How many times have we heard management exude ‘confidence’ on hitting the FY numbers and then shortly afterwards warn of miss? Such is the case for energy sector software and services supplier KBC Advanced Technologies, which only two months ago was ‘confident’ about meeting FY expectations (see KBC points to a steady H1). Yet today’s interim report not only warned that they will miss target, but that they have also made a net loss and are running short on cash.
Looking at the numbers first, revenues for the 6 months to 30th June rose by 6% to £27.5m, but the failure to close a key Latin American software deal and having too many consultants on the bench saw operating profit plummet by almost 70% to just £725k. Management chose to ‘derecognise’ (Ed: not in my dictionary) a prior deferred tax asset adding another £1.4m to the tax bill, which left KBC with a £0.9m net loss (H1 2011: +£1.5m). With the resulting strain on working capital, management is placing up to 2.7m shares at 50p, a 25% discount to last night’s closing price, in order raise up to £1.3m net.
I think the underlying problem is a combination of lack of scale and failure to act quickly enough on obvious warning signs. On the face of it, KBC has a diversified business in terms of geography (49% of revenues from Americas, 29% from Asia and 22% in EMEA) and jolly good that is too for a UK-headquartered company. But that also means KBC is spread rather thinly and I assume is dependent on a relatively small number of clients in each region. And as for the warning signs, well, they were surely apparent earlier in the year and either management chose to ignore them or simply didn’t see them.
KBC chairman Ian Godden sees these results as ‘a temporary setback’ and expects the company to get back to growth in 2013. May be so, but I’d be doing a bit more ‘scenario planning’ both on software sales and consulting revenues, and then restructure the business around the worst case picture. At least then there is a better chance of a ‘positive surprise’ in future, rather than another warning.