With stock markets in turmoil, this really was not the best day to (in effect) issue a profit warning. We take little joy in saying “we told you so” back in February (see Logica UK yet to claw back share), and then again in March (see Logica’s margin challenge), when we described the huge mountain that the UK’s largest IT services pure-play, Logica, had to climb if it were to meet CEO Andy Green’s forecast of “modest margin improvement” in 2011 (and, by the way, double-digit margins medium-term), a position reiterated in May (see UK, Benelux mar pleasing Q1 growth at Logica).
But with H1 operating margins down 80bps yoy to 4.2% (or by 1 point to 5.7% 'adjusted’), Green now advises that “Margin improvement (is) now dependent on progress in the Benelux”.
We think it’s not just down to Benelux, where ‘real’ profits (excluding a pension gain) were almost wiped out at the halfway stage. Sweden was also in trouble, with ‘adjusted’ operating margins almost halving to 3.0% due to “(outsourcing) transition costs”, sending Sweden into a ‘real’ £2m loss.
And on our home turf, UK operating margins almost halved to 3.6% including restructuring costs (we do applaud Logica’s practice of including restructuring charges ‘above the line’). But even excluding restructuring costs, UK margins still lost 60bps. Revenues also fell, by 2% to £361m, (though grew a tad in Q2), ceding UK share to major European IT services rivals.
Margins were also down in both of Logica’s core service lines, with Consulting & Professional services at 5.3% (H1 10: 6.8%) and Outsourcing at 6.2% (H1 10: 6.5%).
Margin improvement in Logica’s other geo units, including France, was simply not enough to fix the multiple profitability problems.
Oh – and top line revenues grew by 7% (5% like for like) to a few bob under £2b. There - some good news.
There’s a huge amount of stuff to digest from this morning’s report, and I will bring TechMarketView subscription service clients more after I speak with management. Logica’s shares are already down 18% as I write, far more than peers even on as bleak a market opening as today’s.