CMG profits from the SMS craze

Ian Mitchell

City briefing

It seems wherever you go you see people tapping on their mobiles sending text messages - with...

Ian Mitchell

City briefing

It seems wherever you go you see people tapping on their mobiles sending text messages - with schoolchildren probably the largest group of mobile users. The mobile has become the high-tech equivalent of notes that used to be passed in class when teacher wasn't looking. If you've wondered if someone was making a tidy profit from it, this week's results from CMG provided the answer.

While CMG is known as an IT services company, it was the performance of telecoms products in general, and Short Messaging Service (SMS) in particular, that were the driving factors in what was, overall, an excellent set of figures. Profit, earnings per share and margins were all ahead of expectations, due to a pre-tax profit of £18.6m for telecoms products compared with £2.1m for the same period last year.

A closer look at the figures shows just how distorted they are by the performance in telecoms. In the IT services business, profit before tax was almost flat and would have declined had it not been for a £2.4m contribution from the acquired Admiral business. A combination of the weakness of the euro (the majority of CMG's turnover is earned in Holland), and the much-discussed Y2k effect were at work, proving that even the largest services companies are not immune to outside influences. UK margins (excluding Admiral) were down to 4.1% from 7.3% last year.

However, like many services companies CMG is saying that the worst is behind it and that IT spending is resuming. IT budgets are as large as, if not larger than, last year and now that IT users have decided what their strategy is going to be, services companies can go ahead and help them implement it.

In most cases it seems forward-thinking companies are looking to introduce new business processes, taking full advantage of the capabilities IT offers, rather than trying to automate their existing processes.

While we've seen these attempts at business process re-engineering in the past, too often it has been a case of replacing one set of rigid business rules with inflexible, isolated systems, which introduce their own problems. The new wave of re-engineering promises to be much more flexible and adaptive to business needs, and with many companies coming to similar conclusions at the same time, it will be a real struggle to find enough good IT staff to help. CMG sees particular opportunities in mobile commerce, and this will lead to rises in both utilisation and day rates on the part of IT services businesses, boosting CMG's full-year figures.

Looking ahead at the telecoms side of the business, news of trials of third-generation mobile services with France Telecom, in relation to General Packet Radio Services (GPRS), and Mannesman for GPRS and Univeral Mobile Telecommunications system interfaces, is encouraging.

The only downside of having a products business is that you continually have to develop your offerings, so the news that CMG spent £10m in the first half doing so should also be welcomed.

With telecoms firms expected to continue three-figure revenue growth, it's little wonder CMG's shares are so highly rated.

Ian Mitchell is an IT analyst at stockbroker Beeson Gregory. His opinions should not be construed as investment advice.

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