Q4 FINANCIAL RESULTS
Overview of the year
? Revenue decreased by 6.7% to ?1,679.6m. After excluding reductions in fixed to mobile prices,
revenue decreased by 4.2%
? Data revenue grew by 9.8% to ?842.6m and was 50.2% of total revenue
? Gross margin before depreciation increased by 3.3 percentage points to 38.5%
? EBITDA(1) increased by ?6.5m or 2.4% to ?277.4m
? Profit before tax and exceptional items increased by ?48.7m from a loss of ?9.5m to a profit of
?39.2m
? Free cash inflow(2) increased from ?19.1m to ?37.3m
? Capital expenditure increased from ?229.4m to ?259.7m
Compared to Q4 2006
? Revenue decreased by 5.5% to ?424.6m. After excluding reductions in fixed to mobile prices,
revenue decreased by 3.3%
? Data revenue grew by 10.0% to ?220.9m and was 52.0% of total revenue
? Gross margin before depreciation increased by 3.7 percentage points to 39.6%
? EBITDA(1) increased by ?0.9m or 1.3% to ?71.8m
? Profit before tax increased by ?4.6m from ?8.9m to ?13.5m
? Free cash inflow(2) increased from ?3.8m to ?18.4m
? Capital expenditure increased from ?69.0m to ?73.7m
The Group?s financial position continues to improve, with cash and cash equivalents of ?231.1m and
net debt of ?31.1m at the end of the quarter.
Commenting on the results, Rakesh Bhasin, Chief Executive Officer, said:
"We continued to make good progress in 2007. We reorganised the business into three customer facing
business divisions ? Major Enterprise, SME and Wholesale ? more closely aligning our organisation to
the market.
"I am particularly pleased to report that Data revenue growth continues to accelerate, with growth of 9.8 per cent in 2007, up from 6.9 per cent in 2006. Data revenue represented over 50 per cent of Group revenue. During the year we invested in four new Data centres bringing the total number of COLT Data centres to 18 across Europe.
"This was our first full financial year of profitability.
"The results for the fourth quarter also show sustained progress: Data revenues grew by 10 per cent,
margins were up by 3.7 percentage points, EBITDA was up 1.3 per cent and profit grew by ?4.6m.
During the quarter we opened our second site in India, this time in Bangalore; and our new Data centres in London and Amsterdam.
"We expect 2008 to be another year of progress for our business."
CHANGES TO FINANCIAL REPORTING
The Group changed its operating model during 2007 and formed three new customer facing business
divisions: Major Enterprise, Small and Medium Enterprises (SME) and Wholesale, supported by four
Service Divisions and the Country Division. The financial reporting structure of the Group was aligned to reflect this new, more customer-centric structure. This release includes segmental analysis of the revenues and operating results of these three new divisions.
Historically COLT presented its segmental information on a geographical basis. In order to maintain
consistency in our quarterly reporting in 2007 the geographical segmental information for Q4 and the full year is presented in Appendix 2. However, from Q1 2008 we will no longer report geographic data on a quarterly basis.
FINANCIAL REVIEW
Unless indicated otherwise, all comparatives are against the equivalent period of the prior year.
Total revenue Revenue for the year decreased by ?121.4m or 6.7% to ?1,679.6m (2006: ?1,801.0m) with growth of ?75.4m or 9.8% in higher margin Data revenues and a drop of ?196.8m or 19.0% in lower margin Voice revenues. Data revenue was 50.2% of total revenue compared with 42.6% in 2006. After excluding the impact of reductions in fixed to mobile prices, revenue decreased by 4.2%.
Revenue for the quarter decreased by ?24.6m or 5.5% to ?424.6m, with growth of ?20.0m or 10.0% in
higher margin Data revenues and a drop of ?44.6m or 18.0% in lower margin Voice revenues. Data
revenue as a percentage of total revenue increased to 52.0% (Q4 2006: 44.7%). After excluding the
impact of reductions in fixed to mobile prices, revenue decreased by 3.3%.
At 31 December 2007 deferred revenue (which mainly relates to Data revenue) was ?183.3m (31
December 2006: ?148.0m), a year on year increase of ?35.3m and an increase in the quarter of ?6.5m
(30 September 2007: ?176.8m).
