More gloom for IT services By Maija Pesola and Fiona Harvey Published: August 17 2000 07:43GMT | Last Updated: August 17 2000 11:42GMT

Prospects for the European IT services market worsened on Thursday as Computacenter of the UK reported a halving of interim profits and Getronics, Europe's third largest IT service provider, said it would not reach operating margin targets on schedule.

Computacenter, which had issued a profits warning in June, on Thursday revealed that pre-tax profits for the first half of 2000 were #21.2m, about 48 per cent lower than the same period last year.

The profits did not take into account investment in Biomni, the company's e-commerce joint venture, which the company said had cost it #2m.

Group turnover for the first half was #926.7m, a 2.4 per cent increase on the same period last year. Diluted earnings per share fell to 7.1p from 14.6p last year.

Computacenter, which helps companies install and design computer systems, said IT spending by corporate customers, which had been curtailed in the run-up to the turn of the millennium, had been slower to recover than expected.

Getronics, the Amsterdam-based company, also blamed this slow-down in demand for lowered expectations on Thursday. The company warned that it might not reach its operating margin target of 9 per cent until 2003, a year later than planned.

Getronics reported first-half profits before interest, tax and amortisation of E113m, a 4.6 per cent rise on the same period last year.

Revenues rose 60 per cent to E1.91bn, but this included sales at Wang Global, the US-based company that Getronics bought for $1.8bn last year. On a comparable basis revenues fell.

Shares in Getronics fell 12.3 per cent to E15 in Amsterdam on Thursday morning, while in London Computacenter's shares fell 14.8 per cent to 362p.

The results came in the same month that ICL, the computer services company owned by Fujitsu of Japan, cancelled a public offering of shares. The move was seen as a sign of general distress in the traditional IT services sector, as clients shift their focus towards internet and e-commerce activities.

Mike Norris, Computacenter's chief executive, said the poor results for the first half of the year had been "a hiatus, not a fundamental shift in the business".

"While growth rates will not return to what we saw in 1998 and 1999, the long term prospects are good," he claimed.

Mr Norris pointed to several major contracts that the company won recently, which would roll out in the second half of the year, including a 35,000 PC deployment at BP and an 8,000 PC deal at an unnamed major high street bank.

Mr Norris predicted further consolidation in the IT services market. "We are better place to be a predator than prey," he added.

The company acquired Inacom, a Belgian rival in June, and also recently set up Biomni, an e-commerce joint-venture with Computasoft e-Commerce.

More acquisitions would be possible as the company's cash flow had remained strong. The first-half results showed net funds after capital expenditure, investments, tax and payment of the 1999 dividend increasing to #26.3m from #5.2m.

http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3OKNP30CC&live=true&tagid=ZZZC00L1B0C&subheading=information%20technology

-- Martin Thompson (mthom1927@aol.com), August 21, 2000

Answers

Computacenter Carnage By Maynard Paton (TMFMayn)

Carburton Street, London -- With the benefit of hindsight, the share prices of certain IT companies were always going to be under pressure during 2000. The Y2K-inspired industry slowdown combined with heady stock market ratings was always going to be a recipe for a few investment horror stories.

Few IT tales of Y2K-woe match that of Computacenter's (LSE: CCC). Like many other operators within the sector, Computacenter has been caught out by the delayed recovery after the Millennium "freeze". And if, like Computacenter, you're primarily a commodity reseller of hardware operating on wafer-thin margins, then the customer delays have been all the more painful.

Idle hands...

Today, Computacenter announced their results for the six months to 30th June 2000. The numbers graphically represent how Computacenter's clients firmly kept their wallets zipped. A lower demand for certain project work equated to many an idle, and costly, Computacenter staff member.

Six months to 30/06/2000 30/06/1999

Turnover (#m) 927 905 Operating Profit (#m) 21 40 Earnings per share (p) 7.5 16.2

The near-term shortfall in profits was flagged in a June trading update. Computacenter's profit pain has been adequately reflected in the share price. After their peak at 1502p in February, the company's shares have since slumped 75%. After shedding 63p this morning, the shares now languish at 362p.

Foolish opinion

It's interesting to revisit the Foolish comments I wrote when Computacenter announced their full-year results last March. Back then, I remarked:

"At 1415p, the shares trade on a rather demanding multiple of 46 times the earnings announced today. With only 6% earnings growth forecast this year, rising to a 20% growth in 2001, a fair bit of Computacenter's future is factored into today's price... Buying a long-term growth company, with the stock market expecting a very rosy future, requires a lot of belief in the company's future"

Given the company's distinguished long-term record, never did I think I would see Computacenter's shares collapse by so much in such a short space of time. Yes, they were overvalued in March, but has the stock market overreacted to the disappointing performance?

Deja vu

So, is now the time to buy? Possibly. Included within the Foolish annual results commentary were these slightly phrophetic words:

"With hindsight, the time to have bought Computacenter was when investors were fretting over Y2K last year, and frantically selling the stock down to under 400p. Buying a long-term growth company undergoing a temporary blip can make for a great investment."

That situation looks familiar. Now investors are currently fretting about post-Y2K implications and, indeed, are frantically selling the stock down to under 400p. Although Computacenter is widely recognised as one of the industry's better operators, the company's ultra- competitive marketplace does give me a little concern over the group's long-term profit predictability.

Annualising today's results puts Computacenter on a prospective price to earnings ratio (P/E) of 24. But with Computacenter warning that a full Y2K recovery continues to be delayed, it remains too early for those hunting a turnaround to consider Computacenter and its "temporary blip".

http://www.fool.co.uk/news/foolseyeview/2000/fev000817b.htm

-- Martin Thompson (mthom1927@aol.com), August 21, 2000.