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Square One keeps analysts happy

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Square One Solutions Group has certain analysts nodding in approval with its half-yearly results to end June, reporting attributable earnings of R2,7-million and headline earnings of R2,3-million.

Annuity based business increased significantly from 10% to 25% of turnover, period on period, and operating profit for the half-year is in line with that of the comparable period, despite a 17% decline in revenue.
"Earnings are in line with our budget, which has allowed for certain restructuring and integration costs following the acquisition of NETIntellect during the previous financial year," says Square One CEO, Craig Alexander.
During the six months under review, the Group issued shares for cash to a BEE partner, which had a dilutive effect on earnings and headline earnings per share to 8.2 and 7.1 cents per share respectively.
"It is expected that this relationship, along with our existing Proudafrique partnership, will provide Square One with a competitive benefit moving forward," says Alexander. "To date during financial year 2007/08, we have focused on growing our business both organically and through a value-added acquisition strategy.
"From a budgetary perspective, management is therefore pleased with this set of results for the six month period. Furthermore, the integration of NETIntellect and its related costs have been absorbed during this period, with profitability now growing," he says. "We are confident that our full year results expectations are well on track to being achieved."
The six months under review has also seen management effectively contain costs across the business. Over the comparable period, results indicate a 5% improvement in ongoing cost management. The changing nature of the business has also led to better working capital management.
This set of results highlights a substantial reduction of long-term liabilities, from R19,7-million to 14,2-million. Cash flow from operating activities has moved into positive territory when compared to the six months ending June 2006.
"We have applied a large proportion of cash held as at the end of the previous six months, to financing and investment activities," Alexander says. "The net cash flow from operating activities has improved substantially and we have seen a critical turnaround on core cash flow items."
According to Alexander, Square One’s core focus is on being an avertically-centric, applied technology solutions provider, which has seen it move away from being a pure distributor based business.
"This set of results indicates that, based on our strategic intent, we are exactly where we expected to be," Alexander says.
Analysts Frost & Sullivan say Sqaure One is displaying innovative ways of overcoming some of the challenges associated with operating in the South African IT market and that the company is strongly positioned to grow its profitability.
"Square One Solutions has initialised a process that will result in a change of business focus to an annuity-based business," says Frost & Sullivan ICT industry analyst Lindsey McDonald. "While this has lead to some expenditure and slightly lower earnings, it is a key investment for the company’s future."
McDonald believes that the group’s integration of NETIntellect will show benefits quickly, not only in earnings, but also in broadening Square One’s offering.
"Square One’s consistent focus on its core competencies has meant that it offers clients ‘best of breed’ services in all its areas of operation," she says. "In instances where the company has sought to grow its service offering portfolio, it has acquired the necessary skills.
"One of the greatest challenges to this market is the shortage of specialised skills currently available in the South African IT market," McDonald says. "Personnel with the required skills are difficult to source and often expensive to retain, so companies have to establish innovative revenue models to offset this challenge. Square One has overcome this by moving its business to an annuity-based model and through the acquisition of companies that broaden its skills base.
"In addition, the clever positioning of the company towards the mid-capitalised market sector means that it is perfectly suited to offer services to medium and large companies as well as catering for the burgeoning SMME sector."