Interim Results Announcement

Computacenter plc, the European IT infrastructure services provider, today announces interim results for the six months ended 30 June 2007.

Financial Highlights:

• Group revenues up 4.1% to £1.16 billion (2006: £1.11 billion)
  
• Operating profit* up 12.1% to £12.8 million (2006: £11.4 million)
  
• £3.0 million net interest income reduction, primarily due to capital return in 2006
  
• Profit before tax* 11.8% lower at £12.8 million (2006: £14.5 million)
  
• Diluted earnings per share up 9.3% to 4.7p (2006: 4.3p)
  
• Interim dividend of 2.5p per share (2006: 2.5p)

*  Reported post amortisation of acquired intangibles

Operating Highlights:

1. Awarded multinational BT Group contract to provide desktop services and supply product to BT’s entire global estate
2. UK operating profit impacted by price erosion and services contract renewals
3. Improved pipeline of UK services activity
4. Acquisitions of Digica and Allnet strengthening services capability
5. Improved performance in Germany with growth across all areas of the business  and significant contract wins
6. Continued progress in France with further restructuring cost efficiencies
   

Ron Sandler, Chairman of Computacenter plc, commented:

“Overall, the Group performance in the first half has been encouraging. We were pleased to see a stronger performance from France and Germany and expect this trend to continue.  In the UK, despite a weaker performance, we have made good progress in transforming our business in response to some fundamental changes in our markets. We remain committed to translating these adjustments into consistent performance improvements. 

Looking ahead, we expect our market positioning and performance to continue to improve. The second half of the year has started positively for the Group and we are increasingly confident about our outlook for the full year, which remains unchanged.”

For further information, please contact:

Computacenter plc.
Mike Norris, Chief Executive - 01707 631 60                                                    
Tessa Freeman, Investor Relations - 01707 631 514                                                       
www.computacenter.com
 
Tulchan Communications                                                                     
Stephen Malthouse - 020 7353 4200
www.tulchangroup.com

 

Chairman’s statement

The Group had an encouraging first half, with stronger performance in France and Germany partially offset by a weaker result in the UK. Overall, Group revenues, including acquisitions, were up 4.1% at £1.16 billion and up 2.1% on a like-for-like basis (H1 2006: £1.11 billion).  

Operating profit was up 12.1% to £12.8 million (H1 2006: £11.4 million). Following the £74.4 million capital return in July 2006 and expenditure of £32.6 million on acquisitions in 2007, net interest income reduced from £3.0 million to nil. Consequently, profit before tax decreased 11.8% to £12.8 million (H1 2006: £14.5 million). Despite the pre tax profit reduction, diluted earnings per share increased by 9.3% to 4.7p (H1 2006: 4.3p), as a result of the reduced number of shares in issue.

The balance sheet remains strong, with net borrowings prior to customer-specific financing of £16.5 million at the period end. There was an outflow of £45.9 million in the half-year, driven by the two acquisitions and a working capital outflow of £15.1 million.

I am pleased to announce the payment of an interim dividend of 2.5p per share (2006: 2.5p) to be paid on 19 October 2007 to shareholders on the register as at 21 September 2007. This is consistent with our policy of seeking to keep the interim dividend at a level equal to one-third of the preceding year’s total dividend.

A central pillar of our strategy for ensuring long-term earnings growth is the expansion of our contracted services business. An important milestone was achieved in March 2007 with the signing of a five-year contract with BT Group to provide desktop services and supply product to BT’s entire global estate, covering 54 countries. This replaces our previous UK contract with BT and represents a considerable enhancement in both scope and breadth of service.

Excluding the results of the acquired businesses, UK revenues declined 1.8% to £649.2 million (H1 2006: £661.1 million) and operating profit declined 27.9% to £11.9 million (H1 2006: £16.4 million), with both product and services activities delivering a lacklustre performance. The operating profit decline was largely due to price erosion on renewals and the loss of some key services contracts in 2006, which adversely affected revenues and operating profit in H1 2007. However we have seen an improving pipeline of services activity, with a number of contract wins secured in late 2006 and 2007 yet to be translated fully into revenue.

