Faritec has announced a decline in revenue for the six months to 31 December 2008 and a slight deterioration in gross profit margins for the same period.
Faritec CEO Simon Tomlinson says revenue has declined by 18% from R502-million to R414-million compared to the same period last year; Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) decreased to a loss of R11,6-million; and gross profit margins have decreased slightly from 24% to 23%, mainly as a result of significant pressure on hardware margins.
This has resulted in a significant decrease in headline earnings per share (HEPS) to -8,3 cents and earnings per share (EPS) to -8,3 cents. The group remains cash positive, reporting a closing balance of R42-million.
The group also raised a deferred tax asset for the period of R10 million. The recognition of the deferred tax asset has resulted in the difference in the actual loss per share and headline loss per share of -9,3 cents from -11,6 cents as included in the trading statement released on 29 January 2009.
Tomlinson says that while the revenue drop was pronounced in the company's Gauteng and Public Sector operations, revenue from the coastal operations has remained stable.
"While hardware and software revenues have declined by 21% and 23% respectively, the services side of the business declined by a comparatively low 6%," he says. "This is in part due the stability of long term service and support contracts that are in place as customers seek to protect their existing investments in IT infrastructure although holding back on additional capital expenditure."
Tomlinson says that as the group's costs were aligned for growth that, due to prevailing economic conditions, failed to materialise, operating costs grew by approximately 17%, compared to the same period last year, consisting of R3,1-million from salary inflationary increases and operating expenses, and R10,9-million from new salaries and operating expenses arising from the recent acquisitions and the new ventures. Included in the operating costs is a R2-million provision for bad debt that relates to a government tender.
"As a result of the above, we have continued to experience pressure on our working capital and this has resulted in our financing costs increasing by approximately R9,7-million for the six months period," he says.
Taking the view that the slowdown in trade is unlikely to improve significantly in the next six months, Tomlinson says the group embarked on a major exercise to reduce costs and cut expenditure, a proactive move that he believes should restore the group to profitability during the second half of the financial year.
Measures taken include a halt to all capital expenditure except for that required to maintain existing projects as well as a significant reduction in operating expenses and human resource costs.
"While the negative impact of this latest result is that the loss was fairly large and immediate, the effects of decisive actions taken by management to remedy this have not yet had time to reflect," he says. "The cost-cutting exercise has already realised savings of approximately R 2-million per month, and once completed by the end of the first quarter of this year, will result in approximately R 4-million worth of monthly cost savings."
Subsequent to the reporting period Faritec reported that the acquisition of Ubusha Technologies had not been finalised and the parties had mutually agreed not to pursue the fulfilment of the agreement due to suspensive conditions not being met.
Tomlinson says that as a result of profits earned and retained over the last four years combined with secured funding, the group continues to operate within the covenants of its funding agreements and has a stable balance sheet.
"Looking ahead, the good news is that the cost-cutting measures across the group's operations coupled with a conservative analysis of our current order pipeline will serve to ameliorate this revenue loss and we anticipate restoring the group to a profitable position in the medium term," he says.