Equant Announces 2004
First Half Results and Confirms Second Half Guidance
AMSTERDAM,
Netherlands--(BUSINESS WIRE)--July 22, 2004--Equant (Euronext Paris: EQU)
(NYSE: ENT):
-- First half revenues of $1,433 million, a decline of (3.1) per cent on a
reported basis and (6.2) percent on a constant currency basis
-- Scheduled expiry in June 2003 of the SITA minimum revenue commitment
impacted revenues by $47 million during the half; excluding SITA, first half
revenues growth of 2.5 percent on a reported basis, and decline of (1.6)
percent on a constant currency basis
-- Decline in Network Services Indirect and Direct with legacy data
migration
-- Growth in integration services and outsourcing revenues
-- Operating income before depreciation and amortization (2) of $59 million,
a decrease of $100 million in first half 2004
-- This decrease reflects net adverse currency movements of $55 million and
lower revenues, in particular with the scheduled expiry of the SITA minimum
revenue commitment
-- Robust cost controls yielded net savings, on a constant currency basis of
$50 million in total costs before depreciation
-- Net cash position of $199 million at June 30, 2004, a $280 million
decrease compared to December 31, 2003
-- Operating assets and liabilities increased by $206 million, due to
working capital movements specific to the first half 2004, with shorter payment
periods with suppliers and reduced accruals
-- Outlook for the second half 2004 confirmed
-- Operating income before depreciation and amortization (2) for the second
half expected to be well above the first half
-- Stabilization of the net cash situation in the second half
Equant (Euronext Paris: EQU) (NYSE: ENT) today announced its results for the
first half of the 2004 financial year.
Financial Highlights
(Unaudited; French GAAP; U.S. 1H 1H %Better/ %
dollars in millions) 2004 2003 (Worse)Better/(Worse)
Actual Actual on a constant
currency
basis (1)
----------------------------------------------------------------------
Total revenues 1,433 1,479 (3.1) (6.2)
----------------------------------------------------------------------
Gross profit 329 483 (31.9) (27.5)
----------------------------------------------------------------------
Selling, general and administrative
expenses 270 324 16.7 23.1
----------------------------------------------------------------------
Operating income before depreciation
and amortization and restructuring
and integration (2) 59 159 (62.9) (43.3)
----------------------------------------------------------------------
Depreciation and amortization 235 253 7.1 13.6
----------------------------------------------------------------------
Restructuring and integration 16 61 73.8 76.8
----------------------------------------------------------------------
Operating loss 192 155 (23.9) 18.6
----------------------------------------------------------------------
Net loss 195 174 (12.1) 23.5
----------------------------------------------------------------------
Capital expenditures 111 151 26.4
----------------------------------------------------------------------
Operating free cash flow (3) (52) 8 NM
----------------------------------------------------------------------
Net cash and loans (4) 199 462 NM
----------------------------------------------------------------------
(1) On a constant currency basis: to provide a basis for comparison, the
company has adjusted the results for the first half of 2003 to reflect the
exchange rates applicable to the first half of 2004.
(2) Operating income before depreciation and amortization is operating
result before depreciation, amortization, and restructuring and integration.
(3) Operating free cash flow is defined as operating income before
depreciation and amortization and restructuring and integration (2) minus
capital expenditures.
(4) Net cash and loans at June 30, 2004 is defined as cash and cash
equivalents plus $150 million of unsecured short-term loans to France Telecom
less bank loans and less loans from France Telecom of $122 million.
Commenting on Equant's results, Daniel Caclin, president and chief executive
officer of Equant, said: "We have had a challenging first half during
which our financial performance has been affected by specific factors, like the
scheduled expiry of the SITA minimum revenue commitment and the negative impact
of currency movements, compounded by difficult market conditions. In light of
these conditions, we have continued to adjust firmly our cost base, and our
actions have yielded a substantial reduction in our costs and capital
expenditures.
"Beyond these results, we have made real progress in our business
transformation to a communication infrastructure solution provider. Our
services and outsourcing activities have performed strongly during the half: we
have won 47 solutions contracts, representing half of our order intake, and our
outsourcing business has doubled. Customer satisfaction has also improved, and
we have enriched our portfolio, with extended offerings in Voice over IP, DSL
and mobility solutions.
"In the second half, we are committed to accelerate our business
transformation, and on delivering the actions launched in order to grow our
operating income before depreciation and amortization well above the first half
and stabilize our net cash situation."
