Interoute Finco plc. As the Issuer of. 350,000, % Senior Secured Notes due Financial results of Interoute Communications Holdings SA

Transcription

1 Interoute Finco plc As the Issuer of 350,000, % Senior Secured Notes due 2020 Financial results of Interoute Communications Holdings SA For the period ended March 31, 2017 Dated 23 May

2 PRESENTATION OF FINANCIAL INFORMATION Financial information The historical consolidated financial data included on the following pages for the three months ended 31 March 2017 and 2016 for Interoute 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 International Financial Reporting Standards as adopted by the European Union ( EU IFRS ). The issuer, Interoute Finco plc (the Issuer ), is a public limited company incorporated under the laws of England and Wales as a private limited company on 11 August 2015 with the name Interoute Finance Limited and was re-registered as a public limited company on 13 August The Issuer was formed for the purpose of issuing the Notes and the related transactions. The Issuer has no material assets or liabilities and has not engaged in any activities and, in the future its only material assets and liabilities are expected to be intercompany balances. The Issuer is a wholly owned finance subsidiary of Interoute Communications Holdings Limited. Because the Issuer is a finance subsidiary without significant operations, we do not present any financial information or financial statements of the Issuer within this report. This document contains references to certain measures, including EBITDA, EBITDA Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Synergy Adjusted EBITDA and Consolidated 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. Unless otherwise indicated, the financial information for Interoute presented in this report is the historical consolidated financial information of Interoute Communications Holdings S.A. ( ICHSA ) and its consolidated subsidiaries. ICHSA s historical consolidated financial information includes certain minor administrative and operating expenses incurred at the ICHSA level. As a result, ICHSA s consolidated financial information is not directly comparable to the consolidated financial information of Interoute Communications Holdings Limited ( ICHL ) for any prior periods. The differences between the consolidated financial information of ICHSA and ICHL primarily relate to fees of auditors and certain minor administrative expenses incurred and paid at the ICHSA level which amounted to 374k for the twelve months ended 31 March For Further Information investor.relations@interoute.com 2

3 TABLE OF CONTENTS SUMMARY OVERVIEW OF RESULTS... 4 INTEROUTE MANAGEMENT DISCUSSION AND ANALYSIS... 9 FINANCIAL STATEMENTS

4 SUMMARY OVERVIEW OF RESULTS Operational Data for Combined Business Three months ended 31 March ( millions, unless otherwise indicated) Total recurring revenue Average new net monthly recurring revenue ( 000s)... (84.2) 92.8 Of which Network Services ( 000s) Of which Enterprise Services ( 000s) Of which Easynet ( 000s)... (188.2) (99.9) Signed contracted value Of which Network Services Of which Enterprise Services Of which Easynet ( 000s) Churn Rate % 0.9% Of which Network Services % 1.1% Of which Enterprise Services % 0.5% Of which Easynet ( 000s) % 1.2% Other financial data Total revenue Of which Network Services Of which Enterprise Services Of which Easynet Adjusted gross margin For analysis of the Total recurring revenue please refer to the Interoute Management Discussion and Analysis. 2 The Internet Access and Internet Transit products are now grouped in Enterprise services under VPN & Security (previously in Network Services under Transport). The prior year has been adjusted based on the new split so that 2016 and 2017 are on a like-for-like basis has been adjusted in Easynet for some cost re-codes between sales related costs to other cost categories including network costs and administrative costs. This will impact the quarterly phasing of the gross margin to amounts previously reported but has no impact on the full year 2016 allocation of costs as reported in the Annual Report. 4

5 Three months ended 31 March ( millions, unless otherwise indicated) EBITDA Adjusted EBITDA Capex Adjusted EBITDA less Capex Monthly recurring revenues from delivered services for the three months ended 31 March 2017 improved against the three months ended 31 March 2016, mainly due to higher revenues from Enterprise Services and lower ceases in Easynet. However, net monthly recurring revenue from Network Services is lower, as the prior year included one particular renewal which positively impacted the net monthly recurring revenue in Signed contracted value decreased in the three months ended 31 March 2017 against last year mainly due to lower wins in Easynet. Total churn for the three months ended 31 March 2017 has improved against the prior year, which was mainly impacted by the ceases in Easynet. Churn for Enterprise Services also improved. Recent Developments Starting on Friday 12 May 2017 many computers across the globe were hit by the Wannacry malware attack often with the result that organisations were locked out of access to critical information and systems. Whilst Interoute was not directly impacted by this attack, it has taken the remedial actions proposed by the UK s National Cyber Security Centre and continues to monitor the progress of this malware attack. Integration Update Integration of the Easynet business remains on track. 19.5m of synergies have been realised in the Mar-17 LTM period and there are 27.5m of run-rate cost synergies as end of Mar-17. Of the 5.7m of Non-Headcount realised synergies, 3.4m relates to OLO/local tails. There have been approximately 35m of integration costs from the start of the project 5. 4 Excluding integration capital expenditure. 5 Includes 35m of integration costs per the P&L from 2015, 2016 and Q1-17. Also includes 8m integration capex, less 6m related to noncash onerous lease/dilapidation provisions and 2m received for sale of a data centre. 5

