including Data Centre Services revenue growth of €6.2m (46.3%)
• Voice revenue grew by 4.1% with growth in Carrier Voice (38.1%) exceeding the decline in Corporate and Reseller Voice (11.7%)
• EBITDA was €161.8m, with gross profit improvement offset by operating costs from investment in the business. EBITDA benefited from a reduction of provisions for bad debt and voice termination costs totalling €10.0m
• Capital expenditure was in line with H1 2011 with programmes focused on network expansion, data centre expansion and product and services development.

BUSINESS OVERVIEW

Over the first half of 2012, the Company continued to focus on its strategic agenda and development of the information delivery platform. First half results show a return to growth for the Company for the first time in many years. Pipelines are building across all of the business units and bookings are increasing for our managed solutions sales for both network and IT sales to enterprise customers. The economic headwinds are, however, affecting our smaller customers where we are seeing churn in both legacy Data and Voice products.

As highlighted at our Capital Markets Day held in May, we are moving forward with our investment programmes which include both capital investment and an increase in operating expenses to improve skill sets, particularly in the IT services area. While investment will not always coincide with immediate revenue generation, we continue to leverage our new operating structure and will drive further efficiencies such that investments can be absorbed while managing EBITDA performance.

Operational highlights for the first six months include the improvements to both the quality and quantity of our pipeline and bookings for Managed Network and IT solutions, the new modular data centre site acquired in the Netherlands, the development of our new franchise channel and several network enhancements and extensions. The development work at the new site in the Netherlands is progressing on time and on budget. The site should be revenue generating from early 2013. Colt launched a new franchise channel in April targeted at the mid-market, an area of limited historical focus. We continue to expand and enhance our network, including undersea connectivity to Dublin, enhanced routes in Spain and improved low latency routes between key European financial hubs . All these investments develop our information delivery platform to support sustained profitable future growth.

FINANCIAL REVIEW

Income Statement

Despite continued challenging economic conditions, we are pleased with our financial performance for the half year.

Total revenue of €797.9m (2011: €766.2m) increased by €31.7m or 4.1% (2011: 3.5% decline) with growth across all major product categories. EBITDA increased by €4.6m (2.9%) to €161.8m (2011: €157.2m) and operating profit increased by €2.8m (10.9%) to €28.5m (2011: €25.7m). The Group‟s free cash outflow was €57.8m (2011: €68.8m), including €25.0m of vendor payments carried into H1 2012 due to year end timing issues.

Revenue
Total revenue for the first half of 2012 was €797.9m with growth of 4.1% (€31.7m) compared to the first half of 2011. The increase in Carrier Voice, Managed Services and Data more than offset the decline in Corporate and Reseller Voice. Revenue growth benefitted from currency movements with overall revenue growth amounting to 2.6% on a constant currency basis.

Data revenue increased by €7.1m (1.8%) to €407.7m (2011: €400.6m), driven by a 12.8% increase in Ethernet revenue which more than offset declining revenue from our legacy Data products.

Managed Services revenue, including Data Centre Services related revenue, increased by €13.3m (15.4%) to €99.9m (2011: €86.6m). Data centre revenue grew 46.3% (€6.2m) to €19.6m (2011: €13.4m) due to modular data centre contracts which came online mid year 2011 and the sale of another modular data centre installed on site at a customer premises during H1 2012. The remainder of the increase was due to an increase in sales activity with enterprise customers.

Total Voice revenue increased by 4.1% (€11.3m) to €290.3m (2011: €279.0m). The 38.1% (€33.6m) improvement in Carrier Voice revenue was largely driven by increased international traffic enabled by investments in our Voice trading platform. The Carrier Voice revenue growth more than offset the in Corporate and Reseller revenue of 11.7% (€22.3m) that reflected competitive markets in Germany, Spain and France. A major element of this decline was the decision to withdraw from low margin business in the Canary Islands (€6.5m).

Cost of Sales and Gross Profit

Gross profit increased by €12.9m (6.0%) to €227.0m. As a percentage of revenue gross profit increased to 28.4% from 27.9% in H1 2011. The H1 2012 gross profit reflects investments made in product development and delivery resources that resulted in cost increases of €18.7m over H1 2011. This increase was partially driven by currency movements given the concentration of these costs in the United Kingdom. Offsetting this increase were reductions to both bad debt expense and accruals for voice termination costs with third party carriers.

H1 2012 includes a bad debt credit of €4.9m reflecting a reversal of increases in the provision for uncollectable accounts which occurred during 2011. The bad debt provision in 2011 was increased by €5.0m reflecting in part the increase in the trade receivables balance that arose at the end of the first half of 2011. The consolidation of the credit and collection function has been completed and our trade receivable balances have normalised. We performed a review of collectability on receivables and believe that the increase in the provision is no longer warranted. We do not expect the bad debt expense for the remainder of the year to be above historical levels.

