2009 proving tough for K3

(By Philip Carnelley 2 Sep 09 09:30) K3 Business Technology Group said when it reported its 2008 results that it expected 2009 to be tough – and so it has proved. The software and services group sells primarily into manufacturing and retail markets, which we’d say are the verticals suffering most from the recessionary climate. In its interims reported today, it announced revenues down 7% to £15.9m and operating profit down 55% to just £0.68m – a 4% margin. Both divisions – retail and manufacturing – suffered equally. After increasing revenue 8% in 2008 (including acquisitions) this is disappointing even if expected – especially the margins. A bright spot is that the company reports that the new sales pipeline “looks stronger.” Furthermore, K3 is continuing to develop its own software – which is complementary to the Microsoft Dynamics software that it resells – aiming to sell differentiated services and products at higher margins.

Software generally delivers higher margins than services – but that depends on economies of scale. To get the looked-for profitability, K3 must develop its own IP efficiently, produce differentiated functionality and sell it in sufficient quantities. But leveraging the core Dynamics functions and building around it is a good strategy. Dynamics products are development platforms as well as packaged applications, and many Microsoft resellers operate successfully this way –and K3 is indeed one of the larger and (historically) more successful among them.