Thursday, 30 April 2009

Logica, Capgemini update

(By Anthony Miller – Thursday 30th April 2009 5:30pm). There were differences in nuance between the two company concalls (see Logica, Capgemini signal gloomy first-half) but the other strong common thread was the laying off of contractors, in effect moving the bench offshore. However, the net growth in offshore headcount in both firms was pretty muted (c. 150) though of course the number of gross offshore recruits would have been higher to replace staff lost through attrition. Though I would have liked to see a faster transition, Andy Green made the valid point that you can’t cut contractors off just like that for fear of damaging customer relationships, plus of course there’s the additional overhead of training up the replacement full-timers stepping into the contractors’ shoes. But this really just begs the question as to why Logica (in particular) didn’t accelerate offshore transition much earlier, notably B.G. (Before Green)?

Warning from Sanderson

(By Richard Holway 9.00am 30th Apr 09) Sanderson has issued a profits warning this morning. Revenues for the 6 months to 31st Mar 09 will be c3% but operating profit has been halved to c£1m. As well as the current economic conditions, Sanderson has seen a change in its mix away from larger, more profitable own-label software. Sales to manufacturing and smaller retailers have also suffered.

On a brighter note, the cash is still coming in and debt servicing (c£10m now compared with £11.7m in Sept 08) is on track.

Sanderson shares are down another 10% at 9.5p on this news. That gives them a market valuation of just £4.1m. Sanderson had revenues of £26m in FY08. All this is a far cry from the 50p IPO price back in Dec 04. Sanderson is one of those companies that really should form part of someone's consolidation exercise. If the price keeps falling, the odds on this happening just increase. But, of course, the price will not exactly be comforting for the long term loyal shareholder base.

Logica, Capgemini signal gloomy first-half

(By Anthony Miller – Thursday 30th April 2009 7:30am). Though both Logica and Capgemini reported Q1 revenues pretty much flat yoy on a like-for-like basis, they also signalled deteriorating market conditions that would see first-half revenues show a slight decline. Unlike Cap, Logica also ventured to take a peek at the rest of the year, expecting second-half revenues in line with first-half, and full-year margins (less nasty bits) at least flat yoy. Cap expects no more than a 1% drop in H1 margins.

The ‘compare and contrast’ on a geographical basis shows quite significant differences between the two players (all percentages like-for-like). In the UK, Logica grew revenues 4% to £182m but clearly lost share to Cap, with 7% growth to €456m (say £415m). Logica also lost share to Cap in the Benelux region (which in Logica’s case curiously excludes the ‘Lux’ bit leaving, I guess, just ‘Bene’), with revenues slumping 11% vs less than 1% decline for Cap. Logica has been giving Bene a lot of therapy recently to manage down the cost base, chopping out contractors and announcing 300 employees are to lose their jobs. The Netherlands has a much higher skew towards time-and-materials work than the UK. Logica outgrew Cap in France (+2% vs -1%) but not in Germany (-8% vs -2%).

But both companies were in lock-step on where the growth was coming from – outsourcing – much more so for Logica (+9%) than Cap (+1%), though Cap did better in the other service lines (-1%) than Logica (-4%). Logica added just 150 to its ‘offshore and nearshore’ headcount since the end of the year – now 5,150. They will ‘prioritise’ offshore recruitment as onshore recruitment declines. That makes the 8,000 headcount target CEO Andy Green set last year look a little challenging now. Cap also appeared to add about 150 heads offshore (Asia/Pac) but their tally stands at 22,200.

Anyway, there’s a heap of data to sift through and a couple of concalls to listen to, so I hope to bring you an update late today.

Wednesday, 29 April 2009

Firstsource - an ‘unusual’ BPO suspect

(By Anthony Miller – Wednesday, 29th April 2009 10:30pm). One of the lesser known India-based BPO players also reported its FY results today (Wednesday), Firstsource. First who? Actually, they started life as ICICIOneSource, a BPO ‘captive’ for ICICI, India’s second largest bank. When I say captive, it would more appropriate to say BPO venture, as OneSource did precious little work for its parent bank. It changed its name to Firstsource in November ’06 and listed on the Mumbai stock exchange. ICICI Bank still owns 27% of the stock, while US banking software player Metavante, which recently announced it is to be acquired by Fidelity National Information Services, owns 20%. Metavante was reportedly trying to sell its stake in Firstsource last September.

I only mention all this because Firstsource plays over here in the UK, mainly in Telecomms/Media and BFSI. Firstsource turned over about $375m in the year to 31st March ’09, and 26% of this was generated from UK customers, albeit down from 35% the prior year. I reckon that puts Firstsource’s UK revenue run rate somewhere in the £50-60m p.a. bracket which certainly puts it on the local radar. It’s been a fair while since I met management so it seems about time I should renew the acquaintance.

LinkedIn

(By Richard Holway 4.00pm 29th Apr 09) On Tuesday I met with Reid Hoffman – founder of LinkedIn – at the Guardian’s HQ at the invitation of my friend Sherry Coutu who sits on their advisory board.

Although I have had my profile on LinkedIn for some considerable time, I’ve made little use of it. In preparation for the meeting, I decided to compare my Outlook contact list with those already on LinkedIn. I was amazed to add about 300 new connections! That’s c20% of my business contacts.

I was equally impressed at the response I got to my request for your comments on LinkedIn. Clearly LinkedIn is well established amongst our readership.

Recruitment goldmine
However, the feedback from our readers is far from positive. It appears that the real value most see is the database of profiles. Indeed, I was impressed with how many of the most senior CEOs in our sector had full LinkedIn profiles thus providing a goldmine for recruiters. Are they all wary of losing their jobs? Indeed, it appears that ‘recruitment’ is the key use of LinkedIn. Either to identify and approach people to hire or to make sure you are seen to be ‘available’. Indeed Hoffman stressed the importance to many of having a Public Profile. (It’s interesting that many of you expressed to me that that was exactly what you didn’t want! Maybe that’s an age thing?)

Of course, this is where some organisations are a bit fearful of LinkedIn. It was interesting last night that Hoffman mentioned several times that LinkedIn would never produce ‘organigrams’ – even though they could. Clearly, many enterprises think that’s a step too far!

Profitable
Unlike other Web 2.0 enterprises, Hoffman told me that they have been profitable for the last two years. The main part of the revenue comes from subscriptions with recruiters topping the customer list. Advertising is a minority source. Hoffman is now concentrating on building market share. Just like in the dot.com era, clearly eyeballs still determine your exit valuation!

Disappointments
If LinkedIn is going to really take off, it has to be more than a recruitment goldmine. For example, that’s not an area that greatly interests me. Here, many readers are less impressed. Those that thought it might be a business social network are disappointed. LinkedIn’s status reports are not a patch on Facebook or Twitter. There is no real incentive to use LinkedIn for email. Even Hoffman suggested I emailed him rather than messaging him on LinkedIn. Connecting with others requires an ‘introduction’. Many of you expressed reluctance at doing that.

Groups
I think the LinkedIn Groups feature has great potential. But it has to be used correctly. Many of you hated the current unregulated groups where anyone could join. But I do see potential in private employee networks (internal and/or external) administered by LinkedIn. Indeed, many have suggested we start a LinkedIn closed group for TechMarketView subscribers. What do you think?

Answers
Hoffman made great play of LinkedIn Answers. So, in the interests of research I have just posed a question on LinkedIn. I thought the process was clunky. I could only ask 200 connections and I had to select them all individually. But I’ll report on the answers in a subsequent post. As Hoffman himself said last night, whether these answers will provide “The Wisdom of the Crowds” or the “Stupidity of the Masses” we will see!

