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Colt to Jettison Ailing IT Business

Iain Morris
6/30/2015
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Colt Technology Services has revealed it will quit the IT services market as part of a restructuring aimed at focusing resources on its core network, voice and data center businesses.

Explaining the move in a detailed statement, the operator said it would need to make considerable short-term investments in its IT services business to deliver profitability and that it was not prepared to bear the risk.

The decision marks a radical break with the strategy Colt Technology Services Group Ltd announced earlier this year, when CEO Rakesh Bhasin said that one of the operator's priorities in 2015 would be "delivering the turnaround in our IT services business."

Following restructuring last year, Colt now operates four lines of business -- network, voice, data center and IT services.

Accounting for about 5% of total company revenues last year, the IT services division provides three key types of service, according to Colt's most recent annual report: end-user services, such as hosting virtual desktop solutions; enterprise application hosting, including ERP and CRM systems; and business-critical web hosting, which would cover things like infrastructure-as-a-service ecommerce platforms.

Revenues in that area fell from €79.7 million (US$89.1 million) in 2013 to €77.8 million ($87 million) in 2014 -- a decline that Colt blamed on the ongoing transition to a cloud platform from a traditional IT services one.

Colt's overall revenues fell by 5.1% in 2014, to about €1.5 billion ($1.7 billion), while profit before tax was down 45.8%, to €23 million ($26 million).

Rivals such as Deutsche Telekom AG (NYSE: DT) have also reported declining revenues from IT services as they make the same transition from legacy to cloud platforms, but Colt appears to believe it does not have the wherewithal to last the distance in what remains a fiercely competitive market. (See T-Systems Looks to Restructuring for Recovery.)

Earlier restructuring, as well as the €128 million ($143 million) acquisition of Japan's KVH Co. Ltd. , reduced cash holdings by 60.4% in 2014, to €77.4 million ($86.6 million).

Although Colt will honor existing IT services contracts, it will cease to look for new work and hopes to exit the market entirely in the next two or three years.

The restructuring is expected to cost the operator between €44 million ($49 million) and €55 million ($62 million) in cash costs plus €90 million ($101 million) in non-cash impairment charges. Colt also anticipates what it calls "exceptional restructuring costs" of about €25 million ($28 million) related to its core business.

"Employee costs constitute a large proportion of the restructuring costs," said Morten Singleton, Colt's vice-president of investor relations, in response to questions from Light Reading. "IT services had about 450 people in it at the start of this year -- some of these we will seek to redeploy in the core business and many will be retained as we take the two to three years to run down the IT service operations."

Colt had a total of 5,438 employees on its books in 2014, according to the operator's most recent annual report.


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The company reckons the restructuring move will lead to annual savings of €25 million ($28 million).

Although revenues from IT services will decline by €20 million ($22 million) in each of 2015, 2016 and 2017, the operator is confident it can increase overall sales to €1.5-1.52 million ($1.68-1.7 million) in 2015 and €1.5-1.53 million ($1.68-1.71 million) in 2016.

It is also guiding for improvements in free cash flow, saying it expects this to rise from €70-80 million ($78-89 million) in 2015 to €100-120 million ($112-134 million) in 2016.

"The fundamentals of our core network services and voice services businesses remain solid, and we are driving improvements in our data center services businesses," said Bhasin in a statement. "We are taking decisive action to become a more focused and disciplined organization, which we believe will accelerate the performance of our core business."

Among other things, Colt has set up a dedicated sales team within its network services business to focus on selling into the "existing estate of connected buildings," and it claims bookings in the first quarter (January to March) were the highest for a number of quarters.

It also reckons the second quarter will be the last full one in which carrier voice revenues decline as a result of its decision to quit low-margin carrier voice contracts last year.

Colt is also currently conducting a review of its data center business "to identify the optimal structure and positioning of the business."

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
7/2/2015 | 12:17:43 PM
What's going on?
Does this mean weakness in the IT services sector overall, only for carriers, or only for Colt and Deutsche Telekom?
Joe Stanganelli
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Joe Stanganelli,
User Rank: Light Sabre
6/30/2015 | 10:35:47 PM
Re: Ruh?
Yeah, if it's such a small portion, it either should take very little in terms of resources.  Ideally.

Of course, there is the saying that 20 percent of your customers are responsible for 80 percent of your business.  I tend to wonder how true that is in terms of lines of business, leaving individual customers out of it.
Joe Stanganelli
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Joe Stanganelli,
User Rank: Light Sabre
6/30/2015 | 10:34:08 PM
XaaS
Probably a wise move...although they could have just started outsourcing all of it to cloud providers.  ;)
thebulk
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50%
thebulk,
User Rank: Light Sabre
6/30/2015 | 2:03:54 PM
Re: Ruh?
I think sometimes its good to fill a small gap, but I agree IT service is not where you want that to be, compaines are going to want someone who can come in and take care of everything, not just a company that comes on board and handles one single aspect and then they have to hire someone else to do everything else. 
mendyk
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mendyk,
User Rank: Light Sabre
6/30/2015 | 1:59:30 PM
Re: Ruh?
It looks like Colt is focusing more on margins than revenue growth, given it also said it has been pulling back on low-margin voice services. That's a reasonable strategy, although the danger is ending up in a long-term tactical retreat and reaching the point where growth is almost impossible (cf UBM).
danielcawrey
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danielcawrey,
User Rank: Light Sabre
6/30/2015 | 1:17:01 PM
Re: Ruh?
This IT services group sounded like it only did a lot of hosting. In order to compete in the IT services market today, you've got to be able to offer a full spectrum of things to customers. I can see why Colt would want to restructure given it's only doing a small part. 
thebulk
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thebulk,
User Rank: Light Sabre
6/30/2015 | 12:22:10 PM
Re: Ruh?
I guess it's not really a bad idea to pivot away from one sector and focus more on the core if you can make revenue grow again. 
mendyk
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mendyk,
User Rank: Light Sabre
6/30/2015 | 12:15:06 PM
Re: Ruh?
The network services performance would be the one to worry about, then. It's the majority of the company's business, and it declined last year. And if my arithmetic still works, data center services account for less than 10% of revenues, and the growth there isn't exactly scintillating.
iainmorris
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iainmorris,
User Rank: Blogger
6/30/2015 | 12:07:51 PM
Re: Ruh?
Network services revenues, which account for 56% of the total, declined by 1.2% last year but Colt says business picked up in the first quarter of this year. Revenues from the voice services division (30% of total) declined by more than 18% but that was mainly blamed on decision to exit low-margin business. Revenues from data centres were up 8%.
mendyk
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mendyk,
User Rank: Light Sabre
6/30/2015 | 12:01:16 PM
Ruh?
So Colt's revenue dropped by 5.1% last year, but its IT services revenue fell by only 2.4% according to the numbers provided. That suggests that its "core businesses" may be declining at a faster rate. This decision also raises some questions about migration to the cloud.
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