Data revenue
Data revenue for the year increased by 9.8% to ?842.6m (2006: ?767.2m) and comprised 50.2% of total
revenue (2006: 42.6%). The growth in Data revenue during the year has been mainly driven by Ethernet
and COLT Managed Services offerings, which now account for approximately 40.0% of Data revenue and
which both grew at over 20% per annum during 2007. Data revenue from Major Enterprise customers for
the year increased by 10.2% to ?485.5m (2006: ?440.7m) driven by increased COLT Managed Services
and Ethernet revenues. Data revenue from SME customers for the year increased by 11.8% to ?171.7m
(2006: ?153.6m), driven by growth in COLT Total, our combined Voice/Access product for this market,
and Ethernet. Data revenue from Wholesale customers for the year increased by 7.2% to ?185.4m (2006:
?172.9m), driven again by Ethernet products.
Data revenue for the quarter increased by 10.0% to ?220.9m (Q4 2006: ?200.9m) and to 52.0% of total
revenue (Q4 2006: 44.7%) with increases across all divisions and geographies. Annual Data revenue
trends and growth drivers were reflected in the quarter with Data revenue from Major Enterprise
customers increasing by 8.1% to ?126.2m (Q4 2006: ?116.7m), from SME customers increasing by
12.4% to ?45.3m (Q4 2006: ?40.3m), and from Wholesale customers increasing by 12.5% to ?49.4m (Q4
2006: ?43.9m).
Voice revenue
Voice revenue for the year decreased by 19.0% to ?837.0m (2006: ?1,033.8m), and for the quarter
decreased by 18.0% to ?203.7m (Q4 2006: ?248.3m). After excluding the impact of reductions in fixed to mobile prices, annual Voice revenue decreased by 14.7% and the quarter by 14.1%.
Corporate and Reseller Voice revenues fell by ?80.1m for the year to ?590.3m and by ?14.8m for the
quarter to ?143.9m, primarily in Germany due to the mobile termination rate reductions in December 2006 and December 2007 and the disruption from the mobile operators? court victory overturning the 2006 reduction. The situation in Germany is exacerbated by our exposure to the consumer segment through our reseller business and the continued decline in revenues from our legacy Carrier Pre-Select (CPS) product. Revenue also fell in the UK as we eliminated some of our low margin business.
Carrier Voice revenue declined by 32.1% to ?246.7m (2006: ?363.4m). The mobile rate cuts and the
market disruption in Germany caused the majority of this decline. Revenue in the quarter declined by
33.3% to ?59.8m (2006 Q4: ?89.6m).
Voice revenue from Major Enterprise customers for the year decreased by 3.1% to ?187.6m, with a
quarterly increase of 3.7% to ?48.2m. Voice revenue from SME customers for the year decreased by
21.3% to ?317.1m with a quarterly decrease of 20.7% to ?74.0m, the decline being primarily in Germany
due to the factors described above. Voice revenue from Wholesale customers for the year decreased by
24.0% to ?332.3m, with a quarterly decrease of 24.9% to ?81.5m, driven by the Carrier Voice decline.
Cost of sales
Cost of sales for the year decreased by 11.3% to ?1,226.8m (2006: ?1,382.5m), and for the quarter by
10.8% to ?302.6m (Q4 2006: ?339.3m). Mainly as a result of the changing revenue mix, the decrease in
cost of sales was greater than the decrease in revenue leading to an increase in gross profit for the year of ?34.3m or 8.2% to ?452.8m (2006: ?418.5m), and in the quarter of ?12.1m or 11.0% to ?122.0m (Q4 2006: ?109.9m).
Interconnect and network costs for the year decreased by 11.4% to ?1,032.9m (2006: ?1,166.2m), and
for the quarter by 10.9% to ?256.6m (Q4 2006: ?288.0m) mainly reflecting the lower volume of Voice
traffic. Gross margin before depreciation for the year improved by 3.3 percentage points to 38.5%
(quarterly increase 3.7 percentage points to 39.6%) mainly reflecting the improved revenue mix towards Data revenue.
Network depreciation for the year decreased by 10.4% to ?193.9m (2006: ?216.3m) and for the quarter
decreased by 10.3% to ?46.0m (Q4 2006: ?51.3m).
Operating expenses
Operating expenses for the year increased by 0.9% to ?397.5m (2006: ?393.8m before exceptional
items), and for the quarter increased by 8.6% to ?104.4m (Q4 2006: ?96.1m).
