22nd May 2007 07:00
22 May 2007
LogicaCMG Update on Current Trading
- First quarter IT services revenue up 4.3% on a pro forma constant currency basis to ‚£767.8 million
- Disappointing performance in the UK with revenues and margins expected to be down in the first half and with full year revenue slightly lower than 2006
- Provision in relation to a UK project cost overrun expected to be in the range of ‚£10 to ‚£15 million
- Strong organic revenue growth in France (8.1%), the Nordics (9.0%) and the Netherlands (9.0%) with continued profitability in Germany
LogicaCMG has today issued the following trading statement1:
Demand for IT services during the first quarter has been strong in Europe and we retain our estimate of overall market growth in the range of 4% and 6% for 2007. The market remains competitive but pricing for key skills is positive.
Revenue in the first quarter was ‚£767.8 million, up 36.4% on last year (Q1 2006 actual: ‚£562.7 million). This represents growth of 4.3% on a pro forma constant currency basis.
Our more stable and balanced profile ensured revenue growth for the group broadly in line with our previous guidance. We achieved strong organic revenue growth in the Nordics, France and the Netherlands, offsetting a revenue decline in the UK in the first quarter.
United Kingdom
Performance in the UK was disappointing across the commercial market sectors, somewhat compensated by a strong Public Sector business. Revenue in the quarter at ‚£174.6 million was down 4.1%. This was mainly as a result of the conclusion of a contract in the Industry, Distribution and Transport (IDT) sector and a slow start on some framework agreements in the Energy and Utilities sector. Public Sector revenue was up 10.0% on the first quarter of last year and we commenced work during the quarter on a major public sector contract won at the end of 2006. Order intake in the first quarter was significantly above the same period last year. This was driven by strong performance in the Public Sector, strengthening our order backlog and providing confidence for revenue growth in this sector through the year. Revenue in the early part of the second quarter has shown further weakness in the commercial sectors and consequently overall UK revenue will be lower than the first quarter.
Outside the Public Sector, we are selling our blended delivery model more aggressively and realigning the cost base accordingly. During the first half, we will incur approximately ‚£2 million of expense to achieve this cost reduction and expect an equivalent saving by the end of 2007. First half underlying margin in the UK will be approximately 3% lower, affected by the lower revenue and the costs associated with overhead reduction.
Additionally, the UK business has been impacted by a cost overrun on a long-term contract in the commercial sector. The provision in relation to this project cost overrun is expected to be in the range of ‚£10 to ‚£15 million. We have now taken a number of actions to stabilise and improve the performance of the contract.
Order intake for the first half is expected to be ahead of revenue, which should lead to second half revenue improvement. Full year revenue in the UK is now likely to be slightly lower than 2006. The cost reduction and improved utilisation should drive second half margin improvement in addition to the normal seasonal increase.
Nordics
Revenue in the Nordics was up 9.0% on a pro forma basis to ‚£214.2 million, driven by strong performance in the Swedish business. On 31 March 2007, we acquired part of Siemens Business Services' activities in Norway, which will broaden our customer base in the country. Progress with cross-selling remains encouraging with a number of small wins. These include the signature of a new framework agreement with Ericsson for infrastructure services and IT consultancy. We have also seen increasing demand for blended sourcing in the applications management area. We have started to move development and support work offshore but are balancing the pace of the integration cost savings against the opportunities to deploy resources to meet strong market demand. While the slower pace of the transition may result in less than two full quarters of integration cost savings in 2007, we continue to expect ‚£15 million of cost savings per annum from 2008 and to incur ‚£22 million of costs to achieve these savings.
France
In France, revenue was ‚£145.3 million, which represented growth of 8.1% on a pro forma basis. Ongoing recruitment and targeted use of subcontractors allowed us to respond more quickly to demand in France. We ended the first quarter with 8,683 employees, compared to 8,563 at the end of 2006. The order pipeline continued to strengthen in the first quarter. We booked a ¢â€š¬24 million customer relationship management (CRM) win in the tourism sector as well as several smaller French wins in Energy and Utilities, Public Sector and Telecoms. We are pursuing a number of deals using our blended delivery model, particularly in the applications and testing areas.
Netherlands
In the Netherlands, revenue was ‚£119.7 million. This represented a 9.0% increase on the first quarter of last year, which continues to be well ahead of market growth. The public sector was a major contributor to strong year on year growth. In the quarter, we also added over 300 ING employees as part of an outsourcing contract.
Germany
We made further progress in Germany during the quarter with continued profitability and revenue growth of 7.0% to ‚£39.8m.
International
We saw a 2.6% revenue decline in the International business to ‚£74.2 million, with lower revenue from Asia following the completion of the Natrindo contract at the end of 2006. Revenue in Edinfor remains at a similar level to last year. We have invested approximately ‚£2 million in this business to deploy our global service delivery platform and processes. The resulting cost efficiencies will improve profitability in the second half.
At the end of March, we had 39,441 employees (excluding Telecoms Products) compared to 38,789 at the end of December 2006. In a good market, we have seen attrition at similar levels to 2006 and we have continued to recruit aggressively. Recruiting, deepening customer relationships, increasing use of our blended delivery capability and leveraging the expertise of the larger group remain the key drivers of revenue growth.
At the end of February 2007, we announced the disposal of the Telecoms Products business to an investment consortium, subject to consultation with employees and competition authorities around the world. The consultations are progressing and we expect to complete the transaction before the end of the first half. As previously announced, we plan to return approximately ‚£130 million of the proceeds via a share buyback programme in the second half of 2007.
As usual, margins in 2007 will be weighted to the second half. In addition to normal seasonality and the UK impacts described above, the WM-data cost savings will be second half weighted. The costs associated with the Edinfor investment and our branding campaign will largely be expensed in the first half.
In accordance with normal practice, the company will give a further trading update in late July, prior to entering a close period ahead of its interim results. The interim results are scheduled to be released on 29 August 2007.
Commenting on the announcement, Dr Martin Read, Chief Executive said:
"We are disappointed that our performance in our UK commercial businesses, including cost overruns on a long term contract, has overshadowed strong growth in our other key territories. We are taking actions to address the issues in the UK."
For further information, please contact:
LogicaCMG Media relations: Carolyn Esser/Louise Fisk +44 (0) 20 7446 1786 (mobile: +44 (0) 7841 602391)
LogicaCMG Investor relations: Karen Keyes/Frances Gibbons +44 (0) 20 7446 4341 (mobile: +44 (0) 7801 723682)
Brunswick: Tom Buchanan/Craig Breheny +44 (0) 20 7404 5959
Notes:
1 Revenue numbers are unaudited numbers for the quarter ended 31 March 2007.
2 2007 revenue represents IT services only. Telecoms Products revenue is expected to be reported as a discontinued operation following completion of the divestment.
3 2006 pro forma revenue excludes Telecoms Products and assumes WM-data was incorporated from 1 January 2006. Adjustments have also been made for non-recurring passthrough revenue in France which was reported in 2006 as well as for the divestments of the No Limits and pdv.com businesses. For full details, see our preliminary results presentation. Comparatives throughout this release are stated on a pro forma, constant currency basis unless otherwise stated.
4 Exchange rates used are as follows:
Q1 2007 Average Q1 2006 Average
¢â€š¬/‚£ 1.49 1.46 SEK/‚£ 13.72 13.62
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