Product sales, in particular to public sector organisations, were below expectations in the first quarter, although some recovery was evident towards the end of the period and we continued to see strong growth in software revenues. We continue to invest in our products business for the long term, through tools and processes that lower our cost of sale, by adding sales capacity, and by leveraging our successful mid-market sales model for smaller organisations and for customers with less complex service requirements.

Computacenter UK made two significant services acquisitions in the period to extend our capability in the growth areas of datacentre services and network computing. In January we concluded the acquisition of Digica Limited, a provider of datacentre managed services. This was followed in April by the acquisition of Cable & Wireless (Allnet) Limited, a leading provider of network integration and structured cabling services.

Computacenter Germany enjoyed strong growth across all areas of its business, with H1 revenues up 14.4% to £340.7 million (H1 2006: £297.7 million) and operating profit of £3.8 million (H1 2006: £0.5 million). This is the best first-half performance since the German business was acquired in 2003 and reflects both a market recovery and our success in diversifying into new sectors, particularly the mid-market. With market conditions likely to remain strong and the full impact of the change programme in our German business yet to be realised, we expect this level of performance improvement to continue throughout the year.

Operating losses for the half-year decreased from £5.4 million to £2.1 million despite a 4.5% fall in revenues to £135.3 million (H1 2006: £141.7 million). French Managed Services revenue growth of 5.6% was offset by a 3.8% reduction in Professional Services revenues and a fall in product sales of 5.3%; however, margins increased in both products and services. Additionally, operating performance improved as a result of the cost savings arising from the restructuring of the French cost base that took place at the end of 2006. We expect the performance of Computacenter France to continue to improve and, based on progress to date, we are confident of a return to profit.

Whilst much remains to be done, particularly in translating the substantial changes we have made to the UK business into consistent performance improvements, we have made good progress in transforming our business in response to some fundamental changes in our markets. For our continuing success in this endeavour, I am indebted to our staff for their hard work and commitment.

Looking ahead, we expect our market positioning and performance to continue to improve. The second half of the year has started positively and we are increasingly confident about our outlook for the full year, which remains unchanged.

 

Review of Operations

UK

UK performance has been below expectation. Despite a strong performance from the Technology Solutions business unit, Services Division revenues were adversely affected by price erosion on renewals and the previously reported loss of some key contracts in 2006. The Product Division, whilst showing some recovery in Q2 compared to Q1, has traded below 2006 levels, largely due to a reduction in government sales. 

Services Division

Overall services revenues, excluding the effect of acquisitions, declined 3.7% to £129.9 million (2006: £134.9 million), with Technology Solutions growth partially compensating for a decline in contractual revenues.

Managed Services

Our Managed Services business saw a 14.3% decline in revenues largely due to the loss of several key contracts in H2 2006, which also led to a gross margin reduction.

Our strategy has focused on the growing market for datacentre and enterprise computing Managed Services and on extending our offering to mid-market customers. In the datacentre market, our presence was enhanced substantially with the acquisition of Digica in January.

The use of the Shared Services Factory’s repeatable processes and embedded best practice were fundamental to our securing a number of contracts, including a recent win with EDF Energy, worth £9.6 million, signed in July.

Important new mid-market wins in the period included a five-year, £4.1 million, datacentre Managed Services contract with FremantleMedia.

Support Services

The market for IT infrastructure support continues to be highly cost competitive, with increased price pressure at renewals of larger contracts mostly responsible for a small decline in our Support Services revenues.

Demand for our offerings is polarising into larger, complex deals and smaller commoditised packaged services. For the former, customers look to us to consolidate their infrastructure support whilst reducing cost and improving service levels. An example of this is our four-year, £20 million contract win with Reuters, where services provided to their customers include product supply logistics, engineering, service management and contract management.

At the more commoditised end of the market, there is increasing demand for simplified packaged services with transparent pricing. To address this market sector, Computacenter launched three packaged services in the first half of the year: lifetime maintenance, resource on demand and a disaster recovery service.  

29 new contracts were signed with Support Services in the period, including with Merrill Lynch for server support and with TGI Fridays UK for server, desktops and EPoS maintenance. 

