Financial review

Chief Financial Officer's review

"Colt has continued to execute in a challenging environment through 2012, posting revenue growth for the first time in seven years. EBITDA grew slightly in a period of investment particularly focused on our growth segments. Our skills transformation programme, announced in December, will allow for continued investment in these segments in line with our strategic plan."

Mark Ferrari / Chief Financial Officer

Overview of 2012

Total revenue grew for the first time in seven years. The comparative performance over last year, 2.6% growth versus a decline of 1.9% in 2011, was driven by a stabilisation of Voice revenue trends in the year. EBITDA1 before exceptional items grew slightly to €333.6m with the benefit of increased revenues offset by investment in growth areas. These operating results were achieved against a backdrop of challenging economic conditions throughout Europe.

The free cash outflow for the year of €56.6m was driven largely by increases in capital expenditure and working capital. During the year investments were made in data centre expansion (€45.8m), portfolio development (€29.4m) and network expansion (€12.5m). Cash used for working capital was largely a consequence of the timing of prior year creditor payments, movements in accruals and deferred revenue. Additionally, Colt made a cash payment of €9.2m in 2012 associated with the acquisition of ThinkGrid, a channel-focused cloud platform solutions provider. As at 31 December 2012, the net funds of the Group amounted to €280.1m (2011: €343.7m).

In December 2012 we announced a programme to accelerate skills transformation to support growth in the areas of managed network and IT revenue while aligning costs related to our legacy business and ultimately improving future group profit. The implementation of this programme resulted in a 2012 exceptional charge of €32.0m with net recurring annual cost savings of approximately €27.0m anticipated by 2014.

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

Total revenue

Five year revenue summary

Total revenue for 2012 was €1,594.6m, an increase of 2.6% over 2011, with growth across all the main product categories. Voice revenue, which had declined by c8% to c12% over the last four years, stabilised in 2012 with overall growth of 1.0% driven by Carrier Voice revenue.

Data revenue increased by 2.4% to €824.1m, driven by the continued growth of Ethernet (12.6%), offset by declines in legacy Bandwidth of 12.8% as customers migrate away from legacy technology and products.

Managed Services revenue, including Data Centre Services related revenue, grew by 8.4% to €201.9m. Excluding Data Centre Services revenue, Managed Services grew 10.2% to €165.0m, primarily related to managed IT solutions. During the year Data Centre Services revenue from external customers increased by 1.1% to €36.9m driven by increased wholesale activity with enterprise customers offset by lower sales of modular components to customer sites compared to that in 2011.

Overall Voice revenue increased by 1.0% for the year. Growth in Carrier revenue of 25.4% was driven by increased international traffic enabled by investments in our voice trading platform. This growth offset the continued decline in Corporate & Reseller revenue of 12.0%, which was driven by competitive markets throughout Europe, regulatory price declines particularly in Germany and the decision to withdraw from low margin business in the Canary Islands (€9.3m reduction).

Gross Profit (before exceptional items)

Gross profit before exceptional items declined by 2.4% to €447.5m in 2012. The gross profit margin before exceptional items decreased slightly to 28.1% (2011: 29.5%) which reflects investments made in product development and delivery resources, changes to the product mix for Voice revenue and higher depreciation as a result of our continued investment in data centres, IT and network infrastructure. Partially offsetting these increased costs were reductions in both the bad debt expense and Voice and Data cost of sales.

Cost of sales included a bad debt credit of €2.7m (2011: bad debt expense €10.0m) reflecting a reversal of the increase in the provision for uncollectable accounts during 2011. The 2011 provision reflected in part an increase in the aged trade receivables balance during 2011. This was partially attributable to the consolidation of the credit and collection function in Barcelona, which has now been completed, as well as potential exposure from the economic situation across Europe. During 2012 our trade receivable balances have normalised and we believe that the increase in the provision is no longer appropriate.

Voice related cost of sales have been reduced by €8.1m over 2012 related to a reduction in voice accruals for settlement with third party carriers. Improvements in our internal processes have allowed us to reduce the period over which the Group needs to retain accruals to cover late charges from other carriers. The 2012 Data direct margin was relatively flat on 2011 as a higher volume of off-net revenue was offset by favourable credits related to regulatory settlements in the year, the amounts of which are comparable with 2011.

Operating expenses (before exceptional items)

Operating expenses1 of €390.4m (2011: €391.4m) fell by 0.3% (€1.0m). There was a 1.5% increase in selling, general and administrative expenses (before exceptional items). Unfavourable currency movements due to the concentration of costs in the United Kingdom and expansionary spend, including MarketPrizm and ThinkGrid, were partially offset by reductions in discretionary costs.

