Computacenter 2006 results announced

Computacenter plc, the European IT infrastructure services provider, today announces preliminary results for the twelve 
months ended 31 December 2006.

Financial Highlights: 

- Group revenues of £2.27 billion (2005: £2.29 billion)
- Operating profit of £33.6 million before exceptional items (2005: £29.3 million)
- Pre-exceptional profit before tax of £38.0 million (2005: £35.7 million)
- Pre-exceptional diluted earnings per share of 13.8p (2005: 11.8p)
- Final dividend of 5p per share, total dividend 7.5p (2005: 7.5p)
- Return of £74.4 million to shareholders in July 2006
- Net funds before customer-specific financing of £29.4 million (2005 : £101.0 million)

Operating Highlights:

- UK Product business showing benefits of re-engineering with improved performance and market share
- In UK Services, a strong performance from Technology Solutions division compensated for slower growth from Support 
and Managed Services divisions. 
- Continued effort to expand and strengthen the Group’s services capability, augmented by the acquisition post year-end of
 Digica.
- Good underlying progress in the German business, however higher than expected costs for the implementation of new 
shared datacentre contracts

Ron Sandler, Chairman of Computacenter plc, commented:

“The results reported today show the early signs of progress arising from the considerable efforts in recent years to
 improve the strategic positioning and operating performance of Computacenter. These initiatives position the Group well 
for the future.”

For further information, please contact:
    

Computacenter plc.
Mike Norris, Chief Executive                                                                                         01707 631 601
Tessa Freeman, Investor Relations                                                                              01707 631 514
www.computacenter.com
    

Tulchan Communications                                                                                               020 7353 4200
Stephen Malthouse
www.tulchangroup.com
    

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Chairman’s Statement

Computacenter made steady progress during 2006. In each of the Group’s three principal markets, management continued to make determined efforts to improve both strategic focus and operating performance.

The steep fall in revenue in recent years was arrested in 2006.  Despite continuing product price erosion, revenues of £2.27 billion were only marginally lower than the previous year (2005: £2.29 billion), reflecting improvements in the competitiveness of our offerings and the increased focus on mid-market sales opportunities. Operating profit, before exceptional charges, increased by 14.5% to £33.6 million (2005: £29.3 million) and this figure includes approximately £6.2 million of losses arising in Germany associated with the start-up of two shared datacentre contracts. Taking into account non-operating exceptional charges of £5.0 million in France, operating profit increased by 3.2% to £28.5 million (2005: £27.7 million).  A reduction in net interest receipts following the return to shareholders of £74.4 million in July resulted in a 3.2% fall in profit before tax to £32.9 million (2005: £34.0 million). The share consolidation that accompanied the return of capital had a beneficial impact on the Group’s diluted earnings per share, which rose by 16.9% to 13.8 pence (2005: 11.8 pence) on a pre-exceptional basis, and by 1% to 11.0 pence (2005: 10.9 pence) after taking exceptional items into account.

Notwithstanding the £74.4 million return of capital, the balance sheet remained strong, with year-end net cash of £29.4 million (2005: £101.0 million), prior to customer-based loans and finance leases. Inclusive of these, the net funds of the Group finished the year at £10.8 million (2005: £100.4 million).

The Board is pleased to recommend a final dividend of 5.0p per share, bringing the total dividend for 2006 to 7.5p (2005: 7.5p). This is consistent with our stated policy of maintaining the level of dividend until earnings have risen sufficiently to bring the cover to within the target range of 2 – 2.5x. The final dividend will be paid on 31 May 2007 to shareholders on the register as at 4 May 2007.

Operating profit in the UK increased by 16.8% to £37.5 million (2005: £32.1 million), principally as a result of improved gross margins on product sales. Our UK Product Division has been re-engineered in recent years to serve our customers more cost effectively, involving considerable investment in new e-commerce systems and a reorganisation of resources. These improvements are beginning to show benefit, both in terms of margin and in our market share. We also continue to target the mid-market segment through our telesales operation, Computacenter Direct, where revenues in 2006 grew in excess of 40%.