6 The following chart presents the realised cost synergies in the last twelve month period. Business Update Q1-17 for Interoute maintained the momentum demonstrated in Q4-16 with a total of 77.6m of new contracts signed. Renewals were 50.3m, further demonstrating that Interoute is a trusted supplier for customers digital transformation initiatives. Q1-17 saw the first orders for Interoute s new innovative Software Defined Wide Area Networking solution (SD-WAN), Interoute Edge, with leading German shower and bath products maker, Hansgrohe. Interoute Edge broadens the ability for customers to create higher levels of resiliency through the augmentation of traditional access with lower cost internet services. Interoute Edge also when combined with Interoute s Enterprise Digital Platform creates a predictable and optimised connection to the world s leading SAAS and Cloud providers. Interoute s long running association of global logistics providers as a partner was further cemented in Q1-17 with the signing of GEFCO, the global manufacturing logistics provider. Interoute s Enterprise Digital Platform s breadth and flexibility allows logistic operators to optimise their fleet of vehicles, warehouses and depots. Interoute added another healthcare industry supplier, as a customer, with the signing of a multiyear services contract with Ivoclar Vivident. Interoute s ability to offer local and global capability allows the dental industry to innovate with 3D imaging in patient surgeries with direct connectivity to the manufacturing facilities. Other significant multi-year contracts were signed with Danish Crown and Karnten Netz. Interoute s position as a leading hyperscale infrastructure platform for Europe was further supported by the signing of Apple Inc, who needed a partner with the scale and expertise to support its ambitions in Europe. Interoute s market leading track record with the world s biggest hyperscale providers made Interoute the natural choice. Key Milestones The world of wide area networking is undergoing a technological revolution. This is comparable to the impact Cloud computing had on the way applications were developed and customer s need to run their own infrastructure. Gartner s annual Critical Capabilities Network Services, Pan-European report was published on the 15 March Interoute maintained its strong showing, with Interoute joining the top four group of suppliers globally and continuing its position as the leading independent European provider. Gartner specifically cited Interoute s second generation SD-WAN service one of the few to allow customers to run a range of virtualised functions. Interoute Edge Access (rebranded from Interoute Cloud Connect) is its NFV and vcpe offering, 6

7 currently on its second generation, with a range of virtual functions available on demand, including path selection and SD-WAN. Gartner s client facing approach also reflected Interoute s strong reputation as an able technical advisor for customers especially pertinent as the industry revolutionises. Clients are most satisfied with its strong technical postsales support and ability to manage/resolve troubles. Interoute Edge received further industry recognition at the 9th Comunicaciones Hoy Awards in Spain beating Oracle among others to win the Best ICT product in the Network category. Interoute s bi-modal approach to transformation was further supported by the announcement of Interoute s innovated Managed Container Platform at Cloud Expo Europe in London March 2017 in partnership with Rancher Labs the open source pioneers for container management and orchestration. Further to analyst and industry recognition, Interoute received public endorsements from Spacemetric, Monin and AO.com acting as public references. Interoute Market Positioning Enterprise Market Interoute s target market can be characterised as managed infrastructure services supporting the digital development and transformation of Enterprise customers IT. The collective market is defined as summation of the European connectivity (enterprise networks), communications, data centre & cloud infrastructure market, estimated 6 to be 10bn in This segment describes the services that a customer is likely to have a third party deliver e.g. a MPLS VPN or Cloud service. The 10bn sits as a served available market inside of an estimated overall Enterprise IT Services market estimated 7 to be circa. 130bn. The key trend within this overall Enterprise IT services is the transition of spend away from services directly managed by the Enterprise to services managed by outsourced service providers. This is borne out by the movement of workloads from enterprise on premise facilities to off-premise data centres and cloud platforms run by 3 rd party service providers and partners. According to Gartner, >50% of all on premise workloads will transition into 3 rd party service providers like Interoute over the next 4 years. Despite the rapid growth in cloud most customers require a model that combines and leverages both their legacy and new digital services maximizing their effectiveness in a market that remains distributed and competitive. Interoute provides an inclusive model binding together the different facets of Enterprise transformation via its converged Enterprise Digital Platform (EDP). EDP is a flexible interconnect platform or Cloud Fabric that combines cloud (Interoute VDC) Interoute s private network, data centre and SD-WAN access technologies (Interoute Edge) to provide a single view of an Enterprise s IT assets including 3 rd party clouds and SAAS services. We estimate that our share of the market is currently circa. 5% 8. 6 European Enterprise Services market defined as: Pan-European VPN and Computing & Communications market source Gartner and Frost & Sullivan 7 Global Data ( 8 Calculated based on FY Enterprise revenues of approx. 0.55bn of the 10bn market 7

8 Network Services The demand for bandwidth services continues to grow exponentially according to forecasts from Cisco; global data centre, Internet and cloud related traffic will more than double by To meet this growth Interoute has completed (98%) of the build out of its 100G optical platform to support the demand from the hyper-scale providers as they scale out. Completing the platform now means that our short term capital expenditure is predominantly linked to client services and not capability expansion. This combination of underlying demand and continued innovation in deployment costs continues to offset price pressure securing stable revenues. Interoute s estimated share of the European bandwidth market is circa. 15%. 9 In 2020, the gigabyte equivalent of all movies ever made will cross the Internet every 2 minutes. 9 Ovum European Wholesale Market Share : The Big Picture 8

