I am delighted to join Colt and look forward to driving better delivery of value for shareholders.

Overview of 2014

Group financial performance in 2014 reflected the ongoing transformation of our business, with a disappointing first half, but a second half that delivered to expectations. As we outlined in our 2013 Annual Report, we restructured the organisation along four lines of business: Network, Voice, Data Centre and IT Services; increasing the focus on our assets, providing end-to-end ownership and responsibility for revenue, profits and cash returns and enhancing visibility of performance and delivery.

Early in the year it became clear that a combination of margin compression from product mix changes, continued churn in our bandwidth products and the flow through of previous year rate declines to our enterprise voice customers were going to impact our performance, leading us to issue guidance to the market in April that the then market expectations for 2014 EBITDA exceeded our internal forecasts. At the same time we announced workforce restructuring actions to align cost structures and improve profitability. The implementation of these plans helped ensure the second half of the year delivered to expectations.

During December 2014 Colt completed the acquisition of KVH Asia, an infrastructure- based services provider of networks and data centres across Asian cities, which will provide us with a strong platform in the region.

Group revenue declined 5.1% due largely to a reduction in Voice associated with our proactive withdrawal from low margin carrier voice trading contracts, and regulatory price declines.

EBITDA1 declined 7.2% to €297.1m (2013: €320.1m). EBITDA performance was negatively impacted by margin compression from regulatory driven termination rate reductions in Voice Services and product mix changes in the business, particularly in Network Services, associated with the continued run-off of high margin legacy SDH (low bandwidth) circuits and increased proportion of off-net business from the growth in managed networking. €2.9m of costs associated with the acquisition of KVH are also included in 2014 EBITDA. These impacts were partially offset by targeted savings from our restructuring and cost control programmes which occurred mainly in selling, general and administrative expenses. Currency movements did not have a significant impact on EBITDA.

Operating profit before exceptional items decreased from €39.4m to €21.0m mainly due to the reduction in EBITDA, partially offset by lower network infrastructure depreciation due to a reduction in accelerated depreciation on ceased network-connected buildings.

Net cash generated from operating activities (before capital expenditure and exceptional items) has remained fairly flat at €268.7m (2013: €266.5m). Cash balances have declined to €77.4m (2013: €195.6m) largely as a result of our acquisition of KVH Asia (€128.0m) and payments made as part of our restructuring programmes. Even after the €41.7m purchase of a strategic building in 2013, capital expenditure reduced to €245.5m (2013: €326.9m) mainly due to lower spend in IT and data centre infrastructure during the year.

Total revenue

Total revenue for 2014 was €1,495.5m, a decrease of 5.1% over 2013 principally due to the commencement of our withdrawal from low margin carrier voice trading contracts and regulatory driven price reductions within Voice Services.

Network Services revenue increased by 1.2% to €841.5m (2013: €831.3m). On a constant currency basis Network Services revenue declined 0.1% as growth in managed networking was offset by declines in legacy low bandwidth (SDH) circuits.

Voice revenue decreased by 18.3% to €452.1m (2013: €553.5m) for the year. On a constant currency basis total Voice revenue decreased by 19.4%. Carrier voice revenue declined to €174.8m (2013: €250.4m) driven by our mid-year exit from low margin carrier voice trading contracts. Enterprise voice revenue fell to €277.3m (2013: €303.1m) driven by regulatory price declines of €16.2m.

Data Centre Services revenue grew 8.0% to €120.2m (2013: €111.3m). On a constant currency basis, Data Centre Services grew by 5.7%.

IT Services revenue declined by 2.4% (3.4% decline on a constant currency basis) to €77.8m (2013: €79.7m). This reduction was primarily driven by the proactive churn of several legacy dedicated hosting contracts as we focus the business, and our customers, on our next generation flexible shared hosting cloud platform.

Gross profit before exceptional items

Gross profit before exceptional items in 2014 declined by 3.4% to €386.6m due to regulatory driven termination rate reductions in Voice Services and product mix changes in the business, particularly in Network Services. This was partially offset by €11.1m lower infrastructure depreciation.

The profit decline in Network Services was due principally to the changing mix with growth of larger managed networking contracts resulting in increased use of third party networks (off-net connections) which carry lower margins. The contribution from our high margin legacy bandwidth products (SDH), which reduced to 7.8% (2013: 10.2%) of total Network Services revenue, also played a part in the gross profit decline. We have implemented a number of initiatives to improve the proportion of higher margin on-network business and general network utilisation going forward.

As a percentage of revenue, gross profit before exceptional items marginally increased to 25.9% (2013: 25.4%). This increase was driven by the exit from low margin Voice business and lower depreciation offset by the margin compression in Network Services.

Hugo Eales

Hugo Eales

Chief Financial Officer

Group financial performance in 2014 reflected the ongoing transformation of our business, with a disappointing first half, but a second half that delivered to expectations.

