With the economic downturn now more than just speculation, the
likely impact across the channel is becoming clearer.
Computacenter, Sherwood International and Torex all returned
interim financial reports last week, as did Netstore, the troubled
ASP. It was also a week in which two CEOs threw in the towel at the
realisation that a longer and possibly deeper slowdown was
beginning to set in.
Computacenter, the UK's largest value-added reseller and software
services company, has been hit by the retrenchment in corporate IT
budgets. Whereas IT departments had budgeted for a 20% increase in
spending this year, that figure has now evolved into a reduction of
1%, according to a report by Gartner.
In Computacenter's case the heat was felt in the telecoms and
investment banking sectors. As a result, the group's £34m pre-tax
profits for the six months to June - a 61% increase compared to the
corresponding period last year - failed to inspire the markets.
Turnover stood at £1.2bn, up from £927m, but was not enough to
prevent an 11% reduction in Computacenter's share price on the day
of the announcement.
Computacenter said it had absorbed an exceptional charge of £4m as
a result of the closure of iGroup, the company's specialist
e-business operation which made a loss of £5m in the first half of
the fiscal year.
The group had a good first half as spending on software and
computer services recovered from the millennium bug hangover,
although this did not prevent it from adopting a cautious approach
towards the second half of the year. Computacenter's chairman, Ron
Sandler, said: "Although these results are encouraging in
aggregate, they conceal a deterioration as the period
progressed.
"Trading conditions, and therefore the outlook for profits, in the
second half are difficult to predict with confidence."
Computacenter now looks unlikely to meet analysts' expectations of
£68.8m pre-tax profits for 2001. As PC sales fall - results from
the direct seller Dell underline just how serious the problem is -
Computacenter is going to suffer, although its sheer size means it
will be around for the rebound when it comes.
In common with most of its peers, the group has found itself
saddled with an over-optimistic growth strategy in a marketplace
that is appearing more depressed by the day.
Outlook healthy for government contractors
Again, as
this column has pointed out over the past few weeks, those UK-based
companies exposed to the government IT expenditure boom,
particularly in health and education, are likely to weather the
storm.
Viewed in this context, Torex is clearly likely to be one of the
winners. The health-focused software and services group unveiled
pre-tax profits of £3.86m for the six months to June 30, up from
£1.79m for the corresponding period last year. Revenues on
continuing operations grew a massive 77.5% to £62m.
Management at Torex said the first half of the year, a period of
consolidation for the company, had seen critical examination of the
group's business units. In particular, much work was done with
Laufenberg, the German health-oriented IT business bought by Torex
last December, to improve its operating margins.
Mark Pearman, the Torex chief executive, said: "We have been
turning a business [Laufenberg] that was focusing on R&D into
one that was more sales and marketing-orientated." Laufenberg's
operating margin has historically been around 8%, but Pearman said
this had now increased to double figures. Torex is aiming to
achieve operating margins of 20% across all its businesses.
The group also expects its second half results to surpass the
profits and revenues achieved in the first six months.
"Historically, the fourth quarter has been our busiest quarter in
terms of revenue recognition," said Pearman. The Laufenberg
acquisition means that 72% of Torex's sales now come from the
health sector, with the retail sector accounting for the remaining
28%.
Torex is the main supplier of software and IT systems to the NHS,
with health sector software sales accounting for 44% of the
company's business last year. This focus on health separates it
from most IT services and software businesses, and it is likely to
benefit from the UK government's plans to spend £1.25bn on National
Health Service IT by 2005.
According to City analysts, the company is particularly likely to
benefit from further implementation of the Electronic Patient
Record system, which has currently been installed in only 10 out of
245 NHS trusts.
Meanwhile, the company said its retail division had made a
satisfactory contribution during the first half, with operating
profits of £2.7m on turnover of £17m. Strong performances in the
division's food retail and leisure businesses helped to offset
disappointing sales of systems to high street retailers.
Torex will be able to continue along its growth path, although the
gradient is not likely to be as steep.
