Phoenix IT Group PLC
27 November 2006
27 November 2006
Phoenix IT Group plc
Interim results for the six months ended 30 September 2006
Phoenix IT Group plc ('Phoenix' or the 'Group') the UK IT services company,
announces its interim results for the six months ended 30 September 2006.
Highlights
• Group revenue and operating profit maintained despite significant changes
to a major contract in Phoenix IT Services
• Revenue of £54.4m (2005: £54.8m)
• Profit from operations of £9.7m (2005: £9.6m)
• Operating profit margin 17.8% (2005: 17.6%)
• Profit before tax of £9.2m (2005: £8.9m)
• Diluted earnings per share of 10.4p (2005: 10.1p)
• Cash generated by operations of £13.7m (2005: £14.9m) representing 141.5%
(2005: 155.3%) of profit from operations (see note 6)
• Net borrowings substantially reduced to £10.5m (2005: £23.4m)
• Interim dividend increased by 15.2% to 1.59p per share (2005: 1.38p)
• Continuing good growth in disaster recovery and business continuity market
• NDR contributed revenues of £9.2m (2005: £7.3m for the period post
acquisition from 19 April 2005 - 30 September 2005)
• NDR won its largest ever contract worth over £700,000 over three years
• Strong growth in order book - up 21.4% to £173.9m (2005: £143.3m) of which
34% is expected in FY 2008 and 19% in FY 2009
• Acquisition of Servo Computer Services Limited following period-end,
extending IT services offering
Commenting on these results, Nick Robinson, Chief Executive of Phoenix, said:
'Revenue and profit from operations were in line with management expectations
and were broadly maintained at the record levels achieved last year. The Group
remains highly cash generative and the underlying business continued to perform
well.
The Group operates in competitive markets where the highest standards of service
are demanded at increasingly competitive prices. Sales activity levels continue
to be buoyant throughout the Group and the sales pipeline has grown
significantly in the first half of the year, but there are still some delays in
contract commencements, particularly in Phoenix IT Services where there is often
an extended sales cycle. Against this market back-drop and the ongoing
reductions in our largest contract, we are pleased that our strategy of focusing
on complex IT services has enabled profits to be maintained and we are
particularly pleased with the performance of NDR.
We remain confident that our partners will seek to outsource more of their
activities, with new opportunities emerging out of the increased competition
from offshore players and a desire on the part of our partners to focus on core
activities. In addition, our continued expansion into the growing SME market
for managed services and outsourcing through NDR and our latest acquisition,
Servo, presents further opportunities for growth.
The high degree of visibility provided by the recurrent nature of the majority
of our revenues together with the levels of current sales activity gives us
continuing confidence in the performance for the year for the Group as a whole.'
Enquiries
Phoenix Tel: +44 (0)1604 769000
Nick Robinson Chief Executive Officer
David Simpson Group Finance Director
Financial Dynamics Tel: +44 (0)20 7831 3113
Giles Sanderson
Harriet Keen
Haya Chelhot
About Phoenix
Phoenix is a leading provider of a range of high quality IT support services,
including network and systems management, network services, service desks, field
services, professional services, and business continuity.
These services are frequently sold and delivered as a managed service where
Phoenix, in conjunction with a partner (Phoenix's partners include major IT
outsourcers and IT managed service providers in the UK), supports an end-user's
entire IT infrastructure rather than providing individual support services.
Phoenix's end-users are typically major UK corporations or government
organisations. In addition, Phoenix provides business continuity services,
including disaster recovery, through its stand-alone subsidiary Network Disaster
Recovery Limited ('NDR'). Since the period end, Phoenix has further expanded
the range of services it provides through the acquisition of Servo Computer
Services Limited, an independent provider of IT services and equipment primarily
to the UK small and medium enterprise ('SME') market.