9 INTEROUTE MANAGEMENT DISCUSSION AND ANALYSIS Consolidated Profit and Loss Account Three months ended 31 March ( millions) Total Revenue Sales related costs... (68.6) (66.6) Gross Margin Network Costs... (27.3) (27.0) Staff Costs... (41.3) (37.6) Administrative Costs... (10.8) (8.9) Adjusted EBITDA Integration costs... (3.9) (2.0) One-off adjustments Other (costs)/income (0.2) Derivatives fair value change... (5.2) (0.4) Share-based payments... (0.2) (0.4) EBITDA Depreciation and Amortisation... (26.6) (25.3) Net Finance Costs... (12.9) (11.6) Profit/(loss) before taxes... (14.5) (2.2) Income (charge)/tax Credit Net profit/(loss) for the period... (14.1) (1.6) The consolidated business increased its revenues by 0.7% on constant currency basis, from 180.9m in the three months ended 31 March 2016 to 182.2m in the three months ended 31 March Adjusted EBITDA increased by 12.4% to 37.0m while EBITDA increased by 38.2% to 34.6m. Gross margin increased by 0.3% points and is 62.4% in the three months ended 31 March Profits 9

10 before tax increased from a loss of 14.5m in the three months ended 31 March 2016 to a loss of 2.2m in the three months ended 31 March 2017 due to the increased Adjusted EBITDA and lower one off adjustments in 2017 so far (including integration costs and derivatives fair value adjustments). Staff costs as presented in this report include 3.2m of costs in the three months ended 31 March 2016 and 3.5m of costs in the three months ended 31 March 2017 that, if presented in a statutory format, would be recognised within other costs/income. Reconciliation of EBITDA to Net Profit/Loss Three months ended 31 March ( millions) EBITDA Depreciation and Amortisation... (26.6) (25.3) Net Finance Costs... (12.9) (11.6) Income (charge)/tax Credit Net profit/(loss) for the period... (14.1) (1.6) Total Revenue Three months ended 31 March, 2017 and 31 March, 2016 Total revenue decreased by 2.1%, or 3.8m, in the three months ended 31 March 2017 to 177.1m from 180.9m in the three months ended 31 March However, revenue increased by 0.7% on a constant currency basis. Excluding Easynet, revenue increased by 6.1% for the Network and Enterprise Services business. Enterprise Services increased by 5.4m, which was driven by an increase in VPN & Security and Computing revenues. VPN & Security increased by 3.8m while Computing increased by 1.4m mainly due to higher VDC revenues. VDC continued to grow in the three months ended 31 March 2017, growing by 68.5% over the same quarter in the prior year. Revenue for Communications increased by 0.2m due to 0.8m higher Voice revenues but was offset by lower Video revenues (due to lower hardware and recurring revenues). Network Services revenues increased by 1.7m due to increased Infrastructure revenues as a result of higher IRU revenues and a large hardware resell deal (most of which was delivered in Q4-16 but is also being delivered through 2017). This has been offset by lower Transport revenues. Quarter on quarter revenue performance for Easynet is encouraging and is relatively stable as Q4-16 Easynet revenues were 53.6m against Q1-17 revenues of 53.2m. Recurring revenues for the group decreased by 4.5m mainly due to the adverse exchange rate movement which impacted the revenues in Easynet in addition to churn in the Easynet business. Excluding Easynet, recurring revenues increased by 4.2m (3.8%), which was driven by the Enterprise Services product group (representing a growth rate of 7.8%). 10

11 Transactional revenues increased from 7.9m to 8.5m in the three months ended 31 March 2017 due to higher hardware revenues and fibre IRU sales offset by lower licence transactional resells. Our recurring and transactional revenue were as follows: Three months ended 31 March ( millions) Recurring revenue Transactional revenue Total Revenue The charts below present the recurring and transactional revenues (with Easynet revenues shown separately), as well as the segmental split within the recurring revenues. Revenue by Type Recurring revenue by segment The following table sets out our revenues from Network Services, Enterprise Services and Easynet. Three months ended 31 March ( millions) Networks Services Enterprise Services Easynet Total Revenue