The increase in these expenses was offset by a decline in other depreciation in the year.

EBITDA and Operating profit (before exceptional items)

EBITDA before exceptional items increased by 0.5% driven by higher gross profit (excluding network depreciation) offset by the increase in selling, general and administrative costs. EBITDA (before exceptional items) margin declined slightly as a percentage of sales from 21.4% to 20.9% which generally reflects the continued investment in the business in line with our strategic direction.

  1. Reported amount excluding the exceptional item in 2012.

Five year EBITDA summary

Operating profit summary (before exceptional items)

Operating profit (before exceptional items) decreased by €9.8m (14.6%) due primarily to an increase in overall depreciation expense of €11.4m due to our incremental investment in capital expenditure. This was partially offset by improved EBITDA.

Exceptional items

In 2012, Colt accelerated the transformation of the business by executing a programme to drive our skills transformation to support growth in managed network and IT revenue streams while aligning costs related to our legacy business and protecting future group profit. The Group realised a charge of €32.0m in relation to this programme for redundancy costs. The efficiencies from implementing this programme will amount to approximately €45.0m per annum. Of this, approximately one third will be invested into new roles, providing a net recurring annual cost saving of approximately €27.0m by 2014. There were no exceptional items in 2011.

Taxation

The Group recognised a taxation charge for the year of €3.7m (2011: €9.7m). The reduction in overall taxation is due primarily to changes in the deferred tax asset recognised. The current tax charge amounted to €6.6m (2011: €7.7m).

Total gross tax asset

2012
€m
2011
€m
Group tax losses carried forward – without time limits2,215.02,045.6
Group tax losses carried forward – time limited225.9221.0
Total gross tax losses2,440.92,266.6
Other timing differences1,041.01,084.3
Total gross tax asset13,481.93,350.9
  1. Total gross tax assets includes recognised and unrecognised tax assets.

Gross tax assets increased by €131.0m in the year, due primarily to tax based net operating losses generated in the year. The majority of the brought forward time limited losses must be utilised by 31 December 2026; all must be utilised in the country of origin. They remain subject to legislative provisions and to agreements with the various tax authorities in the jurisdictions in which the Group operates. The other timing differences mainly arose from our assets being depreciated more quickly in our financial accounts than in our tax accounts.

Profit after tax

Profit after tax (before exceptional items) decreased by 6.7% to €58.1m as the lower operating profit was partially offset by the movement in the tax charge and the foreign exchange gain of €4.8m (2011: €3.2m). Including the 2012 exceptional restructuring charge of €32.0m, profit after tax decreased by 58.1% to €26.1m (2011: €62.3m).

Cash flow

The normal proscribed cash flow format has been amended in the presentation below to include free cash flow, a key performance indicator of the Group.

2012
€m
2011
€m
Cash and cash equivalents at start of year283.7150.4
EBITDA333.6332.0
Movements in payables(64.6)(10.9)
Movements in receivables(4.9)26.5
Other items(7.3)(7.8)
Net cash generated from operating activities before exceptional items256.8339.8
Restructuring payments(8.0)(19.1)
Net interest1.12.1
Capital expenditure(306.5)(279.5)
Free cash (outflow)/inflow1(56.6)43.3

Acquisition of subsidiaries

(9.2)

Issue of shares0.7
Redemption/(purchase) of bank deposits60.090.0
Net movement in cash and cash equivalents(5.1)133.3
Cash and cash equivalents at end of year280.1283.7
Add back 3–12 month deposits60.0
Net cash and deposits at end of year280.1343.7
  1. Free cash flow is net cash generated from operating activities less net cash used to purchase non-current assets and net interest received.

Colt's free cash outflow was €56.6m in 2012 compared to an inflow of €43.3m in 2011. Net cash generated from operations decreased compared to 2011 principally due to working capital movements. The net change in payables amounted to an outflow of €64.6m, an increase of €53.7m over 2011. This increase was mainly attributable to the timing of payments of trade payables at 31 December 2011, a reduction in deferred revenue, as well as changes in accruals related to voice cost of sales. The receivables outflow of €4.9m resulted from the reduction in the bad debt provision. In 2011 there was also a positive impact from improved collection of trade receivables and favourable balance sheet management in certain other receivable accounts.