The Group's services include the following:
Network and systems management Field services
• Monitoring, managing and administering local and • Over 600 permanently employed service engineers
wide-area voice and data networks through Remote provide support of desktop and server
Management Centres. infrastructure, 24 hours a day, seven days a week.
Network services Professional services
• Design, configuration, installation and support • Management and delivery of project
of voice and data networks in complex multi-vendor implementation, configuration and roll-out of
environments. partner-developed information technology solutions.
Service desks Business Continuity
• Dedicated call teams deliver first line support • Business continuity and disaster recovery
and guidance for end users, 24 hours a day, seven services and facilities covering all major
days a week. platforms across a wide range of vendors.
Overview
Group revenues and profits for the period were in line with management's
expectations. The results reflect the effect of the renewal of the Group's
largest contract, announced in January 2006. The changes to the scope of work
being delivered under the renewed contract together with revised pricing has, as
expected, substantially reduced its contribution to Group revenue and operating
profit in the six months to 30 September 2006. Results for the period also
reflect the loss by one of our partners of a significant contract with effect
from June 2006. Despite the impact of these two significant changes in contract
revenue as compared to the prior period, the Group has broadly maintained
revenues and profit from operations at the record levels achieved last year and
has continued to be highly cash generative.
Results
Group revenue for the six months to 30 September 2006 declined by 0.6% to £54.4m
(2005: £54.8m). However, the underlying businesses continued to perform well.
NDR contributed £9.2m (2005: £7.3m for the period post acquisition from 19 April
2005 - 30 September 2005) and continues to grow strongly in a buoyant disaster
recovery and business continuity market. Although Phoenix IT Services' revenues
declined by 4.6% to £45.2m (2005: £47.5m), revenues were maintained at the same
level as those achieved in the second half of last year.
Operating profit margins have remained strong throughout the Group. The
operating profit margin before amortisation of intangibles was 19.3% (2005:
19.4%). After amortisation of intangibles, Group operating profit margin
increased to 17.8% (2005: 17.6%).
Profit from operations increased by 1% to £9.7m (2005: £9.6m) and profit before
tax increased by 3.8% to £9.2m (2005: £8.9m). The tax rate of 31% is based on
the estimated annual effective rate applied to the profit before tax for the
period.
Diluted earnings per share increased to 10.4p (2005: 10.1p), and adjusted
diluted earnings per share excluding amortisation of intangibles (see note 5)
increased to 11.4p (2005: 11.2p).
The Group has maintained its close focus on working capital management and has
continued to be highly cash generative. The cash generated by operations (see
note 6) was £13.7m (2005: £14.9m), representing 141.5% of profit from operations
(2005: 155.3%). This decline from the previous year is due to the timing of
trade creditor payments around the period ends. Including obligations under
finance leases and hire purchase contracts, the net cash inflow for the period
of £7.7m improved the Group's net borrowings from £18.2m at the start of the
period to £10.5m at 30 September 2006.
The Group's order book increased by 21.4% to £173.9m (2005: £143.3m) of which
34% is expected in FY 2008 and 19% in FY 2009. Since 31 March 2006 the order
book has increased by 17% as a result of new contract wins and renewals of
existing contracts.
Dividend
The confidence in the long term growth prospects of the Group is reflected in
the Board's declaration of a 15.2% increase in the interim dividend to 1.59p per
share (2005: 1.38p per share) which will be paid on 2 February 2007 to
shareholders on the register at 12 January 2007.
Review of Operations
Phoenix IT Services
Despite the impact of the two significant changes in contract revenue from the
prior period, Phoenix IT Services maintained a similar financial performance to
that of the second half of last year. Substantial new contracts have been signed
or agreed in principle with a number of partners and it is particularly
encouraging that the Phoenix businesses, excluding NDR, have increased their
order book by 24.6% to £149.9m (2005: £120.3m).