Total revenue (€m)

Total revenue (€m)

Gross profit before exceptional items (€m)

Gross profit before exceptional items (€m)

EBITDA1 before exceptional items (€m)

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

Operating expenses (before exceptional items)

Operating expenses of €365.6m (2013: €360.8m) increased 1.3% (€4.8m) driven by an increase in other depreciation (excludes network depreciation) due to increased spend on IT systems which came into operation at the end of the prior year, relating to enhancements to our order processing, billing and customer relationship management systems. Operating expenses were adversely impacted by foreign currency movements of €8.6m due to the impact of the strengthening of Sterling against the Euro. The impact of our restructuring was insufficient to offset this movement.

Selling, general and administrative expenses decreased by €1.7m to €311.1m (2013: €312.8m). The impact of cost savings measures, including restructuring, was largely offset by an adverse foreign currency impact of €6.7m.

EBITDA (before exceptional items)

EBITDA decreased by 7.2% to €297.1m (2013: €320.1m) with the fall in gross profit before depreciation partially offset by the reduction in selling, general and administrative expenses. EBITDA margin as a percentage of sales fell slightly to 19.9% (2013: 20.3%). EBITDA was not materially affected by currency movements.

Exceptional items

In April 2014, Colt announced a reorganisation of its business resulting in workforce restructuring actions. The Group incurred an exceptional expense of €31.1m in 2014 associated with the costs of implementing these actions. Of the €22.3m restructuring cash payments made during the year, €14.6m were made in relation to this restructuring programme with the balance relating to the 2012 transformation programme.

The establishment of the lines of business in 2014 has facilitated an alignment of our IT Services product portfolio with customer demand for cloud-based services in addition to rationalising our cost structure to improve profitability.

As a result of the portfolio realignment, which is focused on growth areas in both the enterprise and service provider space, we have reviewed the carrying values of non-current assets in IT Services and recorded a non-cash impairment expense of €15.0m in 2014. This cost has been treated as an exceptional item.

Total gross potential tax asset

2014
€m
2013
€m
Group tax losses carried forward
– without time limits2,698.02,542.8
Group tax losses carried forward
– time limited189.2127.4
Total gross tax losses2,887.22,670.2
Other timing differences1,117.0985.3
Total gross potential tax asset14,004.23,655.5
  1. Total gross tax asset includes recognised and unrecognised tax assets.

Operating profit (before exceptional items)

Operating profit excluding exceptional items decreased to €21.0m (2013: €39.4m) mainly due to the decline in EBITDA.

Other income and expenses

Finance costs increased from €0.7m to €5.3m primarily as a result of non-recurring items including a forward option related to the funding of the KVH Asia acquisition. Foreign exchange gains rose from €3.3m to €6.7m due to the strengthening of Sterling against the Euro.

Taxation

The Group recognised a taxation charge for the year of €5.1m (2013: €4.4m). The increase in overall taxation is due mainly to a lower deferred tax credit recognised in the period. The current tax charge amounted to €5.2m (2013: €6.9m).

The current tax charge did not reduce in line with the reduction in profit compared to 2013, as most of the current tax the Group pays does not vary with profit. This is mainly because tax is payable in jurisdictions which are structurally profitable and profits generated in other jurisdictions are sheltered by tax losses brought forward, which does not give rise to a current tax cost.

Total gross potential tax asset

Gross potential tax assets increased by €348.7m in the year which is due to tax- based net operating losses generated in the year, including net operating losses of approximately €26.0m following the KVH Asia acquisition. The majority of the time limited carry forward 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 52.9% mainly as lower operating profit was offset by a foreign exchange gain of €6.7m, mainly due to the strengthening of Sterling against the Euro. Including the 2014 exceptional restructuring charge of €31.1m and €15.0m impairment charge, the Group reported a loss after tax of €28.2m (2013: profit of €38.0m).

Operating profit summary (before exceptional items) (€m)

Operating profit summary

Cash flow

2014
€m
2013
€m
Cash and cash equivalents at start of year195.6280.1
EBITDA297.1320.1
Movements in payables(47.7)(18.7)
Movements in receivables21.1(25.1)
Other items(1.8)(9.8)
(28.4)(53.6)
Net cash generated from operating activities before exceptional items268.7266.5
Restructuring payments1(22.3)(21.3)
Net interest(3.4)(1.1)
Capital expenditure(245.5)(326.9)
Free cash outflow2(2.5)(82.8)
Acquisition of subsidiaries net of cash acquired(117.3)(0.8)
Issue of shares0.3
Net movement in cash and cash equivalents(119.8)(83.3)
Effect of exchange rate changes on cash and cash equivalents1.6(1.2)
Cash and cash equivalents at end of year77.4195.6
  1. Reported as an exceptional item.
  2. Free cash flow is net cash generated from operating activities less net cash used to purchase non-current assets and net interest paid.

