Megabuyte

Megabuyte morning round-up 28.01.08

Markets largely held on to Thursday's gains on Friday with the FTSE 100 broadly unchanged at 5,869.0 and the Megabuyte Leaders Index up a shade at 902.4. Autonomy recovered some of the week's losses to close up 3.5% to 589p although it was still down nearly 11% on the week. For more on last week's news and share price performance, take a look at our Weekly Monitor.

Phoenix IT in line at IMS

Turning to this morning and Phoenix IT (MB 50) has published its IMS which strikes a positive tone. Results for the third quarter are in line with management expectations. Group revenues including the ICM and Servo acquisitions jumped 90%, whilst like for like revenues were up a healthy 16%. The order book at the end of December was up 1% and annualised contract values had increased by 5%. The integration plan for ICM, which has been meticulously planned, is on track and should deliver the £5m of promised cost savings. The statement concludes that trading in the fourth quarter has started well and activity levels are described as buoyant.

Maxima warns

Acquisitive IT services company Maxima (MB 50) has warned that results for the six months to November will be below market expectations. Whilst H1 results should be strong, since the period end, the company has suffered a loss of work as a result of vendor consolidation. To make things worse, new business has been also been delayed in other parts of the group. The upshot of these issues will be that results for the year to May will be below market expectations. Consensus expectations prior to this statement were for pre-tax profits of  around £10.0m, up from £5.8m last year.

We had expressed concern about a lack of focus in Maxima's acquisition strategy in our piece on the full year results which you can read here. When a company acquires at such a rapid rate, issues like the ones that have now surfaced for Maxima can occur when management time is focused on acquisitions rather than running the business. Also, when vendor management teams leave acquired businesses, momentum in that business can often be lost, although there is usually a time lag before the loss of momentum manifests itself in poor financial performance. It's going to be a long road back for Maxima.

System C acquires Care Records from Huntleigh

Following on from sparkling results last week, healthcare software and services player System C Healthcare has announced the acquisition of Care Records for up to £3.45m in cash (£0.85m up front with up to £2.6m over the next three years). Care Records, currently part of Huntleigh, has developed maternity and diabetes management systems which have made some initial sales to UK hospitals. The acquisition is expected to be earnings enhancing in the year May 2009 as System C will be investing in marketing capability for the product in the current year. Huntleigh will remain a distribution partner for the product.

Directors respond to price weakness with share purchases

Following recent share price weakness in the sector, we have seen a decisive response from directors in the form of share purchases. We have compiled a list of recent director share dealings (which we do not claim to be exhaustive) which you can download here . Our analysis suggests that directors have bought some £2m of stock in the last few weeks but that these purchases have been concentrated into a small number of transactions. We would highlight Phoenix IT Group, SDL, AT Communications and Microgen as significant as they account for nearly 90% of the purchases by value. The general trend of directors share purchases suggests that current trading in these companies and, by extrapolation, is solid and that the short term outlook is positive. This in turn suggests that news flow for the remainder of 2007 and in early 2008 is likely to be broadly positive and we may therefore see a mini sector rally early in the new year. However, we continue to believe that, as financial services contagion continues to spread that the 12-24 month outlook for the sector is poor and that 2008 will be a very tough year for the sector.

Phoenix shares take a hit on interims and management changes

Shares in Phoenix were down as much as 20% in early trade following interim results and the move of CEO Nick Robinson to a non-executive role, although as we write they have recovered to 13% down to 316p. Interim results are in line with expectations with revenues for the six months to September up by 87% to £101.9m and included a maiden contribution from ICM which was acquired in May. Underlying revenue growth was 7.7%. Clean operating profits were up from £10.5m to £14.3m but, following a significant increase in financial gearing following the ICM acquisitions, PBT grew more slowly from £10.0m to £11.om.

Results analysis

Following the ICM acquisition, Phoenix has organised itself into three business units - Partner Services (the original Phoenix IT Services business), Business Continuity (NDR and the BC business of ICM) and SME (Servo and the IT services piece of ICM). Partner Services was impacted by lost revenue from DWP and the Met Police but still managed a 7% revenue increase although margins were lower resulting in broadly flat operating profits. The underlying BC business enjoyed 10% underlying revenue growth and had a first time contribution from ICM. As previously reported, Servo had a tough Q1 and, as a result, profits were down slightly half year on half year. Phoenix has now revelaed that it expected to generate £5m of cost synergies from ICM and will take a £6m chanrge this year. Cash flow was strong with operating cash flow well ahead of operating profits. Net debt at the end of the period was £106.3m.

