2nd Mar 2005 07:00
LogicaCMG reports full year 2004 results 2 March 2005 Strong full year book-to-bill ratio of 1.13:1Return to organic revenue growth in second halfFull year cash conversion of 104%IT Services (86% of Group revenues):- Strong performance in UK (41% of Group revenues), notably in public sector- Sustained revenue growth in Benelux (24% of Group revenues)- Germany (6% of Group revenues) delivered restructuring to tight timetable andwith stable second half revenues- Outsourcing grew from 20% to 23% of Group revenuesEdinfor acquisition with EUR 510 million outsourcing contract - expectedcompletion March 2005Wireless Networks (14% of Group revenues):- Increased revenues in second half and cost reduction programme deliveredsmall full year profit from continuing operations- Disposal of loss-making businesses underpins improvement in 2005Final dividend raised 2.9% to 3.5p Commenting on the results, Dr Martin Read, Chief Executive, said: "We closed 2004 with a strong book-to-bill ratio and a return to organic growthduring the second half. We began this year with a good pipeline and expect tofurther strengthen the order book in the first quarter. We have also signedour largest ever outsourcing contract with Energias de Portugal and look toincrease the momentum in our outsourcing business. "In Wireless Networks we began 2005 with a significantly lower cost base, animproved mix of business and a solid revenue stream from long term servicecontracts. "Overall, we expect to make significant progress in 2005, benefiting from theinitiatives we have put in place during 2004." Financial HeadlinesFor the year ended 31 December 2004, LogicaCMG plc financial results were asfollows:Book-to-bill ratio at 1.13:1 (2003: 1.12:1)Revenues from continuing operations were ‚£1,658.4 million (2.2% lower than2003), with 6.2% organic growth in second halfAdjusted operating profit was ‚£111.3 million (down 0.4% on 2003)Statutory operating profit was ‚£67.7 million (2003: loss of ‚£19.8 million)Group adjusted operating margin was 6.7% (up from 6.6% in 2003); 7.4% in secondhalf- IT services adjusted operating margin at 7.8% (up from 7.2% in 2003); 8.0%in second half- Wireless Networks adjusted operating margin at 0.3% (3.4% in 2003); 4.5% insecond halfAdjusted profit before tax was ‚£97.2 million (2.8% lower than 2003)Statutory profit before tax was ‚£42.4 million (2003: loss of ‚£33.0 million)Adjusted operating cash flow was ‚£113.6 million, giving a cash conversion of 104%Basic earnings per share was 1.9p compared to (6.3)p in 2003Adjusted basic earnings per share of 9.0p compared with 9.3p in 2003Net debt at 31 December 2004 stood at ‚£194.5 million (2003: ‚£177.4 million)Final dividend of 3.5p (2003: 3.4p), making a total for the year of 5.8p Notes: 1. Adjusted results are from continuing operations and, where applicable,before goodwill amortisation, restructuring charges and other exceptionalitems. 2. Adjusted operating cash flow is from continuing and discontinuedoperations and before project financing, cash outflows from restructuringcharges and other exceptional items.3. 2003 comparatives have been restated, where applicable, for the effect ofdiscontinued operations. For further information: Mark Broughton - media relations +44 20 7446 1786 (mobile: +44 7880 506345)Tony Richards/Frances Gibbons - investor relations +44 20 7446 4372(mobile: +44 7733 260393)Toby Mountford/Seb Hoyle - Citigate Dewe Rogerson +44 20 7638 9571 (mobile:+44 7799 476804) NOTE: High resolution images are available for the media to view and downloadfree of charge from www.vismedia.co.uk STATEMENT OF FULL YEAR RESULTS 2004 INTRODUCTION The IT Services market generally saw a gradual recovery in 2004, which isexpected to continue in 2005. IT services companies with a strong position inthe public sector tended to fare best and LogicaCMG was no exception, postingyear on year revenue growth of 17% in that part of our business. We continueto perform strongly in the UK and Benelux, our largest territories. The best growth opportunities remain concentrated in the outsourcing arenawhere LogicaCMG continues to make good progress. The proportion of Grouprevenues derived from long-term outsourcing contracts rose from 20% to 23%during 2004 and we expect to make further progress in 2005, benefiting from therecent contract with Energias de Portugal and other initiatives. Theacquisition of Edinfor, announced in January 2005 and expected to be completedshortly, strengthens our global energy and utilities business and should bemodestly earnings accretive in 2005. We made good progress with cost reduction in Germany, achieving the tighttimetable for our restructuring, refocusing the business and therebyestablishing a sound basis for better performance this year. In France, ratesremained under pressure in a tough market. We continue to work on the businessmix to create a more differentiated business capable of delivering sustainableprofits. However, against the market backdrop, we were unable to make anysignificant progress during the second half of 2004. We have therefore takenaction to reduce overheads and increase utilisation rates while we intensifyour efforts to reposition the business. Nearly all territories returned to revenue growth in the second half of theyear. Moreover, sectors that were badly affected by the downturn of