With the for sale sign officially hammered into the ground (see here) K3’s interim results (six months to December 31 2011) are of particular interest and while the overall numbers are respectable there are pockets - like profitability - where performance is less appealing.
H1 and 2010 acquisitions boosted overall revenue, taking it up 35% yoy, to £33.36m. Profitability growth is not on the same trajectory however. At £3.98m profit before tax was 6% lower compared to last year. Under the kinder adjusted profit assessment, before tax grew 7% to £6.23m. Profits were held back by H1 investments in Managed Services and the Microsoft UK Division. The UK market was ‘challenging’, although international business rose 29%, albeit to a still low £4.84m. But that means there is growth potential. Managed services is suffering from the time-to-profit lag ie up front investment but phased revenue recognition. The division delivered a 55% rise in revenue to £2.61m but adjusted profit from operations was down to £0.09m from £0.15m.
The Microsoft UK Division grew 13% to £12m but adjusted profit from operations was flat at £1.5m due to work to bring on its Microsoft AX offering for retail and investments in sales and delivery resources. Nearly half the opportunities in the pipeline are related to the AX retail solution so a lot is riding on its success. SYSPRO and the relatively new Sage Division saw a 61% increases in revenue to £13.81m and adjusted profit from operations was up 15% to £4.07m. Acquisitions contributed £3.09m of revenue and £0.31m of adjusted operating profit.
We have a lot of faith in K3’s business model, specifically its ambition to wrap software into a managed services offering for SME’s, because it embraces the cloud movement and has enabled K3 to move beyond SME VAR status. But as a mid sized company itself it is facing the cloud curse – funding the move to managed services from a modest revenue base. Acquisitions are aiding its development but as the potential sale indicates, time is not on its side.