K3 issued a pre-tax profits warning this morning, citing a drop in retail sector business and investment in its global retail Microsoft AX-based solution as the reasons why it will come in below market expectations over the full year (to June 30 2013). The early warning signs have been there for some time, from the for sale/not for sale switch (see here), to the pre-AGM statement in December that warned of trading environment difficulties leading to deferred spending (see here).
CEO Andy Makeham told us that three already deferred deals that were expected to close in December 2012 have rolled into H2. There is no certainty that they will come in by June (and even if they did they would not generate service revenue in the period), hence the warning. There are no indications that the prospects are buying elsewhere though. As he pointed out, the combination of slow sales due to overall problems in the retail sector (witness Jessops, HMV, Blockbuster), plus higher costs as the company invests to extend the AX platform with its own IP and adds AX resources (c26 AX developers/consultants on staff vs c2), have resulted in a double hit. While development of the AV platform is marginally behind schedule, the vast majority of the problem has been caused by the hiatus in UK retail sector spending. With the exception of the UK and Dutch retail aspects, business in other areas of K3’s operations, and international sales, are strong says Makeham.
We fear that problems could extend into the next financial year given the state of the retail environment in general. And although K3’s early AX extensions are emerging and the company has a few customers implementing and lined up, it will be a year before the complete offering is available. While the pipeline has grown from around £9m a year ago, to c£16m six months ago and now stands c£27m, it could be hard work converting them in the current environment. Meanwhile K3 is pushing ahead, accelerating investment to get the full suite to market and focussing on the retail segments that are still performing, like the discount retailers and pawnbrokers.