Dangers
One of the other attendees last night commented that LinkedIn was like a Rolodex. She added that when staff left they used to take their Rolodex with them. So the company invested in expensive CRM systems to ensure that the network belonged to the company – not the individual. Now LinkedIn was turning the clock back. One of the principles of LinkedIn is that the network created belongs to the person – not the company.

Conclusion
I was greatly impressed with Hoffman. A really likeable guy – not always the case with rich, successful silicon valley types! I am genuinely interested in the enterprise uses and benefits (or even disadvantages!) of using social networking – as I know many of our readers are too. I’m sure this will not be my last post on the subject.

Y

(By Richard Holway 12.00pm 29th Apr 09) As readers know (indeed I have had much feedback) I have been pondering seriously whether the current economic downturn is U or L shaped.

So, on a more light-hearted note, I was intrigued by the article in the FT yesterday which suggested we Take comfort in a Y-front recession.

I quote: "According to Debenhams, sales of Y-fronts have risen by 35 per cent since the downturn began, overtaking boxer shorts for the first time since the 1990s recession – attributed to the “greater sense of security” they provide. Instead of worrying about whether this will be a U-, L- or W-shaped recession, we can call it the Y-front recession."

Sorry to bring a note of levity into such a serious discussion!

Internet World Looks to Social Software to Boost the Market

(By Philip Carnelley 11.00am 29th Apr 09) Yesterday I visited the Internet World exhibition at Earls Court which runs for 3 days until Thursday. The name is slightly misleading: it’s really an online marketing show, with oodles of companies (around 300) who help businesses with their web – and mobile – sales and marketing. They run from marketing agencies with whacky names like Lost Ferret, Chillifish and Punkyduck through core software companies like Autonomy-Interwoven to hosting companies like iomart.

A few themes struck me.

First, that many companies are willing to spend on marketing through technology to get them through the recession. No-one’s saying it’s a panacea, but pre-registrations for the show were up on last year, and the organisers tell us that the related TFM&A (Technology for Marketing and Advertising show) they held a couple of months back had attendance up 20% on last year. That said, some exhibitors thought it was a bit quiet on the first day, although many seminars were standing room only.

Second, that mobile marketing is of even more interest than straight web sales and marketing – at least if the number of exhibitors is anything to go by. Many companies of course are looking for blended approaches to online.

Third, that surely this is an area ready for a shakeout. Perhaps it’s a sign of its immaturity and rapid evolution but there seem to be a lot of companies who are so similar in their offerings that commercial pressures must be intense. There are many new entrants, from as far afield as Latvia and Bulgaria as well as many British companies – the market can only stand so many. The most obvious example is companies offering domain name registration. There can be few more ‘commoditised’ services than that.

And, finally, the most striking theme is that social software continues to intrigue businesses as a potential tool. There were many seminars with a social software slant. Innovation continues, such as Jadu, a web content management suite which can now manage Twitter messages alongside other stuff. But still companies struggle to understand how best to use social software. The organisers tell us that one of the most keenly-awaited seminars is a session on using Twitter for business benefit, with panellists from Carphone Warehouse and others.

As a footnote, apparently quite a few visitors have been drawn to register for the event – even from overseas – at least in part because it offers “Tweet-Ups” – a chance to meet face to face those you have been ‘tweeting.’ Strange but true.

NotePhilip Carnelley joined us this month as an Associate. You can read his biog here. We will be running occasional HotViews posts from our Associates in the future.

Another tough quarter for Unisys

(By Anthony Miller – Wednesday, 29th April 2009 11:30am). It’s hard to find any rays of sunshine in Unisys’ Q109 results, though the boost in cash flow from the latest restructuring programme is welcome news. Nonetheless, revenues fell again in the quarter, down 5% constant currency (ccy) to $1.1bn. Services revenues, almost 90% of the total, fell 2% ccy, but services margins rose 40bps yoy to 2.7% as cost reductions kicked in. Services orders were badly hit by the same decline in outsourcing megadeals noted by sourcing advisors TPI and indeed by many players (e.g. see HCL update), leaving Unisys’ services order backlog down 6% to $5.7bn.

When I met Unisys UK MD, Duncan Tait earlier in the year (see Unisys UK sees silver lining on banking clouds) it appeared to me that the UK business was in relatively better shape given its skew towards outsourcing, BPO and public sector. I’ll see if I can glean any new insights as to how it’s all going.

Grim quarter for private equity deals

(By Anthony Miller – Wednesday, 29th April 2009 9:45am). After a suprise rise in UK tech sector VC investment in Q4 last year (see Surprising rise in UK VC tech funding) it all went horribly pear-shaped in Q109. Latest figures from Ascendant Corporate Finance show the aggregate value of tech VC investments in UK & Ireland fell to £114m, the lowest level since Q405 and almost 70% down on Q108. Deal flow (over £500k) fell 39% to 44 transactions. The primary subsectors of investor interest were Software, Cleantech and Internet/Wireless, though the latter was also among the worst hit in terms of value of investment. There were no deals larger than £11m, way down from Q108 (£50m for Spinvox).

There was also a substantial shift in the participants; private investors participated in 30% of completed deals, up from 19%. Top investors included regional development boards, e.g. Enterprise Ireland, Scottish Enterprise, South Yorkshire Investment Fund.

Lots more on this in IndustyViews Private Equity in May.

SAP sticks to FY guidance

(By Anthony Miller – Wednesday, 29th April 2009 9:30am). Though SAP’s Q1 software licence revenues fell 33%, software and related services revenues remained pretty much flat as reported, and ‘only’ down 4% in constant currencies. In other words, it was support revenues, now 52% of SAP’s total revenues, that kept the ship afloat, up 18%. Management stuck to its prior 25% FY margin guidance, having previously given up trying to predict revenues. No real surprises here. I’m curious to hear what they think of Oracle’s acquisition of Sun and will tune in to this afternoon’s concall to find out!

Offshoring now 20% of Harvey Nash’s profit

(By Anthony Miller – Wednesday, 29th April 2009 9:00am). We’ve written many times about recruitment firm Harvey Nash’s Vietnam-based offshore development centres, especially its landmark €54m deal with Alcatel-Lucent last November (see Harvey Nash wins its biggest outsourcing contract with Alcatel-Lucent). I’ve just been speaking with CEO Albert Ellis, who told me that offshoring is now contributing 20% of group operating profit, with new clients coming on board, mostly as sell-throughs from its core recruitment businesses.

Harvey Nash had a cracking year last year (to 31st January ’09 - see here) with reported revenues up 32%, but a slight trimming of operating margins down 20bps to 2.5%. On a constant currency (ccy) basis, profits grew 10% and so it’s fair to assume revenues grew pretty much in line ccy, a very pleasing result in such a difficult recruitment market, especially as it’s virtually all organic. The strongest sectors were Healthcare, Pharma and Telecoms, though Ellis told me that demand for interim management specialising in turnarounds, restructuring and M&A is also pretty buoyant, notably in the Utilities sector. As other players are also finding, permanent recruitment is just horrible. So far this year, only 29% of Harvey Nash’s net fee income (NFI – essentially gross profit) came from perm, compared to 43% last year.

Ellis has a cautious view on market outlook very much in tune with ours. He doesn’t believe the ‘green shoots’ story is sustainable and is operating the business with the expectation that perm recruitment may not pick up again for another couple of years. To my mind, this is what makes Harvey Nash’s move into offshore services such a shrewd idea.

Services drives Computacenter's growth

(By Anthony Miller – Wednesday, 29th April 2009 8:30am). Although its products business has been “challenged” this year, Computacenter’s services business has marched forwards in all geographies. In today’s IMS (see here) Computacenter reported 6% UK services revenue growth against a 12% overall revenue decline. Germany and France showed similar trends, with 4% and 13% services revenue growth respectively (at constant currency) against a 1% and 8% total revenue decline (also ccy). This will surely push services gross profit closer to – if not above – the 50% level (see Services nearly half of Computacenter’s gross profit). It looks to be a tough Q2 as well, with revenues down yoy so far, although the later Easter was mostly to blame.