12 Sales related costs Three months ended 31 March, 2017 and 31 March, 2016 Sales related costs decreased by 3.0%, or 2.0m, to 66.6m in the three months ended 31 March 2017 from 68.6m in the three months ended 31 March 2016 as reported revenue also declined due to churn and the adverse foreign exchange impact in Easynet. Excluding Easynet, sales related costs increased 1.1m primarily as a result of the increase in revenue over this period. The largest increase was for hardware resell costs for which the associated gross profit is in the Infrastructure product. Gross margin Three months ended 31 March, 2017 and 31 March, 2016 Gross margin decreased by 1.7m, or 1.5%, to 110.6m in the three months ended 31 March 2017 from 112.3m in the three months ended 31 March Gross margin in Easynet declined by 7.8m, or 22.0%, but declined by 16.6% on a constant currency basis. Excluding Easynet, gross margin increased by 7.8%, or 6.0m, due to higher gross margins in both the Enterprise Services and Network Services product groups. Gross margin from Enterprise Services increased by 4.9m, or 10.0%, from 49.5m to 54.5m, due to an increase in margin in the VPN & Security and Computing product groups. The VPN & Security product category contributed to the largest increase in gross margin ( 3.3m higher). Computing s performance further enhanced margin by 0.9m, mainly due to higher margin achieved from VDC. Gross margin from the Communications product category also increased by 0.7m due to increased margin from Voice ( 0.9m) offset by lower Video margin ( 0.2m). Overall the gross margin percentage for Enterprise Services increased from 63.6% to 65.4%. Gross margin from Network Services increased 1.0m, or 3.8%, to 28.6m in three months ended 31 March 2017 from 27.6m in the three months ended 31 March 2016 due to higher margin achieved from the Infrastructure product offset by lower Transport margin (as a result of lower Ethernet and SDH margin mainly arising from one particular customer cease in Q3-16). Infrastructure margin is higher due to transactional revenues resulting from higher IRU revenues in 2017 so far. The margin percentage has remained relatively stable from 71.0% to 70.7%. Gross profitability of the combined group, in percentage terms, increased by 0.3% points from 62.1% in the three months ended 31 March 2016 to 62.4% in the three months ended 31 March The chart below presents the quarterly gross margin, which shows a consistent gross margin % by quarter. Q was impacted by one particular low margin hardware resale transaction. Gross Margin % by Quarter 12

13 Network costs Three months ended 31 March, 2017 and 31 March, 2016 Network costs decreased by 1.0%, or 0.3m, to 27.0m in the three months ended 31 March 2017 from 27.3m in the three months ended 31 March m of the decrease is due to a network damage reimbursement received in Italy while there is an additional 0.5m of lower costs for leases that that ended in Q1-16 (previously in the Vtesse business). Euro equivalent spend for the UK network costs are also lower compared to the prior year, as a result of the depreciation of the pound sterling. This is offset by annual rental and indexation increases which have caused an increase in rent and utilities ( 0.2m) and operation and maintenance charges ( 0.3m). Costs for licences are also higher than the prior year ( 0.4m). Staff costs Three months ended 31 March, 2017 and 31 March, 2016 Staff costs decreased by 3.7m, or 8.9%, to 37.6m in the three months ended 31 March 2017 from 41.3m in the three months ended 31 March The decline in costs was driven by 3.3m lower salary and social security costs in the three months ended 31 March Permanent headcount has reduced by 56 heads to 2,149 as at 31 March The biggest decrease in costs has been in the Easynet UK entities offset by an increase in the low cost service centres of Nottingham and Sofia, due to the migration of Easynet operational and financial activities from Bracknell and Shepton Mallet. The benefit of the synergy realisation from the Easynet acquisition has led to the year on year decline. Bonus costs ( 0.4m), car allowances ( 0.3m) and pension costs ( 0.2) are also lower offset by lower capitalised labour costs ( 0.3m) and higher travel costs ( 0.1m). Staff costs as presented in this report include 3.5m of costs in the three months ended 31 March 2017 that, if presented in a statutory format, would be recognised within other costs/income. Administrative costs Three months ended 31 March, 2017 and 31 March, 2016 Administrative costs decreased by 1.9m, or 17.3%, to 8.9m in the three months ended 31 March 2017 from 10.8m in the three months ended 31 March This is mainly due to 0.9m lower establishment costs and 0.9m lower foreign exchange losses. Establishment costs are lower in the UK following the move of various rent costs to the exceptional cost categories as a result of the migration of Easynet operational and financial activities. Costs in Italy and Netherlands are also lower, as Q1-16 included costs for an office in Milan which we no longer have in 2017 and lower costs resulting from the sale of the Easynet Schiphol-Rijk data centre operation. Additionally, IT costs have been lower in three months ended 31 March 2017 compared to the prior year, but is offset by higher legal costs. Administrative costs as presented in this report exclude 3.5m of costs in the three months ended 31 March 2017 that if presented in statutory format, would be recognised within other costs/income (instead of under the Employee benefits expense and Work performed by the Group and capitalised categories). 13

14 Depreciation and amortisation Three months ended 31 March, 2017 and 31 March, 2016 Depreciation and amortisation costs decreased by 1.3m, or 5.0%, to 25.3m in the three months ended 31 March 2017 from 26.6m in the three months ended 31 March Depreciation for transmission equipment ( 0.5m), customer premise equipment ( 0.5m) and local tails ( 0.3m) was higher in the prior period. Amortisation of licences ( 0.3m) was also higher in the three months ended 31 March This is partially offset by a higher depreciation charge in 2017 so far resulting from the impairment of network assets ( 0.4m). Net finance costs Three months ended 31 March, 2017 and 31 March, 2016 Net finance costs decreased by 1.3m, or 10.3%, to 11.6m in the three months ended 31 March 2017 from 12.9m in the three months ended 31 March m of the decrease is as a result of lower interest costs from re-financing the floating rate notes. During November 2016, Interoute completed a 275.0m Term Facility which was used to fund the repayment in full of the 240.0m senior secured floating rate notes which led to a lower interest charge. There is a further 0.4m lower charge for debt fees being expensed on the new financing compared to the prior period. This is offset by 0.3m lower credit from unrealised foreign exchange gains from financing costs. Income tax credits/(charges) Three months ended 31 March, 2017 and 31 March, 2016 Income tax credits increased by 0.3m in the three months ended 31 March 2017 to 0.7m, from 0.4m in the three months ended 31 March