Management changes

The results were accompanied by the news that CEO Nick Robinson will move to non executive Deputy Chairman. Current COO Jeremy Stafford will take over as CEO following a transition period during which time the current non-exec Chairman Peter Bertram will take over as Executive Chairman. There have also been some interesting additions to management below board level. Former Netstore CEO Neil Lloyd has been brought in to run the SME business (which will have an increasing bias towards hosted services going forward) and ex-Guardian IT executive Roland Mann has been brought in a sales director in the BC business.

Our View

The share price move today says a lot more about the state of the stock market than it does about these results or the management changes. Whilst Phoenix does have a bit to do in H2, there are three key reasons to believe that they should get there. First, ICM will be included for a full six months in H2 compared to four months in H1. Secondly, the SME services business (Servo) had a poor Q1 but has shown good sales and margin momentum in Q2 and into H2. Lastly, the new ICM business continuity centre in Farnborough was loss making in H1 but it should make a contribution in H2.

On the management changes, whilst Nick Robinson has been a key part of the growth of the business since its inception, it should not come as a surprise that he is stepping back from day to day control. People close to the business have speculated that Robinson has wanted to step back for a while now. Robinson leaves a strong management team in place and we feel that Jeremy Stafford has played well to the City audience since is appointment. We therefore see the management changes as a natural evolution of a rapidly expanding business and not something that should cause share price weakness.

Assuming that there ar no significant changes to consensus estimates today, the shares currently trade on 13x March 2008 earnings dropping to 10x 2009 although these numbers are flattered by the companies debt/equity structure. Nevertheless, this looks too low for a business with Phoenix's track record and prospects.

UK Technews 22.11.07

Yesterday's movers

Lots more red ink in the screen yesterday with very few stocks registering any gains. The larger stocks were down 2-5% whilst some of the second liners were worse hit. Blinkx was down another 10%, Kewill Systems down 7% to 94p and Microgen 8% lower at 41p. Not much more to say than than at this stage - it looks like it mights just a case of battening down that hatches until Christmas - if trading news in the sector remains OK, then there's going to be some real value around in the new year, but if it isn't, then we ain't seen nothing yet.

Phoenix IT Group - interims, board changes

Interim results from Phoenix are in line with expectations and are accompanied by the not unexpected news that CEO Nick Robinson will move to non executive Chairman. The current COO Jeremy Stafford will take over as CEO following a transition period during which time the current Chairman Peter Bertram will take over as Executive Chairman. Revenues for the six months to September were up by 87% to £101.9m and included a maiden contribution from ICM which was acquired in May. Underlying revenue growth was 7.7%. Clean operating profits were up from £10.5m to £14.3m but, following a significant increase in financial gearing following the ICM acquisitions, PBT grew more slowly from £10.0m to £11.om. Net debt at the end of the period was £106.3m. We'll have more on this story following the analyst meeting.

Strategic Thought - interim results

Risk management software vendor Strategic Thought has issued an upbeat set of interims ahead of expectations - the first set of results under new CEO Martin Metcalf. The improved performance has been driven by a healthy increase in licence sales of the core product and a 9% increase in services revenue. Overall, group sales increased 14% to £6.1m and the company reduced its underlying loss before tax to £0.2m from £0.4m in H1 2007. Net cash at the end of September was £4.7m. 

Business Continuity is the jewel in Phoenix's crown

We're still at the Phoenix IT Group analyst teach-in and we have moved onto the Business Continuity part of the day. Despite having to walk round an empty office, an empty datacentre, an empty mobile recovery centre and even an empty car park, the visit has underlined the scale of the opportunity for Phoenix in the business continuity space. We continue to be of the view that Business Continuity is the jewel in Phoenix's crown. We would highlight the following key areas.

Build it and they will come

Growth drivers in the BC market remain strong. Regulatory and supply chain imperatives mean that organisations from large financial institutions through to small suppliers to Tesco are being forced to create or upgrade their business continuity plans. Furthermore,  there is increasing demand for dedicated services, particularly in heavily regulated industries, because shared BC facilities are not sufficient to comply with business continuity aspects of FSA and Law Society regulations. This is driving increased demand for dedicated seats relative to syndicated seats.

Leapfrog

The business continuity market has experienced massive consolidation in the last four years whereby pretty much all of the smaller or mid sized BC suppliers have been acquired. Phoenix's acquisition of ICM has pushed the business over HP into third place behind IBM and Sungard.

2+2=5

With any acquisition, one hopes that 2+2 will equal 5 and we feel that this is the case here. The combined businesses has 15 centres with 7,500 positions and can now compete with its three main competitors on their own terms. The combination of the two businesses should therefore result in accelerated top line growth.

Leverage

Phoenix's BC estate is only around one third filled. With the current levels of demand in the market, it seems highly likely that this capacity will be filled at good rates going forward. With a fixed cost base, the operational leverage in this business is substantial. Hence we would expect to see significant margin upside in the BC division going forward.

