Q1-17 FINANCIALS UPDATE
23 May 2017
Disclaimer
THIS PRESENTATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY, AND IS NOT AN OFFER OR A SOLICITATION OF AN OFFER TO BUY OR SELL SECURITIES IN THE UNITED STATES OF AMERICA OR IN
ANY OTHER JURISDICTION. BY VIEWING THIS PRESENTATION, YOU AGREE TO THE FOLLOWING:
ANY INFORMATION IN THIS PRESENTATION THAT IS NOT A HISTORICAL FACT IS A “FORWARD-LOOKING STATEMENT”. SUCH STATEMENTS MAY INCLUDE OPINIONS AND EXPECTATIONS REGARDING
INTEROUTE AND ITS FUTURE BUSINESS, THE STRATEGIES OF ITS MANAGEMENT AND ITS MANAGEMENT’S EXPECTATIONS OF GLOBAL ECONOMIC AND REGULATORY TRENDS.
BY THEIR NATURE, SUCH FORWARD-LOOKING STATEMENTS INCLUDE UNKNOWN AND KNOWN RISKS AND UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE INTEROUTE’S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED IN, OR IMPLIED BY, SUCH FORWARD-LOOKING STATEMENTS. WHILE INTEROUTE BELIEVES THAT ITS
ASSUMPTIONS REGARDING FUTURE EVENTS ARE REASONABLE, THESE FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS AND, IN ADDITION TO BEING SUBJECT TO UNKNOWN AND KNOWN
RISKS, UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS BEYOND INTEROUTE’S CONTROL, THERE ARE INHERENT DIFFICULTIES IN PREDICTING CERTAIN IMPORTANT FACTORS THAT COULD IMPACT
THE FUTURE PERFORMANCE OR RESULTS OF INTEROUTE’S BUSINESS. AS A RESULT, SUCH STATEMENTS SHOULD NOT BE REGARDED AS REPRESENTATIONS AS TO WHETHER SUCH ANTICIPATED EVENTS
WILL OCCUR NOR THAT EXPECTED OBJECTIVES WILL BE ACHIEVED. ALL FORWARD-LOOKING STATEMENTS APPLY ONLY AS OF THE DATE HEREOF AND INTEROUTE UNDERTAKES NO OBLIGATION TO
REVISE OR UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
THE GROUP’S FINANCIAL STATEMENTS ARE PRESENTED UNDER EU IFRS.
THE CONSOLIDATED FINANCIAL DATA INCLUDED ON THE FOLLOWING PAGES FOR THE THREE MONTHS ENDED 31 MARCH 2016 AND 31 MARCH 2017 HAVE BEEN DERIVED FROM THE UNAUDITED
MANAGEMENT ACCOUNTS AND UNAUDITED INTERIM FINANCIAL STATEMENTS, INCLUDING THE NOTES RELATED THERETO. THE FINANCIALS HAVE BEEN DERIVED FROM THE INTERNAL ACCOUNTING
FORMAT BASED ON THE INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION (“IFRS”).
THIS PRESENTATION ALSO CONTAINS REFERENCES TO CERTAIN NON-IFRS FINANCIAL MEASURES, INCLUDING EBITDA, EBITDA MARGIN, ADJUSTED EBITDA, ADJUSTED EBITDA MARGIN AND SYNERGY
ADJUSTED EBITDA AS WELL AS CERTAIN LEVERAGE AND COVERAGE RATIOS THAT ARE NOT REQUIRED BY, OR PRESENTED IN ACCORDANCE WITH IFRS. SUCH MEASURES SHOULD NOT BE CONSIDERED
AS ALTERNATIVES TO OTHER INDICATORS OF OPERATING PERFORMANCE, CASH FLOWS OR ANY OTHER MEASURE OF PERFORMANCE DERIVED IN ACCORDANCE WITH IFRS. IN ADDITION, THESE
MEASURES ARE USED BY DIFFERENT COMPANIES FOR DIFFERING PURPOSES AND ARE OFTEN CALCULATED IN WAYS THAT REFLECT THE CIRCUMSTANCES OF THESE COMPANIES, THUS LIMITING THEIR
USEFULNESS AS COMPARATIVE MEASURES.