In regard to voice costs, improvements in our internal processes have allowed us to reduce the period over which we need to retain accruals to cover late charges from other carriers. Accordingly voice related accruals have been reduced by €5.1m in H1 2012. We expect underlying voice margins to be reasonably consistent in the second half of 2012 compared to the first half, exclusive of mix change that could occur within the voice product line.

Operating Expenses

Operating expenses of €198.5m (2011: €188.4m) increased by 5.4% in H1 2012. Selling, general and administrative expenses increased by €12.2m (7.4%) over H1 2011 (€164.6m). Currency movement contributed to €3.8m of the increase with investment in headcount and other spending contributing the balance. MarketPrizm costs increased by €2.4m on a comparative basis accounting for a full period of costs in H1 2012 as compared to one month in H1 2011 post acquisition.

EBITDA and Operating Profit
Group EBITDA1 of €161.8m increased by €4.6m (2.9%) from 2011 (€157.2m) with the increase in operating expenses partially offsetting the improvement in gross profit. EBITDA margin decreased marginally by 0.2 percentage points to 20.3%.

Operating profit increased by €2.8m (10.9%) to €28.5m (2011: €25.7m) due to items contributing to the growth in EBITDA offset by an increase in depreciation expense of €1.8m.

1 EBITDA is profit for the year before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items.

Taxation

The Group recognised a tax expense of €2.8m in H1 2012 (2011: €5.1m). The current tax expense of €3.0m compares with €3.4m for 2011. The current tax expense arose in jurisdictions where we cannot fully offset income with accumulated tax benefit carry forwards and also due to the expiry of the tax holiday in India, which took place in April 2011. A deferred tax credit of €0.2m (2011: €1.7m expense) was recognised in respect of the unwinding of a deferred tax liability. The Group continues to recognise a deferred tax asset because it is probable future taxable income will arise to utilise the asset.

Profit after tax

Profit after tax increased by €13.7m (82.0%) to €30.4m (2011: €16.7m), largely due to the increased operating profit and the net impact of foreign exchange of €9.2m (2012: €4.7m gain; 2011: €4.5m loss).

Free cash flow

Free cash outflow, excluding the impact of restructuring payments (€3.6m in 2012 and €13.3m in 2011), improved slightly to €54.2m from €55.5m in 2011. Net cash generated from operating activities (excluding restructuring payments) decreased to €92.6m (2011: €95.9m), down 3.4% (€3.3m) compared to 2011. Excluding increased trade payments of €25.0m related to carry-over items disclosed in our 2011 annual report, net cash generated from operating activities (excluding restructuring payments) would have been €117.6m.

Receivables comprise trade receivables and other receivables, including prepayments for network capacity and IT support. The €29.1m outflow in receivables in 2012 was 16.4% (€5.7m) lower, mainly due to tighter control over trade receivables following the centralisation of our credit and collection function last year.

Net capital expenditure decreased by 3.4% (€5.2m) to €147.4m (2011: €152.6m). This included continued spend on expanding our data centre and network footprint and capacity; significant investment in the Company‟s IT infrastructure to provide a platform for selling integrated computing and network solutions and to drive cost efficiency; and on-going product development, including the development of our Cloud computing platform.

Capital expenditure relating to Customer Order revenue is primarily expenditure on new equipment both on customer premises and elsewhere in the network to support the acquisition of new customer contracts. These contracts are typically medium to long term in nature. Capital expenditure in relation to customer orders increased by 13.1% (€7.8m) in 2012 to €67.3m (2011: €59.5m).

Capital expenditure relating to our data centre capacity increased by 2.6% (€0.6m) to €23.4m (2011: €22.8m) and related mainly to the expansion of the Company‟s modular data centre capacity in France and investment in a new data centre site in the Netherlands where operations are expected to commence in early 2013.

Internal IT, representing spend on internal systems, reduced by 40.3% (€11.2m) to €16.6m (2011: €27.8m) after significant investments were made in the platform for selling integrated Cloud computing and network solutions in the first half of 2011. Product and Services Development spend decreased by 35.1% (€7.3m) to €13.5m (2011: €20.8m). This category of spend will fluctuate from period to period, but overall remains consistent with the guidance provided at our Capital Markets Day on 2 May 2012. The 2011 capital expenditure included carry-over spend of €8.0m related to 2010 asset additions.

Spend on network capacity and upgrades increased by 43.6% (€7.1m) to €23.4m (2011: €16.3m) as Colt invested in new low latency routes to Ireland, enhanced the network in Spain and improved speeds on ultra-low latency routes between key European financial hubs during the period.

