Phoenix H1 hit by ‘double whammy’

The impact of both ‘Servogate’ (see Phoenix uncovers accounting hole at Servo) and ex-CEO David Courtley’s attempt to unify the company’s disparate businesses (see Phoenix IT: three become two become one) was brought into stark relief in Phoenix IT Group’s half-time results.

PwC’s investigation into the ‘accounting irregularities’ at Servo, Phoenix’s mid-market IT services unit, revealed no cash theft but highlighted a systematic manipulation of Servo’s P&L since March 2009 (hardly a great endorsement of its then auditors). The impact was worse than expected, and Phoenix has taken a £17.3m post-tax hit rather than the £14m originally signalled.

But (now) Executive Chairman Peter Bertram appeared to lay the blame for Phoenix’s otherwise ‘disappointing’ results firmly at Courtley’s door, advising that the disruption caused by the transition to the new organisation structure caused performance to drop to ‘unacceptable’ levels, notably in the core Partner Services (third-party IT services) unit. Profits in the unit were down £2m to £5.8m partly due to the extra cost of pumping service levels back up but also due to ‘a degree of slippage’ in the expected integration cost savings. Partner Services revenues fell by 7% to £53.7m and the order book was down a little to £90.6m, though this has since been bolstered by a recently signed £40m contract (see Phoenix signs £40m+ deskside support deal).

The only unit that saw profits increase (by £1m to £8m) was Business Continuity (BC), although revenues slipped back 2% to £27.6m. Net net, Phoenix group reported first-half revenues (to 30th Sept.) of £124m, down 5% yoy, and pre-tax losses of £63.3m, burdened by some £68m in Servo write-downs.

Whichever way you want to look at it, Phoenix remains a ‘business of three halves’. It’s hard to see any way forward with the ‘integration’ – indeed that should be put firmly into reverse. There is some hope for the two mainly mid-market focused units (Servo, BC) as that space remains fragmented. But with huge competitive pressures on its much larger IT services clients, Bertram’s real challenge lies with Partner Services.