We are confident that Phoenix IT Services is well positioned to maintain its
growth momentum by continuing to win both new customers and new contracts with
existing customers and by further development of new services. Phoenix IT
Services continues to develop new skills and services particularly in the UNIX
and storage environments and also continues to invest in Internet Protocol
Telecommunications ('IPT') skills supported by its involvement with a number of
high profile deployments through several partners.
The revised terms of the Group's largest contract (for desktop support services
to a UK Government Department) includes some phased unit price reductions
against certain activities in future years. This, together with an on-going
technology refresh programme within the Department, is likely to result in a
further reduction of revenue from this contract in the second half of the year
and during the next financial year
We remain confident that our partners will seek to outsource more of their
activities and in recent months we have seen strong evidence of a particular
desire to contract-out field services, driven by increasing competition from the
offshore players and a desire to focus on core activities, thus reducing
headcount. Phoenix IT Services is well placed to help its partners achieve their
goals in this area.
NDR
Our business continuity and disaster recovery ('DR') business continues to
deliver strong growth in both revenue and profit and we continue to look for
organic and acquisition opportunities to increase that rate of growth. NDR has
opened an East Midlands DR facility using an existing Phoenix building and the
expansion of the City of London DR facility will come on stream early in 2007.
It is pleasing to report that NDR won its largest ever contract in the period.
The contract has a value of over £700,000 over three years and covers DR and two
of NDR's newer services - consulting and remote real-time data back-up. This
contract was a landmark for NDR where the average contract size is £12,000 per
annum, and NDR is well positioned to win larger as well as traditionally-sized
contracts in the future.
Servo
The acquisition of Servo Computer Services Limited was completed on 3 November
2006 for a total consideration of £30.25m consisting of £28.0m gross (£25.6m net
of cash acquired) in cash and the issue of 708,103 ordinary shares in the share
capital of Phoenix. Immediately prior to the acquisition of Servo the Group
arranged an additional five year term loan with Bank of Scotland for £15.0m. The
loan carries an interest rate of 0.813% above LIBOR.
Servo is an excellent strategic fit with the Phoenix Group and the acquisition
will enable the Group to sell managed IT services into the SME market which is
considered to be one of the fastest growing segments of the UK IT services
market. Our immediate plans and longer term strategy for this business include
strengthening sales and marketing for managed services; broadening the service
offering; reducing product sales as a proportion of the whole from the current
levels of 48% of revenue and 11% of gross margin through increased service
sales; cross-selling of services between Servo's customers and NDR's broad SME
customer base; and, where appropriate, leveraging the Group's existing skills
and logistics resources.
Strategy
The Group's strategy is to focus on growth markets within the IT services sector
in the UK and within our chosen markets to deliver above market average organic
growth. Markets are chosen where we can derive high margins from them and
therefore they tend to be niche such as business continuity, IPT and complex
remote management using in-house developed software tools. Our chosen channels
to market are also niche: the partner model is widely recognised to be a
differentiator of Phoenix IT Services and competition within the SME market
place, where we recently acquired Servo, is highly fragmented. NDR's and Servo's
delivery of services directly to SME's does not conflict with or compromise our
existing relationships with partners or with the partner-focused model in
general. Phoenix IT Services continues to develop relationships with existing
and new partners and continues to win both managed service and single service
business.
On entry into a particular market, the Group ensures that high quality
management teams deliver the potential available in terms of both organic
revenue and margin growth. Our acquisitions are made to enable the Group to
enter new markets or provide new services which provide platforms for further
organic growth.
Employees
The Phoenix Group comprises knowledge and skills-based service businesses and
our success is dependent on the skills of our employees and their commitment to
the needs of our customers. We would like to take this opportunity to thank all
of our staff for their continued contribution to the success of the Group.
In view of the growth of the business, the Board has decided to recruit a Chief
Operating Officer to the Board and this process is well underway.