Technology Solutions, the consulting and systems integration unit within our UK Services Division, performed strongly and continued to enhance its reputation for technical excellence, particularly in datacentre-related activities. Professional services revenues grew by 10.6% in 2006. Elsewhere within the Services Division, performance was mixed. Margins in our contractual services business units, Support Services and Managed Services, remained attractive, partly as a result of further centralisation of resources within a shared services delivery model; however, in a disappointing year for contract renewals, revenues for contractual services increased by just 1.0% from the previous year.

In January 2007, we concluded the acquisition of Digica Limited for a consideration of £28 million, including the settlement of approximately £12 million of debt. Digica is a leading provider of infrastructure management and application services for medium sized public and private sector organisations, with particular expertise in datacentre managed services. Its operations are highly complementary to those of Computacenter, and the combination will give both businesses the opportunity to deliver a far broader offering to their respective client bases. This acquisition fits neatly with Computacenter’s strategy of developing its contractual services businesses.

Computacenter Germany produced revenue growth of 5.9%, stimulated in the latter months of 2006 by the impending change to German VAT, which became effective in early 2007. Profit performance in Germany was less encouraging, with operating profit falling to £2.8 million (2005: £5.0 million), although this decline can be attributed to higher than anticipated start-up losses of £6.2 million associated with two shared datacentre services contracts. Nevertheless, this should not be allowed to obscure the encouraging underlying improvement in the German business. Services revenues, which account for over a third of the German total, grew strongly, particularly in managed services (both desktop and datacentre) and in telephony projects, including Voice Over IP.

The performance of Computacenter France remained unsatisfactory, although pre-exceptional operating losses for the year reduced from £7.6 million to £6.5 million. The restructuring during the first half of 2005 contributed to this improvement, although its benefits were mitigated by intense price competition in the French market and further product margin erosion as a consequence. Additional restructuring of the French cost base took place towards the end of 2006, resulting in an exceptional charge of £2.4 million, and we expect the business to show further progress in 2007 towards an eventual return to profitability. The financial statements also show a non-cash exceptional charge of £2.6 million representing an impairment of the French non-current asset base.

In October, I was pleased to announce that John Ormerod had joined the Board as a Non-Executive Director and also assumed the chairmanship of the Audit Committee. John brings a wealth of experience to both roles and I very much look forward to his involvement with the Group in the years ahead.

As we have stated before, it is difficult to draw any meaningful insights from current trading until we have completed the first quarter. Notwithstanding this, a considerable amount of work has taken place in recent years to improve the strategic positioning of Computacenter, through developing significantly the services capabilities and restructuring the cost base of our product businesses. Alongside these initiatives have been a series of operational enhancements, aimed at improving efficiencies in our core processes and at upgrading our sales capabilities. The combination of these activities positions the Group well for the future.

As always, the credit for the Group’s performance belongs to the staff, to whom I offer my wholehearted thanks for their dedication and hard work.

Review of Operations

UK

UK revenues declined by 5.2% to £1.28 billion (2005: £1.35 billion). Modest services growth partially mitigated a product sales decline of 7.2%, which was principally due to our withdrawal from selected low margin volume sales in trade distribution.

Operating profit grew 16.8% to £37.5 million (2005: £32.1 million). The improvement came mainly from better product margins, but also reflected our success in penetrating new markets and delivering operational efficiencies.

Services Division

Overall services revenues grew 3.1%, with strong Technology Solutions growth compensating for a disappointing 1.0% increase in contractual revenues.

We continued to focus on reducing operational costs and improving customer service. In particular, we sought to make more effective use of shared resources and tools for service delivery. The increased use of the Technical Resource Group, a flexible, shared engineering resource, across our client base, helped reduce our operational overheads significantly and made our offerings more competitive.

Throughout 2006, we saw a growth in contractual opportunities arising from an increase in the number of organisations seeking to split their service contracts across a range of specialist partners. These were typically for contracts of from three to five-year terms, rather than the ten-year service engagements traditionally placed with large systems integrators.

The Services Division comprises three business units: Managed Services, Support Services and Technology Solutions.