15 Reconciliation of EBITDA to Adjusted EBITDA The table below presents a reconciliation of EBITDA and Adjusted EBITDA for the three months ended 31 March 2017 compared to the three months ended 31 March Three months ended 31 March ( millions) EBITDA Integration costs Derivatives fair value change Share-based payments Reclassification of unrealised foreign exchange Valuation of dark fibre stock... (0.2) (1.0) Right of Way settlements... (1.4) - Dilapidation and onerous lease provision releases... (0.5) (0.1) Restructuring Other adjustments Adjusted EBITDA Three months ended 31 March, 2017 and 31 March, 2016 Adjusted EBITDA increased by 12.4%, or 4.1m, to 37.0m in the three months ended 31 March 2017 from 32.9m in the three months ended 31 March EBITDA increased by 9.6m, or 38.2%, from 25.1m in the three months ended 31 March 2016 to 34.6m in the three months ended 31 March 2017 (after integration and other exceptional costs are considered). The difference between EBITDA to Adjusted EBITDA is significantly lower in 2017 so far. The variation between EBITDA and Adjusted EBITDA included 2.0m of integration costs in the three months ended 31 March 2017 compared to 3.9m in the three months ended 31 March The 2.0m of integration costs in Q1-17 include 1.6m of headcount related costs and 0.4m of nonheadcount costs. 0.8m has been adjusted for fair value of derivative financial instruments and share based payments (compared to 5.4m in the prior year), which are non-cash charges required by IFRS but do not reflect underlying business performance. A further 0.3m related to restructuring is added back to EBITDA to derive the Adjusted EBITDA in the three months ended 31 March 2017 and 0.5m of other adjustments (which include the Easynet warranty and indemnity insurance costs, some exceptional contractor fees, and other income/losses 15

16 including profit and losses on disposal of fixed assets). This is offset by a 1.0m benefit relating to the valuation of dark fibre stock which represents the impact of the timing difference on gross margin between the commitment and delivery of IRU contracts signed. Such adjustments will reverse out on delivery of the IRUs. There is also 0.1m for dilapidation and onerous lease provision releases. Further adjustments in the three months ended 31 March 2016 included 0.6m for the reclassification of unrealised foreign exchange losses and 0.2m of other adjustments (including the Easynet warranty and indemnity insurance costs and other income/losses). This was offset by 1.4m in relation to a one off benefit resulting from a provision release for the Navigli Lombardi dispute. Interoute SpA had been disputing several rights of way charges from the Lombardi region in Italy, which was settled in the first quarter of 2016 and resulted in the release of the provision. An additional 0.2m related to the valuation of dark fibre stock and 0.5m for dilapidation and onerous lease provision releases. 16

17 Capital Expenditure and Investments The following table sets out our capital expenditures for the periods set forth below: Three months ended 31 March ( millions) Maintenance Base Of which Network Services Of which Enterprise Services Total Base Strategic Growth Of which Network Services Of which Enterprise Services Total Strategic Growth Purchased Buildings Subtotal Acquisition Integration Total capital expenditure Three months ended 31 March, 2017 and 31 March, 2016 Capital expenditure decreased by 22.9%, or 4.7m, to 15.8m in the three months ended 31 March 2017 from 20.5m in the three months ended 31 March 2016 (excluding integration related capital expenditure). Including integration costs, spend declined 4.0m or 18.8%. 2.8m of total capital expenditure, or 17.4%, related to maintenance in the three months ended 31 March 2017 compared to 2.3m, or 11.2%, in the three months ended 31 March Maintenance capital expenditure in 2017 so far has included some one off spend under the Information Systems category for Oracle licences ( 0.8m). Base capital expenditure decreased from 9.6m in in the three months ended 31 March 2016 to 5.1m in the three months ended 31 March Spend for both Network and Enterprise services declined over this period. Network services spend declined due to higher investment in the capacity (transmission) in Enterprise services spend declined due to some renewal costs incurred in the three months ended 31 March 2016 in relation to a specific Hosting customer ( 0.9m) and a VPN customer ( 0.7m incurred in Q1-16 and 0.1m of costs incurred in Q1-17 for the same customer). 17

18 Strategic growth capital expenditure decreased by 0.1m from 8.0m in the three months ended 31 March 2016 to 7.9m in the three months ended 31 March Spend for Enterprise services in Strategic growth expenditure decreased by 0.8m mainly due to lower Hosting spend. The prior year included 1.0m for the Hosting shared storage hardware refresh spend and a further 0.8m of cost for one specific customer (this customer also has some spend under Base capital expenditure as the cost was for both for existing and new revenues). However, there is higher investment in the VDC platform in Q1-17 compared to the prior year by 1.2m. Spend in Strategic Network services increased due to investment in the IP network. There was a further 0.6m incurred under Purchased Buildings in relation to the purchase of a PoP in Liege in Additionally, 1.6m was incurred during the three months ended 31 March 2017 related to our integration of Easynet and the Vtesse networks compared to 1.0m in the three months ended 31 March

