BCX sees profit

Johannesburg, 16 Aug 2006

Despite a slower second half and pressure on margins, the full-year has seen an increase in profit, a trend expected to continue as further business units come on stream, says JSE-listed outsource ICT services provider Business Connexion (BCX).

In the company`s results for the year ended May, it says revenue growth in the second half the year slowed. However, year-on-year revenue growth was 14%, taking revenue to R3.2 billion from R2.8 billion the previous year.

The first six months of the year saw revenue grow by 25% to R1.7 billion. However, revenue in the second half slowed as a result of a "relatively flat local outsourced ICT services market devoid of any major contracts".

Commenting on the results, CEO Peter Watt says they are satisfactory under the circumstances, but the second half was slower compared to a promising first half.

"We continued to benefit from the major 2005 new business gains in the first half, and responded to several major new tenders in the second six months, none of which were awarded. These high profile tenders absorbed enormous financial and technical resources and it was disappointing to see them recalled," he notes.

"The skills shortage in the local ICT sector continued to worsen and we had to compete in an increasingly competitive local market for technical expertise. This also put pressure on our operating expenses," he adds.

However, the next year should see benefits accruing from recent investments. Watt says the investments in the new data centre, the Business Connexion Communications acquisition, and the internal implementation of SAP, are expected to yield benefits.

"We expect to better contain operating expenses while continuing to grow revenues in all areas of our business," he says.

Margin pressure

In its commentary on the results, published on the JSE news service Sens on Wednesday morning, BCX said it experienced a "significant increase in cost levels, both operating costs and those included in cost of sales". BCX also commented that margins had been under stress as a result of pricing pressure from its customers.

Its operating profit, which was down about 15%, was weighed on by the "high cost" of tendering for long-term contracts, it said. Operating profit fell to R143.8 million, compared with R185.1 million in 2005.

In addition, the expenses associated with internal projects such as internal restructuring, the implementation of SAP and the construction of the new R143 million data centre, increased costs.

The new data centre, however, was completed on time and the transition from the old data centre to the new buildings is under way. "Good progress was also made with our new data centre which was completed on time and is already housing its first clients. We expect to move all our clients to the centre by the end of October this year," Watt says.

As a result of these costs, operating expenses rose 16% to R767.3 million, compared with R663.4 million the previous year. However, some of these costs are once-off items and are not expected to be repeated in future.

These expenses weighed on headline earnings per share (HEPS), which were down 12% on the previous year at 45.6c. "HEPS in 2005 of 70.6c was not strictly comparable with 2006, as it included income from associates which were sold during the past year and the financial effects of the SARS trademark settlement," the company stated.

The 2006 HEPS figure was also reduced by the payment of secondary company tax on the group`s 37c dividend in 2005. On a comparable basis, HEPS decreased by 11%.

Some R106.3 million was generated by the company`s operations, leading to cash reserves of R743.3 million, despite capital expenditure of R196 million. As a result, the board declared a dividend of 15c a share.

Revenue from operations on the continent increased by 20%, but collectively these were unprofitable. "Cost savings were identified and implemented at year-end, which will have a beneficial effect in the new year," said the company.