I met up with CEO Mike Norris very recently and he put me straight on the role services plays in their go-to-market. I understand that well over 50% of Computacenter’s business is services-led, with product resale increasing playing the role of ‘add-on’ business. This is a terrific result and shows the pay-off of ‘sticking to the knitting’ with infrastructure-related services offerings. I’ll also be meeting next week with Mark Howling, formerly Digica’s CEO (see Farewell to Digica) and now in charge of all of Computacenter’s UK services and solutions business, so hope to bring you more then.

Tuesday, 28 April 2009

Mindtree eyes a billion – from a distance!

(By Anthony Miller – Tuesday, 28th April 2009 9:00am). Somewhat overshadowed by Tech Mahindra’s results (see below), much smaller Bangalore-based SI, Mindtree, also reported its Q4 and FY results (to 31st March 2009) yesterday. Likes most peers, Mindtree saw Q4 revenues fall in dollar terms, by 9% sequentially to $68m, though this was 28% higher yoy. FY revenues soared 46% to $269m helped by the May ’08 acquisition of outsourced software product development firm AztecSoft, also based in Bangalore (see MindTree aims to make a mark in the UK).

While forecasting a $290-300m revenue year, executive chairman Ashok Soota reaffirmed his aim to put Mindtree “on a path to become a $1 billion organisation” though he didn’t say by when. This is clearly not going to happen organically and now would be rather a good time for Mindtree to mop a few more mid-tier players to push them further along that path.

Advanced Computer Services - Part Two

(By Richard Holway 8.00am 28th Apr 09) Further to our coverage of Advanced Computer Software’s results (Click here), I had the opportunity for a lunch with CEO Vin Murria yesterday. Vin was the COO at Kewill and I got to know her at Elderstreet where she did a pretty amazing job as CEO of one of our investments – Computer Software Group - undertaking 16 acquisitions and boosting the share price from 15p to 150p.

Now, of course, the hope is that Vin (and Michael Jackson as Chairman) will do it again at ACS. Rather than in membership systems (as at CSG) the application now is in Healthcare starting with Primary Care. The first acquisition, Adastra, has provided the first step. Adastra has c95% of the Out of Hours (OoH) market in the UK and 50% of the walkin clinics.

The ‘Murria Model’ is to move into adjacent areas by a combination of organic growth and a series of acquisitions. The adjacent areas this time run from Polyclinics (obvious) all the way through to GP Practices (currently EMIS territory)

Organically, I was pretty impressed with their new iNurse application. A pda-base call handling, scheduling, allocation, GPS tracking and reporting system for district nurses and community workers.

Inorganically, I got the sense that a medium-sized acquisition was imminent – maybe within days. Vin says that she has identified over 100 potential targets – most sub £1m. The vast majority of smaller companies in this space as ‘lifestyle’ companies. Vin has a reputation of turning such lifestyle companies to focus on shareholder return. Sometimes that change can be brutal and doesn’t always make Vin ‘Little Miss Popular’.

But the track record is now proven. I will watch the repeat performance with great interest! ACS shares are already up 60% in the last six months.

Note - Richard Holway is a general partner at Elderstreet.

Monday, 27 April 2009

Tech Mahindra and Satyam to run independently for 2 years

(By Anthony Miller – Monday, 27th April 2009 4:45pm). Satyam is to continue to run as a separate company for two years before its operations are integrated with those of Tech Mahindra. On the Q4 concall this afternoon, management also advised that the forensic audit of Satyam’s accounts is complete, although the restated accounts may not be ready until the end of the year. However, management changes in Satyam’s UK and European operations are likely to be announced in the next few weeks.

Tech Mahindra CEO, Vineet Nayyar, also confirmed that Satyam had lost 30-35% of its clients since the Raju scandal broke, though didn’t say what the starting point was and which ones went. In their last published financial results for the Sept. ’08 quarter, Satyam reported 649 active clients, though how many of those were figments of Raju’s accounting ‘practices’ are unknown. Satyam’s customer base had a pretty long ‘tail’; about 30% of revenues came from its top 10 clients.

It was also clear that Satyam is losing money, though management was hopeful it would return to profit “very, very soon”. Cost cutting will be concentrated on the back office, but front-line redundancies were not ruled out. In any event, Satyam has ceased campus hiring and the 5,000 or so graduates with existing job offers will find it a pretty long wait before they start work – if at all.

As for Tech Mahindra’s number one client (and investor), revenues from BT dropped again from £60m in Q3 to £58m. Both ‘core’ BT services and last year’s £500m/5 year ‘Barcelona’ contract were hit by the well documented problems in BT Global Services. BT now generates 52% of Tech Mahindra’s revenues, down from 65% a year ago. In contrast to Satyam, Tech Mahindra’s customer base is highly concentrated; of the 108 clients in total, the top 10 account for 84% of revenues.

Tech Mahindra’s European body-shop operation, Tech Talenta (see Tech Mahindra launches European body-shop business) seems to have been primarily set up as a means for clients to consolidate their IT contractors to one vendor (i.e. Tech Mahindra) as a prelude to switching to fixed price contracts and/or offshoring. The business doesn’t have a salesforce per se, and staffing numbers appear to have declined from 500 at launch to some 350. Sounds like a good marketing ploy to me.

For the record, Tech Mahindra finished its FY with revenues of $985m, 5% up yoy. The 9% sequential decline in Q4 revenues (to $212m) had the unfortunate effect of pushing Tech Mahindra below the ‘magic’ $1bn trailing 12 month run rate which it first passed a couple of quarters ago. Margins in the quarter dropped 10bps to 26.9%, though this was over 5% up yoy.

I’m still hoping to get some insight into the current state of Satyam’s local operations, and will let you know as and when.

InterQuest makes first private equity play

(By Anthony Miller – Monday 27th April 2009 8:30am). AIM-listed ITSA (IT staff agency) InterQuest has announced the first investment for its new private equity arm, IQ Equity. It has taken a 70% stake in a JV with Lanborne Consulting, a Slough-based 6-man ITSA, specialising in the NHS and public sector recruitment markets.

When I met the InterQuest team last month (see Interquest update), executive chairman Gary Ashford told me he wanted to set up half-a-dozen such ventures over the next couple of years. The ITSA market is still hugely fragmented despite the clean-out after the last downturn, and I don’t doubt there’ll be other ‘Lanbornes’ out there that would be keen to ride on InterQuest’s coat-tails. By the way, InterQuest’s CEO, Ross Eades stepped back to a non-exec role a couple of weeks ago.

We’ll have more to say about the state of the UK private equity market on UKHotViews tomorrow. TechMarketView subscription service clients will get the detail in our forthcoming IndustryViews Private Equity quarterly review.

Some bright spots amongst the clouds

(By Anthony Miller – Monday 27th April 2009 8:15am). Today brought results and trading updates from three UK SITS players, each with a ray of hope for the year.

AIM-listed Advanced Computer Software (ACS) presented its maiden prelims for the 14 months to Feb. ’09 (see here) though in effect these covered its six months as a trading business after the Aug. ’08 reverse acquisition of Out of Hours (OoH) hospital software specialist Adastra (you can see the history here). Pro forma revenues for the 14 months are now £15m, with some 65% recurring. Adastra has a near-monopoly in OoH operational hubs and (only!) 50% share in NHS walk-in clinics. With nearly £15m cash in the bank, CEO Vin Murria is looking for other primary care businesses to bolt on. ACS’s shares were 17p at the time of the Adastra acquisition; they closed last week at 27p. As the procurement shackles of the NHS National Programme for IT increasingly get loosened, it’s just got to look better and better for niche players who can actually meet a real need in the health service.

