K3Business Technology Group warned of a full year profits miss earlier this year (see here) and today’s H1 results provide insight into what is happening within the business which has been hit by a double punch – falling sales in the retail sector and an increase in costs as K3 invests in its Microsoft Dynamics AX IP and Managed Services.
For the six months to December 31 2013 revenue fell 5% to £31.55m, and that includes £6.08m of revenue from previous year acquisitions. Recurring revenue was up 3% to £17.6m and 56% of group income. It was not enough to cover the cost of increased investments but does provide some forward visibility and if it continues to build will provide a bigger buffer against downturns. The impact on profits was clear to see with profit from operations slumping from £4.66m to £0.62m, while PBT dropped from £3.98m to just £0.19m.
Performance was mixed across the divisions. Microsoft was the weakest due to the retail market slump, plus extensive investment in AX for Retail - £2.15m net costs. Revenue fell by 30% with adjusted loss from operations of £1.26m vs. a year ago profit of £1.52m. SYSPRO and Sage fared best in terms of recurring revenue and cash with revenue up 6% and adjusted profit from operations marginally higher yoy at £4.11m (vs. £4.07m). Previous year acquisitions contributed £3.0m and £0.62m respectively. The International division was negatively impacted by a slowdown in the Dutch market. Managed Services is drawing in revenue but not at a rate to offset lower prices points for some services and an increase in costs due to investment. The result was that although revenue was up a respectable 18%, the adjusted loss from operations was £0.16m (vs. a profit of £0.09m).
It is clear H1 has been a tough period. Although the strategic review and sales process of the past 12 months has been a distraction, there are other reasons for the drop in performance. We will be speaking with management later to get more colour on the results.