recentyears, such as financial services and energy & utilities, also grew strongly inthe second half. These are encouraging milestones in returning the IT servicesbusiness to sustained organic growth. They also underpin our recruitmentplans, including our aim to double the size of our offshore facility in Indiaagain in the current year to more than 2,000 people. We have recently opened anew facility in Bangalore that provides our growing workforce with astate-of-the-art working environment. The process of building customers and volumes in new multimedia servicescontinues to take time for the mobile operators, although we are beginning toinstall more significant capacity for a number of the most innovativecompanies. After a difficult start to the year, our Wireless Networks businessincreased its revenues in line with normal seasonality during the second halfand, coupled with the benefits of cost cutting, the continuing operations madea small profit for the full year. LogicaCMG is well positioned in 2005 to help its customers achieve theirbusiness goals. We are continuing to build our low cost delivery capability inmultiple centres around the globe, whilst deepening our domain knowledge in ourchosen sectors and service streams. OUTLOOK In IT services we entered 2005 against the backdrop of a strong book-to-billratio for 2004 as a whole and a return to organic growth during the secondhalf. With a good pipeline, we expect to further strengthen the order book inthe first quarter. Helped by gradually improving markets, our UK and Beneluxbusinesses should continue to perform well. France remains challenging butinitiatives are underway to improve performance. Germany continues to makegood progress and the restructuring programme has established a sound basis forfurther improvement this year. In Wireless Networks we began 2005 with a significantly lower cost base, animproved mix of business and a solid revenue stream from long term servicecontracts. With demand for new technology offerings gradually increasing, weexpect to improve the profitability of this business in 2005 as a whole. Overall, we expect to make significant progress in 2005, benefiting from theinitiatives we have put in place during 2004. BUSINESS RESULTS For the year ended 31 December 2004, profit before tax* was ‚£97.2 millioncompared with ‚£100.0 million for the previous year. Revenues from continuingoperations of ‚£1,658.4 million were down 2.2% (0.9% at constant currency)compared to 2003. Operating margins* were 6.7%, up from 6.6% in 2003. Earningsper share * were down 3.2% at 9.0p. After restructuring costs of ‚£17.8million, goodwill amortisation of ‚£23.8 million, net interest payable of ‚£14.1million and a ‚£11.2 million loss on disposal of operations, profit on ordinaryactivities before tax amounted to ‚£42.4 million, giving a profit per share of1.9p (2003: loss per share 6.3p). Cash flow from operating activities^ for theyear was ‚£113.6 million, giving a cash conversion of 104%. Net debt at 31December 2004 was ‚£194.5 million (2003: ‚£177.4 million). The directors havedeclared a final dividend of 3.5p to be paid on 19 May 2005 to shareholders onthe register at the close of business on 22 April 2005. This makes a totaldividend for the year of 5.8p, in line with our policy. In IT Services, revenue growth returned in the second half to mostterritories. The performance in Germany was encouraging given that we werecarrying out our rationalisation programme. Operating margin* progression waslimited by the losses in Germany and France and by higher costs in Benelux inthe second half. Nonetheless, it increased from 7.2% to 7.8% year-on-year, oneof the better margins in the sector. In 2005, we will have the benefit ofcost-reduction actions taken during 2004 and the opportunity for continuedrevenue growth. Outsourcing business represented 23% of Group revenues in2004, up from 20% in the previous year. The Wireless Networks continuing business was slightly ahead of break-even forthe full year, reversing the loss reported at the half year stage. Revenuesincreased 11.5% in the second half during which further cost savings wereachieved. Revenues for the year from continuing operations were ‚£237.3 million(2003: ‚£267.0 million) with a full year operating profit* of ‚£0.7 million(2003: ‚£9.2 million), an operating margin of 0.3%. The operating margin* inthe second half was 4.5%. Staffing levels across the Group decreased slightly to 19,695 at 31 December2004 (2003: 19,749), but increased by 227 compared to 30 June 2004. Completionof the Edinfor acquisition will bring a further 1,300 people to the Group. While attrition levels have generally risen across the sector as the businessenvironment improves, we have been recruiting in our key territories to coverthe growth opportunities we see. The fastest growth in staff numbers is in ourlower cost delivery centres, notably in Bangalore, India, where we nearlydoubled headcount during 2004 to 1,175. * From continuing operations and, where applicable, before goodwill,restructuring costs and other exceptional items. Statutory operating profitand the adjusted operating profit are reconciled on the face of the profit andloss account. ^ From continuing and discontinued operations and before project financing andcash outflows from restructuring charges and other exceptional items. MARKET