Despite the tough economic environment, Business Connexion (BCX) is still experiencing demand for its services from public sector organisations. There has been increased IT spend from this sector as authorities take steps to counter the effects of the economic downturn.
The ICT service provider released interim results today, revealing a 7,9% growth in revenues for the period. However, operating profit for the period was down 30% and earnings per share slipped 30,9%. These decreases were put down to spending on the group's revitalisation programme and foreign exchange movements that impacted its international earnings.
"Price sensitivity in this market has put operating margins under pressure, and this is reflected in BCX's results," says Frost & Sullivan senior ICT industry analyst Lindsey Mc Donald. "All ICT companies are feeling the impact, so BCX's revitalisation programme, with its focus on weeding out inefficiencies and increasing margins, has come at the right time. That the group made this move at a relatively risky time has stood them in good stead."
The group has changed its year end from 31 May to 31 August, so has released interim results for the past 12-month period. Audited results will be released for the 15 months to 31 August in November.
Mc Donald believes that BCX has done well to capitalise on opportunities in the public sector over the last twelve months, which was not a traditional area of strength for the group.
"This has brought results, as there has been a slowdown in spending from the private sector," she says. "In the past, its competition has often taken more of the public sector pie, but its good news for BCX that they are generating more revenues in that area."
The increased revenues from BCX's international operations are also a positive sign. Although operating profit for the International Group was down 29.9%, this was severely affected by the strengthening of the rand.
"It's particularly promising that the group's Nigerian investment has shown good returns," Mc Donald says. "BCX has not always been seen as a company with prospects in the rest of Africa, but there are significant opportunities on the continent that they are showing they have the capacity to exploit."
BXC reports that its revitalisation programme was initiated in February 2008 to centralise, consolidate, standardise and optimise non-core and certain business functions, and is due for completion at the end of August 2009.
Costs for the period related to the revitalisation programme amount to R46,1-million and the company expects that a further R48,4-million of costs will be incurred by 31 August 2009. While the net savings during the current period have been small, the group anticipates that the programme will generate annualised future savings of approximately R100-million.
Business Connexion reported revenue growth of 7,9% to R4,44-billion for the 12 months ended 31 May 2009. The impact of the economic downturn became more evident in the second half of the period with revenue growing by 5,7% compared to the 10,3% growth for the first six months as reported in November 2008.
Revenue in the Services Group slowed in the second half, as project spend in the retail and banking sectors declined, although full-period revenue growth was 6,4%. The Services Group remains the largest contributor to the group's revenue at 48,5%.
Revenue in the Technology Group showed growth in both the first and second half of the period, increasing by 10,2% on the back of public sector contracts, however at tighter margins. The Technology Group contributed 43,2% to the group's revenue.
The International Group's revenue increased by 5,7%, with the investment in the Nigerian business delivering a good result in the period. However, margins decreased as a result of the economic slowdown with customers becoming increasingly price-sensitive. Furthermore, these results include unrealised foreign exchange losses of R19,1-million.
The group's gross margin for the period at 26,8% was higher than the prior year at 26,4% but remains under pressure. The pressure on margins is due to the mix of business currently being written and the effect of the economic conditions with customers being extremely price sensitive.
The group recorded an operating profit of R114,9-million for the period, compared to R164-million for 2008, a decrease of 30%. This was largely due to the spend on the revitalisation programme and foreign exchange movements impacting the International Group, partially offset by the profit on sale of property. Excluding these factors, comparable normalised operating profit grew by 15,9%.