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Cable & Wireless plc (CWPUF.PK)

F2Q2011 Earnings Call Transcript

November 16, 2010 4:30 am ET


Jim Marsh – CEO and Executive Director

Tim Weller – CFO and Executive Director


Robert Grindle – Deutsche Bank

John Karidis – MF Global

Andrew Beale – Arete Research

Paul Howard – JP Morgan

Chris Alliot – RBS

Andrew Lee – Goldman Sachs

Lawrence Sugarman – ING

Stuart Gordon – Berenberg

Christopher Nicholson – ORACA Ltd

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Jim Marsh

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Okay. Good morning ladies and gentlemen, and welcome to our half one results, and our first opportunity to talk to you about performance post the IMS statement. We are continuing to build a high-quality business focused on data, IP, and hosting, and in the first half we have grown our margin from these products by 5%, within the guidance range of 5% to 10% indicated at the full-year.

In the short term, over and above the solid data performance, there have been some challenges. The public sector squeeze hurt us, but we are moving beyond it, and voice decline is an ongoing thing. Tim will give you more detail on this later, but the underlying voice margin decline is within the 5% to 10% range that we had anticipated. But I want to be clear this is not the start we had anticipated in our first six months as a stand-alone company.

I would have liked certain areas of our financial performance to be stronger, but the direction is positive with profit before tax up around 140%, and trading cash flow ahead by almost 70%. And the challenges in the short term are far outweighed by the broader industry trends, which are in our favor. The global demand for bandwidth is increasing, the migration to Cloud is a reality, and customers are becoming more and more dependent on their network in order to drive competitive advantage.

So we remain on track for the journey we set out on almost 5 years ago. We are continuing to build the IP data hosting and applications business, which is much higher margin than traditional voice, and now represents over three quarters of total margin. And therefore over time, the voice decline becomes less of an issue for us. Our differentiation through focus on the customer means we are continuing to win in the marketplace. We are growing our global markets business through leveraging our significant International network, and there are UK markets where we are still underrepresented, and where we’re sharpening our product focus, the public sector, carrier, and the mid-market. But I will come back to these later.

So now let me hand you over to Tim to look in more detail at the financials for the first-half. Tim.

Tim Weller

Thanks Jim. Good morning everyone. I have to warn you that you may need to be alert for this bit, as there is a lot of detail in what I’m about to talk through. But we think it is right to give greater granularity as these are made in interims than you might have seen in the past when we were part of a wider group.

But turning first to the income statement, revenue and margin are down slightly on the first half of last year, reflecting the decline in voice and legacy revenues, partially offset by continued growth in our IP data and hosting strategic products. As we indicated at the time of our IMS in July, in light of the anticipated shortfall in margin against our original expectations for the year, we redoubled our efforts to drive cost efficiencies, and this is reflected in the £20 million reduction in operating costs half-on-half.

We provided analysis of operating expenses in the appendices to your pack, but in summary the main drivers behind the Opex reduction are lower property and network costs, and an improvement in charges of bad debt. It is worth noting at this point that operating costs in both first halves benefited from property rebates of 30 million in 10/11 and 10 million in 9/10.

Given that these rebates are firmly first half effects, our expectation is that second-half operating costs in the current year will be slightly up from the first half. The improvement in operating costs in the first-half more than offset the reduction in gross margins, giving rise to growth in EBITDA of 9 million. Exceptional charges were reduced significantly year-on-year to 11 million in line with the forecast we gave at the full year results.

Depreciation and amortization are up by 10 million as a result of the profile of capital expenditure in previous periods. Overall, our operating profit is up by 50% to 66 million. PBT shows an even more marked improvement, more than doubling to 53 million, reflecting the reduced interest charge incurred by the group following the establishment of an independent capital structure post the merger. As indicated at the full-year results, we are paying an interim dividend of 1.5p per share, representing one third of our expected full year dividend of 4.5 pence.

This slide shows our cash flows for the half. You will see that we now pay this write-down for free cash flow, the single most important measure in our opinion. In previous results announcements, we have seen balance sheet Capex in the cash flow analysis with cash flows movements and Capex accruals and finance leasing netted off within the working capital and other caption.

To aid transparency and to ensure consistency with our statuary cash flow statement, we showed cash Capex rather than balance sheet Capex, but for the avoidance of doubt this change does not alter the basis of calculation of trading cash flow. Cash Capex was reduced by 16 million compared with the same period last year, essentially reflecting a step up in the level of our Capex program funded through finance leases, which I will explain in more detail shortly.

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