The second ‘bright spot’ came from trading systems supplier, Fidessa. After a very impressive 2008 (see Fidessa capitalises on financial markets downturn), CEO Chris Aspinall reported ‘early signs of recovery in the market’ (see here), though did not think this was necessarily sustainable. Short-term visibility remains poor, but Aspinall hinted at FY growth at the upper end of market forecasts, which seems a pretty bold punt to take just now, I would have thought. Readers of our IndustryViews Quoted Sector review will know that Fidessa’s shares were the real stars in the FTSE SCS index in Q109, up 65% since the end of 2008, with another 18% rise since then!

Finally, translation software and services supplier SDL’s IMS (see here) also followed a good year (SDL translates service into profit) with an above-expectations quarter and sees an in-line year. SDL’s shares are up nearly 50% ytd.

Rather than seeing these reports necessarily as signs of the ‘green shoots of recovery’ – indeed we think there is still more company bad news to come – they show that even in a downturn, companies with ‘right time, right place’ products and services can fare very nicely.

New brace of management at Maxima

(By Richard Holway 7.00am 27th Apr 09) Maxima has announced an interesting ‘brace of new hirings’. Graham Kingsmill (previously CEO at Netstore) joins as CEO and David Memory (previously FD at Netstore) joins as FD. Current CEO, Kelvin Harrison becomes Chairman – I assume ‘Executive’ not ‘Non-exec’ as Kelvin will ‘continue to be actively involved in the business’. Chairman Mike Brooke becomes Senior Independent Director.

It had already been announced that John Taylor, the current FD , had resigned.

You may remember that both Kingsmill and Memory had worked together on Netstore since they were appointed together in Sept 07. Netstore was sold 11 months later to 2e2 for £58m.

Kelvin Harrison told me that “we need to grab the opportunities for organic growth thrown up by the market whilst also being ready for distressed asset sales. We want to be a leader as the market moves into its next shape. We have been considering how best to do this for some time and the opportunity to add a matched pair to our top team was too good to miss. We needed an FD and there are a lot of good FDs on the market at the moment. We also needed to strengthen sales. Bringing in two people with a proven strong working relationship is a real risk reducer in achieving these goals.”

Maxima shares have halved since the start of 2009 – against the 21% rise in the FTSE SCS Index. Indeed they are a quarter of what they were in Aug 08. Of course, they were not helped by a series of profits warnings – the latest Profits Warning was issued on 18th March 09. We have questioned Maxima’s focus and small size in our previous posts. Maxima is a classic 'consolidator'. They have undertaken 11 acquisitions since their Nov 2004 IPO. Before that Maxima was the company name used for a merged Azur and Maxima. Maxima was an EPR supplier in the 1990s formed from an MBO at Minerva which then acquired Systems Team. Azur had been created out of Weir Systems and had bought Maxima in 2001 before acquiring IBS in 2004. That’s a pretty mega merger record! But I suspect that Maxima will soon end up on the other side of someone else’s consolidation process.

Sunday, 26 April 2009

Acquisition transactions tweak up but values plummet

(By Anthony Miller – Sunday, 26th April 2009 9:00pm). First quarter M&A activity in the European tech sector was rather a mixed story. Latest data from Regent Partners showed transaction volumes rose 3% over Q408 to 715 deals, albeit this is still 9% down yoy. However the combined value of these acquisitions has fallen yet again to $13.8b, 25% down from the $18.5b recorded in the previous quarter and less than a third of the $45b worth of deals in Q108. It’s clear that the credit squeeze while not materially affecting the smaller deals, is hammering the megadeals.

Regent reported a small uptick in UK buyers (1% qoq) with 161 deals, though France with 89 deals showed the greatest increase (+35%). North America buyers dropped by a third (55 deals) though Regent expects the stronger dollar to reverse this trend. Most popular acquisition targets across the board were in Internet Services, Communications and Media/Content. IT services deals were flat overall, though resourcing, desktop services and consulting transactions rose.

The valuation story isn’t all bleak. The decline, as measured by PE ratio, slowed, leaving the sector average at 12.2x, with most subsectors at a premium over quoted counterparts. Indeed, the average price-to-sales ratio across the sector rose from 0.97 to 1.01, the first increase since mid-2007.

So, with zero tech IPOs anywhere in Europe so far this year, owners’/investors’ exit options are rather limited. Those that eschew ‘unrealistic’ bid offers may find the alternative even more uncomfortable.

We will examine the UK software and IT services M&A scene in more detail in our forthcoming IndustryViews M&A quarterly review.

LinkedIn - Help required

(By Richard Holway 6.00pm 26th Apr 09) I know that many of you are LinkedIn users. On Tuesday night I am meeting Reid Hoffman, the founder of LinkedIn.

I have my own views (as you might expect!) on the value of LinkedIn - but I'd really appreciate your views ahead of that meet. Please email them to me at rholway@techmarketview.com.

L

(By Richard Holway 6.00pm 26th Apr 09) Thanks for the kind words many of you expressed on my Review of The Budget. You will remember that I started the piece thus:

In Feb 08 I had a stand up argument with Brad Holmes of Forrester when he forecast IT would return to double-digit growth in 2009 and 2010. (see IT forecasts - Holway’s Rant) Well, I felt exactly the same anger when I heard Alistair Darling declare that growth would return to the UK economy in the last quarter of 2009 and would amazingly grow at 3.5% in 2011 and beyond. This from a man who also got every forecast he has made as Chancellor totally wrong.

This is a forecast as dangerous for the economy as the Forrester forecast might have been for IT companies. If you believe either you would make the wrong decisions - or more precisely, you won't make the hard ‘survival-type’ decisions at all.

I have to admit that I thought I’d have to wait a bit longer before Darling was shown to be wrong – yet again. But it only took 72 hours. On Friday the ONS released figures showing that GDP contracted by 1.9% in Q1 – that compares with 1.6% estimated by Darling. It makes Darlings estimate of a contraction of ‘just’ 3.5% for 2009 look unattainable. Forecasters are saying that 4%+ is now more likely.

Many of you also commented on my article U on 13th Apr 09 – when I suggested that confidence had hit a low point and that we were now in for a ’very long bottom’ before we saw the first signs of a up-tick in the 2nd part of 2010. I still hold to that.

But I was amused by Jon Moulton (see my post Gloomy moi? On 24th Apr 09) on the Today programme on Friday. Moulton said that the downturn this time was ‘L-shaped’. Given the shape of the Letter L above, I think I’d now prefer to use an ‘L’ than a ‘U’ too!

When Moulton was asked how long it would take before signs of recovery were seen, he said “an L of a long time…”.

Thank goodness for technology...

(By Richard Holway 6.00pm 26th Apr 09) As you will have read both in HotViews, every month this year and, if you are a subscriber (and if not, why not?) in our recently published IndustryViews Quoted Sector, UK technology stocks have been stars in 2009 so far. Against a backdrop of a 6.3% fall in the FTSE100, the TechMark is up 7.7% and the FTSE SCS index is up a pretty massive 21%. Indeed it was up another 4% last week.

The same is happening Stateside with a 7.4% rise in NASDAQ this year. Indeed NASDAQ finished its 7th straight week of gains. Kitan Stacey explored the reasons for this in the FT on 25th Apr 09 - Technology comes to the rescue.

The article makes the points we have made several times before. Firstly that the post dot.com bust actually gave tech companies prior experience of a severe downturn. Indeed, unlike some Governments I can name, many tech companies hoarded cash for the ‘rainy day’. They didn’t squander it on dividends or a lot of M&A. Now is a great time to be debt free with loads of cash.

On top of that, we have a whole generation who thinks that tech is a necessity – not a luxury. Anyway, gadgets are a very cheap alternative to going out!