Outlook
The Group continues to operate in competitive markets where the highest
standards of service are demanded at increasingly competitive prices. Sales
activity levels continue to be buoyant throughout the Group and the sales
pipeline has grown significantly in the first half of the year. However, we
continue to see some delays in contract commencements, particularly in Phoenix
IT Services where there is often an extended sales cycle. Against this market
back-drop and the ongoing reductions in our largest contract, we are pleased
that our strategy of focusing on complex IT services has enabled profits to be
maintained and we are particularly pleased with the performance of NDR.
Taking into account current trading, the Board continue to have confidence in
the year as a whole.
Consolidated statement of income
For the six months ended 30 September 2006
Unaudited Unaudited Audited
six months six months year
to 30 to 30 to 31
September September March
2006 2005 2006
Note £'000 £'000 £'000
Revenue 2 54,443 54,751 108,919
Profit from operations before amortisation of intangibles 10,507 10,622 21,401
Amortisation of intangibles (812) (999) (1,998)
Profit from operations 9,695 9,623 19,403
Interest receivable 130 133 217
Interest payable (638) (905) (1,671)
Profit before taxation 9,187 8,851 17,949
Taxation 3 (2,848) (2,744) (5,365)
Profit for the period 6,339 6,107 12,584
Earnings per share
Basic 5 10.7p 10.4p 21.3p
Diluted 5 10.4p 10.1p 20.8p
All activity is derived from continuing operations
Statement of changes in shareholders' equity
For the six months ended 30 September 2006
Unaudited Unaudited Audited
six months six months Year
to 30 to 30 to 31
September September March
2006 2005 2006
£'000 £'000 £'000
Profit for the period 6,339 6,107 12,584
Exchange differences on translation of foreign operations
recognised directly in equity (8) 3 2
Total recognised income for the period 6,331 6,110 12,586
New share capital issued 2 4 4
Employee share options - shares to be issued 418 531 437
Share-based payments deferred tax reserve (12) (221) (308)
Share-based payments corporation tax reserve - - 313
Premium on issue of shares 269 237 292
Final dividends (1,642) (1,421) (1,421)
Interim dividends - - (818)
Net increase in shareholders' equity 5,366 5,240 11,085
Balance at start of the period 41,808 30,723 30,723
Balance at end of the period 47,174 35,963 41,808
Consolidated balance sheet
At 30 September 2006
Unaudited Unaudited Audited
30 30 31
September September March
2006 2005 2006
£'000 £'000 £'000
Non-current assets
Goodwill 57,820 58,544 57,820
Intangible assets 6,203 8,014 7,015
Property, plant and equipment 12,019 12,314 12,327
76,042 78,872 77,162
Current assets
Inventories 6,286 6,541 6,334
Trade and other receivables 19,691 22,686 21,618
Cash and cash equivalents 10,926 1,243 2,760
36,903 30,470 30,712
Total assets 112,945 109,342 107,874
Current liabilities
Trade and other payables (16,078) (19,452) (17,129)
Current tax liabilities (3,839) (3,436) (3,638)
Bank loans (4,000) (4,000) (4,000)
Obligations under finance leases and hire
purchase contracts (1,837) (1,624) (1,619)
Provisions (496) (450) (496)
(26,250) (28,962) (26,882)
Net current assets 10,653 1,507 3,830
Non-current liabilities
Bank loans (11,946) (15,915) (11,932)
Obligations under finance leases and hire
purchase contracts (3,649) (3,063) (3,381)
Deferred tax liabilities (921) (1,343) (1,123)
Provisions (865) (1,153) (741)
(17,381) (21,474) (17,177)
Deferred income
Due in less than one year (21,896) (22,778) (21,832)
Due after one year (244) (165) (175)
(22,140) (22,943) (22,007)
Total liabilities (65,771) (73,379) (66,066)
Net assets 47,174 35,963 41,808
Equity
Share capital 595 593 593
Share premium account 37,069 36,745 36,800
Other reserves 1,071 756 661
Retained earnings 8,439 (2,131) 3,754
Total equity 47,174 35,963 41,808
