Colt Reports Q1, Restructuring Plans

News Wire Feed Light Reading 4/22/2014

LONDON -- Colt Group S.A. (London Stock Exchange: COLT) today issued its Interim Management Statement for the three months ended 31 March 2014.

Group revenue for the quarter amounted to €399.8 million (Q1 ‘13: €392.1 million). This reflects year on year revenue growth of 2.0% (Q1 ‘13: declined 1.3%). On a constant currency basis Group revenue grew 1.2% (Q1 ’13: declined 0.7%) with contributions from all four lines of business:

Network Services revenue grew 0.4% (Q1 ’13: 1.9%). Managed networking revenues grew 9.8%, while bandwidth services and other revenues declined by 6.5%. Legacy (SDH low speed connections) revenues accounted for the majority of the decline at €5.5m.

Voice Services revenue grew 0.8% (Q1 ’13: declined 4.6%). Enterprise voice declined by 11.4% (Q1 ’13: 12.0%) driven by regulatory driven price declines and contraction of certain lower margin customer accounts. Growth in Carrier voice offset the decline in Enterprise voice albeit at low margins. The impact of regulatory driven price changes amounted to €6.1m negative impact in the quarter compared with €10.8m in Q1 ’13.

Data Centre Services revenue (excluding modular product sales) grew 8.1% (Q1 ’13: declined 3.4%). Growth in colocation revenue was offset by the timing of sales of our modular ftec halls which are not recurring in nature. As a result, total data centre revenue grew 0.5% (Q1 ’13: declined 1.0%).

IT Services revenue grew 15.0% (Q1 ’13: 4.3%) largely due to increased levels of equipment sales.

Group EBITDA of €74.1 million (Q1 ‘13: €80.5 million) represented a year on year decline of €6.4 million (8.0%). The decline in EBITDA resulted from margin compression due to product mix changes, the continued churn and pricing pressures in our bandwidth products and the flow through of previous year rate declines to our Enterprise voice customers. In bandwidth products, highly profitable legacy products are being replaced with lower margin managed networking services. In voice products, the impact of termination rate declines have affected both overall revenue and margin on enterprise and wholesale business. We would expect this pressure on margins to continue through the year.

Net funds as at 31 March 2014 amounted to €157.0 million (31 December 2013: €195.6 million). The cash outflow of €38.6 million for the quarter (Q1 ’13: outflow of €54.2m) reflected normal seasonal outflows, including annual prepayments and staff incentives. Capital expenditure for the first quarter of 2014 decreased to €74.5 million (Q1 ‘13: €81.2 million).

Colt is currently completing a strategic review of its performance by lines of business with a focus on operational and financial improvement. We are moving forward with the reorganisation of our business into four lines of business as previously announced: network services, IT services, data centre services and voice services. These new business units will be supported by our existing go to market and shared service organisations. Business plans for each of these units have been formalised and organisational change is in process. The underlying plans are aimed to facilitate the prioritisation of investments and opportunities that are of the greatest strategic and commercial value to our Group with a goal to improve revenue growth, margin and cash flow in 2015 and beyond.

As part of this process, we are announcing today a planned reduction in our Carrier voice business. We will withdraw from approximately 85% of our Carrier voice trading contracts over the next few months. Our objective is to liberate approximately five billion minutes per annum of voice network capacity to pursue more profitable enterprise voice business. This decision will result in the loss of approximately €175m of annualised revenue (total 2013 Carrier voice revenue was €250.4m), with roughly half the reduction evident in FY 2014. We expect that the rationalisation of the voice trading operations will improve Group profit margins over the next few years and have an immaterial impact on absolute EBITDA in 2014.

We expect that execution of all of the business plans will result in certain workforce restructuring actions during the second half of 2014 as the Company aligns its cost structure to improve profitability. Payback on the restructuring will typically be in the range of 9 to 12 months and for the most part occur in 2015.

Outlook
As a result of margin compression due to product mix changes, the continued churn and pricing pressures in our bandwidth products and the flow through of previous year rate declines to our Enterprise voice customers, we expect 2014 EBITDA (before restructuring charges) to range c.5% to 10% below current consensus estimates of €325m. In addition we expect to incur restructuring charges in the second half of 2014 of approximately €30m relating to the execution of the plans laid out above.

Rakesh Bhasin, Chief Executive Officer, said: “We are moving forward with our reorganisation into four lines of business. I believe this structure will provide the focus we need to address challenges in the marketplace. It will also allow us to prioritise investments that are of greatest strategic and commercial value to our Group. I am confident that these changes will help us grow the business and improve profit margins in future years.”

Colt Technology Services Group Ltd