Our own view (indeed the evidence of the last 20+ years) expressed in IndustryViews is that Tech stocks and the FTSE100 behave in tandem. If that is the case again, then tech stocks might need some adjustment. This would more likely come from a general equities rally, which merely catches up with tech, than in a tech crash.

Friday, 24 April 2009

Spring confirms gloomy permanent recruitment market

(By Anthony Miller – Friday, 24th April 2009 9:45am). Following its recent trading update (see No let up in ‘challenging’ recruitment market), Peter Searle, CEO of leading recruitment player Spring Group, confirmed the gloomy state of the permanent recruitment market in today’s IMS, reporting a 42% yoy drop in net fee income (NFI, basically gross margin) vs just a 3% drop on the contractor side of the business during the first quarter. As permanent staffing represents 20% of NFI, this dragged group NFI down 12% yoy.

I met up with Searle yesterday and had a long chat about the Managed Solutions part of the business, which includes its RPO (recruitment process outsourcing) activities. Managed Solutions, accounted for some 35% of group revenues and nearly 40% of operating profit last year. RPO is an interesting model for staffing firms as it gives them control of the client’s recruitment process. This means they usually get to choose how and where to source the candidates. Spring aims to source as many as candidates possible from its own trading companies (includes its own brand as well as Best, Glotel and others), hence keeps the margin for itself. Other RPOs, such as market leader Alexander Mann Solutions (see Alexander Mann Solutions make recruitment the process) tend to be ‘vendor neutral’ and source from third-party agencies, giving up a share of the margin. There are pros and cons here but I'm afraid we’ll have to leave that discussion for another time.

Atos UK update

(By Anthony Miller – Friday, 24th April 2009 9:15am). I caught up again with Atos Origin UK CEO, Keith Wilman just now to get a bit more ‘colour and movement’ on his rather good results last week (see Another storming quarter for Atos Origin UK). The story on Consulting is interesting because there are indeed new projects being kicked off even now in a couple of areas: business analytics and ‘lean’ (or ‘time and motion’ as we oldies used to call it!). In other words, it’s all about cutting costs.

Outside of Consulting, the day after reporting its results, Atos announced another win for its online ticketing system with UK bus operator, Go-Ahead. This is one of Atos ‘sweet spots’, with National Express already using their system, though trainline.com, developed by Capgemini, still rules that market. We’re also expecting to hear confirmation next week of the ill-kept secret that Atos is part of the IBM consortium that won the bid to develop a new National Biometric Information Service for the UK Border Agency (see UK Government to spend £1.65bn on ID & passport contracts).

On the offshore front, regular readers will know I give Atos a hard time on its relatively ‘relaxed’ approach to global delivery. The UK is a somewhat different story for Atos, with about 40% of its private sector SI workforce offshore. Still room for improvement, of course, and with its infrastructure management services too, with about 10-15% of the workforce offshore. But it’s Atos’ European business I really worry about, as it appears management are just not prepared to bite the bullet on onshore staffing. I just think the longer they wait to take the ‘tough’ decisions, the weaker position they will be in when market demand recovers. Now’s the time to take the pain else there’ll be little chance to see the gain!

Morse – still a long row to hoe

(By Anthony Miller – Friday, 24th April 2009 8:15am). Management’s valiant attempts to stabilise the various remaining parts of Morse’s business (see Morse – And then there were four), have yielded some positive results but the path ahead is far from straight and narrow. In today’s IMS (see here) CEO Mike Phillips warned that South Tyneside and Gateshead is now in dispute with Morse over its Building Schools for the Future project and so the company has had to reverse £500k profit booked last FY. They now risk losing the entire contract, signed in September 2007 and originally worth £23m over 5 years with a similar option to extend. This was the last remaining contract in Morse’s now defunct Education business.

The brighter news was that margins at Morse’s UK infrastructure business jumped 200bps to 5.2% (pre-restructuring costs) for the nine months to 31st March, albeit on 13% lower revenues (£84m). However, Europe (Spain and Ireland) struck £600k losses on broadly flat £42m revenues, with particular pain in Spain. It sounds like this isn’t going to get much better while the economy remains depressed i.e. any time soon. Also a mixed result in Business Application Services (essentially Diagonal) with margins up 40bps to 3.8% against a 12% revenue decline to £31m. Morse is still wrestling with troublesome fixed price contracts.

Net net, margins on continuing operations almost halved to 1.8% on a 10% revenue fall to £157m. This must be a real disappointment to Phillips and the team. Unfortunately, Chairman Kevin Loosemore’s 7.2% ‘medium term’ margin target, set last September, must surely look no more than a distant dream.

TechMarketView in the media

(By Richard Holway 7.00am 24th Apr 09) We've had a lot of media coverage lately.

Thought you might be interested in my interview with Lindsay Willott of The Marketing Practice on what Sales and Marketing people in SITS companies should be doing in the downturn. See Leading IT analyst on what marketers should be doing now.

You might also be interested in our views on Consolidation in the IT industry in the light of the Oracle/Sun deal. See Computer Weekly - IT consolidation

Microsoft’s first revenue decline in 23 years

(By Richard Holway 11.00pm 23rd Apr 09) Microsoft has recorded its first revenue decline in 23 years. Q3 revenues fell 6% yoy to $13.6b. Profits were down 32% at $3b. By the way, still a 32% profit margin.

Microsoft’s client division (which sells Windows etc) suffered a 16% drop in revenues. Vista has been a real flop. Microsoft is clearly praying that Windows 7 will reverse their fortunes.
Revenue from Internet services fell 14% to $721m as Microsoft falls further behind Google. Microsoft's Business Division, which sells the Office productivity suite, saw a 4.7% sales drop to $4.5b. Sales in the Entertainment and Devices unit (ie the X-box) dropped 4.7%, to $1.6b. The only good news came in the Server group which increased sales by 7% to $3.4b.

Nothing in the Microsoft announcement should come as any surprise. The immediate outlook looks no better. But Intel’s results last week indicated that perhaps a nadir had been reached in the semi conductor market. But even if that feeds through into stabilised PC sales, will it benefit Microsoft? Maybe it's smartphones and netbooks that will benefit in the next uptick – areas where Microsoft makes much less (or nothing) per unit. And then there is Cloud ready to chip away at the wondrous Microsoft cash generation model.

Gloomy moi?

(By Richard Holway 11.00pm 23rd Apr 09) Jon Moulton has made more of a career out of being gloomy (and right!) than even I have. Jon seems to be giving even more speeches than normal right now but Moulton’s gloomy risotto analysis in the FT today deserves our full attention.

Even by his own apocalyptic standards, Jon Moulton could not have given a more gloomy analysis of the UK economy at a City dinner this week.

The outspoken founder of Alchemy, the private equity group, noted the only green shoots were to be found in the risotto served with the main course, conceding that "substantial social unrest" was possible, not to mention greater socialism and social intervention, before concluding that "very few recessions of this depth have not ended in war".

The evening would have been uncomfortable for any friends of Barclays: Mr Moulton handed out page 103 of the bank's recent results announcement and used the table on "Unobservable Profits" for a coruscating critique of the penchant for opaque financial disclosure in the banking sector.

I’m sure that has made you all feel a whole lot better.

Exodus of execs from EDS

(By Richard Holway 11.00pm 23rd Apr 09) The New York Times reports Top EDS executives leave HP. Currently the list is all US. “Mike Koehler, the head of the Americas region for E.D.S.; Tom Haubenstricker, the head of finance; and Mike Paolucci, the head of human resources, all plan to call it quits at H.P. by the end of May. And Bobby Grisham, the head of sales, will retire at the end of June.”

