Q2 2006 Earnings Release
29 July 2006
Financial Highlights:
- +17.1% growth in total revenue in Q2'06 vs Q2'05.
- Q2'06 Gross Margin and Adjusted EBITDA in line with plan.
- Network expansion on plan and on budget - Completion forecast by end of Q3 '06.
Q2 05 Q1 06 Q2 06 Growth Growth
In million of Euros Q2 06/Q2 05 Q2 06/Q1 06
Corporate Revenue 37.6 42.4 42.8 +13.8% +0.9%
Wholesale Revenue 9.2 12.1 12.0 +30.4% 0.0%
Total Revenue 46.8 54.5 54.8 +17.1% +0.1%
Gross Margin (1) 20.3 20.8 20.8 +2.5% 0.0%
Adjusted EBITDA (1) 8.1 4.3 3.3 (59.3%) (23.3%)
Cash (end of period) 44.9 118.0 77.4 NS NS
Operational Highlights:
- +21.6% increase of sites connected to our fibre networks in Q2'06 vs Q2'05.
- +92.7% increase of DSL sites in Q2'06 vs Q2'05.
- +15.9% increase of fibre customers connected to our networks in Q2'06 vs Q2'05.
ON-NET METRICS Q2 05 Q3 05 Q4 05 Q1 06 Q2 06
Total sites connected with fibre 3,151 3,281 3,476 3,685 3,833
Total sites connected with DSL 2,587 3,075 3,741 4,485 4,984
Total fibre customers connected 2,185 2,268 2,379 2,462 2,532
Corporate ARPU (Euros/month) (1) 5,800 5,800 5,700 5,800 5,700
Recent events:
- Three 15-year IRUs worth more than EUR40 million, signed with three wholesale customers in Q2'06.
- Call termination settlement secures 2006 - 2008 tariffs above Completel's estimate.
(1) Refer to Note 1 for definition
Completel Europe NV, a national infrastructure-based operator providing telecom services to the French business market, announced today its results for the quarter ended June 30, 2006.
Jerome de Vitry, President and CEO of Completel Europe N.V., commented: "We expect to complete our extended DSL network covering 110 cities at the end of the summer of 2006, within the timeframe and the cost estimate projected a year ago for 80 cities. As of today, we have approximately 450 DSL collocation sites in service.
Q2'06 also saw significant corporate sales due to our network expansion. We signed customers such as Caisse d'Epargne and Generale de Sante, for which our extended network was a key factor in their decision to select Completel for their nationwide data networks.
We opened sales offices in six new regions during the quarter, and our sales force is now positioned to ramp up orders on our expanded market, starting in September, distributing our recently released DSL based product offer.
In Q2'06, we expanded our share of the wholesale market segment, signing key contracts with 3 customers, to whom we sold bandwidth capacity IRU's on our extended network. These contracts will represent more than EUR40 million of data revenue over the coming 15 years, starting in Q4'06. More than EUR15 million will be paid before year end 2006, and a significant portion will be invested in our network for extra bandwidth capacity in anticipation of future similar contracts. After the very large contract signed with Darty last February, these contracts confirm our ability to capture an increasing share of the wholesale market."
Alexandre Westphalen, Chief Financial Officer, added: "The IRUs signed in Q2'06 will also contractually enable us to redeem up to EUR20 million of our debt at favorable terms, starting Q3'07, allowing us greater flexibility in future balance sheet optimization and interest expense reduction.
The ARCEP decision on call termination issued June 1st, 2006, eventually led to the settlement of our dispute with France Telecom over 2006 tariffs. This settlement secures call termination tariffs for the years 2006 - 2008 at a level slightly above our former estimate, and eliminates the regulatory uncertainty which was looming over our past and future call termination revenues. This first settlement over 2006 - 2008 tariffs does not end our dispute over 2005 tariffs. However, considering the terms of the ARCEP decision, we expect to settle 2005 tariffs in the coming months, within our estimated range".