SECTOR REVIEW 2004 % growth % growth % growthRevenue by sector* ‚£'m year-on- at constant % share H2-on-H1 year currency Public Sector 443.8 17.0 17.3 26.8 (1.6) Industry, Distribution & 325.9 (14.6) (13.4) 19.7 2.9Transport Energy & Utilities 264.2 (3.0) (2.0) 15.9 23.3 Financial Services 259.2 (3.1) (1.8) 15.6 7.5 Telecommunications 128.0 0.5 1.7 7.7 (1.2) Total IT Services 1,421.1 (0.5) 0.5 85.7 5.4 Wireless Networks 237.3 (11.1) (8.3) 14.3 11.5 Total Group 1,658.4 (2.2) (0.9) 100.0 6.2 * From continuing operations. Commercial sectors, with the exception of telecommunications, deliveredsequential revenue growth in the second half, an important milestone in themarket recovery. Public sector revenues grew 17% in 2004 as revenues from major contracts in theUK and the Netherlands came on stream. While growth flattened in the secondhalf, the order book was strong going into 2005 and we remain well positionedfor many of the opportunities already approved for tendering. The revenue decline in industry, distribution and transport (IDT) reflectscontinued difficulties in the automotive sector with severe budget restrictionsand associated pricing pressure. The transport sector fared better, notablywith rail operators and their suppliers. We continue to build revenues andprofile in new technology areas such as RFID (Radio Frequency Identification),biometrics and mobile enterprise solutions. Revenues in energy & utilities improved in the second half, while the orderswere up 63% over the previous year. This performance was prior to thesuccessful negotiations with Energias de Portugal (EDP) which were concludedafter the year end. Following approval by the European authorities, we willhave a 60% controlling interest in its IT operation, Edinfor, as well as anoutsourcing agreement with EDP worth ‚£359 million over ten years. The skillsthat Edinfor brings to the group will be an important element in businessdevelopment from 2005. We also won major new contracts in Australia, Belgium,USA and the Czech Republic during 2004. The last was an emissions registry,consolidating our leadership position in the emerging market for emissionsmanagement and trading. Financial services declined 3% year-on-year, but grew strongly in the secondhalf. Our focus has been on applying our differentiated expertise in payments,regulation & compliance and operational efficiency. Increasing globalisationamongst banks and insurers is driving outsourcing opportunities, includingapplications management using both local and offshore resources. Inevitably atthis stage in the economic cycle, sales lead times have been long and subjectto delays in some cases. However, we had a strong pipeline going into 2005. Major account development has been an important factor with four customers nowgenerating more than ‚£20 million of orders each across multiple countries. The market for telecom services continued to improve with revenues broadly flatyear-on-year after several years of significant decline. Both fixed line andwireless operators are faced with unprecedented changes both in technology andmarket dynamics. All are fighting to improve customer loyalty, whileintroducing new broadband services and fighting off competition from bothtraditional and new competitors. Rationalisation of the underlying systems isimperative to reduce costs, while more intelligent management and analysis ofcustomer data, including billing, is critical to our major customers such asVodafone, BT, mm02, T-Mobile and KPN/E-Plus. UNITED KINGDOM OPERATIONS 2004 % growth % share % growthRevenue by market sector ‚£'m year-on-year H2-on-H1 327.9 17.6 48.3 (5.5)Public Sector Industry, Distribution & 91.1 (23.5) 13.4 (8.6)Transport Energy & Utilities 143.4 (1.6) 21.1 30.2 Financial Services 55.1 (13.4) 8.1 11.9 Telecommunications 61.8 15.7 9.1 (4.4) Total 679.3 2.8 100.0 2.1 H1 04 H2 04 FY04 FY03 Operating Margin* 11.8% 12.4% 12.1% 10.9% The United Kingdom had another successful year delivering revenue growth withone of the better operating margins in the sector. The primary driver was thepublic sector where work related to the National Health Service IT programmewas at an intensive level throughout the year and extensions were awarded on anumber of existing programmes at the Crown Prosecution Service, OFSTED, theMetropolitan Police and the Health & Safety Executive. At the end of the year,a major, multi-year outsourcing contract was won with HM Land Registry. LocalGovernment also performed well with new contracts at Oxford, Barnsley, Barnet,Cardiff, Haringey and Waltham Forest councils and the States of Guernsey. Space & defence revenues grew, underpinned by the substantial Skynet contract.Procurements on a number of projects were delayed, partly while the budgetimpact of security issues such as Iraq was worked through. However, we enter2005 with a strong pipeline. The revenue decline in our industry, distribution and transport sector largelyreflects the difficult competitive environment faced by automotivemanufacturers. However, revenues built steadily through the year, not least asa result of a strategic focus on the travel and transport sector which showedyear on year revenue growth of 20%. Significant contracts were awarded byMetronet and TUI (Britannia Airlines) in the second half and SAP business alsoimproved. Bidding for the largest opportunities