IN ADDITION, THIS PRESENTATION CONTAINS REFERENCES TO CERTAIN KEY OPERATIONAL METRICS USED BY INTEROUTE AND EASYNET, INCLUDING AVERAGE NEW NET MONTHLY RECURRING REVENUE
AND CHURN RATE, WHICH ARE ALSO NOT CONSIDERED MEASUREMENTS OF FINANCIAL PERFORMANCE UNDER IFRS AND SHOULD NOT BE CONSIDERED AS ALTERNATIVES TO OTHER INDICATORS OF
OPERATING PERFORMANCE, CASH FLOWS OR ANY OTHER MEASURE OF PERFORMANCE DERIVED IN ACCORDANCE WITH IFRS. IN PARTICULAR, THE METHODOLOGY USED TO CALCULATE THESE
OPERATIONAL METRICS MAY DIFFER FROM THAT USED BY OTHER COMPANIES, THUS LIMITING THEIR USEFULNESS AS COMPARATIVE MEASURES.
INTEROUTE OBTAINED CERTAIN INDUSTRY AND MARKET DATA USED IN THIS PRESENTATION FROM PUBLICATIONS AND STUDIES CONDUCTED BY THIRD PARTIES. WHILE INTEROUTE BELIEVES THAT THE
INDUSTRY AND MARKET DATA FROM EXTERNAL SOURCES IS ACCURATE AND CORRECT, INTEROUTE HAS NOT INDEPENDENTLY VERIFIED SUCH DATA OR SOUGHT TO VERIFY THAT THE INFORMATION
REMAINS ACCURATE AS OF THE DATE OF THIS PRESENTATION AND DOES NOT MAKE ANY REPRESENTATION AS TO THE ACCURACY OF SUCH INFORMATION.
1
Today’s presenters
Gareth Williams
Chief Executive Officer
2
Catherine Birkett
Chief Financial Officer
Table of contents
1. Executive summary
2. Business update
3. Financials
Q&A
3
Q1-17 Highlights
• Mar-17 LTM Adjusted EBITDA increased to €151m from €147m per FY-16.
-
Q1-17 Adjusted EBITDA up 12.4% y-o-y
-
Q1-17 EBITDA up 38.2% y-o-y
-
Q1-17 EBITDA of €35m converging with Adjusted EBITDA of €37m
-
Q1-17 Adj. EBITDA margin increased to 20.9% from 18.2%
• Continued y-o-y growth in Interoute
-
Revenue growth of 6.1%
-
Enterprise recurring revenue growth of 7.8%
• Easynet churn stable. Long term focus unchanged.
• Integration activity is on track
-
Run-rate synergies of €27.5m (€19.5m realised in our LTM results) vs. final anticipated synergies of €31.9m (86% of target met)
• LTM synergy Adjusted EBITDA of €163.2m
4
(1)
1
Includes anticipated synergies of €12.4m in addition to the €19.5m of synergies already realised in our LTM results (€31.9m anticipated synergies in total)
Table of contents
1. Executive summary
2. Business update
3. Financials
Q&A
5
Interoute’s market positioning 2017
Enterprise Services
•
Interoute’s market for Connectivity, Communications and Computing infrastructure is
c.€10bn1 against an overall EMEA IT services market of c.€130bn2
•
According to Gartner, >50% of all on premise workloads will transition into 3rd party
service providers like Interoute over the next 4 years
•
The market remains distributed and competitive. A unique sales proposition is
required to stand out
•
Interoute’s Enterprise Digital Platform is just that. A unique interconnect or Cloud
Fabric, offering a flexible platform which combines computing and SD-WAN
technologies to provide a single view of an Enterprise’s IT assets
•
We estimate our share of the market is c.5%3
Network Services
•
Bandwidth demand continues to grow exponentially
‒
•
6
According to Cisco, global data center, IP and cloud traffic will more than double by
2020.
In 2020, the gigabyte equivalent of all movies ever made will cross
the Internet every 2 minutes.
Interoute has completed its build out of 100G:
-
capability is available on 98% of the network
-
short term capex is predominantly linked to client services not network capability
•
Underlying demand and innovation in deployment continue to offset price pressure
securing stable revenues
•
Interoute’s estimated share of the European bandwidth market is c.15%4
(1)
(2)
(3)
(4)
European Enterprise Services market defined as: Pan-European VPN and Computing & Communications market source Gartner and Frost & Sullivan
Global Data (www.globaldata.com)
Calculated based on FY Enterprise revenues of approx. €0.55bn of the €10bn market
Ovum European Wholesale Market Share 2012-2013: The Big Picture
Q1-17 Business Update
Large deals
New contracts and renewals
•
Despite pan-euro geo-political uncertainty, we signed:
‒
New contracts worth €77.6m
‒
Renewals of €50.3m
•
Large deals in Network Services include; Apple, KNG – Karnten Netz and Danish Crown
•
Large deals in Enterprise Services include; Gefco, Hansgrohe and Ivoclar Vivadent
Achievements
7
•
Interoute recognised as a top 4 Network Provider, in the Gartner Critical Capabilities
for Network Services, Pan-European report, Published: 15 March 2017.