19 Financial Data and Key Ratios The results below show selected Interoute results. Twelve months ended 31 March 2017 ( millions, unless otherwise indicated) Consolidated Revenue Consolidated EBITDA Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA margin Consolidated Synergy Adjusted EBITDA 10 Consolidated Synergy Adjusted EBITDA less Capex Consolidated net debt 11 Consolidated Interest Expense Consolidated Synergy Adjusted EBITDA / Consolidated Interest Expense Net debt / Consolidated Synergy Adjusted EBITDA % Includes anticipated synergies of 12.4m, of which most is expected to be realised by end of The twelve month period ended 31 March 2017 benefits from approximately 19.5m of synergies from actions taken since the acquisition of Easynet. We have a further 12.4m of synergies to realise out of the 31.9m anticipated synergies. The 12.4m of anticipated synergies are expected to be comprised of (i) 6.8m related to the removal of duplicative functions, consolidation of our government services team with Easynet s government services team and centralisation of hosting and data centre engineers as well as the centralisation of back office and support functions; (ii) 1.7m related to the shift of certain Easynet supplier leases to our network and combining ours and Easynet s overlapping network providers to leverage higher discounts from suppliers; (iii) 3.3m related to expected rent, lease and power cost savings from the absorption of Easynet data centres into our current locations that are capable of assuming their utilisation; (iv) 0.3m related to rent savings from the consolidation of Easynet s office properties into our office locations; and (v) 0.3m related to savings from shifting activities in-house and the elimination of duplicative marketing events, sponsorships and other costs. 11 Net debt as at Mar-17 consists of 350.0m Fixed Rate Notes, 275.0m Term Loan B, 82.2m other indebtedness less 23.8m cash. Other indebtedness includes 34.2m of vendor loans, 34.9m of finance leases and 13.1m of accrued interest. 19

20 Liquidity Our liquidity requirements arise principally from our capital investment and working capital requirements. Our principal uses of cash are for supplier payments, staff salaries and the expansion of our network and product and service offerings through acquisitions or otherwise. Our principal sources of liquidity have historically been cash generated from our operating activities and cash raised through bank borrowings and the 350.0m 7.375% Senior Secured Notes due On 9 October 2015, we issued the 350.0m 7.375% Senior Secured Notes due 2020 (the Fixed Rate Notes ) and 240.0m Senior Secured Floating Rate Notes (the Floating Rate Notes and together with the Fixed Rate Notes, the Notes ) and placed the proceeds from the issuance into escrow pending completion of the Easynet acquisition. We used the net proceeds from the issuance of the Notes to finance the acquisition of Easynet (including the repayment of certain outstanding Easynet indebtedness) and to refinance our previous term and revolving facility. On 15 October 2015 we entered into a Revolving Credit Facility in an aggregate committed amount of 75.0m. The financing also added 44.9m cash. For the remainder of 2015 and most of 2016, the primary source of liquidity was the cash generated from operations. On 14 November 2016, Interoute drew down on a 275.0m Term Facility due The Term Facility was used on 15 November 2016 to fund the repayment in full of Interoute Finco PLC s existing 240.0m senior secured floating rate notes due 2020, to pay transaction fees and expenses and for general corporate purposes. We held cash at bank, cash in postal cheque accounts and cash in hand of 51.1m at 31 March 2016 and 23.8m at 31 March We also held restricted cash in connection with rental deposits and certain guarantees of 11.9m at 31 March 2016 and 13.0m at 31 March All treasury matters are managed from our head office in London, although bank accounts are held in locations in which we operate. Our long-term indebtedness consists primarily of the Fixed Rate Notes and the Term Facility (issued in November 2016) and any amount drawn under the Revolving Credit Facility. As at 31 March 2017, the Revolving Credit Facility was undrawn. The Company may, from time to time, repurchase bonds on the open market. 20

21 Net working capital The following table sets out the principal components of our net working capital as at the end of the periods indicated. 31 December 31 March ( millions) Stock Provisions... (28.3) (26.8) Trade and other receivables Prepayments and accrued income Trade and other payables... (183.8) (154.4) Deferred revenue... (197.3) (192.6) Net working capital... (206.2) (164.1) Working capital increased by 42.1m 12 from 31 December 2016 to 31 March 2017 mainly due to a decrease in the trade payable balance. In addition, stock, trade and other receivable and prepayments and accrued income have increased from year ended 31 December The working capital was impacted by movements associated with a large hardware resell deal ( 8.4m, mainly for payment of costs impacting trade creditors), integration costs ( 2.8m), a reduction in payable days to allow more efficient management of payables, an increase in receivable days due to migration of collection from Bracknell to Nottingham/Sofia and delayed invoicing of two large assets deals to later in the year (negatively impacting deferred income vs. our expectations for Q1-17). The following graph 13 presents the net working capital movements by quarter m movement in working capital balances per the balance sheet. The 41.9m balance shown on the graph, is the cash flow statement impact of the change in working capital, which excludes the impact of translation foreign exchange movements. 13 Values as presented in graph exclude the large hardware resale deal and integration. 14 Current assets include inventory, receivables and prepayments/accrued income. 21

22 Net working capital as reported in the 2016 annual report to bondholders was 202.1m. Net working capital as reported in the 2016 consolidated annual accounts of Interoute Communications Holdings S.A was 206.2m. The variances are provided below and principally relate to late adjustments and reclassifications identified during the annual audit. As previously reported Consolidated accounts Variance Stock Provisions (25.1) (28.3) (3.2) Trade and other debtors Prepayments and accrued income Trade and other creditors (175.4) (183.8) (8.3) Deferred revenue (197.3) (197.3) - Net working capital (202.1) (206.2) (4.1) 22