extended into 2005. Theseincluded a new contract for Transport for London which has now beensuccessfully concluded, thereby creating further momentum. Energy & utilities continued the improvement in its revenue and orderperformance through the second half. There were good renewals and extensionswith longstanding customers such as NETA (Elexon) as well as a new applicationdevelopment and support contract with British Energy. The contract with EDFEnergy for SAP rationalisation and application support for their electricitydistribution network was an important development with this internationalclient; and a very large utility data migration project started for RWE. Although the year-on-year revenue decline was significant, financial serviceswas an encouraging recovery story. We focused the business on the Group'sdifferentiated propositions and achieved quarter-by-quarter growth, exiting theyear with a number of major outsourcing opportunities. The most notable eventwas the 10 year strategic outsourcing contract with global insurance broker Aon- the largest ever won by us in this sector in the UK and one that emphasisesthe power of our blended delivery proposition using local and offshoreresource. Contracts with the Financial Services Authority (FSA), the ABI andat LIFFE keep us at the heart of the London financial markets. Performance in telecommunications services was up 16% on the previous year butwas impacted by some tightening of budgets in the second half causing a numberof programmes to slip into 2005. The major accounts remained BT, mmO2,Vodafone and T-Mobile with growth in outsourced services for managed testing,billing rationalisation, applications management and payroll business processoutsourcing, in addition to traditional systems integration work. The continuing success of the outsourcing business meant a further expansion ofour Welsh operations which will continue in 2005, as well as plans for furtherheadcount in Bangalore to service UK customer support requirements. BENELUX OPERATIONS 2004 % growth % growth % growthRevenue by market sector ‚£'m year-on-year at constant % share H2-on-H1 currency Public Sector 99.1 16.2 17.8 25.0 11.8 Industry, Distribution & 102.5 (12.3) (11.1) 25.8 5.0Transport Energy & Utilities 56.9 1.8 3.1 14.3 6.2 Financial Services 111.0 11.1 12.6 28.0 16.0 Telecommunications 27.3 0.4 1.5 6.9 (0.7) Total 396.8 3.0 4.4 100.0 9.4 H1 04 H2 04 FY04 FY03 Operating Margin* 10.3% 9.5% 9.9% 9.1% The return to sequential revenue growth in constant currency reported at theinterims accelerated in the second half, although tight labour marketsnecessitated greater use of sub-contractors. We are investing resource in ourpush to win larger project assignments and outsourcing contracts and arebeginning to see the benefit. However, slippages in procurement and changes inbid specifications led to slightly higher than expected costs in the secondhalf with some impact on the operating margin. Public sector grew strongly, up 16%. This was driven by increased volume ofwork at the Ministries of Justice, Traffic, Interior Affairs and Defence, andthe police authority. The largest single contract won was the HR SharedService Centre (P-Direkt). However, because this project spans most of theGovernment ministries, it has an extended design and build phase through 2005and 2006 to allow for harmonisation of historic arrangements. We also won alarge project with the City of Rotterdam in the field of document managementand an HR outsourcing contract with the CWI, the Dutch unemployment agency. The first phase of the payroll outsourcing for the City of Rotterdam went liveduring the period with processing for all staff scheduled for the first half of2005. We have been awarded a contract by the Dutch government for thedevelopment of a citizen alert platform based on cell broadcast. In thehealthcare arena, we secured contracts at the Academic Medical Centre and theOrder of Medical Specialists to provide electronic patient records. This is anarea of considerable opportunity going forward where LogicaCMG now hasdemonstrable experience in several countries. Industry, distribution and transport remained challenging in 2004 as customerscontinued to focus on cost efficiency. Nevertheless, we improved our positionas we came through the year by focusing on innovative solutions around securityand mobility. Examples are projects undertaken for the Port Authority ofRotterdam and for Schiphol Airport. For the NS (Dutch railways) we executedthe biggest European Mobile Workforce project to date by equipping its 10,000mobile employees with "railpockets" (PDAs) in order to maintain a dynamic viewof staff activities as well as distributing operational and travelinformation. We have also begun to provide testing services to Trans LinkSystems, the new Dutch operator of an electronic payment card system for publictransport. A pilot of face recognition technology was successfully completed,aimed at identifying banned visitors entering the stadium of PSV Eindhoven, oneof the top 20 European football clubs. This pilot proves that implementationof biometrics offers real benefits for the security of public places and hasbeen followed by a further implementation in a major shopping mall. Our energy and utilities business benefited from the final stage of fullliberalisation within the Dutch Retail Gas