Monday, 1 June 2009

Phoenix rises

(By Anthony Miller – Monday 1st June 2009 9:00am). Given the difficult market conditions, plus the general joys of integrating a major acquisition (ICM in May ‘07) and managing a minor disposal (France), infrastructure support services group Phoenix had a pretty reasonable year. Revenues for the year to 31st March ’09 rose 4% on a like-for-like basis to £253m (10% as reported). However, operating margins dropped 1 ppt to 9.1%, mostly due to a profit decline in Partner Services, Phoenix’s ‘Tier 1 SI’ channel business, which now represents 42% of group revenues and 41% of profit contribution.

Business Continuity division, basically ICM and NDR (acquired April ’05), was the real star, with pro forma revenues up 12% to £51m and operating margins up 4.3 ppts to 25.4%. The BC order book rose 6% to almost twice annual revenues (£99m) despite the loss of the Lehman’s business (see Phoenix, Fidessa and the Lehman effect) and a slight decline in contract renewal rates to 87% (FY08: 89%).

Phoenix’s mid-market general IT services business, Servo (acquired in Nov. ’06), saw pro forma revenues rise 1% to £97m (12% reported); margins remained flat at 10.4%. Hosting revenues near-doubled to £6m. However, the order book fell slightly to £46m.

I still see Partner Services as Phoenix’s biggest exposure (see Phoenix sees growth slow). CEO Nick Robinson made the point that “there have been fewer large scale multimillion pound, multi-year contract opportunities and consequently new business wins have been increasingly of a smaller size”. Added to that, “Partners (are) committing to shorter periods of minimum contracted revenues on contract renewals”. We simply do not see this situation changing. As a result, renewal rates dropped from 86% to 66% and the order book is down 17% to £142m.

But we hope that by regrouping to focus purely on the UK market, and with what still seems to be an active market for its other divisions, Phoenix will be able to hold a reasonably steady course. The market seems to think so too, as Phoenix's shares are up 25% as I write!

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