•
Interoute Edge Access solution beat Oracle and Infoempresa to be named Best ICT
product in the Network category, at the 9th Comunicaciones Hoy Awards in Spain.
•
New customer validations published for Spacemetric, Monin And AO.com.
•
Interoute launches innovative Managed Container Platform at Cloud Expo Europe in
London 15-16 March
Achievements
Q1-17 Integration Update
Realised cost synergies in LTM period
(€ in millions)
20.9
27.5
(€2.6m)
23.3
31.9
11.3
19.5
14.5
5.7
4.1
9.3
20.6
2.0
10.5
7.2
Sep-16 LTM
Dec-16 LTM
Headcount
•
8
(1)
13.8
Mar-17 LTM
Non-Headcount
Final anticipated
Run-rate cost synergies
Successful execution of our synergy programme
‒
€27.5m run-rate cost synergies as end of Mar-17. €19.5m realised in Mar-17 LTM
‒
Of the €5.7m of Non-Headcount realised synergies, €3.4m relates to OLO/local tails.
‒
Approximately €35m of integration costs from start of project.
1
Includes €35m of integration costs per the P&L from 2015, 2016 and Q1-17, €8m integration capex, less €6m related to non-cash onerous lease/dilapidation provisions and €2m received for sale of a data centre.
Table of contents
1. Executive summary
2. Business overview
3. Financials
Q&A
9
Consolidated business gross profit and Adjusted EBITDA
Overview
•
Revenues increased by 0.7% on a constant currency basis.
(2.1%)
•
Improvement in Gross Margin % by 0.3% points.
(67)
(3.0%)
•
Operating costs significantly lower than Q1-16
112
111
(1.5%)
62.1%
62.4%
Network costs
(27)
(27)
(1.0%)
Operating costs
(52)
(47)
(10.6%)
•
Adjusted EBITDA of €37.0m, up 12.4% y-o-y.
Adjusted EBITDA
33
37
12.4%
•
EBITDA of €35m, up 38.2% y-o-y with lower one off adjustments.
18.2%
20.9%
Integration costs
(4)
(2)
(49.3%)
One-off adjustments
(4)
(0)
(89.9%)
EBITDA
25
35
38.2%
13.9%
19.6%
(€ in millions)
Q1-16
Q1-17
Total revenue
181
177
Sales related costs
(69)
Gross margin
Gross margin %
Adjusted EBITDA margin
EBITDA margin
10
Comments
Growth
-
€3.7m lower staff costs (as synergy benefit is realised); and
-
€1.9m lower non-headcount operating costs (resulting from lower establishment costs
and foreign exchange movements).
-
•
Adjusted EBITDA and EBITDA converging.
Adj EBITDA margin increased to 20.9% and EBITDA margin increased to 19.6%.
Revenue (1 of 2)
Revenue by segment
(€ in millions)
181
177
39
41
78
83
64
53
Q1-16
Q1-17
Easynet
11
Enterprise Services
Easynet Revenue – Q4-16 to Q1-17
4.3%
7.0%
(17.0)%
Network Services
•
Total group revenue up on constant currency basis by 0.7%.
•
Encouraging Easynet Q1-17 revenue performance, stable vs. Q4-16.
•
Easynet declined 11.0% vs. Q1-16 on a constant currency basis.
(€ in millions)
54
53
Q4-16
Q1-17
Revenue (2 of 2)
Revenue by type
Recurring revenue by segment
(€ in millions)
(€ in millions)
181
177
6
9
111
111
115
3.8%
64
53
(17.0)%
Q1-16
Q1-17
Easynet
•
12
IRT Recurring
IRT Transactional
Interoute recurring revenue grew to €115m, up 3.8%.
-
•
41.5%
Driven mainly by Enterprise recurring growth of 7.8%.
Increase in total Network Services revenue driven by transactional revenues.
115
36
34
(4.5)%
75
80
7.8%
Q1-16
Q1-17
Gross Margin
Gross Margin % by Quarter
80%
70%
60%
62%
63%
63%
Q1 2016
Q2 2016
Q3 2016
50%
59%
62%
40%
30%
20%
10%
0%
13
Q4 2016
Q1 2017
•
Consistent Gross Margin % by quarter
•
Q4 2016 was impacted by a large, low margin hardware resale
transaction.
Group KPIs
Average new net monthly recurring revenue (MRR) (1)
Churn rate(2)
(€ in thousands)
1.8%
1.5%
1.3%
1.3%
93
1.2%
1.2%
1.2%
1.2%
1.1%
0.7%
(84)
Q1-16
0.6%
0.8%
0.3%
Q1-17
Q1-16
Q2-16
Easynet
•
14
Notes:
(1)
(2)
Q3-16
IRT Network
Q4-16
Q1-17
IRT Enterprise
Substantially higher Q1-17 average net MRR than Q1-16:
-
•
0.5%
0.7%
Net MRR increase driven by Enterprise.