and Electricity market where ourdeep knowledge and experience of this complex domain on a global base is nowwell-recognised. Despite the difficulties within the global oil and gassector, we were able to leverage our business with our longstanding clients,especially in the upstream (exploration & production) area. In addition, we wonanother contract with one of the oil majors for delivering our On LineAuthorisation product for managing their B2B fuel cards. Financial services grew strongly during the year, up 11%. In particular, wehave leveraged our specialist expertise such as test management and our globaldelivery capability (including offshore application management) to expand ourposition in the major banks and insurers. Payments, distribution channels andrisk & compliance have been key areas of focus. Both international and Dutchnational regulations are demanding significant changes to IT infrastructures. Our customers increasingly see outsourcing and access to skilled resources inmultiple centres around the world as ways to address this issue. Broaderprocess efficiency at a reasonable cost, delivered through our blended globaldelivery, is also a growing requirement. Our shared service centre for backoffice business process outsourcing in the banking and insurance sector is nowfully operational with over 200 staff. At ABN Amro Bank, we have delivered theworld's largest anti money-laundering implementation. In telecommunications services, we managed to maintain broadly flatyear-on-year revenues in a challenging market. Growth came from our ringbacktones solution, which was implemented at a number of national and internationaltelecom operators. In addition, we implemented a pre-paid top-up solution atone of the leading Dutch mobile operators. Our focus in 2005 remains oninnovative, repeatable solutions that we can both sell locally and add to theoverall Group portfolio of global telecoms propositions. From 2005, the Netherlands will be reported separately, with Belgium beingreported in Rest of Europe. In 2004, Belgium contributed revenues of ‚£28.7million with a small operating loss of ‚£0.1 million. Having submitted asuccessful design blueprint, our Belgium operation secured a major SAPrationalisation project with energy company, Electrabel. GERMANY OPERATIONS 2004 % growth % growth % growthRevenue by market sector ‚£'m year-on-year at constant % share H2-on-H1 currency Public Sector 0.8 0.9 Industry, Distribution & 39.1 (40.7) (39.8) 42.5 (41.7)Transport Energy & Utilities 15.5 39.6 42.2 16.9 242.9 Financial Services 28.4 (10.4) (9.0) 30.9 (8.1) Telecommunications 8.1 14.1 15.7 8.8 53.1 Total 91.9 (20.7) (19.5) 100.0 (1.5) H1 04 H2 04 FY04 FY03 Operating Margin* (21.0%) (14.0%) (17.5%) (8.7%) The new management team in Germany delivered on their two key objectives for2004. The restructuring plan was carried through against a very challengingtimetable so that the operating results began to benefit from the costreduction in the last quarter of the year. Revenues were stable from midyear. We now have a single, integrated business in Germany that is closelyaligned with the Group strategy and is building a solid sales pipeline, albeitwith little help from the general market climate. As elsewhere, the fastest growth is in outsourcing and the ¢â€š¬44 million renewaland extension contract with InBev (previously Interbrew), now an internationalaccount for the company, was a significant milestone. Other important dealswere at SWB (Bremen utility), IKB Leasing and Deutsche Post. Outsourcingalready represents some 28% of our German revenues. In financial services, we successfully developed our business at both DeutscheBank and Commerzbank. In telecommunications we achieved good growth from arelatively small base, with new business at Deutsche Telekom, Vodafone D2, O2Germany, E-Plus and Nokia. Energy & utilities also grew strongly, with ShellGermany being a notable contributor. Deutsche Post was the best performingaccount in industry, distribution & transport. Across the business as a whole,orders closed the year 11% higher than in 2003 providing a solid platform forfurther progress in 2005. FRANCE OPERATIONS 2004 % growth % growth % growthRevenue by market sector ‚£'m year-on-year at constant % share H2-on-H1 currency Public Sector 6.6 43.5 43.5 5.8 - Industry, Distribution & 66.9 29.9 31.7 58.7 49.6Transport Energy & Utilities 2.0 (63.6) (63.0) 1.8 (33.3) Financial Services 29.5 (15.2) (14.0) 25.9 (5.9) Telecommunications 8.9 (2.2) (1.1) 7.8 2.3 Total 113.9 8.0 9.4 100.0 23.8 H1 04 H2 04 FY04 FY03 Operating Margin* 0.8% (2.9%) (1.2%) (1.3%) Performance in France in the second half was disappointing as the small profitachieved in the first half was reversed. Increased bid costs, lowerutilisation, pressure on rates, a higher proportion of low margin pass throughrevenue (hardware resale) and a number of deferred opportunities allcontributed to the decline in operating margin. We have taken action to reduceoverheads and drive up productivity, including changes in our pre-salesmethodology which will bring greater focus, discipline and efficiency to thecapture of higher value added assignments. On a more positive note, the major SAP-based outsourcing contract signed withAuchan at the beginning of the year has proceeded well and order intake frommajor accounts HP, Renault and Cegetel