Revenue Details:
(Unaudited; French GAAP; U.S. 1H 1H % %
dollars in millions) 2004 2003 Better/ Better/(Worse)
Actual Actual(Worse) on a constant
currency basis
----------------------------------------------------------------------
Network Services:- Direct 655 666 (1.7) (5.0)
----------------------------------------------------------------------
Network Services:- Indirect (5) 110 145 (24.1) (26.8)
----------------------------------------------------------------------
Total Network Services 765 811 (5.7) (8.9)
----------------------------------------------------------------------
Fulfillment 93 62 50.0 45.3
----------------------------------------------------------------------
Messaging, Hosting and Security 72 65 10.8 2.9
----------------------------------------------------------------------
Other Integration Services 102 92 10.9 6.3
----------------------------------------------------------------------
Total Integration Services 267 219 21.9 16.1
----------------------------------------------------------------------
Other Services 135 108 25.0 16.4
----------------------------------------------------------------------
Total Revenues pre SITA 1,167 1,138 2.5 (1.6)
----------------------------------------------------------------------
SITA 266 341 (22.0) (22.0)
----------------------------------------------------------------------
Total Revenues 1,433 1,479 (3.1) (6.2)
----------------------------------------------------------------------
(5) Network Services Indirect refers to revenues through Radianz, Deutsche
Telekom, Sprint and other wholesale channels.
The company's revenues for the first half of 2004 were $1,433 million.
Compared with the first half of 2003, foreign exchange movements had a positive
effect of $48 million on the company's revenues, driven in particular by the
appreciation of the euro against the U.S. dollar.
Compared with the first half of 2003, revenues for the first half of 2004
grew by 2.5 percent excluding SITA but fell by 3.1 percent after the inclusion
of SITA revenues. Increases in revenues from Integration Services and Other
Services more than offset the weakness in Network Services revenues.
The growth in Messaging, Hosting and Security and Other Integration Services
reflects the company's concentration on its services strategy, the success of
its outsourcing activities and positive currency effects of $9 million. The
company's total revenues from its outsourcing activities more than doubled in
the first half of 2004 compared with the first half of 2003 whilst revenues
from consulting, project management and service management grew by 49 percent.
SITA revenues reflect the expiry of the minimum revenue commitment in June
2003 and the continuing move to lower priced unmanaged internet-based connections
as well as lower activity.
Second quarter revenues totaled $728 million. On a constant currency basis,
second quarter revenues grew by 4.0 percent above the level of the first
quarter 2004 of $700 million. Fulfillment, Messaging, Hosting and Security,
Other Integration Services, and Other Services all showed growth above the
first quarter 2004. On a constant currency basis, excluding SITA, second
quarter revenues in 2004 were up 7.8 percent compared with the first quarter of
2004. On a reported basis revenues in the first quarter of 2004 totaled $704
million.
Network Services
Revenues for Network Services decreased 5.7 percent to $765 million but
declined by 8.9 percent on a constant currency basis.
The company's Network Services direct revenues in the first half of 2004
were $11 million below the first half of 2003's levels before taking into
account a benefit of $24 million from the favorable foreign currency movements.
On a constant currency basis, revenues were down compared with the first half
of 2003 as a result of a higher level of disconnections, particularly in North
America, as customers moved to lower cost IP solutions, which especially
affected the revenues from older technologies.
Network Services indirect channel revenues fell by 24.1 percent to $110
million in the first half of 2004 compared with the first half of 2003. On an
actual basis revenues from Sprint, Deutsche Telekom and Radianz fell by some
$47 million in the first half of 2004 compared with the first half of 2003.
In the first half of 2004 the company continued to win new business, adding
32 new logos and announcing a number of multi-million dollar contracts with
major customers, including JT International.
This contract, valued at more than $100 million over a six- year period,
with its services-rich elements, is a new success in the implementation of our
strategy.
As planned the company has expanded its IP VPN coverage by integrating
satellite and DSL access to broaden the addressable customer base. At June 30, 2004
the company had a DSL presence in 16 countries and DSL connections more than
doubled in the first half of 2004.
Integration Services
Revenues from Integration Services increased 21.9 percent to $267 million in
the first half of 2004. This increase would have been 16.1 percent on a
constant currency basis. Compared with the first half of 2003, fulfillment
revenues increased by 50.0 percent with strong growth in the European, Middle
East and Africa region. Messaging, Hosting and Security revenues grew by 10.8
percent in the first half of 2004 compared with the first half of 2003
benefiting from increased activity outside France and the positive effects of
currency movements of $5 million. In the first half of 2004, Other Integration
Services revenues showed an increase of 10.9 percent compared with the first
half of 2003 mainly as a result of increased activity in skills -based services
and despite a decrease in maintenance services.
