Profit and loss: weekly round-up

With the economic downturn now more than just speculation, the likely impact across the channel is becoming clearer.

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.

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