Technology Solutions

This business unit continued to perform well, with Professional Services revenue growth of approximately 20% compared to H1 2006, prior to the effect of acquisitions. Increased project activity also benefited our product supply business, with a 21% increase in associated hardware and software sales. Particularly pleasing was the continued strong performance of our datacentre business, particularly our virtualisation and consolidation activities, and our datacentre utility and relocations services, which have been a major focus of our business development efforts.

The acquisition and integration in April of Allnet, a leading UK provider of network integration and structured cabling services, has significantly increased our penetration of the connectivity market, doubling the size of Computacenter’s business in this segment. Recent wins utilising Allnet’s capabilities include Varian Medical Systems, a new trading customer for whom we worked on the design and implementation of a new datacentre facility, and a major telecoms operator, where we are providing the system design, installation, migration and testing for a new subscriber pre-payment service.

Other significant wins in the period include a contract for the design, implementation and hosting of a software testing environment for Amdocs, a leading provider of customer experience systems.

Digica

The H1 profit performance of this newly acquired business was below expectation, due to some disruption resulting from the transaction, plus the start-up of several large new datacentre contracts. However we are confident of a significant improvement in the second half of the year.

Demand for Digica’s services remained buoyant, with the business achieving record new business contract values in the 12 months to June 2007. Significant wins include Crest Nicholson, where we added a major transformation project to our existing five-year outsourcing contract. The strength of the combined Computacenter/Digica proposition was an important consideration in awarding this project.

 

Product Division

Total UK products revenue, excluding the effect of acquisitions, declined 1.3% to £519.2 million (H1 2006: £526.2 million), although improved product margins from increased enterprise technology spend partially compensated for this revenue deterioration.

There is an increasing demand from customers for Computacenter to own assets, particularly in the datacentre, and charge for the cost of equipment bundled with the service. We welcome this and see it as an opportunity to improve margins and increase services revenue over time. This customer specific finance amounted to £36.9 million at the end of the period (H1 2006: £1.8 million).

To lower our cost of sale and increase productivity in this business we launched new versions of our online procurement system, Connect, and our sales administration system, One Touch. We also continue to focus on improving automated processes for the direct delivery of technology to clients.

Hardware

Desktop sales continue to decline, largely offset by the increase in sales of server, networking and storage systems from Sun, EMC and Cisco and a significant increase in HP Intel server business.

We continued to see growing demand for electronic trading, with sales via our webshop and other EDI links increasing to over 30% of all orders. This area remains a key focus.

Supply associated services such as portfolio management, technology benchmarking and commercial advisory services proved important market differentiators. These include our new ‘green advisory service’, which shows how organisations can reduce costs and increase competitive advantage whilst reducing the IT element of their carbon footprint.

Significant hardware wins in the period include technology benchmarking and desktop supply for Leeds City Council, which also includes disposals management via our RDC subsidiary.

Software

Our Software business unit had a strong start to the year, with revenues recording a 14.5% increase on the first half of 2006.

The needs of our customers to reduce their software costs and increase their return on investment helped us win important new business. Our ability to track licence renewals and entitlements and so monitor compliance, consolidate licences and improve discount bands is leading to significant opportunities.
Computacenter continues to invest in this business and we are increasing the numbers of licensing executives and managers in response to growing customer demand. Significant wins include a three-year Microsoft Enterprise Agreement with the NHS, worth £37 million.

Computacenter Direct

We continued to target the growing market for IT product and services in the medium-sized business sector. The success of our ‘light touch’ account management approach led to over 1,000 smaller trading accounts being transferred to this sales model and we continued to recruit significant numbers of new sales staff.
Over 650 new trading customers were added in H1, and we are confident of continuing growth in the mid-market sector.

CCD

The first half of 2007 saw a continuation of the improving trend in the financial performance of our trade distribution arm, CCD. This was attributable to a focus on tight operational control, combined with the new sales structure implemented during 2006.

 

Germany

Computacenter Germany recorded the best H1 operating performance since the acquisition of the German business in 2003. Revenue growth was fairly evenly spread, with services revenue growing by some 12%, and product revenues by 16%. As a result, our business mix remained fairly constant, with approximately 35% of our revenues coming from services and 65% from product.