Management continuity

One of the key tenets of the current group restructuring is to take the best of what the four companies in the group have to offer and seed them throughout the group. We are pleased that this has extended to management. We were impressed with ICM's BC management when the company was independent and it is good to see that they are in senior positions in the combined group.

Our view

Overall then, we have come away from the meeting with a renewed feeling of enthusiasm for the Business Continuity division of Phoenix. Phoenix IT shares came back sharply form their highs when it became clear that it was going to have to pay up for ICM. The shares have drifted since the ICM deal was completed and trade on 15x March 2008 dropping to 12x 2009. We will wait to see if the results on 22 November are the catalyst needed to get momentum back in the shares.

Phoenix IT Group uses ICM acquisition as a catalyst for change

We're at the Phoenix IT Group analyst teach-in at an ICM Business Continuity centre in Farnborough, Hampshire. The day is really about the Business Continuity division but there was an interesting kick off about the group structure going forward. The key points that we took away were.

Four businesses into three divisions

Phoenix IT Group has completed three acquisitions in the last few years - NDR (Business Continuity), Servo (mid-market IT Services) and ICM Computer Group (BC and IT services). Following the recent completion of the acquisition of ICM, Phoenix is rationalising the whole group into three key divisions which are:

• Phoenix IT Services The original outsourcing business based in Northampton. This division sells exclusively through partners and will be kept separate from the other divisions.
• Business Continuity This will bring together the business continuity activities of NDR and ICM and will sell direct to the customers.
• Mid-market This business combines the IT services business of Servo and ICM and will also sell direct to the customer.

Business Continuity and Mid-Market will be branded ICM, whilst Phoenix will retain its original branding. These three divisions will have responsibility for sales, marketing, service delivery and will be accountable for revenue in their respective areas. Segmental reporting will be along these lines starting from fiscal 2009.

Shared operations underneath

Underneath the three service delivery units there will be shared operations. The key operational areas are:

• Logistics
• Field/services/call centre
• Remote management and hosting
• Corporate services

Without going into the detail of each of these, it is clear from the presentation that there is significant duplication across the group which can be removed without damaging service delivery. Rationalisation of these operations will be tested first with the logistics piece and then rolled out more aggressively across the group.

Our thoughts so far

There is clearly a lot of work to do to integrate all four businesses and achieve the desired structure. That said, we have been impressed with the apparent rigour with which the change programme has been planned. Although no numbers have been talked about today, it seems clear that there are substantial cost synergies to be wrung out of the business, particularly in shared operations.

Looking at the strategy of the business going forward, our overriding feeling is that Phoenix management is viewing this restructuring phase as the end of the beginning rather than an end in itself. The management was keen to point out that this new structure enables much more rapid and low risk integration of acquisitions going forward. From this we can assume that, once this period of restructuring is over, Phoenix will again be on the acquisition trail.

UK Technews 1.10.07

It was an interesting day of Friday in relation to SmartStream after we posted a story on the delayed IPO. First of all, many thanks to Richard Holway for the credit on his hotviews blog. On a less positive note, we were a bit miffed about being misquoted in the FT as saying that Fidessa is a competitor to SmartStream when actually we said that it was a comparator. During the day the quote was picked up on Elton Cane's blog on Finextra - with some pretty harsh words attached - you can read the post here. Still, they do say that no publicity is bad publicity. We didn't spot any further press comment on SmartStream or Telecity over the weekend.

With results season pretty much over, we look forward to some period end trading updates from March and September year end companies. Phoenix IT has started the ball rolling this morning with a period end trading update for the six months to September. Although there trading at Phoenix is said to be in line with expectations, the statement also notes that the integration of ICM is likely to cause some disruption. It is difficult to know whether this statement is simply noting that the integration of ICM will be a significant task for the group or whether it is preparing the market some financial impact of the integration in Phoenix's fiscal H2. The shares have opened down a shade at 382p.

Of the other companies with September period ends, we will be particularly interested to hear from Detica, whose shares have dropped by around a quarter over the summer. The interim management statement in August noted integration difficulties with DFI in the US, so we wait to see what progress has been made there. Also, it will also be interesting to see if the turmoil in the credit markets is having an impact on Detica's financial services practice which now represents around 25% of revenues. Detica didn't issue an interim period end trading update last year so we may need to wait until the results in November to find out more. Other companies with September period ends include, Civica (trading update 18 October last year), Intec Telecom Systems (no trading update last year until November) and The Innovation Group (trading update expected in late October).

On the M&A front, BT has made further advances in the IT sector with the acquisition of IT reseller Lynx Technology for an undisclosed sum. The acquisition of Lynx, which has revenues of just under £50m, follows the recent purchase of Basilica and sees BT significantly raising its profile in the SME IT solutions market.

Please note that there will be no morning update tomorrow.