Statement of financial position

Non-current assets increased by 2.1% (€29.9m) to €1,478.9m (31 December 2011: €1,449.0m) with the impact of capital expenditure and exchange gains arising on translation of non-Euro denominated operations being largely offset by the depreciation expense. The movement in net working capital balances, comprised of receivables, payables and provisions are discussed in the cash flow section above. Colt invested €35.0m over the first half of 2012 in three to six month bank deposits, which are classified as current asset investments. Net funds of €288.5m (31 December 2011: €343.7m) decreased by 16.1% (€55.2m), reflecting the free cash outflow for the period. Shareholders‟ funds increased by 3.2% (€46.6m) to €1,494.8m mainly due to the €30.4m profit for the period and €14.7m of exchange gains on translation of foreign operations.

BUSINESS REVIEW

Colt is composed of three business units, leveraging shared assets to better serve our customers, all supported by an ITIL-based service delivery organisation which integrates IT, Technology and Operations:

Colt Enterprise Services (CES):

CES serves medium to large sized corporates within the financial, public, media and professional services sectors through our information delivery platform. Services include Managed Networking, Managed IT services and Unified Communication solutions. This platform combines assets, people and tools to deliver an integrated, seamless service across the compute, storage, network, applications/ operating services. CES is developing an innovative portfolio of managed services which integrates compute, storage and network resources that allows different consumption models for our customers.

Against a tough economic backdrop across Europe, CES revenue declined by €3.2m (1.1%) to €298.8m (2011: €302.0m) with declines in legacy Data and Voice services, particularly more commoditised offerings to smaller enterprise customers, offset by strong growth in Managed Service revenue.

Managed Services revenue increased by 11.3% (€6.3m) to €61.9m (2011: €55.6m) driven by activity in larger enterprise customers. Our MarketPrizm acquisition had the benefit of a full half contribution as well as some incremental wins combining with the core CES capability. We had a number of key Managed Services wins in the first half and have generated a strong pipeline going into H2 as a consequence of our investments. The number of more service-centric integrated solutions engagements is increasing in both volume and average contract value, though these invariably involve longer sales cycles and longer implementation timeframes.

Data revenue declined by 2.2% (€4.2m) to €183.4m (2011: €187.6m) with the majority of the decline coming from smaller sized customers. The market is increasingly price conscious and the continued economic headwinds encourage customers to re-assess their requirements resulting in some rationalisation. Overall we continue to see price pressure on legacy products, but strong growth potential with Ethernet and IPVPN services.
Corporate and Reseller Voice revenue declined by 9.0% (€5.3m) to €53.5m (2011: €58.8m), in line with the trend seen in recent years.

Looking at the broader financial picture, while revenue decreased by 1.1%, gross margins remained broadly flat with growth in Corporate Voice margins being offset by a slight decline in Data margins (increased off-net mix) and Managed Services margins (higher mix of lower-margin asset sales). Fixed costs were broadly flat despite a decline in the headcount of 3% year on year, due largely to foreign exchange movements.

EBITDA increased by 2.8% (€1.3m) to €47.2m (2011: €45.9m) with a reduction in provision for bad debt partially offset by a decrease in Data margins and increased investment in resources to deliver on the growing solutions business.

Colt Communication Services (CCS):

CCS provisions services through indirect sales channels to small and medium sized businesses as well as large national and international service providers, carriers and system integrators. Our services are offered through branded and unbranded products, offering our customers an alternative to building their own infrastructure.

CCS experienced growth across all major product categories, with overall revenue growing by 6.4% (€28.7m) to €479.5m (2011: €450.8m). The largest contributor to the growth was Voice, with Carrier Voice growth more than offsetting the decline in Corporate and Reseller Voice. Data and Managed Services revenue both increased compared to 2011.

Overall Voice revenue grew by 7.5% (€16.6m) but with a continued evolution of the mix. Carrier Voice revenue increased by 38.1% (€33.6m) to €121.9m (2011: €88.3m) leveraging the investments made in our Voice trading platform and driven by International traffic and extensions in Voice over IP-based interconnect relationships, helping to offset regulated rate declines. Corporate and Reseller Voice revenue declined by 12.9% (€17.0m) to €114.9m (2011: €131.9m) due to continued competitive pressures, mobile termination rate reductions, and a decision to exit low margin reseller accounts. We are seeing encouraging signs of growth in demand for our white label voice offering.

Data revenue grew by 5.3% (€11.3m) to €224.3m (2011: €213.0m). The Ethernet portfolio continues to deliver strong revenue growth, particularly in the UK, Germany and France, and our IP services have also started to return to growth. Revenue from legacy Data products continued to decline, partially offsetting the Ethernet and IP growth.

In 2012 we continued to see growth in Managed Services revenue which increased 4.5% (€0.8m) to €18.4m (2011: €17.6m).

EBITDA grew by 3.4% (€3.1m) to €93.3m (2011: €90.2m). This was due to a combination of incremental revenue, a reduction in the bad debt provision and the release of accruals no longer required to cover late Voice charges from other carriers. Margin progression has been hampered by the evolution of the product/solution mix coupled with currency effects and inflation.