In part this performance can be attributed to an upturn in the German IT market driven by general economic factors. However, it is also the result of a concerted campaign over the last two years to expand our customer base, especially in the medium-sized enterprise sector, and to leverage opportunities for cross-selling to existing customers.

The profitability in 2006 was affected by start-up losses from the shared datacentre contracts, which totalled £6.3 million, £5.4 million of which were in the second half. As a consequence, we will see a further additional material improvement in our overall German profitability in H2 2007.
 
We secured a number of new and extended Managed Services contracts and saw strong growth in our solutions business, particularly in Voice Over IP Telephony and Voice on Demand. This in turn helped boost enterprise technology sales, driving growth of over 17% in our server and storage products business.

Reversing a long-standing trend, we also saw 15% growth in our desktop products business, with software sales in particular performing very well. Despite continuing price declines, this revenue growth has been achieved with no degradation to margins.

Significant wins in the period include a server support contract with SAP Hosting, and a network supply and maintenance contract with BMW Group. Additionally, we secured a datacentre outsourcing contract with Immobilienscout 24, which operates Germany’s largest Internet real estate marketplace.

 

France

Significant progress was made in France, where operating losses reduced 60.6% despite a small decline in revenues. Services revenue growth of 0.8% was offset by a fall in product revenues of 5.3%; however the margin improvements of late 2006 continued into the first half of 2007, with increased margins from both products and services.

The performance improvement is largely attributable to our ongoing focus on reducing the cost base and streamlining our operations, with particular progress made in the latter half of 2006. As well as further progress in reducing expenses in 2007, we are already seeing the benefits of a new sales pay plan, which focuses more sharply on achieving services growth and maximising margins. We are also benefiting from a sales management programme, launched last year, which is designed to better identify, qualify and capture maintenance and enterprise product opportunities.

Significant wins include four new Managed Services contracts, worth in the region of £2 million a year, including a large European staffing and recruitment company and one of France's biggest power and energy companies.

 

Benelux

Overall, our Benelux operation recorded a small loss of £111,000 (2006: £82,000). Product supply again performed strongly, as did Managed Services, whilst project and consulting services remained weak.
 
Key wins include a large international hardware supply contract with KBC, an extension of current infrastructure projects at Recticel, and an application services project for Dexia.

 

RDC

RDC has made a good start to the year with H1 profit above expectations. In the UK business, service sales grew 21% on H1 2006 and remarketing margin was up 20%. This growth came from the success of our Computacenter Asset Recovery Services offering and was also boosted by sales of our fledgling ‘collect and recycle’ service into the mid-market. RDC’s German business was slow in H1, but revenues from two major wins will start to come through in the second half of the year.

Consolidated income statement
For the six months ended 30 June 2007

	Unaudited six months ended 30 June 2007		Unaudited six months ended 30 June 2006		Year ended 31 Dec 2006
	£'000		£'000		£'000
Revenue	1,160,333		1,114,939		2,269,903
Cost of sales	(1,006,183)		(969,619)		(1,974,437)
Gross profit	154,150		145,320		295,466
Distribution costs	(9,267)		(9,304)		(19,075)
Administrative expenses	(131,819)		(124,581)		(242,819)
Operating profit:
Before amortisation of acquired intangibles and exceptional items	13,064		11,435		33,572
Amortisation of acquired intangibles	(240)		-		-
Operating profit before exceptional items	12,824		11,435		33,572
Impairment of non-current assets	-		-		(2,606)
Redundancy costs	-		-		(2,425)
Operating profit	12,824		11,435		28,541
Finance revenue	2,157		4,044		6,677
Finance costs	(2,166)		(1,053)		(2,289)
Share of profit of associate	-		98		-
Profit before tax:
Before amortisation of acquired intangibles and exceptional items	13,055		14,524		37,961
Amortisation of acquired intangibles	(240)		-		-
Profit before tax before exceptional items	12,815		14,524		37,961
Impairment of non-current assets	-		-		(2,606)
Redundancy costs	-		-		(2,425)
Profit before tax	12,815		14,524		32,930
Income tax expense	(5,319)		(6,434)		(13,994)
Profit for the period	7,496		8,090		18,936
Attributable to:
Equity holders of the parent	7,496		8,090		18,927
Minority interests	-		-		8
	7,496		8,090		18,935
Earnings per share
– basic for profit for the year	4.8p		4.3p		11.0p
– basic for profit pre exceptional items and amortisation of acquired intangibles	4.9p		4.3p		13.9p
– diluted for profit for the year	4.7p		4.3p		10.9p
– diluted for profit pre exceptional items and amortisation of acquired intangibles	4.8p		4.3p		13.8p