Financial Review
Revenue
Revenue Breakdown Q2 05 Q1 06 Q2 06 Growth Growth
In million of Euros Q2 06/Q2 05 Q2 06/Q1 06
Corporate: Voice 26.1 28.3 27.6 +5.7% (2.5%)
Corporate: Internet, 11.5 14.1 15.2 +32.2% +7.8%
Data & Hosting
Total Corporate Revenue 37.6 42.4 42.8 +13.8% +0.9%
Wholesale Revenue 9.2 12.1 12.0 +30.4% 0.0%
Total Revenue 46.8 54.5 54.8 +17.1% +0.1%
Q2 05 Q3 05 Q4 05 Q1 06 Q2 06
ON-NET METRICS
Cumulative buildings connected with 3,151 3,281 3,476 3,685 3,833
fibre
Cumulative buildings connected with 2,587 3,075 3,741 4,485 4,984
DSL
Cumulative fibre customers connected 2,185 2,268 2,379 2,462 2,532
Cumulative fibre corporate customers 2,049 2,120 2,221 2,300 2,357
connected
ARPU (Euros/month) (1) 5,800 5,800 5,700 5,800 5,700
(1) Refer to Note 1 for definition
Completel reported total revenue of EUR54.8 million in Q2'06 compared to EUR46.8 million in Q2'05 and EUR54.5 million in Q1'06, an increase of 17.1% and 0.1%, respectively. Corporate revenue increased to EUR42.8 million in Q2'06 from EUR37.6 million in Q2'05 and EUR42.4 million in Q1'06, an increase of 13.8% and 0.9%, respectively. Double digit year over year positive change of total and corporate revenue reflects the growth in the wholesale and corporate data segments. The flat quarter to quarter evolution of total and corporate revenue reflects the reduced number of business days in the current quarter, which had a negative impact on the Q2'06 corporate and wholesale voice revenues.
Corporate data revenue was EUR15.2 million for Q2'06 compared to EUR11.5 million in Q2'05 and EUR14.1 million in Q1'06, an increase of 32.2% and 7.8% respectively. Corporate data revenue represents an increasing proportion of total corporate revenue. Corporate revenue growth continues to be driven by data revenue derived from network solutions for corporate customers, such as LAN-to-LAN and VPN services on Ethernet and IP networks. The growth is due to a combination of continuing to add new customers, as well as up-selling of additional services to existing customers. In Q2'06, corporate data revenue represented 35.5% of total corporate revenue, compared to 30.6% in Q2'05 and 33.2% in Q1'06.
Corporate voice revenue was EUR27.6 million in Q2'06 against EUR26.1 million in Q2'05, and EUR28.3 million in Q1'06, an increase of 5.7% and a decrease of 2.5%, respectively. Year over year, the limited corporate voice growth of 5.7% reflects the prior years declining pricing environment despite the 15% growth in corporate customers connected to the network during the same period. The decrease in corporate voice revenue in Q2'06 vs Q1'06 was anticipated and was due to the 7.6% decrease in the number of business days in Q2'06, (60 business days in Q2'06 vs 65 business days in Q1'06 due to the number of public holidays) which negatively impacted the voice revenue from the installed customer base. Incremental revenue from new customers and up-sale contracts from existing customers partly compensated this 7.6% decrease in the number of business days, limiting the revenue decrease to 2.5%. The number of business days does not affect corporate and wholesale data revenue derived from standard monthly charges.
The increase of corporate revenue was also driven by solid operational progress in the number of corporate customers connected. Completel corporate customer base grew to 2,532 customers at the end of June 2006 compared to 2,185 customers at the end of June 2005, a 15.9% increase.
Buildings connected with fibre and DSL grew to respectively 3,833 and 4,984 at the end of June 2006, compared to 3,151 and 2,587 at the end of June 2005, a 21.6% and 92.7% increase. The proportion of DSL connected secondary sites against fibre connected primary sites is increasing, demonstrating the ability of the Company to successfully sell its DSL services for the secondary sites of existing fibre connected customers and to address new customers with national requirements.
Wholesale revenue increased to EUR12.0 million in Q2'06 from EUR9.2 million in Q2'05, and from EUR12.1 million in Q1'06, an increase of 30.4% and remaining stable quarter to quarter, respectively. Completel anticipates wholesale revenue to resume its growth trend in the coming quarters, benefiting from increased call termination capacity in its newly covered cities.
Gross Margin
Gross margin amounted to EUR20.8 million in Q2'06 compared to EUR20.3 million in Q2'05 and EUR20.8 million in Q1'06. In Q2'06, gross margin was 38.0% of revenue versus respectively 43.4% and 38.1% in Q2'05 and Q1'06.