All these executives are being replaced by either HP execs or execs from products companies. The NYT muses “There is, however, a school of thought that says HP is underestimating some of the nuances behind the services business. The services types spend years building relationships with customers. It’s part of a world with far more layers of back-scratching and schmoozing than moving PCs and servers.
Perhaps making wholesale changes on this scale is short-term thinking?”

Of course we couldn’t agree more. Been beating that drum for several decades. Execs schooled in product – be it hardware or telecommunications products – just don’t get IT services.
How long before EDS EMEA and UK lose all its EDS talent? Built up over three decades. Not long I would suggest.

Thursday, 23 April 2009

Prince's Trust Gala Dinner at Guildhall on 7th July

The Prince’s Trust Technology Leadership Group is holding its annual Gala Dinner this year on the 7th July. The dinner will take place at London’s historic Guildhall, right in the City. The evening will start at 7pm with drinks in the crypts followed by a 3 course dinner in the Great Hall – the venue for the Lord Mayor’s annual dinner. We expect up to 350 senior leaders from across the technology sector to be present.

Autonomy founder and CEO Dr Mike Lynch is our guest speaker. There will also be speeches from a young person whose life has been transformed by your help and a popular after dinner speaker (can’t confirm the name right now but it will be VERY GOOD!!)

Tables cost £3500 (10 places) and we hope to raise a considerable amount for the Prince’s Trust. TechMarketView will be there and we really hope your organisation will be too. It’s about the best corporate IT event around in 2009! More details and to book contact Jamie Webb on jamie.webb@princes-trust.org.uk

IDOX acquires J4B

(By Anthony Miller – Thursday, 23rd April 2009 7:45am). Just time to note that public sector software supplier IDOX has acquired local authority web-based content firm J4B for £800k cash (see here). Given the rapid consolidation among government software and IT services suppliers we kinda thought IDOX would be next (e.g. see Anite sells Public Sector business - at last!) but obviously not (yet)!

Another cracking quarter for Autonomy

(By Anthony Miller – Thursday, 23rd April 2009 7:30am). This is the sort of monotony we really like. Another (Autonomy's24th) quarter of yoy growth,23% to $130m, including a small contribution from Interwoven (see Autonomy to interweave Interwoven) which acquisition completed mid-March. Margins are also up, both ‘adjusted’ and ‘real’ (IFRS). All this beat market consensus and CEO Mike Lynch “expects to be discussing upgrades” to analysts forecasts. What I can’t seem to pick out from today’s results statement (see here) is the value of new licence sales, obviously a key indicator of future revenues, though Autonomy has announced many wins over the last quarter. I’m sure this will all become clear in this morning’s briefing.

TechMarketView subscription service clients will know from reading our recently published IndustryViews: Quoted Sector report that Autonomy has been the most consistent stock performer in the FTSE SCS Index, showing substantial share price gains over 3, 12, 36 and 60 months. Indeed, had you bought Autonomy’s shares 5 years ago you would have seen the value of your stake increase 5-fold. Congratulations all round.

Wednesday, 22 April 2009

Apple. Recession? What recession?

(By Richard Holway 11.00pm 22nd Apr 09) OK, I'm an Apple fan and have been since 1983 when I first laid my hand on a mouse attached to a Lisa. But it would take a sad person not to give Apple three cheers for their Q2 (to end march 09) results. Apple actually boosted revenues by 9% to $8.16b - way ahead of expectations. Apple sold twice as many iPhones (3.3m) in Q2 as they did a year back. iTunes revenues surged 20% to top $1b. It was the amazing success of Apple's now much copied Apps Store that put the icing on the cake. By the time you read this on Thursday, Apple will have sold 1b apps - about half a dozen to me.

Conversely revenues from Macs and ipods both fell slightly.

Even better news is that Steve Jobs is on track to return to work at end of June.

Apple shares are up 45% ytd. I have long declared that I am an Apple shareholder - indeed they have been the best performer in my portfolio over the last few years.

The Budget

(By Richard Holway 9.00pm 22nd Apr 09) You may remember that I had a stand up argument with Brad Holmes of Forrester in Feb 2008 when he forecast IT would return to double-digit growth in 2009 and 2010. (see IT forecasts – Holway’s Rant) Well, I felt exactly the same anger when I heard Alistair Darling declare that growth would return to the UK economy in the last quarter of 2009 and would amazingly grow at 3.5% in 2011 and beyond. This from a man who also got every forecast he has made as Chancellor totally wrong.

This is a forecast as dangerous for the economy as the Forrester forecast might have been for IT companies. If you believe either you would make the wrong decisions – or more precisely, you won't make the hard ‘survival-type’ decisions at all.

At least this time I’m not alone. My new best friend Vince Cable (see my post yesterday – Vince Cable and a positive lunch) has just appeared on Channel 4 News saying that he thought this amazing return to boom-level growth was a fiction too.

Then we get on to the ‘soak the rich’ tax increases. I really thought that these tactics were a thing of the past. From next April, those earning over £150K will pay 50% tax, which with employers and employees NI will take the rate to over 60%. Many earning over £150K will have the ability to shift income to capital. Take stock or stock options. If you are a business owner, leave the money in the business. Vince Cable agrees – but thinks the solution is to put the CGT tax rate up to match. You can imagine my reaction to that! Afterall I campaigned long and hard to get it reduced to 10% for business owners in the late 1990s – only to find it increased to 18% in the last budget. If they tax the sale of a business at 60%+, even I would leave the UK.

But there are ‘bits to like’ too. Getting the growing number of young, unemployed youngsters into some meaningful education or work, is obviously close to my heart as my work with the Prince’s Trust will testify. Doubling Capital Allowances for one year might bring forward some IT hardware purchases. The extra funding on Broadband might give us a speed where we can watch iPlayer even here in darkest Farnham. The £750m Innovation Fund sounds good – except I’d always thought the private sector was better at picking winners. But these are all small beer and will have no real effect on the Big Picture.

And the Big Picture right now seems to be a cross between a Disaster movie and a Disney fairy tale. All with no reliable ‘running time’. We are all set to watch this one for years to come.

HCL update

(By Anthony Miller – Wednesday, 22nd April 2009 8:30pm). It was of course Axon that boosted HCL’s revenues last quarter, adding some $75m to what would otherwise have been a 4% revenue decline much as for TCS, Infosys and Wipro. Nonetheless, this is below the $95m figure the company mooted for Axon last quarter (see HCL playing the game differently), which I guess is symptomatic of the poor state of the market and the perils of counting ‘contracts in the bag’ before they have hatched, if you’ll pardon the mixed metaphor. But Axon is still a two-edged sword for HCL, costing it 138bps in margin – though on the bright side, the company was expecting a hit nearer 200bps.

I had been sceptical about whether this acquisition would work, but the more I hear, the more I like! Recently I met up with Mark Wyllie, previously Axon COO and now HCL-Axon Corporate Development head. He told me of prospects that Axon had previously lost because it didn’t have the global coverage or sufficient offshore leverage. Some of these prospects are now back in the frame, and cross-selling is really starting to work. Indeed, over 25 HCL customers are now being targeted for Axon’s services and 10 the other way round, with three deals already in the bag. What’s more, Axon had apparently spent $900m partnering with other IT services firms over the past ten years to provide a full service line for some of its larger deals; now HCL-Axon can go after the whole piece alone. OK, it’s still early days, and there’s a whole lot of margin to recover, but they seem to be off to as reasonable a start as you could hope for in current market conditions.

It’s a bit harder to be sanguine about HCL’s other recent UK acquisition, Liberata Financial Services (LFS), which to be frank I had written off as a basket case. Well, there’s still a pulse and HCL is very much in resuscitation mode. Indeed, HCL CEO Vineet Nayar said LFS is shortlisted on a couple of deals which should resolve this quarter. Whether HCL can raise this Lazarus from the (near) dead is still moot, in my mind, but I hope they can if only to make the UK Life & Pensions BPO market less of a one-player game (as much as I think Capita is great etc etc).