23 Quantitative and Qualitative Disclosures About Market Risk Our activities expose us to a variety of financial risks in the normal course of business, including price risk, credit risk, liquidity risk, currency risk and interest rate risk. Our risk management strategy seeks to limit the adverse effects of such risks on our financial performance. The following section provides quantitative and qualitative disclosures on the effects that these risks may have. However, the quantitative data reported below do not have any predictive value and do not reflect the complexity of the markets or reactions which may result from any changes that have taken place. Price risk The Group is exposed to price risk as a result of downward pressure on prices in the telecommunications market. The Group mitigates this risk in several ways: all contracts not strictly adhering to the Company s standard prices are subject to approval by an independent team before they can be closed by the sales force thus ensuring a base level of margins is attained; a focus on controlling local tail costs, including the establishment of a team of professionals with experience in local tail acquisition and cost control; by structuring the sales force s incentive plan such that higher commissions are earned on higher margin products; and by developing the Interoute.com and Interoute CloudStore, which will help drive online sales and find new markets for Interoute products. Credit risk The Group is exposed to credit risk to the extent that customers may default on payment for services provided or pay for the services after the due date, which disrupts cash flow. The Group has implemented policies to mitigate this credit risk, including: The requirement for appropriate credit checks on potential customers before sales are made. The establishment of counterparty credit limits. Specific transaction approval procedures have been put in place. The employment of debt collection agencies to recover overdue debts. Liquidity risk Liquidity risk is that the Group does not have sufficient liquid assets to meet its obligations as they fall due. Liquidity is maintained at a prudent level and the Group ensures there is an adequate liquidity buffer to cover contingencies. The Group maintains sufficient cash and open committed credit lines from credit institutions to meet its funding requirements and monitors cash flow as part of its day to day control procedures. In addition, on 4 November 2016, we entered into the Revolving Facility and Term Facility. As at 31 March 2017, the Group held cash at bank, cash in postal cheque accounts and cash in hand of 23.8m. 23

24 Interest rate cash flow risk Interest rate risk refers to the risk that market interest rates will increase, resulting in higher borrowing costs under any of our credit facilities which have floating interest rates (including under our Revolving Credit Facility). In order to mitigate this risk, we use a mixture of floating rate and fixed rate instruments. Foreign currency exchange rate risk The Group is exposed to currency risk as a result of our operations across a number of geographical locations, including exposure to (i) transactional foreign exchange risk when a subsidiary enters into transactions in a currency other than its functional currency and (ii) translational foreign exchange risk when we translate the financial statements of certain of our subsidiaries into euro for purposes of the preparation of our consolidated financial statements. Transactional risk Our subsidiaries generally execute their operating activities in their respective functional currencies. As a result, we are exposed to transactional foreign exchange risk, particularly with respect to the pound sterling, the U.S. dollar and the Swiss franc. For the combined business, pound sterling was 30.1%, U.S. dollar was 9.2% and Swiss franc was 2.8% of our revenues for the twelve months ended 31 March A significant portion of the costs are also in pound sterling. In accordance with our investment policy (as approved by our CEO committee), we make use of derivative financial instruments, primarily to mitigate currency risks arising from the different currencies in which we transact with customers and suppliers. Our policy is not to enter into such instruments for speculative purposes. Translational risk Because our reporting currency is the euro, we may be exposed to translation risk when the income statements of our subsidiaries located in countries outside the Eurozone are converted into euro using the average exchange rate for the period, and whilst revenues and costs are unchanged in local currency, changes in exchange rates may lead to effects on the converted balances of revenue, costs and the result in euro. Interest Rate Risk Interest rate risk refers to the risk that market interest rates will increase, resulting in higher borrowing costs under any of our debt instruments that have floating interest rates (including under our Revolving Credit Facility). In order to mitigate this risk, we have historically used a mixture of floating rate and fixed rate instruments. As a result of the issuance of the Notes on 9 October 2015, interest rates are currently materially fixed, with the exception of the Term Facility drawn on 14 November 2016 and any amounts potentially drawn under our Revolving Credit Facility. 24

25 DISCLAIMER Any information in the foregoing results 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 forwardlooking 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. 25

26 FINANCIAL STATEMENTS The following presents the ICHSA condensed consolidated interim financial Statements for the three months ended 31 March This includes the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated balance sheet and consolidated statement of changes in equity and notes to the financial statements. 26

27 Interoute Communications Holdings S.A. Condensed Consolidated Interim Financial Statements For the 3 months ended 31 March 2017 Interoute Communications Holdings Société Anonyme Condensed Consolidated Interim Financial Statements For the 3 months ended 31 March 2017 R.C.S. Luxembourg B Avenue Charles De Gaulle L-1653 Luxembourg 0

28 Interoute Communications Holdings S.A. Condensed Consolidated Interim Financial Statements For the 3 months ended 31 March 2017 Contents Page Condensed Consolidated Income Statement 2 Condensed Consolidated Statement of Comprehensive Income 3 Condensed Consolidated Statement of Cash Flows 3 Condensed Consolidated Balance Sheet 4 Condensed Consolidated Statement of Changes in Equity 5 Selected Explanatory Notes