Managed Services

Despite a disappointing year for contract renewals, our Managed Services business unit grew revenues by 6.6% and improved its profit contribution.

The UK outsourcing market continues to grow at 4-5% annually. Promising market developments for Computacenter’s business include increased interest from medium-sized organisations for desktop and datacentre managed services.

Our growth plans include the continued expansion and enhancement of our service desk and datacentre capabilities. This strategic focus led to the acquisition in early 2007 of Digica, a provider of infrastructure management and application services with a particular focus on medium-sized public and private sector organisations.

Managed Services successes in 2006 include a five-year £28 million distributed IT and datacentre outsourcing contract with Eversheds, a five-year £6 million contract with IT firm Parity to manage its entire IT infrastructure including its datacentre, and an extension in scope and terms of our contract with the Nuclear Decommissioning Authority.

Support Services

A highly cost-conscious market led to an overall decline in our Support Services revenues. Performance from this business unit was strongest in the datacentre environment, where pressure on unit price was less intense.

Market demand was driven by clients seeking to centralise and consolidate their IT infrastructures to improve service and reduce both risk and costs. Growth also came from an increase in the subcontracting of support by large outsourcing organisations and systems integrators, a market upon which we placed particular focus in 2006. Such a partnership approach helped us secure a BT-subcontracted three-year hardware maintenance and support contract with Liverpool Direct.

Support Services continues to be strong in the traditionally attractive financial services market. In addition, our more recent efforts to improve our coverage of the mid-market, where there is greater growth potential, helped us win business with approximately 30 organisations that had not previously traded with Computacenter. We also saw growth in areas such as the retail sector, where we won a three-year contract with John Lewis Partnership for the support of all their desktops, laptops, printers and networks across the UK.

Other significant wins in the period include a three-year contract for the support of Taylor Woodrow’s entire server estate.

Technology Solutions

Our Technology Solutions business grew strongly, with much of the growth coming from an increase in datacentre projects. With a majority of Technology Solutions projects in 2006 including a datacentre component, we sought to develop new offerings to answer client demand in this area. As a result, we are now able to offer an end-to-end datacentre solution for reducing operating costs, speeding up business applications deployment and improving environmental efficiency.

In addition, we benefited from closer integration with our product supply business, as an increasing number of clients chose to couple product supply with the purchase of project services. 

A 15% increase in revenues from consulting and project management led to very high professional services activity, and helped the overall profitability of the Technology Solutions business. We now have a substantial pipeline for professional services projects in the UK and we anticipate further growth in this area.

We continued to refine our propositions to answer changing client requirements. For example, our shared risk approach to Technology Solutions projects, which answers a growing demand for assured outcomes rather than hired expertise, proved of interest to organisations seeking to reduce the risk and fix the cost of projects.

Significant new business in the period included a five-year contract with Doncaster College of Further Education, worth £6 million, for its new 35,000 sq. m. campus.

Product Division

Our ongoing programme of re-engineering our product business to deliver improved profitability and growth began to bear fruit in 2006.  Following a decline in product revenues in 2005, we saw a stabilisation in revenues from end-user sales in 2006.

A 1.7% increase in product gross margins reflects our success in implementing improved business controls relating to product purchasing and supply. We also continued to lower the cost of sale through use of a lighter-touch sales model for product-only clients, enabled through our deployment of improved e-commerce systems.

We benefited from our evolving product mix, with a still greater proportion of sales coming from network, server and other enterprise technologies. This was partly driven by the increased criticality of enterprise systems and partly by the growth of our Technology Solutions business, where such technology is often part of a bundled solution.

The Product Division comprises four business units: Corporate Hardware, Software, Computacenter Direct and CCD.

Corporate Hardware

Technology sales to end-users increased slightly, although following a major investment in the latest version of our webshop, Connect 6, we experienced 28% growth in online revenues. Web sales now comprise over 16% of all hardware orders.

Product margins benefited from an increase in business with the financial sector, as well as the growing enterprise technology proportion in the product mix. We saw particularly strong growth in our Sun, EMC, Cisco and IBM enterprise business.