 

Consolidated balance sheet
As at 30 June 2007

	Unaudited six months ended 30 June 2007		Unaudited six months ended 30 June 2006		Year ended 31 Dec 2006
	£'000		£'000		£'000
Non-current assets
Goodwill	32,199		4,755		4,755
Intangible assets	12,563		4,993		5,190
Property, plant and equipment	102,116		77,456		84,874
Investment accounted for using the equity method	-		184		-
Deferred income tax asset	8,238		5,582		6,166
	155,116		92,970		100,985
Current assets
Inventories	92,011		87,733		94,586
Trade and other receivables	410,222		365,120		427,319
Prepayments	66,133		68,421		50,435
Forward currency contracts	167		26		111
Cash and short-term deposits	47,352		161,862		77,882
	615,885		683,162		650,333
Total assets	771,001		776,132		751,318
Current liabilities
Trade and other payables	306,919		269,250		315,846
Deferred income	71,428		80,313		77,714
Financial liabilities	81,189		70,519		55,736
Income tax payable	7,278		8,006		8,394
Provisions	2,166		1,585		2,132
	468,980		429,673		459,822
Non-current liabilities
Financial liabilities	20,511		704		11,362
Provisions	11,653		13,384		12,839
Other non-current liabilities	731		12		917
Deferred income tax liabilities	2,486		837		1,249
	35,381		14,937		26,367
Total liabilities	504,361		444,610		486,189
Net assets	266,640		331,522		265,129
Capital and reserves
Issued capital	9,585		9,543		9,571
Share premium	2,776		76,004		2,247
Capital redemption reserve	74,542		100		74,542
Own shares held	(2,503)		(2,503)		(2,503)
Foreign currency translation reserve	(2,381)		(1,524)		(2,455)
Retained earnings	184,594		249,883		183,700
Shareholders' equity	266,613		331,503		265,102
Minority interest	27		19		27
Total equity	266,640		331,522		265,129

 

Approved by the Board on 10 September 2007

MJ Norris, Chief Executive                                                          FA Conophy, Finance Director

