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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 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.