On February 5, 2004, the company announced the availability of Microsoft(R)
Exchange Server-based solutions for global enterprises offering a reduction of
up to 20 percent in the total cost of ownership.
Other Services
Revenues from other services totaled $135 million in the first half of 2004,
compared with $108 million in the first half of 2003. The increase reflects the
additional voice revenues from new outsourcing contracts, as well as underlying
increased product management fees from France Telecom Transpac, as a result of
a change in the pricing structure of the Transpac contract.
The company will continue to develop an international Voice over IP platform
for business customers ensuring a common access means and integrated network,
thereby leveraging the company's IP VPN customer base. At June 30, 2004 the
company had more than 1,400 voice enabled IP VPN connections.
On June 17, 2004, as part of the France Telecom Group's launch of Business
Everywhere the first integrated range of mobility solutions for business
customers, the company launched a solution dedicated to multinational
corporations. Business Everywhere offers, from a laptop, a unified mobile
access to corporate information and key business applications via multiple
access technologies: Wi-Fi, GPRS, DSL, Internet and private dial.
SITA
Revenues from SITA were $266 million in the first half of 2004 declining
from $341 million in the first half of 2003, due to the expiry of the minimum
revenue commitment (MRC) of $47 million, and the ongoing move from older
technologies to unmanaged internet based solutions as well as lower activity.
The MRC expired on June 30, 2003 and consequently will have no further impact
on the company's results.
Gross Profit and Gross Margin
The company's gross profit was $329 million in the first half of 2004, a
decrease of $154 million, or 31.9 percent, from $483 million in the first half
of 2003. The gross margin was 23.0 percent compared with 32.7 percent in the
first half of 2003.
The gross profit decrease reflected not only a reduction in revenues of $46
million but also an increase in direct costs, net of other operating income,
principally due to the adverse impact of foreign exchange rate movements and
fulfillment costs. The adverse currency movement on direct costs was $76
million. In the first half of 2004 the company's international, national and
data termination costs fell by 15 per cent compared with the first half of
2003.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses of $270 million for the first half of 2004 were down $54
million or 16.7 percent from last year. SG&A expenses as a percentage of
revenue declined to 18.8 percent compared with 21.9 percent in the first half
of 2003.
Reduced personnel costs of $30 million accounted for a significant part of
the overall reduction in SG&A.
Total costs before depreciation (cost of services and products sold, net of
other operating income, and sales and general and administrative expenses)
increased by $54 million or 4.0 percent to $1,374 million. On a constant
currency basis, total costs, before depreciation, fell by $50 million.
Operating income before depreciation and amortization and restructuring and
integration (2)
Operating income before depreciation and amortization and restructuring and
integration (2) (referred to elsewhere in this release as operating income
before depreciation and amortization) was $59 million compared with $159
million in the first half of 2003, reflecting reduced revenues, the change in
revenue mix, the expiry of the SITA MRC, $47 million, and the net negative
impact of currency movements of $55 million which were partially offset by the
reduction in expenses. The margin of operating income before depreciation and
amortization (2) for the first half of 2004 was 4.1 percent compared with 10.8
percent in the first half of 2003.
Depreciation and Amortization
The depreciation and amortization charge was $235 million compared with $253
million in 2003. The charge for the first half 2003 included $25 million to
align the useful lives of certain Global One assets with those of the company.
On a constant currency basis, the depreciation and amortization charge in
the first half of 2003 was $247 million excluding the one off item of $25
million.
Restructuring and Integration
The company incurred $16 million of restructuring and integration costs in
the first half of 2004. The charge for restructuring and integration in the
first half of 2003 was reduced by recoveries from France Telecom. There were no
recoveries from France Telecom in the period because the company's right to
claim reimbursement from France Telecom for certain restructuring and
integration costs ceased on June 29, 2003.
The major components of the charge were personnel related.
Operating Loss
The operating loss of $192 million reflects the lower operating income before
depreciation and amortization(2) partially offset by a much-reduced charge for
restructuring and integration as well as by a lower depreciation and
amortization charge.
Non-Operating Expenses
Financial Expense and Income
The company recognized a foreign exchange gain of $5 million in the first
half of 2004 compared with a similar gain of $3 million in the comparable
period in 2003.
Income Taxes
The $12 million increase in the tax charge for the first half of 2004
compared with 2003 mainly reflects an increase in valuation allowances in
respect of the company's deferred tax assets.