This interim financial information was approved by the Board of Directors on 24
November 2006
Consolidated cash flow statement
For the six months ended 30 September 2006
Unaudited Unaudited Audited
six months six months Year
to 30 to 30 to 31
September September March
2006 2005 2006
Note £'000 £'000 £'000
Net cash from operating activities 6 10,804 13,657 21,726
Investing activities
Purchases of property, plant and equipment (1,753) (1,203) (3,622)
Acquisition of subsidiary undertaking:
- Cash consideration - (28,825) (28,825)
- Costs of acquisition - (1,143) (760)
- Cash and cash equivalents acquired - 2,018 2,018
Net cash used in investing activities (1,753) (29,153) (31,189)
Financing activities
Dividends paid (1,642) (1,421) (2,239)
Repayments of borrowings - (19,875) (23,875)
Increase in/(Repayments of) obligations under
finance leases and hire purchase contracts 486 (305) (59)
New bank loans raised - 30,000 30,000
Issue of share capital 271 241 297
Net cash (used in)/from financing activities (885) 8,640 4,124
Net increase/(decrease) in cash and cash equivalents 8,166 (6,856) (5,339)
Cash and cash equivalents at beginning of the period 2,760 8,099 8,099
Cash and cash equivalents at end of the period 10,926 1,243 2,760
Notes to the interim financial statements
For the six months ended 30 September 2006
1. Preparation of the interim financial information
The Group's interim financial statements for the period ended 30 September 2006
were authorised for issue by the Board of Directors on 24 November 2006. The
interim financial information is unaudited but has been reviewed by Deloitte &
Touche LLP and their report is attached.
Phoenix IT Group plc prepares its Annual Report and Accounts on the basis of
IFRS as adopted for use by the European Union. The financial information
presented in this Interim Report has been prepared in accordance with the
accounting policies expected to be used in preparing the 2007 Annual Report and
Accounts which do not differ significantly from those used in the preparation of
the 2006 Annual Report and Accounts. The Group has elected not to adopt IAS 34
- Interim Reporting early.
This interim report does not constitute statutory accounts of the Group within
the meaning of section 240 of the Companies Act 1985. Statutory accounts for the
year ended 31 March 2006 have been filed with the Registrar of Companies. The
Auditors' report on those accounts was unqualified and did not contain a
statement under section 237 of the Companies Act 1985.
2. Geographical analysis
Substantially all of the Group's operations are based in the UK. A small part
of the operations are undertaken in France, however this is immaterial to the
operations of the Group as a whole. There is only one class of business activity
undertaken by the Group, being the provision of IT services.
3. Taxation
The Group tax charge represents the estimated annual effective rate of 31%
(2005: 31%) applied to the profit before tax for the period. The interim period
is regarded as an integral part of the annual period and all tax liabilities are
disclosed as such.
4. Dividends
Unaudited Unaudited Audited
six months six months Year
to 30 to 30 to 31
September September March
2006 2005 2006
£'000 £'000 £'000
Amounts recognised as distributions to shareholders in the year:
Final dividend for the year ended 31 March 2006 of 2.76p
(2005: 2.4p) per share 1,642 1,421 1,421
Interim dividend for the year ended 31 March 2006 of 1.38p
(2005: nil) per share - - 818
1,642 1,421 2,239
Proposed final dividend for the year ended 31 March 2006 of 2.76p
(2005: 2.4p) per share - - 1,638
Proposed interim dividend for the year ended 31 March 2007 of 1.59p
(2006: 1.38p) per share 944 818 -
944 818 1,638
The proposed interim dividend for the year ended 31 March 2007 is subject to
approval by the Board and has not been included as a liability as at 30
September 2006.