Sherwood closes dotcom
If we needed to be reminded of
the dire state of IT spending in the Square Mile, Sherwood
International, the insurance software specialist, came up with some
more evidence.
Shares in the company plummeted as chief executive George Matthews
announced his intention to resign. Profits slumped in the first
half of the year and the company said further investment in
cash-hungry e2-one was curtailed as a result of dramatic changes in
the e-commerce market place.
Targeting banks and fund managers, Sherwood set up e2-one 18 months
ago in order to market its high-volume internet transaction
technology outside the insurance sector. The timing turned out to
be less than ideal, however, as transactions plummeted in areas
such as internet share dealing services.
Sherwood has now decided to close e2-one and warned that the costs
involved in running the operation in July and August and
subsequently paying off staff would force it to incur a £1m charge
in the second half.
Profits at the company slumped on the back of the £2.1m e2-one
investment and £0.9m expenses incurred as a result of a failed
acquisition attempt. The company's shares lost 16% of their value
at one stage, taking them down to a three-year low of 120p, only to
bounce back by the end of the week.
Pre-tax profits for the six months to 30 June, excluding
amortisation and the e2-one investment, fell to £0.8m. With the
inclusion of these expenses, the company was £1.4m in the red
before tax, compared to a profit of £2.2m a year ago.
City analysts are not willing to predict when Sherwood is likely to
return to profitability, but the general feeling is that this is
inevitable at some point.
The resignation of Matthews added to the air of uncertainty
surrounding the company, as it followed the departure of chief
operating officer Steve Bellamy in March of this year. Matthews had
been with Sherwood for over 20 years.
Sherwood has found a successor, but was unable to provide a name at
this stage, adding to the uncertainty.
Sherwood is also likely to weather the storm if it can increase its
proportion of government-related business. The Department for
Environment, Food and Rural Affairs is committed to using the
company's aeos workflow software, which is accessible as a portal.
The software is a reworking of its market-leading amarta insurance
workflow product.
Jeff Wykes, the managing director of Sherwood's government
division, says the deal will put Sherwood in a strong position to
win future business. Sherwood management is on the right track even
if the market is a bit slow in recognising this.
Netstore doubles turnover
In the world of ASPs,
Netstore returned results showing turnover had doubled in the year
to 30 June, up from £1.37m to £3.56m. The company's number of
active users rose 12% in the last quarter of the year, marking an
84% increase over the year to 28,529. Turnover, mostly attributable
to Netstore's biggest customer, Cisco, grew 55% over the year but
fell as a proportion of the company's total revenues from 70% to
42%.
Selling and distribution costs were 12% lower than planned at
£10.76m, while administrative costs were 27% below anticipated
levels at £3.62m, mainly due to cuts in the company's workforce. As
a result, full-year pre-tax losses weighed in at £11.8m.
The US Investment bank Merrill Lynch said that Netstore, with a
market capitalisation of just £12.4m, plus cash reserves of £25m,
is unlikely to need refinancing and is a strong candidate for a
merger or acquisition in the near future. Netstore's main weakness
is its current strength - an over-dependence on a single customer
for a large part of the company's business. If it can widen its
customer base, its ASP model implementation should stay the course,
albeit as part of a larger group.
Chief executive Gary Smith is leaving the company and chairman Paul
Barry-Walsh is assuming executive responsibility for the group.
Barry-Walsh, one of Netstore's founders, now works at Guardian IT
following its acquisition of Safetynet. Merrill Lynch believes this
is "likely to signal the beginning of strategic corporate moves for
Netstore".
We were left to guess at what this might mean, but it is not
difficult to envisage Netstore as a ready-made ASP division for a
larger peer - perhaps Guardian IT. Shares in Guardian IT fell last
week after it emerged that it had "terminated discussions" in its
attempt to acquire a US IT services group, believed by City
analysts to be Comdisco.
Comdisco, IBM and SunGard control 90% of the data recovery services
business in north America and the audacious move, if it had come
off, would have made Guardian IT a truly global player.