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euNetworks Reports Fourth Quarter and Full Year 2012 Results

euNetworks Group Limited (SGX: H23.SI), a unique Western European provider of bandwidth infrastructure services, announced results for the three months ended, and full year ending 31 December 2012. The Group reported strong financial performance for the year with continued improvement in recurring revenue, Adjusted EBITDA1 and proxy cash flow.

Recurring revenue improved 10% year over year, to €24.5m in 4Q 2012. Adjusted EBITDA was €5.0m in 4Q 2012, improving materially from 4Q 2011 and 52% from 3Q 2012. Absolute capital spending was reduced and allocated increasingly toward customer sales throughout the year.

Gross margin for the full year was 68.0%, down from 69.0% in 2011, reflecting the impact of acquisitions completed in 2Q and 3Q 2011. Gross margin for the quarter was 71.2%, improving from 64.7% in 4Q 2011 and from 67.1% in 3Q 2012. Year on year and sequential gross margin improvement in 4Q 2012 reflected the Company’s continued focus on high margin new sales. New sales delivered gross margins of greater than 80% throughout 2012.

“The Group maintained its growth and scaling momentum reported quarter over quarter throughout 2012,” said Brady Rafuse, Chief Executive Officer of euNetworks. “As integration and rationalisation wound down in 1H 2012, customer bandwidth demand steadily increased. This enabled our discretionary capital investment to be shifted even more towards extending network reach for our customers. We saw growing opportunity with both our existing customer base and new customers and segments.”

“Whilst our financial metrics continued to improve, churn remained higher than previously seen through 2012. We acknowledge churn is a component of our business which needs to be managed aggressively. Adjusted EBITDA growth, utilising discretionary capital efficiently, is the primary measure for value creation in our business. Steadily improving operating efficiency and leveraging increasing customer demand will enable euNetworks to deliver real value creation over time.”

Performance Highlights for the Full Year 2012

  • Sales performance and customer contract value improved in 2012 relative to 2011. Whilst more than 90% of new sales were derived from the Company’s existing customer base, new customer relationships were consistently established. In addition, more than 95% of sales were within the Company’s core product portfolio including Fibre, Wavelengths, Ethernet, Colocation and Internet, with sales of non-core products of IP VPN and SDH declining materially as expected. Average contract term for new customer contracts was 41 months in the year, increasing from 39 months in 2011.

The Company noted increased awareness by customers, varying by size and industry across all operating markets, of the benefits of fibre connections between buildings and data centres.

Accordingly, the Company made material lit services network investments in 2012 including deployment of an 8.8 Terabit per second Wavelength network from London through Manchester to Dublin and an upgrade to the Company’s long haul transport platform across its entire footprint.

The low latency euTrade service portfolio continued to see strong sales and was a revenue generator in 2012. The December launch of a new euTrade route, delivering high-capacity low latency fibre based connectivity between Basildon, UK (NYSE Euronext) and Frankfurt, Germany contributed to sales in 4Q 2012. However, increased competition through microwave technologies mean that euTrade is expected to be a smaller contributor to the Company’s sales mix going forward.

Sales efforts to pursue new segments in 2012 included the media industry, where both Ethernet and Fibre services proved popular to several large new media customers.

At the same time, the wholesale segment remained an important part of the Company’s business. Whilst supporting existing wholesale customers for their traditional internal needs, euNetworks has developed bundling techniques, thereby enabling such customers to serve their enterprise customers with higher capacity services.

Ultimately, the ability to deliver services directly to enterprise customers or bundled together with partners’ and wholesale providers’ offerings, has remained our core sales methodology. As additional buildings are connected to the network, customers enjoy the benefits of having access to essentially unlimited bandwidth capacity via euNetworks’ infrastructure and the Company enjoys the scaling benefits of high gross margins delivered over an easy to maintain product set.

  • Churn was 1.7% in 4Q 2012 and averaged 1.5% of monthly recurring revenue for the full year 2012. This was higher than previously seen in the business and is expected to continue for the foreseeable future. The primary sources of churn included end of term customer contracts for non-core SDH and IP VPN services in Germany as well as expired euTrade customer contracts which generally related to strategy changes by some Financial Services customers. That is, they discontinued providing services to their customers thereby terminating their need for use of low latency bandwidth services altogether.

Gross margin for churn averaged 72% for 2012. This was consistently lower than the gross margins achieved on new sales in each quarter of 2012.

  • Network investment included the addition of 59 new buildings to the Company’s networks in 4Q 2012, exiting 2012 with 912 on-net buildings and an additional 79 buildings in the process of being connected. Through 2012 euNetworks connected 279 new buildings, up from 268 in 2011.

As mentioned above, euNetworks’ long haul transport platform was upgraded in the year. New Dense Wave Division Multiplexing (DWDM) technology was rolled out across the Company’s European long haul network. This enabled euNetworks to offer customers an end-to-end connectivity solution, from 1G to 100G to over 100 key data centres in Western Europe.

Integration of the LambdaNet Ethernet and Internet platforms ran through 2012. LambdaNet owned and operated one of the most highly ranked Internet Autonomous Systems (AS13237) in Europe. euNetworks customers were migrated to AS13237, enhancing their Internet experience and offering one of the shortest and fastest pathways to a wider range of exchanges and destinations.

Ethernet integration resulted in a solution for customers that offers end-to-end connectivity across 41 cities and 10 countries in Europe, with expansion into Stockholm and Manchester in 4Q 2012.

  • Capital expenditure was €5.0m in the quarter, down from €13.8m in 4Q 2011, and down from €6.5m in 3Q 2012. Capital expenditure was significantly higher in 4Q 2011, due to FTTx build out and wavelength overbuilds underway at the time. Total capital expenditure for the full year 2012 was €27.8m, down from €31.8m in 2011. 66% of capital expenditure in 2012 was allocated to success based (customer sales) investment, compared to 44% in 2011. On average, incremental committed sales enjoyed 4 month payback periods in 2012.
  • Proxy cash flow reflected the benefits of business scaling throughout 2012, improving to €(14.9)m from €(25.9)m in 2011. Proxy cash flow improved each quarter through 2012 to €(0.0)m in 4Q 2012, compared with €(13.7)m in 4Q 2011.

About euNetworks

euNetworks Group Limited (SGX: H23:SI) is a bandwidth infrastructure provider, owning and operating 13 fibre based metropolitan networks across Europe connected with a high capacity intercity backbone covering 38 cities in 9 countries. The Company offers a portfolio of metropolitan and long haul services including Colocation, Dark Fibre, Metro Wavelengths, Wavelengths, Ethernet, and Internet. Enterprise and carrier customers benefit from euNetworks’ unique inventory of fibre and duct based assets that are tailored to fulfil their high bandwidth needs.

euNetworks Group Limited is headquartered in London and publicly listed on the Singapore Stock Exchange. For further information please visit www.eunetworks.com.

(1) Adjusted EBITDA means EBITDA before the deduction of share option expense.

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