Perhaps the main note of caution that Nayar struck about business overall was the dramatic decline in outsourcing deals last quarter. He said this was of great concern both in terms of the number of deals and also the TCV (total contract value). HCL has been relying heavily on new outsourcing deals to take up some of the slack from the drop off in work with existing clients. As if on cue, outsourcing advisory firm TPI had just reported exactly that trend in commercial (private sector) outsourcing deals in its excellent quarterly conference call. What’s more, they expect a similar trend this quarter. This really doesn’t bode well for HCL, but there again it’s no different for other players either.

And hats off to HCL again for its continued ‘glasnost’ on the numbers and indeed the management commentary which is refreshingly frank even when there’s bad news. Long may it last (the glasnost, not the bad news!).

Operational Efficiency Review - Part Two

(By Richard Holway 6.00pm 22nd Apr 09) I covered our first reactions to the Operational Efficiency Programme earlier today after a quick read of the 92 page report last night.

Today I had the opportunity to talk with Martin Read – the author of the Back Office and IT bits of the report. The problem with this conversation was that everytime anything interesting/controversial was discussed, Martin wanted it ‘off-the-record’!

So let me give you my views without referring to which might – or might not - have been Read’s views too!

Both the production of the report, and even more so the implementation of its recommendations, is highly political. I doubt that the current IT management in HM Government took kindly to an outsider coming in doing this kind of exercise. I suspect Read might have ruffled the odd feather. Well, he did at Logica too!

I think that what comes through in the Report is the lack of understanding or even knowledge that HM Government currently has on how much it currently spends on its back office activities. I would guess that is why Read’s recommendations are so focused on accountability. On Departments producing auditable information on what is spent, on what and to what result. Indeed, there is an opportunity for our industry/readers in the supply of those accurate measurement systems.

There is an old adage in Government that what’s important at any one time is what the respective minister wants to know. Maybe ‘cost of back office services’ hasn’t been very high on their agenda. Losing a memory stick makes the 6 o’clock news – but billions spent on HR or payroll is not. I think Read hopes that he can change the DNA of Government so that questions of cost are asked constantly. Ie just like private companies are used to constant Operational Reviews. But it’s a big ask!

Great store is placed in the Report on Shared Services and the role that the private sector – ie the outsourcers – can play. This is clearly the really positive point out of all of this for our readers; particularly the IT services players. Georgina O’Toole, Practice Leader at Ovum (and one of the high;y respected old Ovum Holway team), says “Overall, Ovum’s UK public sector S/ITS market size of almost c£7.3bn in 2008 (excluding BPO) accounts for about 45% of the total IT spend identified by the Operational Efficiency Report. In other words there is still a lot left to outsource leaving substantial potential for a continued internal to external shift in spending. In addition, Ovum’s BPO market size of £1.7bn is a drop in the ocean compared to the estimated £18bn spent on back office functions across UK Government.”

Georgina thinks there will be “a far higher growth rate in the local government market than in central government as there is more potential for spend shifting from internal to external (this is a trend that will impact local police forces and local education as well). On the other hand, about 60% of current central government IT is currently with external suppliers. As there will always be some internal spend for management purposes that is quite high already”.

Shared Services will really only happen with private sector outsourcers acting as, at the very least, the catalyst. So what a fantastic opportunity!

We noted, in our earlier piece, that the word ‘offshoring’ did not occur in the report. I put this to Read and I got the feeling that this was yet another way in which the report had been politicized. But, once services are outsourced, it often is up to those outsourcers where the work is sourced. Indeed Steria, EDS, CSC, Capgemini, Atos etc – the leading suppliers of SITS to the public sector – are all major users of offshore resourcing. In other words, it is difficult to see how the savings envisaged in the Operational Efficiency Review can possibly be achieved without a considerable extension in the use of offshoring.

I must admit I am a bit cynical about these Reviews (Many of you might remember my sarcastic comments last June when Read was appointed. To reread Click here). I’ve seen too many. Why is that ‘Cost savings’ always seem to result in increased public sector spend? I don’t intend to hold my breath over this one either!

Philip Carnelley joins TechMarketView

We are delighted to announce that Philip Carnelley has joined TechMarketView LLP as an Associate. You can read Philip's full biography here.

We got to know Philip's capabilities best at Ovum where he was a member of the 'select' Ovum Holway team as well as the person in charge of Ovum's EuroView service. Philip is currently working on our major CompanyViews report due out in May. CompanyViews is the last of our major reports in the Views service - as the first editions of MarketViews, OffShoreViews, IndustryViews, AnalystViews and, of course, UKHotViews are now available.

Axon boosts HCL

(By Anthony Miller – Wednesday, 22nd April 2009 9:15am). Just got HCL’s results too, but unlike peers they saw a sequential revenue increase in the quarter, by 11% as reported and 13% at constant currency to $564m. Europe grew 17.5% ccy seq. Undoubtedly this is the effect of the Axon acqusition but will know more after the concall. Meanwhile, TechMarketView subscription service clients can refresh their memories about HCL’s European business in our recent OffshoreViews note.

Operational Efficiency Programme

(By Richard Holway 9.00am 22nd Apr 09) Ahead of the Budget today, HM Treasury has issued the results of the Operational Efficiency Programme. You can read the report in all its 92 page glory by Clicking here.

The bit we are most interested in is the Back office operations and IT part, led by Dr Martin Read ex-CEO of Logica. Indeed, Anthony and I were called in to assist Read in the early stages of the project. Read recommends better management information, benchmarking and review of costs and better governance of IT-enabled change programmes. He reckons this will achieve £4b of savings a year on back office operations and £3.2 billion of savings a year on IT spending.

Clearly the bits we recognize from our input to the study are the increased emphasis on outsourcing and finally getting to grips with getting the best from Shared Services. It notes, in examples we discussed with Read, the 30%+ savings at the HM Prisons Shared Service, the 20-30% savings in the NHS/Steria JV and the 13% savings at DWP where HR and finance operations are shared. Read reckons 25-30% savings could be achieved by more effective use of shared services. We agree – but the obstacles are more likely to be political (ie local job losses and property relocation) than economic. There needs stronger willpower to overcome that.

One thing really did surprise us. There is no mention of offshore anywhere in the report. After scan reading it, I thought I must have missed it. So I did a word search and ‘offshore’ does not appear anywhere in the document. Amazing!

There is also no mention of the NHS IT programme and its possible fate. But the report recommends that there should be no sacred cows.

I've heard these efficiency claims so many times before. Even if some are put into effect, it just seems to boost expenditure elsewhere. As in "Cut permanent staff" - in turn means "employ more temps". The bit that might get this moving is that The Treasury is to 'assume the efficiencies' in setting the budgets. That just might focus the mind.

More later, I'm sure. Also on the Budget and its effect on UK SITS.

Wipro in line with peers

(By Anthony Miller – Wednesday, 22nd April 2009 8:30am). The third-ranked India-based SI, Wipro, followed similar trends to larger peers Infosys and TCS, with a small sequential decline in Q4 revenues (to 31st March) and an expectation of the same in the current quarter. at Wipro’s IT services revenues (75% of its total business) fell 4% seq. in constant currency to $1,046m though this did just pip guidance. Management expects another 3%-5% decline this quarter. Margins rose 40bps to 20.8%, though still lag TCS (23.7%) and sector leader Infosys (29.4%).

Cloud

(By Richard Holway 9.00am 22nd Apr 09) Just to remind readers that TechMarketView has recently published two AnalystViews reports on the Cloud and its effect on the UK SITS scene - with forecasts through to 2012. These reports - Cloud and the UK SITS Market and Peering behind the Clouds - are just a small part of the extensive library of research and opinion that we are building for our subscribers. We are just so pleased to have built such an impressive subscriber base in such a short time. But we'd love to welcome you too! Please email Puni Rajah on prajah@techmarketview.com.