Consolidated statement of changes in equity

	Attributable   to   equity   holders   of   the   parent
	Issued capital	Share premium	Capital redemption reserve	Own shares held	Foreign currency translation reserve	Retained earnings	Total	Minority interest	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2006	9,505	74,680	100	(2,503)	(1,757)	250,630	330,655	19	330,674
Exchange differences on retranslation of foreign operations	-	-	-	-	233	-	233	-	233
Net income recognised directly in equity	-	-	-	-	233	-	233	-	233
Profit for the period	-	-	-	-	-	8,090	8,090	-	8,090
Total recognised income for the period	-	-	-	-	233	8,090	8,323	-	8,323
Exercise of options	38	1,324	-	-	-	-	1,362	-	1,362
Cost of share based payments	-	-	-	-	-	568	568	-	568
Equity dividends	-	-	-	-	-	(9,405)	(9,405)	-	(9,405)
	38	1,324	-	-	233	(747)	848	-	848
At 30 June 2006	9,543	76,004	100	(2,503)	(1,524)	249,883	331,503	19	331,522
Exchange differences on retranslation of foreign operations	-	-	-	-	(931)	-	(931)	-	(931)
Net expense recognised directly in equity	-	-	-	-	(931)	-	(931)	-	(931)
Profit for the period	-	-	-	-	-	10,837	10,837	8	10,845
Total recognised income and expense for the period	-	-	-	-	(931)	10,837	9,906	8	9,913
Cost of share-based payments	-	-	-	-	-	843	843	-	843
Exercise of options	28	993	-	-	-	-	1,021	-	1,021
Bonus issue	74,442	(74,442)	-	-	-	-	-	-	-
Expenses on bonus issue	-	(308)	-	-	-	-	(308)	-	(308)
Share redemption	(74,442)	-	74,442	-	-	(73,886)	(73,886)	-	(73,886)
Expenses on share redemption	-	-	-	-	-	(56)	(56)	-	(56)
Equity dividends	-	-	-	-	-	(3,921)	(3,921)	-	(3,921)
	28	(73,757)	74,442	-	(931)	(66,183)	(66,401)	8	(66,393)
At 1 January 2007	9,571	2,247	74,542	(2,503)	(2,455)	183,700	265,102	27	265,129
Exchange differences on retranslation of foreign operations	-	-	-	-	74	-	74	-	74
Net income recognised directly in equity	-	-	-	-	74	-	74	-	74
Profit for the period	-	-	-	-	-	7,496	7,496	-	7,496
Total recognised income for the period	-	-	-	-	74	7,496	7,570	-	7,570
Exercise of options	14	529	-	-	-	-	543	-	543
Cost of share based payments	-	-	-	-	-	1,269	1,269	-	1,269
Equity dividends	-	-	-	-	-	(7,871)	(7,871)	-	(7,871)
	14	529	-	-	74	894	1,511	-	1,511
At 30 June 2007	9,585	2,776	74,542	(2,503)	(2,381)	184,594	266,613	27	266,640

 

 

Consolidated cash flow statement
For the six months ended 30 June 2007

	Unaudited six months ended 30 June 2007		Unaudited six months ended 30 June 2006		Year ended 31 Dec 2006
	£'000		£'000		£'000
Operating activities
Operating profit	12,824		11,435		28,541
Adjustments to reconcile Group operating profit to net cash inflows from operating activities
Depreciation	11,124		6,869		14,585
Amortisation	1,648		850		1,907
Cost of share-based payment	1,269		568		1,411
Impairment of property, plant & equipment	-		-		2,492
Loss on disposal of property, plant and equipment	60		260		353
Impairment of intangible assets	-		-		114
Loss on disposal of intangible assets	36		9		9
Dividend received from associate	-		203		202
Decrease in inventories	4,897		12,846		4,560
Decrease/(increase) in trade and other receivables	16,234		14,240		(35,498)
(Decrease)/increase in trade and other payables	(36,234)		(41,629)		6,895
Currency and other adjustments	(72)		(73)		5
Cash generated from operations	11,786		5,578		25,576
Income taxes paid	(6,345)		(4,744)		(11,994)
Net cash flow from operating activities	5,441		834		13,582
Investing activities
Interest received	1,988		4,066		6,600
Acquisition of subsidiaries, net of cash acquired	(32,596)		-		-
Sale of property, plant and equipment	306		22		24
Purchases of property, plant and equipment	(6,173)		(1,400)		(7,504)
Purchases of intangible assets	(2,934)		(1,115)		(2,499)
Sale of interest in associate	-		-		364
Net cash flow from investing activities	(39,409)		1,573		(3,015)
Financing activities
Interest paid	(2,069)		(1,293)		(2,152)
Dividends paid to equity holders of the parent	(7,871)		(9,405)		(13,326)
Proceeds from issue of shares	543		1,362		2,383
Repayment of capital element of finance leases	(2,061)		(1,320)		(2,629)
Repayment of loans	-		-		(326)
Repayment of other loans	(6,742)		-		(5,201)
New borrowings	6,203		-		12,447
Return of capital	-		-		(74,442)
Expenses on return of capital	-		-		(365)
(Decrease)/increase in factor financing	(8,381)		2,066		(1,377)
Net cash flows from financing activities	(20,378)		(8,590)		(84,988)
Decrease in cash and cash equivalents	(54,346)		(6,183)		(74,421)
Effect of exchange rates on cash and cash equivalents	1		(156)		492
Cash and cash equivalents at beginning of period	58,982		132,911		132,911
Cash and cash equivalents at end of period	4,637		126,572		58,982