Business Transformation

Colt to Jettison Ailing IT Business

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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