Net Loss per Share
The net loss of $195 million for the first half of 2004, or $0.66 per share
compares with the net loss of $174 million, or $0.59 per share, in 2003.
Additional Information
Total capital expenditures for the first half of 2004 were $111 million
including expenditure of $6 million for the purchase of transmission capacity
in the form of indefeasible rights of use (IRUs). Capital expenditures in the
first half of 2003 totaled $151 million including expenditure of $27 million
for the purchase of IRUs. Capital expenditures in the first half of 2004 were
7.7 percent of revenues.
At June 30, 2004, the company's net cash and loans (4) totaled $199 million,
a decrease of $280 million from December 31, 2003. The reduced net cash and
loans position reflects the company's reduced operating income before
depreciation and amortization (2) together with the increase in operating
assets and liabilities.
In the first half of 2004, there was a net $206 million change in operating
assets and liabilities mainly as a result of shorter payment periods with
suppliers in the context of price reductions. These payment periods are now
closer to those advanced to the company customers. There have also been
reductions in year-end accruals, particularly employee liabilities.
The company's headcount at June 30, 2004 was 9,429 compared with 9,547 at
December 31, 2003.
Outlook
The company confirms its guidance for 2004.
As stated in April, the environment for corporate solutions remains
challenging and so, the company expects that revenues for 2004 will be below
those of 2003.
The company expects its operating income before depreciation, amortization,
restructuring and integration for the second half of 2004 to be well above the
first half as a result of the continued delivery of its cost reduction
programs, on the basis of current exchange rates.
The company is taking the necessary actions to achieve its objective of
stabilizing its cash position.
The company will host a conference call for investors on July 23, 2004 at 9
a.m. (EDT) and 2 p.m. London time and 3 p.m. (CET). The call can be accessed
via the Equant Web site at www.equant.com
or by dialing +1-913-981-5559 in North America or +44-20-7098-0704 in Europe
and in France +33-1-70-70-82-14. A replay will be available through midnight
EDT, Tuesday, July 27, 2004 and can be accessed by dialing +1-719-457-0820. The
passcode is 158761.
Accompanying slides will be available on the Equant Web site before 12 p.m.
(CET) on July 23, 2004.
About Equant
Equant (NYSE: ENT) (Euronext Paris: EQU) is a recognized industry leader in
global communications services for multinational businesses. Equant combines
its network expertise - including unmatched seamless network reach in 220
countries and territories and local support in more than 165 countries - with
its expanded services capabilities to provide global, integrated and customized
communication services to enable its customers key business processes. Equant
serves thousands of the world's top companies, with the industry's most
extensive portfolio of communications services and network solutions, including
the market-leading IP VPN used by nearly 1,300 global businesses today. Equant,
a subsidiary of France Telecom, was named Best Global Carrier 2003 and Best
Managed Service 2003 at the World Communication Awards and consistently leads
industry surveys in corporate user satisfaction.
This release may contain projections or other forward-looking statements
related to Equant that involve risks and uncertainties. Readers are cautioned
that these statements are only predictions and may differ materially from actual
future results or events. Readers are referred to the documents filed by Equant
with the SEC, specifically the most recent filing on Form 20-F, which
identifies important risk factors that could cause actual results to differ
from those contained in the forward-looking statements, including, among other
things, risks relating to Equant's history of operating losses, the
unpredictability of growth in Equant's industry, the fact that the interests of
France Telecom, Equant's largest shareholder, may differ from the interests of
Equant's other shareholders, changing technology, uncertain and changing
regulatory restrictions, currency fluctuations, dependence on suppliers,
network security issues, intense competition, in Equant's industry, and
volatility of Equant's stock price. All forward-looking statements are based on
information available to Equant on the date hereof, and Equant assumes no
obligation to update such statements.