Q1-16 included a large volume of churn in Easynet.
Lower churn in Q1-17 against prior quarter. Easynet churn stable.
Average monthly amount calculated as quarterly amount divided by 3. Calculated using incremental additional revenue from new sales delivered during a month and that will recur on a monthly basis, excluding any usage-based
revenue and net of any churn.
Internet Access and Internet Transit products are now grouped under Enterprise services (previously in Network Services) .
EBITDA converging with Adjusted EBITDA
Adjusted
EBITDA
2016 FY
Q1-17
€147m
€37m
• Strong convergence of Adj. EBITDA and EBITDA
€2.4m adjustments, of which:
-€2m integration related;
€1.6m HC, €0.4m Non-HC
€37m adjustments, of which:
-€29m integration related;
€20.8m HC, €8.2m Non-HC
- €0.5 other adjustments
€35m
- €8m other adjustments
EBITDA
15
€110m
Q1-17 EBITDA of €35m against Adjusted EBITDA of
€37m
• EBITDA now 94% of Adj. EBITDA vs. 75% in 2016
• Lower one off / exceptional adjustments
• We expect integration costs to be significantly lower in
2017 as we reach the end of the Easynet integration
Consolidated Group Capex
Capital expenditure by type (1)
Base and Strategic capex split
(€ in millions)
Capex €'m
20
8
8
Of which Network Services
Of which Enterprise Services
Total Base
4.8
4.8
9.6
3.5
1.6
5.1
1.1
6.9
8.0
1.8
6.1
7.9
Strategic Growth
10
5
3
Q1-17
2
Q1-16
16
Q1-17
Base
16
Maintenance capex
Base capex
Strategic growth capex
Purchased Buildings
•
Total capex is lower than Q1-16 by 22.9%.
•
Maintenance and Strategic Capex are stable compared to Q1-16
•
Lower Base spend results from :
•
Q1-16
Of which Network Services
Of which Enterprise Services
Total Strategic Growth
-
Network Services spend was reduced in the quarter due to investment in capacity during 2016.
-
Enterprise Services spend in Q1-16 was high due to cost related to the renewal of two large Enterprise customers.
Integration related capex in Q1-17 is €1.6m.
Notes:
(1) Excludes €1.0m and €1.6m of integration capex in Q1-16 and Q1-17, respectively.
Working Capital
Working Capital Movements (1)
€'m
30
(41.6)
(5.2)
26.2
(9.8)
(41.9)
(40.8)
(10.4)
11.2
(14.1)
(30.8)
20
Total net working capital
movement
Net working capital movement
excluding large hardware
resale deal and integration
10
-
(10)
(20)
(30)
(40)
(50)
Q1 2016
Current Assets
•
•
17
Q2 2016
2
Q3 2016
Provisions
Q4 2016
Payables
Q1 2017
Deferred income
Working capital negatively impacted in Q1-17 by one-off items:
-
Movements associated with the large hardware resale deal (mainly for payment of costs in Q1, €8.4m) and integration (€2.8m)
-
Short term widening of days outstanding of receivables and payables due to integration; and
-
Delayed invoicing of two large assets deals to later in the year (negatively impacting deferred income vs. our expectations for Q1-17).
We are targeting a net WC capital movement of €25m for 2017
Notes:
(1) Values as presented in graph exclude the large hardware resale deal and integration.
(2) Current assets include inventory, receivables and prepayments/accrued income.
Mar-17 LTM Financial Information and Leverage
Mar-17 LTM
(Consolidated)
724
151
163
80
83
(€ in millions)
Revenue
Adjusted EBITDA
Synergy Adjusted EBITDA 1
Capex 2
Synergy Adjusted EBITDA less Capex
Mar-17
xLTM Mar-17
EBITDA
(24)
(0.1x)
--
--
82
0.5x
Fixed Rate Notes
350
2.1x
Term Loan B
275
1.7x
Net Debt
683
4.2x
Cash and cash equivalents
Revolver (€75m facility)
Other indebtedness 3
18
Notes:
(1) Underlying anticipated synergies of €12.4m in LTM Mar-17. As at 31 March 2017, we have realised approximately €19.5m (in our LTM results) of the €31.9m expected synergies.
(2) Capex excludes integration capex.
(3) Other indebtedness as at Mar-17 includes €34.2m of vendor loans, €34.9m of finance leases and €13.1m of accrued interest.
Q&A
19