Gross margin stabilized in a EUR20 million range in Q2'06 in line with the company's network investment plan and, as a percentage of revenue, decreased in Q2'06 compared to Q2'05 and stabilized in Q2'06 compared to Q1'06. This year on year decrease is a consequence of increased network costs as the Company deploys its extended network ahead of new sales. In Q2'06, network costs were EUR 34.0 million compared to EUR26.5 million in Q2'05 and to EUR33.7 million in Q1'06, representing 62.0% of revenue in Q2'06 against 56.6% and 61.8% of revenue in Q2'05 and in Q1'06, respectively.
The increase of network costs is due to:
- Increased fixed costs such as space rental and utilities in a larger number of network sites, maintenance fees for a higher number of kilometers of plant and transmission equipment, and collocation space rental and interconnection capacity leased to the incumbent in more central offices. The increase of such fixed costs started in Q3'05 with the implementation of the expansion plan, and will continue to grow until completion of the Company's network in Q3'06. After completion, these costs, mostly related to the size and organization of its networks, will progressively return to more historical levels as a percentage of revenue as we achieve top-line growth.
- Increased network personnel costs. The Company increased its network staff as it deployed its extended network. The Company will continue to expand its network staff until the end of the year, in relation to its extended network footprint.
The Company anticipates its gross margin, in absolute terms, to remain in this EUR20 million range in Q3'06, and resume its progression, both in absolute terms and in percentage of revenue, starting in Q4'06, when the incremental revenue generated on its current and expanded addressable market will start to absorb the fixed costs of its extended network.
S,G&A
Total Sales, General and Administrative expenses (S,G&A) were EUR17.5 million in Q2'06 compared to EUR12.3 million and EUR16.5 million in Q2'05 and in Q1'06 respectively. S,G&A represented 31.9% of revenue for the second quarter of 2006, against 26.3% in Q2'05 and 30.3% in Q1'06. This increase primarily reflects the reinforcement of sales staff and support functions of the Company in order to sell its services in its expanded addressable market. The Company had 670 employees at June 30, 2006, against 645 at March 31, 2006, and 498 at June 30, 2005.
The Company considers that its quarterly S,G&A expenditures, mostly composed of personnel related costs, are now at the level required to support its higher level of operations on its extended network. The Company anticipates its S,G&A to stabilize in a EUR17-18 million per quarter range for foreseeable quarters going forward, with little relation to revenue growth. The Company accordingly anticipates its S,G&A expenses to decrease as a percentage of revenue, starting Q4'06, resuming the trend it followed before the launch of the expansion plan, when its S,G&A expenses remained in a EUR12-13 million per quarter range for more than two years as revenue doubled.
Adjusted EBITDA
Adjusted Earnings Before Interest, Tax, Depreciation and Amortization (Adjusted EBITDA) was EUR3.3 million in Q2'06 compared to EUR8.1 million in Q2'05 and to EUR4.3 million in Q1'06, representing 6.0%, 17.3% and 7.9% of revenue, respectively.
The adjusted EBITDA decrease, in absolute terms and in % of revenue, results from a decrease in gross margin and an increase in S,G&A. Both of these net changes are directly related to the implementation of the expansion plan.
The Company anticipates its adjusted EBITDA will stabilize in Q3'06, and will start to grow again in Q4'06 when incremental sales growth in addressable markets will start to progressively cover the increased fixed network costs and S,G&A expenses associated with its network extension and new scope of operations.
Operating Losses
Operating losses stood at EUR7.7 million in Q2'06, against EUR0.7 million in Q2'05 and EUR5.0 million in Q1'06. The year on year increase in the operating losses results from the implementation of the Company's expansion plan (increased network costs and S,G&A as described above).
In Q2'06, operating losses of EUR7.7 million included EUR10.2 million of amortization and depreciation, and EUR0.8 million of non-cash share based compensation. In Q2'05, operating losses of EUR0.6 million included EUR8.4 million of amortization and depreciation, and EUR0.1 million of non-cash share based compensation
Net Result
Net loss stood at EUR9.3 million in Q2'06 against EUR0.5 million in Q2'05 and EUR6.6 million in Q1'06.