Cash flow

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

Net cash from operations before exceptional items and restructuring payments increased by €2.2m from 2013. The impact of lower EBITDA by €23.0m was offset by improved working capital performance of €17.2m. Major movements came from trade receivables and payables. There was a reduction in both payables and receivables due to the exit of the Voice trading business and trade payables fell significantly due to the timing of certain payments which were outstanding at the end of 2013 and paid in 2014.

Restructuring payments increased to €22.3m (2013: €21.3m) as a result of the restructuring programme announced with the Q1 2014 results.

Capital expenditure decreased by €81.4m to €245.5m (2013: €326.9m). Excluding the €41.7m purchase of a strategic property in 2013, capital expenditure declined by €39.7m. This was mainly due to lower spend on internal IT systems and investment in our data centre capacity, as we sought to maximise our return on investment.

KVH Asia acquisition

On 22 December 2014 Colt completed the acquisition of KVH Asia Limited, an infrastructure-based service provider in both networks and data centres, which will provide us with a strong platform in Asia. We acquired net assets of €62.3m on completion in exchange for total cash consideration of €128.0m, generating €65.7m of provisional goodwill.

KVH Asia results have been consolidated from 22 December 2014, contributing €3.9m revenue and €0.4m EBITDA respectively to full year 2014 results. For the year ended 31 December 2014, KVH Asia's pro-forma revenue and EBITDA was €144.6m and €17.4m respectively.

Statement of financial position

Non-current assets increased by €191.6m to €1,747.6m (2013: €1,556.0m) driven by the acquisition of KVH Asia and recognition of related goodwill.

The movement in net working capital balances, comprising receivables, payables and provisions, is discussed in the cash flow section of this review.

Net cash and deposits of €77.4m decreased by €118.2m, largely attributable to the €128.0m cash consideration paid to acquire KVH Asia.

Shareholders' funds increased by €8.8m to €1,519.9m (2013: €1,511.1m) mainly due to an increase in translation reserves due to the strengthening of Sterling against the Euro, partially offset by the loss in the year.

Revolving credit facility

In August 2014 the Group entered into a revolving credit facility agreement for €150.0m with a group of banks. The agreement is for an initial three year term which can be extended at the Group's option for an additional two years. The facility will be used to manage the Group's working capital position. As at 31 December 2014 the facility remained undrawn.

Cash & deposits summary (€m)

Cash & deposits summary

Key performance indicators

The Board of Directors monitors the financial performance of the Group's operations on a regular basis. 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 revenue20142013€1,495.5m€1,575.8mRevenue and its growth are used for internal performance analysis to assess the overall performance of the business.The revenue decline was due principally to our proactive withdrawal from low margin carrier voice contracts and regulatory-driven price reductions in Voice Services.
EBITDA20142013€297.1m€320.1mEBITDA is profit for the year before net finance costs and related foreign exchange, tax, depreciation, amortisation and exceptional items. We believe that EBITDA represents a meaningful measure of the underlying operating profitability of the Group.The EBITDA decline was due mainly to margin compression from regulatory driven termination rate reductions in Voice Services and product mix changes in the business, particularly in Network Services, partially offset by reductions in selling, general and administrative expenses.
Profit before tax and exceptional items20142013€23.0m€42.4mProfit 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.The decline in profit before tax and exceptional items was driven by the reduction in EBITDA, slightly offset by a decrease in depreciation and amortisation.
Free cash outflow20142013€(2.5)m€(82.8)mFree cash flow is net cash generated from operating activities less net cash used to purchase non-current assets and net finance costs paid. Free cash flow provides a measure of the cash generated from the Group's operations.There was an improvement in free cash flow as a result of lower capital expenditure in 2014 and improvement in working capital.
Capital expenditure20142013€245.5m€326.9mCash 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.The decline was a result of a €41.7m purchase of a strategic property in 2013 combined with lower spend in 2014 on internal IT systems and investment in our data centre capacity, both of which tend to be variable in nature.

Outlook statement

At a capital markets day in May 2012 Colt outlined several targets for revenue, EBITDA and strategic capex investment levels over the 2012 to 2016 period. These targets are no longer relevant due to an accumulation of factors over the last few years, particularly the sustained weakness of general macroeconomic conditions across Europe, and in the enterprise market in particular, and the continued aggressive regulatory impacts on voice termination.

While we remain committed to investing to develop profitable growth and improved returns for the business through a mixture of organic and inorganic programmes, our current priority is to improve cost control, returns on investment and free cash flow. We aim to update the market with more detailed medium-term plans at a capital markets day to be held in the second half of 2015.

Hugo Eales

Hugo Eales

Chief Financial Officer

25 February 2015