met or exceeded our targets. Significant new business was achieved amongst others from Axa, La Mondiale,chemical company Rhodia, Eurocopter, gedas (IT arm of Volkswagen Group) and TheOffice for Official Publications of the European Communities (OPOCE). OTHER MAINLAND EUROPE OPERATIONS 2004 % growth % growth % % growthRevenue by market ‚£'m year-on-year at constant share H2-on-H1sector currency Public Sector 1.0 (9.1) (9.1) 2.4 (75.0) Industry, Distribution & 5.2 67.7 67.7 12.7 88.9Transport Energy & Utilities 5.2 (26.8) (25.7) 12.7 73.7 Financial Services 14.5 - 1.4 35.4 26.6 Telecommunications 15.1 (17.9) (17.0) 36.8 (6.4) Total 41.0 (7.2) (6.2) 100.0 19.3 H1 04 H2 04 FY04 FY03 Operating Margin* 8.0% 7.2% 7.6% (0.9%) The Central & Eastern Europe operations, headquartered in Prague, continuedtheir recovery, building revenues and orders through the year. Major contractswere secured with CSOB Leasing, Cesky Mobile, Slovak Telecom and AAC Holdings,one of the largest Central European distributors of electronic equipment and aPC assembler. There were two major successes in the Energy arena. A fullyautomated communications system for Czech electricity market participants wasthe most extensive implementation of mySAP NetWeaver Web Application Server inCentral Europe to date. At the end of the year, a contract was secured to setup the Czech national emissions registry, modelled on the one alreadysuccessfully established by LogicaCMG in New South Wales, Australia. Supportcontract renewals were also solid going into 2005.Following the sales successes of the previous year, our Nordic & Balticsoperation had the majority of its resource tied up with its two majorcustomers, Vodafone and Luottokunta. REST OF WORLD OPERATIONS 2004 % growth % growth % growthRevenue by market sector ‚£'m year-on-year at constant % share H2-on-H1 currency Public Sector 8.4 (10.6) (12.1) 8.6 4.9 Industry, Distribution & 21.1 (15.3) (8.7) 21.5 17.5Transport Energy & Utilities 41.2 (12.5) (9.4) 42.0 (11.0) Financial Services 20.7 (10.4) (5.8) 21.0 (13.5) Telecommunications 6.8 (43.8) (40.0) 6.9 (16.2) Total 98.2 (15.8) (11.9) 100.0 (5.2) H1 04 H2 04 FY04 FY03 Operating Margin* 2.4% 4.8% 3.6% 6.3% Australia had a strong year under its new Chief Executive, with energy &utilities and public sector being the best performers. With more than 60% ofthe operation's revenues in outsourcing, renewals are critical and all sevenmajor ones arising during the year were successfully achieved, including AuroraEnergy (Tasmania) and Eraring Energy (New South Wales). The outsourcingcontract with Integral Energy signed late in the year was the largest ever wonin Australia, displaced the incumbent EDS and confirmed our pre-eminentposition in the sector. Another significant milestone was winning the pilotproject for electronic HR for the New South Wales Health Authority, positioningus well for future investment in the healthcare sector. Our Asia operations continued to support major international accounts includingHP, Deutsche Bank and Shell. Significant new wins included an ERM project atthe Port of Tanjung Pelepas (Malaysia), the region's premier containertranshipment hub and work for the Singapore Ministry of Defence as part of aBAE Systems-led consortium. Following the successful "go live" of the Real TimeGross Settlement system at the Reserve Bank of India, we are now focused onimplementing our RTGS-readiness and anti-money laundering solutions across allthe major private and public sector banks in the country. Operating conditionsin the Middle East necessitated greater use of local contractors and slowed anumber of procurements. However, we enter 2005 with a strong sales pipeline. The United States was impacted by continued pricing pressure in the automotivesector, despite improving our overall position in both Ford andDaimlerChrysler. With the latter, we secured our first project using acombination of onshore and offshore resources. In energy and utilities, we wonnew contracts from AGL Resources, Washington Gas, Dominion and Southwest Gas,the last of these being a major Asset and Resource Management (ARM)implementation. WIRELESS NETWORKS EMEA Asia Pacific Americas Japan TOTAL Product area ‚£'m % ‚£'m % ‚£'m % ‚£'m % ‚£'m % change change change change change Messaging (SMS) 77.2 (13.9) 24.8 25.3 37.1 13.1 10.0 (55.8) 149.1 (9.6) Multimedia/ 25.4 22.1 3.9 (60.2) 4.3 (8.5) 0.1 - 33.7 (4.5)Internet Unified Comms 7.8 8.3 3.5 133.3 3.3 (54.2) - - 14.6 (8.2) Payment/Billing 16.7 (49.2) 17.6 16.6 5.6 93.1 - - 39.9 (21.6) 127.1 (15.6) 49.8 7.8 50.3 5.7 10.1 (55.3) 237.3 (11.1)TOTAL H1 04 H2 04 FY 04 FY03 Operating (4.4%) 4.5% 0.3% 3.4% Margin* Revenue growth of 11.5% in the second half, allied to our cost reductionprogramme, enabled us to deliver a small profit in Wireless Networks for theyear. The higher volumes in the seasonally stronger period were well spread,reflecting good licence sales as existing customers installed more capacity. We continue to make solid progress in upgrading our installed base of textmessaging (SMS) systems to our Next Generation Messaging Platform. Not onlydoes this provide our customers with an opportunity to minimise operational andcapital expenditure, but also to introduce new services such as videomail andultimately full 3G. We have as customers a number of tier one operators whoare recognised to be the