Continued tight cost control saw selling, general and administrative ("SG&A") expenses for the year
increase by 1.5% to ?369.3m (2006: ?363.9m before exceptional items) despite increased investment in
systems and people to support our growth. In the quarter SG&A expenses increased by 6.5% to ?96.2m
(Q4 2006: ?90.3m) reflecting this increased investment.
Other depreciation for the year decreased by ?1.7m to ?28.2m (2006: ?29.9m), and for the quarter
increased to ?8.2m (Q4 2006: ?5.8m).
Operating result
The operating profit for the year increased by ?30.6m to ?55.3m (2006: ?24.7m before exceptional items) reflecting the improved mix of revenues and controlled growth in operating expenses. The operating profit for the Major Enterprise segment increased by ?26.4m to ?31.0m due primarily to the growth in higher margin Data revenue. By contrast as noted above the gains from Data revenue growth in the SME segment were more than offset by the decline in Voice revenue resulting in a ?10.3m increase in operating loss to ?11.3m. The Wholesale segment operating profit moved ahead by ?14.5m to ?35.6m driven by Data revenue growth with the decline in low margin Carrier Voice revenues having a limited impact on the operating result.
These trends were reflected in the quarterly segment results with the Group operating profit increasing by ?3.8m to ?17.6m (Q4 2006 ?13.8m). The Major Enterprise operating profit for the quarter increased by ?2.3m to ?8.3m, SME recorded an operating loss of ?1.2m against a profit of ?1.7m in Q4 2006 and the Wholesale operating profit improved by ?4.4m to ?10.5m, all consistent with the reasons for the annual movements noted above.
Finance income and finance costs and similar charges
Finance income for the year decreased by ?1.5m to ?8.2m (2006: ?9.7m), due to the higher average cash balances in 2006 before the ?145.3m outflow in summer 2006 from debt redemption net of share issue proceeds. Finance income for the quarter increased by ?0.7m to ?2.4m (Q4 2006: ?1.7m), reflecting increased interest rates and higher cash balances.
Finance costs and similar charges for the year decreased by ?21.2m to ?23.6m (2006: ?44.8m) as a
result of the debt redemption in summer 2006, and for the quarter increased by ?0.6m to ?6.1m (Q4
2006: ?5.5m).
Profit
Annual EBITDA grew by ?6.5m to ?277.4m (2006: ?270.9m), with a quarterly increase of ?0.9m to
?71.8m (2006: ?70.9m). 2007 was the third successive year of EBITDA growth.
Full year profit before taxation increased by ?48.7m to ?39.2m after a ?9.5m loss in 2006. Q4 was
COLT?s sixth successive profitable quarter, with profit before taxation at ?13.5m, a ?4.6m improvement year on year (Q4 2006: ?8.9m) and a ?4.8m improvement quarter on quarter (Q3 2007: ?8.7m).
Taxation
COLT had no profits on which tax was payable in either the years or quarters ended 31 December 2007
or 31 December 2006. Total tax losses carried forward amounted to ?1,556.6m (2006 ?1,414.5m). At 31
December 2007, ?1,217.1m (2006: ?1,052.5m) of these losses were not time limited and ?339.5m (2006
?362.0m) were time limited. The majority of the time limited losses must be utilised by 31 December
2011, and all losses must be utilised in the country in which they arose. They remain subject to legislative provisions and to agreements with the various tax authorities in jurisdictions in which the Group operates.
No deferred tax asset has been recognised in the light of the Group?s record of taxable losses. At 31 December 2007 the Group also had other timing differences of ?1,184.1m (2006: ?1,333.0m), the
majority of which have arisen as a result of the carrying value of fixed assets being higher for tax
purposes than their value in the accounts.
Cash flow and net debt
The Group?s 2007 free cash inflow increased by ?18.2m to ?37.3m (2006: ?19.1m) the result of an inflow from receivables through improved collection activity and lower finance costs offsetting the increased capital expenditure. Q4 free cash flow increased by ?14.6m to ?18.4m (2006: ?3.8m) due to improved working capital management.
The net movement in cash and cash equivalents for the year was an inflow of ?37.5m (2006: outflow of
?134.4m), with a Q4 net inflow of ?18.5m (Q4 2006 outflow of ?13.0m).
At 31 December 2007 cash and cash equivalents increased to ?231.1m (31 December 2006: ?196.3m).
Net debt at 31 December 2007 was ?31.1m (31 December 2006: ?65.9m).