5. Earnings per share
Unaudited Unaudited Audited
six months six months Year
to 30 to 30 to 31
September September March
2006 2005 2006
Adjusted Earnings per share excluding amortisation of intangibles
Basic 11.6p 11.6p 23.7p
Diluted 11.4p 11.2p 23.1p
The calculation of the basic and diluted earnings per
share is based on the following data:
Earnings £'000 £'000 £'000
Earnings for the purposes of basic earnings per share
and diluted earnings per share being net profit attributable
to equity holders of the parent 6,339 6,107 12,584
Amortisation of intangibles 812 999 1,998
Tax on amortisation of intangibles (244) (300) (599)
Earnings for the purposes of adjusted basic earnings per
share and adjusted diluted earnings per share being net
profit attributable to equity holders of the parent
excluding amortisation of intangibles 6,907 6,806 13,983
Number Number Number
Number of shares 000's 000's 000's
Weighted average number of ordinary shares for the
purposes of basic earnings per share 59,414 58,897 59,078
Effect of dilutive potential ordinary shares:
Share options 1,353 1,691 1,378
Weighted average number of ordinary shares for the
purposes of diluted earnings per share 60,767 60,588 60,456
6. Notes to the cash flow statement
Unaudited Unaudited Audited
six months six months Year
to 30 to 30 to 31
September September March
2006 2005 2006
£'000 £'000 £'000
Profit from operations 9,695 9,623 19,403
Adjustments for:
Depreciation of property, plant and equipment 2,061 1,871 4,044
Amortisation of intangibles 812 999 1,998
Loss on disposal of property, plant and equipment - - 74
Share option costs 418 531 437
Exchange difference (8) 3 2
Operating cash flows before movements in working capital 12,978 13,027 25,958
Decrease/(increase) in inventories 48 (270) (63)
Decrease in receivables 1,928 1,392 2,459
(Decrease)/increase in payables (1,373) 1,930 494
Increase/(decrease) in deferred income 133 (1,131) (2,066)
Cash generated by operations 13,714 14,948 26,782
Income taxes paid (2,861) (974) (3,534)
Interest received 130 133 217
Interest paid (179) (450) (1,739)
Net cash from operating activities 10,804 13,657 21,726
Additions to fixtures and equipment during the period amounting to £1,432,000
were financed by new finance leases and hire purchase contracts.
7. Reconciliation of net borrowings
Unaudited Unaudited Audited
six months six months Year
to 30 to 30 to 31
September September March
2006 2005 2006
£'000 £'000 £'000
Increase/(decrease) in cash and cash equivalents during the period 8,166 (6,856) (5,339)
Movement in borrowings (500) (9,668) (5,998)
Borrowing of business acquired - (14,846) (14,846)
Movement in net borrowings during the period 7,666 (31,370) (26,183)
Net (borrowings)/funds brought forward (18,172) 8,011 8,011
Net borrowings carried forward (10,506) (23,359) (18,172)
Cash and cash equivalents 10,926 1,243 2,760
Other current borrowings (5,837) (5,624) (5,619)
Non-current borrowings (15,595) (18,978) (15,313)
Net borrowings carried forward (10,506) (23,359) (18,172)
8. Events after the Balance Sheet date
On 3 November 2006 the company acquired 100% of the share capital of Servo
Computer Services Limited for a total consideration of £30.25m, consisting of
£28m in cash and the issue of 708,103 ordinary shares in the share capital of
Phoenix IT Group plc. A new 5 year bank loan for £15m was secured prior to this
acquisition increasing the total facilities to £51m. The additional loan
carries an interest rate of 0.813 % above LIBOR.
Independent review report to Phoenix IT Group plc
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 September 2006 which comprises the income statement,
balance sheet, statement of changes in shareholders' equity, cash flow
statement, comparative figures and related notes 1 to 8. We have read the other
information contained in the interim report and considered whether it contains
any apparent misstatements or material inconsistencies with the financial
information.
This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures are consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 September 2006.
Deloitte & Touche LLP
Chartered Accountants
London
24 November 2006
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