most innovative in promoting new services such asmultimedia messaging and content (MMS) more aggressively. As a result, theyhave placed orders for more significant capacity upgrades, in one case up to200 messages per second to handle all of the operator's MMS traffic in Europeand South America. The penetration of camera-enabled handsets continues to grow and, as a result,operators are beginning to devise packages of content and appropriate tariffsto appeal to definable interest groups who are being more accurately targetedwith promotions. Another important enabling factor in the marketplace has beenthe adoption of interoperability standards as established by internationalassociations such as 3GPP and the Open Mobile Alliance. These include DigitalRights Management which is critical if mainstream content owners are to fullyexploit the mobile domain. LogicaCMG is compliant with these standards. Allof these factors would suggest that volumes will continue to build gradually inthe year ahead. As all segments of the telecommunications market converge on broadband deliveryunderpinned by Internet Protocol (IP), LogicaCMG's potential customers areexpanding. Already, we have delivered systems to fixed line operators, tocable companies and to Internet Service Providers, in addition to mobileoperators. For instance, ITENOS, a subsidiary of Deutsche Telekom, is usingour systems to allow fixed line users to exchange multimedia messages withsubscribers on all German mobile networks. In the United States, Time Warneris delivering voice and videomail services over cable, while a major fixed lineoperator is providing home devices that can exchange video and text messages aswell as voice. Across multiple countries, "3" is now achieving some of thehighest ARPU (Average Revenue Per User) figures in the industry for broadbandservices delivered from the integrated messaging platform built by LogicaCMG. In consequence, we continued to achieve good revenues from our frameworkcontract with Hutchison 3G, particularly in the key territories of the UK andItaly. This convergence is driving down what customers will pay for access to basicservices. In order to survive and flourish, operators have to grow new revenuestreams from added value services - from content and applications. To do sothey need sophisticated marketing tools driven by detailed customerintelligence and the ability to implement highly intelligent chargingmechanisms. These must be easy for the user to understand, build loyaltyamongst users and protect the operator from credit exposure and fraud. This isa major area of opportunity and investment for LogicaCMG and one where ourcombined product and systems integration expertise is a differentiator. Wehave a number of framework contracts with operators within which we are helpingthem to address issues related to broadband migration and the creation of newrevenue models. Providing operators with an effective content management anddelivery environment is a key element in our strategy for the Wireless Networksbusiness. DISPOSALSIn line with our stated intention at the time of our interim results, we exitedsome non-core, loss-making businesses within our Wireless Networks portfolio. We disposed of our interest in MiGWay during 2004 for ‚£0.4 million and signedan agreement on 15 February 2005 to sell the EPPIX billing business for aminimal consideration. We expect to complete the transaction during the firstquarter. Consequently, we have written off our interest in MiGWay, for a lossof ‚£1.8 million, and provided for the expected ‚£9.4 million loss on disposal ofEPPIX. The expected cash impact of the EPPIX disposal is a cash outflow of ‚£4.6 million, principally related to vacant property. The disposal of thisbusiness enables us to convert a previous temporary corporation tax deductionto a permanent deduction and crystallises a cash tax refund of ‚£15.4 million tobe received during 2005. BOARD CHANGESOn 10 September, Richard North retired as non-executive director and chairmanof the audit committee due to other business commitments. In his place, RogerPayne (56) was appointed to the same two roles. Roger Payne, FCCA, iscurrently the finance director of Rentokil Initial plc, a UK listed FTSE 100company with a turnover of c. ‚£2.4bn and a market capitalisation of c.‚£2.7bn. With effect from 1 January 2005 Jim McKenna took up the new position of ChiefOperating Officer. He was previously the Chief Executive, UK and Ireland andduring 2004 had responsibility for Germany. He has been a Main Board Directorof Logica and subsequently LogicaCMG since February 1998. He will focus on themonth to month delivery of the Group's operating results, allowing Martin Read,Group Chief Executive, to spend more time on medium and longer term issues andon strategic issues for the Group generally. RESTRUCTURING COSTSA restructuring charge of ‚£17.8 million was included in the profit and lossaccount in the second half of 2004 in line with our estimate at the half yearstage. The majority of this charge relates to our restructuring programme inGermany, primarily a reduction in the headcount with associated propertyrationalisation. The balance went to reduce overheads in our Frenchoperation. CASH FLOW AND DEBTCash flow from operating activities before restructuring costs and otherexceptional items was ‚£113.6 million (2003: ‚£119.0 million), giving a cashconversion of 104% (2003: 107%). Free cash flow after interest, taxation,capital expenditure, but before restructuring costs and other exceptional itemswas ‚£51.8 million (2003: ‚£95.5 million). Net Group debt at 31 December 2004was ‚£194.5 million, versus ‚£177.4 million at 31 December 2003. ACCOUNTING STANDARDSLogicaCMG will adopt International Financial Reporting Standards (IFRS) for theyear 2005 and thereafter. During the first half, the company will restate the2004 results herein reported under UK GAAP with a reconciliation to IFRS,thereby providing appropriate comparators. On 31 August, the company willannounce its interim results fully in accordance with IFRS. The adoption ofIFRS has some impact on the presentation of the primary financial statementsbut does not change the economics, risk profile or cash flow of the business. A presentation is available on the company's investor website that provides anoverview of the standards with an estimate of the changes that will result. DIVIDENDIn line with our previously stated policy of maintaining the value in realterms of the dividend for the year ending 31 December 2004, the Board hasdeclared a final dividend of 3.5p (up 2.9% on last year) which will be paid on19 May 2005 to shareholders on the register on 22 April 2005. This makes afull year dividend of 5.8p. Consolidated Profit and Loss Accountfor the year ended 31 December 2004 Before exceptional Exceptional items items Total Restated Note 2004 2004 2004 2003 ‚£'m ‚£'m ‚£'m ‚£'m Turnover Continuing operations 1,658.4 - 1,658.4 1,695.1Discontinued operations 11.4 - 11.4 11.5 Total turnover 2 1,669.8 - 1,669.8 1,706.6Net operating costs (1,584.3) (17.8) (1,602.1) (1,726.4) Operating profit/(loss) Operating profit from continuing operations before restructuring costs and goodwill amortisation 111.3 - 111.3 111.8 Restructuring costs 3 - (17.8) (17.8) (105.7) Goodwill amortisation (23.8) - (23.8) (23.8) Continuing operations 87.5 (17.8) 69.7 (17.7)Discontinued operations (2.0) - (2.0) (2.1) Total operating profit/(loss) 85.5 (17.8) 67.7 (19.8)Loss on disposals of operations - continuing operations 3 - (1.8) (1.8) (1.5)- discontinued operations 3 - (9.4) (9.4) - Profit/(loss) on ordinary activities before interest 85.5 (29.0) 56.5 (21.3)Net interest payable (14.1) - (14.1) (11.7) Profit/(loss) on ordinary activities before tax 71.4 (29.0) 42.4 (33.0)Tax on profit/(loss) on ordinary activities 5 (29.7) 1.7 (28.0) (10.7) Profit/(loss) on ordinary activities after tax 41.7 (27.3) 14.4 (43.7) Equity minority interests (0.6) (2.4) Profit/(loss) for the year 13.8 (46.1)Dividends paid and proposed 6 (42.7) (41.9) Retained profit/(loss) for the year 12 (28.9) (88.0) Restated 2004 2003 Earnings per share - Basic 7 1.9p (6.3)p- Diluted 7 1.9p (6.3)p Adjusted - from continuing operations before exceptional items, net of tax, and goodwill amortisation - Basic 7 9.0p 9.3p- Diluted 7 9.0p 9.2p Consolidated statement of total recognised gains and lossesFor the year ended 31 December 2004 2004 2003 Note ‚£'m ‚£'m Profit/(loss) for the year 13.8 (46.1)Currency translation differences on foreign currency net investments 12 (9.1) (8.8)Tax on foreign exchange differences reported through 12 3.8 -reserves Total recognised gains/(losses) relating to the year 8.5 (54.9) All gains and losses recognised above are based on historical cost. Consolidated Balance Sheet31 December 2004 Restated 2004 2003 Note ‚£'m ‚£'m ‚£'m ‚£'m Fixed assets Intangible assets 333.5 358.6Tangible assets 79.0 84.1Share of net assets of joint venture - 1.1Trade investments - 0.5 412.5 444.3 Current assets Stock 1.2 3.3 Debtors 8 640.5 604.8 Investments - liquid resources 1.8 2.3 Cash at bank and in hand 104.8 132.4 748.3 742.8 Creditors - amounts falling due within one year (25.3) (1.2) Borrowings 9 (405.9) (426.6) Other creditors (431.2) (427.8) Net current assets 317.1 315.0Total assets less current liabilities 729.6 759.3Creditors - amounts falling due after more than one year (211.2) (208.6) Convertible debt (64.6) (102.3) Other borrowings (275.8) (310.9) Provisions for liabilities and charges Deferred tax (41.7) (6.5)Other (24.4) (20.1) Net assets 387.7 421.8 Capital and reserves Called-up equity share capital 12 75.1 75.0Share premium account 12 707.3 705.9Other reserves 12 4.0 2.5Profit and loss account 12 (399.8) (364.1)Merger reserve 12 (1.3) (1.3) Shareholders' funds 12 385.3 418.0Equity minority interests 2.4 3.8 Total capital employed 387.7 421.8 Consolidated Cash Flow Statementfor the year ended 31 December 2004 2004 2003 Note ‚£'m ‚£'m ‚£'m ‚£'m Net cash inflow from trading operations 10 113.6 119.0 Proceeds from financing of long-term receivables 5.0 21.2 Cash outflow related to restructuring and other exceptional items (23.7) (122.8) Net cash inflow from operating activities 10 94.9 17.4 Returns on investments and servicing of finance Dividends paid to minority interests (2.0) (1.2) Interest received 2.0 2.5 Interest paid (16.4) (13.2) Interest element of finance lease rental payments (0.2) (0.2) Net cash outflow from returns on investments and servicing of (16.6) (12.1) finance Taxation (26.2) (16.5) Capital expenditure and financial investment Purchase of tangible fixed assets (27.0) (25.4)Sale of tangibleRelated Shares:
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