With price competition still intense in the product market, the Corporate Hardware business sought to enhance the range of supply-related value propositions it provides to customers. In particular, we focused on developing and communicating our offerings in the areas of managed multi-vendor procurement contracts, extensive multi-site deployments and environmental advisory services.

Significant new product business includes a £50 million contract with the ATLAS Consortium, covering managed supply and deployment services to support the Defence Information Infrastructure (Future) programme within the UK Ministry of Defence.

Software

Our Software business grew revenues 7% during 2006. Growth was across our vendor base, and partly a result of an expanding software services market.

The increased threat of vendor audits, rising merger activity and the business disruption of off-shoring, all drove clients to look for greater security, efficiency and agility in software purchasing.  Many of these organisations sought help to ensure compliance, consolidate multi-vendor agreements and renegotiate licence terms.

To capture better these opportunities, we increased our investment in dedicated sales and marketing resources. Whilst this has had some short-term impact on this unit’s profit contribution, it is envisaged that future software business growth will be achieved without the requirement to add further to the cost base.

Significant successes in 2006 include a renewal of Microsoft licences with BAA in a three-year Direct Enterprise Agreement.

Computacenter Direct

This business unit, targeting the growing medium-sized business market, continued to grow strongly, with improved product margins and revenue growth in excess of 40%.

Recruitment of additional sales staff helped drive a 23% increase in product volumes, predominantly related to server technology. This, together with our increasing success in attaching deployment and integration services to technology supply, contributed to an increased profit contribution from this unit.

Computacenter Direct continues to attract new clients, and now has over 1,500 trading customers. We are confident of continuing growth in the mid-market sector.

CCD

Following a management reorganisation in 2006, CCD, our trade distribution arm, sought to reduce its exposure in a small number of unprofitable, high volume accounts. As a result, we saw rising margins and profitability in the second half of the year.

Profit performance also benefited from a merger of the two operating units comprising CCD, reducing our operating costs and streamlining the sales operation. Increased sales focus led to a number of notable successes during the year, in particular the growth of our IBM System X server revenues, which significantly increased CCD’s market share in these systems, and the successful introduction of a focused server-based computing initiative in partnership with HP.

The management team was further strengthened in the last quarter and a comprehensive sales development plan has been initiated to underpin the business during 2007 and beyond.  Although market conditions are expected to remain fiercely competitive, management believe that we are well placed to build on the improvements seen in 2006.

RDC

 
After breaking even in the previous year, RDC, our technology recycling and remarketing operation, returned to profit in 2006. Our margin on remarketing services increased by 15.1% and we continued to be profitable in Germany.

Our success in 2006 was in part due to a renewed sales focus in the first half of the year, with the launch of Computacenter Asset Recovery Services and the creation of a new frontline sales team instrumental in a number of service wins.

Throughout 2006 we saw significant successes in both our direct business, and business won with Computacenter accounts. We now see a healthy sales pipeline, which we anticipate should provide a secure platform for profit and revenue growth in 2007.

Germany

Computacenter Germany recorded revenue growth of 5.9% to £654.7 million, although full-year operating profits declined 44.2% to £2.8 million (2005: £5.0 million).

The fall in profitability was largely due to the implementation of two shared datacentre contracts, and the creation of the underlying infrastructure, which collectively produced a loss of approximately £6.2 million. Whilst elements of this were planned costs of start-up, these losses were on an unacceptable scale and considerable efforts were made in the second half of the year to rectify the failings. We are confident that this has now been achieved.

This has obscured to some extent a marked underlying performance improvement in the German business. Trading was particularly strong at the year-end. Although this may signify a developing recovery in the German market, some of this growth appears to have arisen from  additional spending by clients ahead of the VAT increase in Germany in early 2007.

Sales growth also came from an increase in Managed Services business, as clients turned to outsourcing to help reduce IT operational costs. Overall, we continued to attract new business, with some significant wins and renewals leading to 22% contract base growth.

As elsewhere, an increased proportion of our product business came from sales of enterprise technology. We saw particular growth in networking offerings, reflecting the further commoditisation of the PC and laptop business and our increased focus on business-led solutions.