If you are still a 'cloud denier" then I suggest you read Big guns suggest the cloud is here to stay in today's FT. It lists the latest Cloud moves from the likes of Microsoft, Google and IBM. Indeed, the Oracle acquisition of Sun on Monday probably had more to do with the Cloud than anything else.

Microgen “cautiously positive”

(By Anthony Miller – Wednesday, 22nd April 2009 7:45am). It’s pleasing to see an upbeat trading statement amongst all the gloom and doom. Microgen (see here) reported a ‘good start to the year’ in spite of ‘unpredictable’ markets. Once again it was Microgen’s business process management division (Aptitude) which led the way, while Billing Services and Financial Systems remained depressed (see Microgen's conundrum). Cash generation looks good with cash on hand up £1.6m from the end of last year to £16.3m. It’s this, along with share buybacks and dividends that keeps investors interested. Indeed, earlier this month Microgen’s shares almost reached a two-year high at 54p though are now a little below 50p.

Yahoo continues to suffer

(By Richard Holway 7.00am 22nd Apr 09) Although Yahoo has been in trouble for many years, it is still an indicator of certain parts of the sector - online advertising in particular. Yahoo's latest quarterly results were pretty dire with revenues down 13% at $1.58b and net revenues down 78% at a mere £118m. New CEO, Carol Bartz is continuing the job cull. If you remember 1500 went in Nov/Dec 08, 1000 in Feb 09 and now another 700 of the 13,500 workforce are to go.

Bartz says she wants Yahoo to focus Yahoo more on its strengths in "online news, finance, sports, e-mail and Internet search". Problem is that it is a distant second in many of those to Google.

The only bit of Yahoo I use is the Finance pages - which i think are superb. Problem is that i can't remember any of the ads and have certainly never clicked on any of them. It is a 'free resource' in every sense. That is not a viable business model.

PS - Bartz refused to comment on rumours of renewed talks with Microsoft. Again my views on this long-running saga are well-known. Go4it if you are Yahoo. Steer well clear of you are Microsoft except at a rock-bottom price.

Tuesday, 21 April 2009

Vince Cable and a positive lunch

(By Richard Holway 6.00pm 21st Apr 09) I had a really excellent lunch today at the House of Commons with Dr Vince Cable MP - the Liberal Democrat's much-respected economics spokesman. It was one of a series held by the Prince's Trust Technology Leadership Group. Readers must by now be aware of my involvement!

I won't divulge the conversation in detail as it was private lunch. But firstly I was really impressed by Cable. He is probably the only politician whose reputation has been enhanced by recent events. If only he could be part of a Government (of whatever hue)

The lunch was attended by about 20 of the CEOs of the leading companies in the UK tech sector. There was not one request for Government financial aid or even any moans about the environment today. Indeed the conversation was all about skills shortages, global sourcing, education, seed capital, CGT, mobility etc. Cable said at the end that, out of all the lunches and meetings he had attended in the last 3 months, ours was the only one to be positive!

I think that the 2000-2003 downturn in tech (a downturn which didn't affect the general economy) probably did us much good. We had recent experience and many companies took action quickly. Also the sector is at its best when 1) its customers want to save money and 2) when the technology environment is changing very fast. I know that many companies are hurting. But, conversely, many are doing very well. As a sector we seem to weathering this storm much better than many others. We should be thankful!

PA Consulting and Cognizant

(By Richard Holway 9.00am 21st Apr 09) Looks like the widely reported rumours yesterday re: Cognizant acquiring PA Consulting were a load of bunkum.

PA Consulting is very annoyed with the Electronics Times of India issuing a statement saying "PA's Executive team and Board are not, nor have ever been, in talks with Cognizant about anything whatsoever. There is no truth at all in the allegation of an acquisition of PA, nor any part of PA; nor in the possibility of alliances, partnerships or the like. The story contains incorrect information about PA, from our operational performance (we suspect that the article uses the results from one of our many subsidiaries, rather than our overall results), to the valuation of our firm, to the date of our foundation, and even how the firm's name is spelled."

IBM outsourcing signings leap ahead

(By Anthony Miller – Tuesday, 21st April 2009 7:20am). Somewhat overshadowed by Oracle’s ‘industry defining moment’, IBM announced Q1 numbers yesterday, showing services revenues down but margins up. Global Technology Services revenues (infrastructure support et al) fell 1% in constant currency terms (ccy) to $8.8bn while Global Business Services revenues fell 4% ccy to $4.4bn. However, GTS pre-tax margins rose 230bps to 12.1% and GBS margins crept up 10bps to 11.3%. Long-term outsourcing signings (part of GTS) rose 22% ccy and application outsourcing (part of GBS) signings surged by nearly 50% ccy . making it absolutely clear yet again where the money is still being spent. Consulting & SI signings fell 4% ccy.

Oracle and Sun - The morning after

(By Richard Holway 7.00am 21st Apr 09)
You will undoubtedly be swamped with news and analyst views on the Oracle/Sun acquisition. As usual, if you are short of time, read Oracle in $7.4b swoop on Sun in today’s FT for the facts.

For the ‘Views’, I guess ours are pretty close to Lex in the FT – see Oracle/Sun Microsystems:

1 - Java is an industry standard and much of Oracle’s own database software relies on it. Solaris is also widely used as a proprietary variant of UNIX. The deal really makes Oracle the middleware king. There was a huge risk to Oracle if IBM had got hold of these jewels.

2 - The deal does have the feel of an anti-Microsoft move. Well, Scott and Larry have considerable 'form' here! Our world really is polarising into a very small number of powerhouse players...and 'the rest'. As we have said so many times before, being in the middle as a mid-sized generalist is untenable. Best you can hope for is a reasonable premium for your shareholders as you become part of someone else's consolidation process.

3 – Oracle has bought at a pretty good price – just 8x anticipated earnings. But Oracle could slash costs so that Sun adds $1.5b operating profit in Year 1, $2b in Year two. That's a pretty good deal.

4 – It’s the hardware bit that bugs us. Why does Oracle want to be a hardware manufacturer? Why does it want to get into the vanilla server market? What effect is it going to have on its relationships with HP, IBM, Dell etc? (Indeed, as I was surfing for this article I was confronted with an ad of a HP computer and an Oracle Database ‘the perfect combination’!)

The FT suggests Sun’s struggling hardware business will probably be sold on. (Cisco could be a potential buyer.)” We've even heard HP mentioned as a possible acquirer of the hardware bit - along with any number of Far Eastern companies. If that happens, we would applaud.

However, Oracle in their FAQs gives the distinct impression that selling the hardware bit is not on their mind (Well, they would say this at this stage, wouldn’t they?) Oracle makes great play of planning “to engineer a complete, integrated system – applications to disk – where all the pieces fit and work together so customers do not have to do it themselves”. But it is clearly the software bit that was the sole driving force behind consummating the deal.

I think what is less contentious, is that this is a big acquisition in our sector. I have predicted, at the beginning of the year, that 2009 will see a major surge in M&A. Indeed a major surge in mega-sized M&A; particularly 'divestments' and 'troubled assets'. All the people I speak to right now confirm this. A bottom in prices has been called (it may get a bit worse before it gets better – but nobody can that that clever). Many companies have vast cash hoards. Some investors are cash rich. If there was ever a time to use it, it is now. There were two other (non-IT) mega acquisition yesterday. Good to see companies buying when prices are low (unlike RBS who had a policy of buying when prices were at an all time high!)

We will return to Oracle and Sun again. But the message should be “Great (surprise) deal from the software viewpoint but considerably less sure on the hardware front”.