In Q2'06, the net result was positively impacted by interest income gained on the cash balance of the Company and was negatively impacted by interest expense incurred on the 2012 senior secured notes.
Capital Expenditures
Capital expenditure (CAPEX) was EUR34.1 million in Q2'06 compared to EUR6.5 million in Q2'05 and to EUR38.0 million in Q1'06. In Q2'06, EUR6.4 million was related to customer installations and EUR 27.7 million related to the network extension started at the end of July 2005. The vast majority of this EUR27.7 million was related to the implementation of the national backbone and the provisioning of collocation sites. It also includes minor expenditures for IT systems.
The Company anticipates its capital expenditures to remain at a similar level in Q3'06 while it completes its extended network. Capital expenditures will remain at a high level in Q4'06 in relation to the provisioning of the Darty contract and the IRU's sold in Q2'06 to three telecom operators.
Cash
As of June 30, 2006, Completel had EUR77.4 million in cash and cash equivalents against EUR118.0 million as of March 31, 2006. The Company anticipates its cash balance to continue decreasing in the coming quarters due to the capital expenditures described above.
Working capital
In Q2'06, changes in working capital had a negative impact on cash balance for EUR10.5 million, compared to a positive impact of EUR8.7 million in Q1'06. These negative changes in working capital against last quarter result from both a decrease in network vendor payables, and an increase of trade receivables. Network vendor payables started to decrease as the Company is now proceeding towards the end of its network extension plan. The trade receivables increase is for the best part due to the evolution of the Company's accounts receivables position with France Telecom in Q2'06, prior to the settlement of the call termination tariff dispute in July 2006. Further to this settlement, the Company anticipates its account receivables position with France Telecom to return to normal levels in the coming months.
Recent events
15-years IRUs signed with three wholesale customers, for more than EUR40 million.
In Q2'06, the Company sold high bandwidth capacity contracts on its national backbone and its DSL network to three separate wholesale customers, for a total amount of more than EUR40 million. The revenue will be recognized over 15 years, starting Q4'06.
More than EUR15 million will be paid in Q3 and Q4'06. A significant portion of this initial funding will be re-invested during the same period in network electronics providing extra bandwidth capacity on our DSL network, for up to 10 Gbts, beyond the needs of these contracts. This extra bandwidth capacity will be available for possible future similar contracts and will be in addition to the current planned expansion of the network.
After a first long term contract signed in July 2005 with Afone and a second one with Darty signed in February 2006, these three additional contracts demonstrate the ability of Completel's extended network to serve wholesale customers on a national basis.
Call termination settlement with France Telecom
On June 1st, 2006, ARCEP published its decision on a call termination dispute between France Telecom and Neuf Cegetel, setting call termination tariffs for Neuf Cegetel for the period January 1st, 2006 to September 30th, 2008. The decision equates to approximately EUR1.11 cents per minute for 2006, and EUR1.08 cents per minute for 2007 and 2008.
The ARCEP decision of June 1st, 2006 is not directly applicable to the Company, which was not a party to the dispute brought before ARCEP. However, in July 2006, the Company and France Telecom settled their own dispute on the basis on this ARCEP decision, and agreed on similar tariffs for the period January 1st, 2006 to September 30th, 2008. The Company is therefore currently accounting its call termination revenue at EUR1.11 cents per minute, slightly above its former estimate.
The Company also estimates that this decision will eventually lead, later in 2006, to the settlement of its dispute with France Telecom over call termination tariffs for the year 2005, within our estimated range.
The Company further anticipates that this ARCEP decision will eventually lead to the final assessment of call termination tariffs, applicable to all operators including Completel, and will end the regulatory uncertainty for call termination tariffs which has affected the industry and the Company's operations for some years.
Guidance
Based on Q2'06 results, management re-confirms its previously released Revenue and Adjusted EBITDA guidance for full year 2006.
Management increases its capital expenditures guidance for full year 2006, from a EUR105-115 million range to a EUR115-125 million range. This capital expenditures increase is related to the EUR40 million IRUs sold in Q2'06 to 3 wholesale customers, to be installed in Q4'06. These success based incremental capital expenditures will be fully financed by the initial payments for these contracts.