At our Capital Market's day in May 2012, we announced our plan to increase our investment in areas of strategic growth. Consistent with that, net capital expenditure in 2012 increased by €27.0m to €306.5m (2011: €279.5m). This increase reflected 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 ongoing product development, including the development of our Cloud computing platform.

Capital expenditure

2012
€m
2011
€m
Customer order related132.2122.0
Data Centre Services expansion45.833.4
Product and Services Development29.428.0
Network expansion12.54.3
Internal IT39.745.1
Network and data centre enhancements41.540.2
Other5.46.5
Total306.5279.5

Capital expenditure relating to customer orders 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 8.4% (€10.2m) in 2012 to €132.2m.

Capital expenditure to expand our data centre capacity increased by €12.4m (37.1%) to €45.8m in 2012 due to investment in our new data centre site in the Netherlands, where operations commenced in January 2013. We also expanded our modular data centre capacity in France.

Product and Services Development spend of €29.4m in 2012 was similar to the level in 2011. In 2012, we invested in the development of our Managed Services platform which will strengthen our solutions business. This category of spend will fluctuate from period to period, but overall remains consistent with the guidance provided at our capital markets day.

Capital expenditure to expand our network increased to €12.5m in 2012 (2011: €4.3m) as Colt invested in new low latency routes to Ireland, and enhanced the network reach in Luxembourg, Ireland, France, Spain and Italy. In addition, we established a presence in Iceland and improved speeds on ultra-low latency routes between key European financial hubs during the year.

Capital expenditure on enhancements to our existing network and data centre capacity slightly increased by 3.2% to €41.5m.

Internal IT, representing spend on internal systems, reduced by 12.0% (€5.4m) to €39.7m after significant investments were made in the platform for selling integrated Cloud computing and network solutions in 2011. We continue to invest in internal systems which enhance our platform capability.

ThinkGrid acquisition

During Q3 2012, Colt completed the acquisition of ThinkGrid, a channel-focused cloud platform provider, which strengthens our cloud-based services offering for the SME channel across our European markets. Initial consideration paid on completion of the acquisition was €9.2m. The agreement also calls for contingent consideration based on future performance criteria. Estimated realisable contingent consideration of €6.4m was provided for at 31 December 2012.

Cash & deposits and debt summary

Statement of financial position

Non-current assets increased by €68.1m to €1,517.1m (2011: €1,449.0m) as a result of the increase in capital expenditure, the ThinkGrid acquisition and exchange gains arising on translation of non-Euro denominated operations partially 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 of this review.

Net cash and deposits of €280.1m decreased by €63.6m, reflecting the free cash outflow for the year.

Total equity increased by €35.0m to €1,483.2m (2011: €1,448.2m) mainly due to the profit for the year.

Key performance indicators

Colt's key performance indicators (KPIs) for 2012 are detailed below and discussed within the Financial Review.

The Board of Directors monitors the financial performance of the Group's operations on a regular basis. The KPIs have been calculated in line with the values presented in the financial statements unless otherwise stated. Details of the most significant KPIs used by the Group along with explanations of how the KPIs have been calculated and their purpose in assessing the performance of the business are set out below.

Group revenue2012
2011
€1,594.6m
€1,554.3m
Revenue and its growth are used for internal performance analysis to assess the overall performance of the business.
Data revenue2012
2011
€824.1m
€805.1m
The level and growth of higher margin Data revenue, our largest component of revenue, is a key measure of our vision to be the leading information delivery platform.
Managed Services revenue2012
2011
€201.9m
€186.2m
The level and growth of higher margin Managed Services revenue is a key metric to measure growth of the Group's strategically important Data Centre Services, Solutions and Cloud products.
EBITDA2012
2011
€333.6m
€332.0m
EBITDA is profit for the year before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items. We believe that EBITDA represents a meaningful measure of the underlying operating profitability of the Group.
Profit before tax and exceptional items2012
2011
€61.8m
€72.0m
Profit before tax is used as a measure of the overall profitability of the Group after adjusting EBITDA for the costs of depreciating the Group's capital expenditure.
Free cash flow2012
2011
€(56.6)m
€43.3m
Free cash flow is net cash generated from operating activities less net cash used to purchase non-current assets and net interest received. Free cash flow provides a measure of the cash generated from the Group's operations.
Capital expenditure2012
2011
€306.5m
€279.5m
Cash capital expenditure is the amount of the Group's funds which have been spent on the purchase of assets retained within the business. It is a key enabler of future growth, particularly through expansion of our network and data centres and investment in our Solutions business.

Mark Ferrari / Chief Financial Officer

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