In our Technology Solutions business, we continue to see the fruits of the investment made five years ago in the development of Voice Over IP telephony and Voice on Demand. Revenues from this competitive but highly profitable market segment were twice their 2005 value and we expect them to continue to grow attractively in 2007.

To support a growing requirement for the provision of a more international service to large global customers such as Adidas, we took full responsibility in October for our Service Desk facility and its 120 employees in Erfurt. This was previously managed via a joint venture with Sellbytel. Through stronger integration with our other facilities in Milton Keynes (UK) and Barcelona, this will help us build a more integrated international service centre network.

Significant wins include a five-year outsourcing contract with Union Investment IT for DZ Bankgruppe, worth up to £60 million in product and service sales. We will provide an end-to-end service to include support of approximately 15,000 workstations and the outsourcing of the client’s datacentre, with all service and applications managed on our systems.
Other successes include a three-year Europe-wide contract with Airbus, worth 30 million euros, and major extensions of our contracts with Daimler Chrysler, for network support of its Mercedes Technology Centre, and with Bosch, to include the support of 38,000 workstations over a three-year term.

France

Performance in France remains unsatisfactory, although pre-exceptional operating losses reduced 15.0% to £6.5 million (2005: £7.6 million) as revenues grew 3.9% to £307.3 million (2005: £295.8million). Taking into account the effect of exceptional charges, which related to additional restructuring of the French business, operating loss increased from £9.3 million in 2005 to £11.5 million.

Despite further product margin erosion over 2006, we saw a slowdown of the trend over the first nine months and a slight improvement in margins in the last quarter. Encouragingly, services margins improved over the year and we completed the final stages of business take-on of our largest multinational services contract.

We benefited from our ongoing focus on reducing the cost base in France in both people and non-people expenses and we intend to continue with these measures in 2007. We also saw some promising product and services sales growth, particularly in the second half of the year.

The growth of our profitable maintenance business was another key focus, with the launch of a comprehensive sales training programme designed to improve the identification, qualification and capture of these opportunities. We are already starting to see the benefits of this programme, with a significant increase in maintenance business over the period and into 2007. A similar sales training programme for enterprise products, which are less subject to price pressures than desktop systems, led to an expansion of our team of IBM technical consultants and helped grow our IBM revenues by 13%.

Significant wins include a three-year managed services contract with Texas Instruments France, worth approximately £2 million. The contract scope includes help desk provision, installations, maintenance, disposal and support for more than 3,500 devices. We also secured a five-year enterprise and professional services contract with the Centre National d'Etudes Spatiales (CNES) worth £13 million.

Benelux

Our Benelux operation recorded an operating loss of £191,000 (2005: £109,000). The Belgium and Netherlands business achieved a break-even result, in spite of costs arising from the development of new communication and storage business units to address rising demand in those markets. Our sub-scale Luxembourg operation recorded an overall loss.

Product supply performed strongly, with an increased profit contribution, as did Managed Services, mainly from the growing financial sector.

Key wins included a renewal on product supply with Pioneer, a technology refresh project at SWIFT, a desktop managed services contract with Burgo Ardennes, and a CRM project for the European salesforce of Ansell.

International

We saw increasing client interest in our international capabilities in 2006, with a number of contract wins and extensions having a multi-country component. Typically these were with multinational organisations headquartered in Europe, such as Cognis, which outsourced its global IT infrastructure to Computacenter, including management of its datacentre and service desk .

Our service facilities have been extended through the building of a multi-lingual shared service desk in Barcelona and through the service desk capability in Cape Town, RSA that comes as part of the Digica acquisition. This enables Computacenter to determine the most suitable location, in terms of both quality of service and cost, when configuring service contracts for customers.

Consolidated income statement
For the year ended 31 December 2006

Consolidated balance sheet
As at 31 December 2006

Approved by the Board on 12 March 2007

MJ Norris          Chief Executive                          FA Conophy     Finance Director

Consolidated statement of changes in equity
For the year ended 31 December 2006

Consolidated cash flow statement
For the year ended 31 December 2006