The Company anticipates completing its extended network at the end of the summer of 2006. The majority of its expansion sales force is now in place and addresses expanded markets and newly passed cities as they become addressable. The Company anticipates its revenue growth to accelerate during the 4th quarter of 2006, after the customary Q3 summer seasonality.
In million of Euros Guidance for 2006
Corporate Revenue 170 - 180
Wholesale Revenue 55 - 60
Total Revenue 225 - 240
Adjusted EBITDA 17 - 20
CAPEX 115 - 125
This guidance is based on management's current views and assumptions and involves known and unknown risks and uncertainties, such as the regulatory uncertainty for call termination tariffs described above, that could cause actual results, performance or events to differ materially from those anticipated.
Conference call
Further discussion of the above will be provided on the Company's quarterly call to be held on July 27th, 2006 at 16:00 CET. Details of the call are available on the Company's web site http://www.completel.com.
Note 1:
Gross Margin: Gross Margin is defined as revenue less network costs
Adjusted EBITDA:
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization. Excludes (in addition to interest, taxes, depreciation and amortization) non-cash compensation charges and foreign exchange loss and other expenses, including restructuring, impairment and other charges, as well as other non-recurring operating expenses. Adjusted EBITDA is not derived pursuant to generally accepted accounting principles and therefore should not be considered as an alternative to operating income (loss), as an alternative to cash flows from operating activities, or as a measure of liquidity. Furthermore, the Company is not aware of any uniform standards for determining Adjusted EBITDA. Presentations of Adjusted EBITDA may not be calculated consistently by different companies in the same or similar businesses. As a result, the Company's reported Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. Management believes this non-gaap financial measure provides useful information.
ARCEP: Autorite de Regulation des Communications Electroniques et des Postes.
ARPU: Average Monthly Revenue per User for on-net corporate customers connected with fibre.
Reconciliation of Adjusted EBITDA to Net Loss:
In million of Euros Q2 05 Q1 06 Q2 06
Adjusted EBITDA 8.1 4.3 3.3
Non-cash compensation 0.1 0.2 0.8
charges
Network depreciation 7.5 8.3 9.2
expense
Depreciation expense 1.0 1.0 1.0
allocated to S,G&A
Other expenses/ (income) 0.2 (0.1) -
Operating income / (loss) (0.7) (5.0) (7.7)
Financial Income / (loss) 0.2 (1.6) (1.7)
Income tax expense /(income) - - -
Net Income (loss) (0.5) (6.6) (9.3)
Management considers that Adjusted EBITDA is more an operating measure than a liquidity measure of its financial performance. As a result, management reconciles Adjusted EBITDA to its Net Loss.
Disclaimer
Information contained in this press release is based on the current expectations and assumptions of the management of Completel only. Completel does not undertake to publicly update or revise these statements, whether as a result of new information, future events or otherwise. Any such forecasts or forward-looking statements are subject to risks and uncertainties including, but not limited to: (a) decline in demand for Completel's telecommunications services; (b) pricing pressures from Completel's direct competitors as well as from providers of alternative services; (c) failures, shutdowns or service disturbances with respect to Completel's networks; (d) Completel's inability to develop and maintain efficient operations support; (e) regulatory developments adverse to Completel and (f) technological changes affecting Completel's market and service offering. For a more detailed discussion of such risks affecting the Company, please refer to Completel's Annual Report for the year ending December 31, 2005, available on http://www.completel.fr and http://www.completel.com, or obtained free of charge from the Company.
Completel Europe NV
Completel is a leading national infrastructure-based operator serving medium and large businesses in France. Completel ordinary shares are listed in the foreign securities section of the Eurolist of Euronext Paris under the symbol CPT, and are eligible to the SRD.
Completel is a member of the following index of Euronext Paris : CAC Small 90, CAC Mid & Small 190, SBF250, IT CAC and the Next Economy segment.
ISIN Code Bloomberg Reuters
Ticker RIC
Ordinary Shares NL0000262822 CPT FP Equity CPT.PA
http://www.completel.com
Next events :
Q2'06 results conference call : July 27, 2006 at 4pm (Paris time)
Paris "MidCap Events" : September 28 & 29, 2006
Q3'06 earnings release: November 9, 2006
Investor Contact:
Catherine Blanchet, Director of Investor Relations
Tel: +33-1-72-92-20-32
e-mail : ir@completel.fr
Source: prnewswire
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