Data Centre Services (DCS):

DCS serves enterprises and service providers who require densely powered, highly efficient data centre space to support their computing infrastructure. Customer segments include financial services, manufacturing, IT and managed service providers as well as both our internal CES and CCS business units. DCS has developed a market leading modular data centre design which allows us to deploy high quality, flexible capacity within just four months of contract agreement. This product can be delivered either through our owned sites or direct to a customer site. DCS sales are reported as Managed Services revenue.

Overall, DCS saw a 46.3% (€6.2m) increase in external revenue from direct customers to €19.6m (2011: €13.4m). The increase was driven by modular data centre contracts in our UK data centres which came online mid year 2011, and by the delivery of a modular data centre to a customer site in the UK. Internal revenue1 from data centre services provided to CES and CCS end-customers increased by 3.3% (€1.9m) to €58.8m (2011: €56.9m) due to increased demand for server capacity. Due to the size of underlying contracts we expect customer activity to progress in an uneven fashion. Opportunities in the pipeline continue to evolve.

EBITDA increased only marginally by 0.9% (€0.2m) to €21.3m (2011: €21.1m). Almost half the revenue growth came from lower margin modular sales to customer sites. The EBITDA margin also reflects further investments in selling, general and administrative costs to drive growth, and the strengthening of Sterling, which adversely impacted costs.

During the period, a site in the Netherlands was acquired for Colt‟s 20th carrier neutral data centre. The site will expand Colt‟s modular data centre capacity adding to the existing London and Paris sites. It is strategically located between the major cities of Amsterdam, Rotterdam, Antwerp and Brussels, where it will act as a key hub for the delivery of Colt‟s low latency services in the region. At this site, Colt will initially deploy 2,000sqm of data centre space, before increasing this capacity on a success basis to 20 halls, over 10,000sqm. With a significant anchor tenant already secured, operations at the new data centre are expected to commence in early 2013. In June, completion of the buildout of 1,000sqm of modular data centre space at our data centre in Paris was announced.

DCS‟s industry leadership in modular data centre design was recognised with the Modular Data Centre Solution Award at the Broadgroup Data Centre 2012 awards in London in June, recognising innovative leadership and revolutionary approach to building data centres which redefines the method of construction and delivery of large, energy efficient data centres. In addition, during the period, Colt‟s London 3 data centre became the first in Europe to be awarded the Stamp of Approval for Management & Operations (M&O Stamp) by the Uptime Institute.

1 Internal Managed Services Revenue represents the divisional recharge by Colt Data Centre Services to the other two customer facing Business Units for the provision of data centre space and services. Internal Managed Services Revenue is eliminated on consolidation.

TRADING OUTLOOK

While we expect the macroeconomic environment in which we operate to remain challenging for the remainder of 2012, we are targeting growth over the second half of the year. We will continue to invest in our growth platforms, as outlined in our Capital Markets Day of 2 May 2012, such that we expect capital expenditure to be higher in 2012 than in 2011 (2011: €279.5m). Overall, we expect a cash outflow in 2012 compared to an inflow in 2011. Our outlook for the second half of 2012 assumes no material deterioration in the European economy.

Going concern

As stated in note 1 to the condensed financial statements, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES

Colt has processes for identifying, evaluating and managing the principal risks and uncertainties faced by the Group. The risk assessment process is updated at least annually and the Group has a detailed risk management process which identifies the key risks and uncertainties it faces. These risks and uncertainties continue to be: European economic conditions; changes in laws and regulation; changes in technology within the industry; Colt‟s ability to provide a high level of customer service, maintain and develop internal IT systems and other infrastructure; security of Colt‟s infrastructure and IT systems; maintaining business critical processes in shared service centres; and reliance on certain suppliers.

Some or all of the above risks have the potential to impact our results or financial position during the remaining six months of the financial year. The Directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 31 December 2011. Further details of these key risks and uncertainties can be found in the 2011 Annual Report on pages 33 to 35 which is available from the Colt website (www.colt.net).

RESPONSIBILITY STATEMENT

The Directors confirm that to the best of our knowledge:

a. this condensed set of financial statements has been prepared in accordance with IAS 34 „Interim Financial Reporting‟ as adopted by the European Union, including a description of significant events and transactions during the period;

b. the interim management report herein includes a fair review of the information required by DTR 4.2.7R (indication of important events during the six months and description of principal risks and uncertainties for the remaining six months of the year);

c. the interim management report includes a fair review of DTR 4.2.8R (disclosure related to parties‟ transactions and changes therein); and

d. the highlights, business overview, financial review and business review include a fair review of the information required under Article 4(2)(c) of the Luxembourg Transparency Law of 11 January 2008. 

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