29 Interoute Communications Holdings S.A. CONDENSED CONSOLIDATED INCOME STATEMENT For the 3 months ended 31 March 2017 Unaudited Unaudited Before Specific Items 3 months ended 31 March 2017 Specific Items (Note 4) Total Before Specific Items 3 months ended 31 March 2016 Specific Items (Note 4) Total Note Revenue 3 177, , , ,897 Other income Changes in inventories of finished goods and work in progress (12) (221) 156 (65) Work performed by the Group and capitalised ,288-1,288 Employee benefits expense (35,124) (2,140) (37,264) (39,387) (3,985) (43,372) Other expenses: Marginal selling costs (66,549) (18) (66,567) (68,377) - (68,377) Network costs (27,017) 29 (26,988) (27,298) 1,932 (25,366) Other costs (12,630) (1,205) (13,835) (13,966) (6,101) (20,067) (106,196) (1,194) (107,390) (109,641) (4,169) (113,810) EBITDA * 37,010 (2,368) 34,642 32,936 (7,873) 25,063 Gross Margin ** 3 110, , , ,455 Depreciation of property, plant and equipment 7 (21,074) - (21,074) (22,106) - (22,106) Amortisation of intangible assets 8 (4,235) - (4,235) (4,530) - (4,530) Finance income Finance costs 5 (11,915) - (11,915) (13,587) - (13,587) Profit / (loss) before income tax 131 (2,368) (2,237) (6,598) (7,873) (14,471) Income tax (charge) /credit 6 (40) Profit / (loss) for the period attributable to owners of the parent 91 (1,649) (1,558) (6,414) (7,654) (14,068) *Earnings Before Interest Tax Depreciation and Amortisation **Gross Margin defined as Revenue plus change in inventories less marginal selling costs The notes on pages 6 to 17 are an integral part of these condensed consolidated interim financial statements. 2

30 Interoute Communications Holdings S.A. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the 3 months ended 31 March 2017 Unaudited Unaudited 3 months ended 31 March months ended 31 March Loss for the period attributable to owners of the parent (1,558) (14,068) Items that will be reclassified to profit or loss Re-measurement of post-employment benefit obligations - - Items that may be reclassified to profit or loss Currency translation differences (598) (435) Other comprehensive expense for the period (598) (435) Total comprehensive expense for the period (2,156) (14,503) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the 3 months ended 31 March 2017 Unaudited Unaudited Note 3 months ended 31 March 3 months ended 31 March Cash flows from operating activities Cash used in operations 18 (8,371) (12,756) Cash inflow / (outflow) from collateralised deposits and guarantees 1,147 (839) Interest paid (3,425) (5,034) Income taxes paid (127) (221) Net cash used in operating activities (10,776) (18,850) Cash flows from investing activities Payments for property, plant and equipment (17,351) (20,468) Payments for intangible assets (67) (970) Interest received Net cash used in investing activities (17,372) (21,376) Cash flows from financing activities Proceeds from borrowings 9, Repayments of borrowings (4,889) (5,614) Finance lease payments (1,873) (2,060) Net cash generated from / (used in) financing activities 3,056 (6,892) Net decrease in cash and cash equivalents (25,092) (47,118) Cash and cash equivalents at beginning of the period 48,943 99,306 Exchange losses on cash and cash equivalents (44) (1,054) Cash and cash equivalents at end of the period 23,807 51,134 The notes on pages 6 to 17 are an integral part of these condensed consolidated interim financial statements. 3

31 Interoute Communications Holdings S.A. CONDENSED CONSOLIDATED BALANCE SHEET As at 31 March 2017 Unaudited Audited At 31 March 2017 At 31 December 2016 Note Assets Non-current assets Property, plant and equipment 7 454, ,167 Intangible assets 8 678, ,212 Deferred income tax assets 26,813 26,813 Available-for-sale financial assets Trade and other receivables 10 6,846 3,320 Total non-current assets 1,166,513 1,171,537 Current assets Inventories 9 3,088 2,134 Trade and other receivables , ,666 Current income tax recoverable Cash and cash equivalents 23,807 48,943 Total current assets 244, ,588 Total assets 1,410,959 1,435,125 Equity and liabilities Equity attributable to owners of parent Ordinary shares , ,306 Preference shares Share premium , ,380 Other reserves 17 21,997 22,472 Accumulated deficit (445,686) (444,128) Total equity 199, ,280 Liabilities Non-current liabilities Trade and other payables 12 37,748 84,700 Borrowings , ,353 Deferred income tax liabilities 37,223 37,926 Employee benefit obligations 14 8,526 7,551 Provisions 15 11,927 12, , ,804 Current liabilities Trade and other payables , ,517 Borrowings 13 34,775 27,506 Financial liabilities at fair value through profit or loss 11 1,472 1,123 Current income tax liabilities Employee benefit obligations 14 5,882 6,050 Provisions 15 10,647 12, , ,041 Total liabilities 1,211,712 1,233,845 Total equity and liabilities 1,410,959 1,435,125 The notes on pages 6 to 17 are an integral part of these condensed consolidated interim financial statements. 4