Consolidated Statements of Operations
(French GAAP; U.S. dollars millions,
except per share data)
6 months to 6 months to
June 30, June 30,
2004 2003
------------ -----------
Unaudited Unaudited
------------ -----------
Sales of services and products $ 1,432.5 $ 1,479.3
Cost of services and products sold (1,161.5) (1,076.9)
Other operating income 58.2 80.8
------------ -----------
Gross profit 329.2 483.2
Selling, general and administrative
expenses (270.3) (324.2)
------------ -----------
Operating result before depreciation,
amortization, and
restructuring and integration 58.9 159.0
Depreciation and amortization,
excluding goodwill (234.8) (252.5)
Restructuring and integration (15.6) (61.3)
------------ -----------
Operating loss (191.5) (154.8)
Financial income (net) 5.2 3.1
Income taxes (17.4) (5.9)
Employee profit sharing (0.7) (0.8)
Equity share in profit/(loss) of
affiliate 9.7 (15.2)
------------ -----------
Net loss from continuing operations,
before minority interests and
goodwill amortization (194.7) (173.6)
Minority interests 0.1 -
------------ -----------
Net loss $ (194.6) $ (173.6)
------------ -----------
Per share data - basic and diluted
------------ -----------
Net loss per share U.S.$ (0.66)U.S.$ (0.59)
------------ -----------
Basic weighted average number of
shares (thousands) 292,885.7 292,709.3
Condensed Consolidated Balance Sheet
(French GAAP; U.S. dollars in millions)
At June 30, At December 31,
----------------------------
2004 2003
------------- -------------
Unaudited
-------------
ASSETS
Long-lived assets, plant property and
equipment, net 906.0 1,030.8
Long-lived assets, indefeasible rights of
use, net 134.7 139.2
Investments accounted for under the equity
method 68.8 59.1
Investments at cost 5.1 5.1
Other non-current assets 58.0 61.7
------------- -------------
Total non-current assets 1,172.6 1,295.9
Inventories 21.8 14.5
Trade accounts receivable from related
parties 376.7 448.3
Trade accounts receivable, other 354.3 354.6
Other current assets and prepaid costs 290.6 266.6
Short-term loan to France Telecom 150.0 150.0
Cash and cash equivalents 171.8 330.1
------------- -------------
Total current assets 1,365.2 1,564.1
------------- -------------
Total assets 2,537.8 $ 2,860.0
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Total shareholders' equity 1,321.4 1,528.6
Minority interests 0.3 0.5
Provisions for liabilities and charges 67.8 70.9
Other non-current liabilities 62.8 70.3
------------- -------------
Total non-current liabilities 130.6 141.2
Bank loans, overdrafts and capital leases 1.3 1.3
Short term loan from France Telecom 122.2 -
Trade accounts payable to related parties 182.3 280.6
Trade accounts payable, and accruals,
other 390.3 448.8
Deferred income 72.2 79.4
Employee liabilities 106.0 150.1
Taxation liabilities 153.1 162.3
Other current liabilities 58.1 67.2
------------- -------------
Total current liabilities 1,085.5 1,189.7
------------- -------------
Total liabilities and Shareholders' equity 2,537.8 $ 2,860.0
------------- -------------
Condensed Consolidated Statements of Cash Flows
(French GAAP; U.S. dollars in millions)
June 30, December 31,
----------------------
2004 2003
--------- ---------
Unaudited
---------
OPERATING ACTIVITIES
Net loss $ (194.6) $ (356.2)
Adjustments to reconcile net loss to net cash
provided by operating activities
Minority interests (0.1) 0.1
Loss on sale and impairment of long-lived assets - 3.9
Depreciation and amortization 234.8 482.4
Restructuring asset write off - 40.7
Movement on provisions (4.6) 25.5
Changes in valuation allowances 3.4 (21.6)
Equity in loss of affiliate (9.7) 40.6
Deferred income taxes 8.0 (8.0)
--------- ---------
Net cash provided by operating activities before
changes in operating assets and liabilities 37.2 207.4
Changes in operating assets and liabilities (206.0) 105.0
--------- ---------
Net cash flows (used in) / provided by operating
activities (168.8) 312.4
INVESTING ACTIVITIES
Purchase of property, plant and equipment (104.7) (234.0)
Purchase of IRUs (5.8) (46.1)
Net cash effect of acquisitions - (2.3)
--------- ---------
Net cash used in investing activities (110.5) (282.4)
FINANCING ACTIVITIES
Proceeds from issuance of shares 2.8 -
Short-term loan to France Telecom - (150.0)
Proceeds from short term loan from France
Telecom 122.2 -
Decrease in bank loans and overdrafts - (6.0)
Decrease in capital leases - (0.7)
--------- ---------
Net cash provided by / (used in) financing
activities 125.0 (156.7)
Effect of changes in exchange rates on cash and
cash equivalents (4.0) 4.6
--------- ---------
Increase / (decrease) in cash and cash
equivalents (158.3) (122.1)
Cash and cash equivalents at beginning of the
year 330.1 452.2
--------- ---------
Cash and cash equivalents at end of the period $ 171.8 $ 330.1
--------- ---------